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 30, 2001 Commission file number 1-7553
Knight-Ridder, Inc
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 38-0723657
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 W. San Fernando St., San Jose, CA 95113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 408-938-7700
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
Preferred Share Purchase Rights 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 (ss.229.405 of this chapter) 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 amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant - $5,738,919,010 (The average market value
is computed by reference to the closing price at which the company's common
stock was sold as of March 19, 2002, as reported on the New York Stock Exchange
for such date).
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date - 83,782,317 one class Common
Stock, $.02 1/12 par value (as of March 19, 2002).
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's definitive Proxy Statement, in connection
with the Annual Meeting of Shareholders to be held on April 23, 2002,
are incorporated by reference into Part III.
Table of Contents for 2001 Form 10-K
Page
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49
SIGNATURES 51
SCHEDULES 54
EXHIBITS 55
PART I
Item 1. Business
The Company
Knight-Ridder, Inc. ("Knight Ridder") is the nation's second-largest newspaper
publisher based on circulation, with products in print and online. The company
publishes 32 daily newspapers in 28 U.S. markets, with a readership of 8.5
million daily and 12.1 million Sunday. Knight Ridder also has investments in a
variety of Internet and technology companies and two newsprint companies. The
company's Internet operation, Knight Ridder Digital, creates and maintains a
variety of online services, including Real Cities (http://www.realcities.com/),
a national network of city and regional destination sites in 58 U.S. markets.
Financial information about the company's business segments is incorporated by
reference to Note 5 to the consolidated financial statements on page 36 of this
report.
Knight Ridder 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, incorporated in Florida in 1976, is headquartered in San Jose,
California, and employs about 19,000 full-time equivalent employees.
Newspapers
Knight Ridder had 32 daily and 25 nondaily newspapers at the end of 2001.
Newspaper operating revenue is derived primarily from the sale of newspaper
advertising. Due to seasonal factors such as heavier retail selling during
Christmas and Easter, retail advertising revenue fluctuates significantly
throughout the year. 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. 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, headed by the publisher/president appointed by the
corporate headquarters in San Jose. 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
San Jose. Editorial and quality control assistance, including development of
best practices, also are provided by the corporate staff.
Each newspaper is served by the company-owned news bureau in Washington, D.C.
Supplemental news, graphic and photographic services provided by Knight
Ridder/Tribune Information Services, Inc. (KRT), a partnership between Knight
Ridder and Tribune Co., include editorial material produced by all Knight Ridder
newspapers, by Knight Ridder's 15 foreign correspondents and by a number of
other newspapers.
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.
1
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 in obtaining national or general advertising.
The table below presents the relative percentage contributions by individual
papers to the company's overall operating revenue in 2001, 2000 and 1999. The
percentage contributions of each paper to operating revenue are not necessarily
indicative of contributions to operating profit.
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2001 2000 1999
- --------------------------------------------------------------------- -------------- -------------- -------------
Sources of Knight Ridder Newspaper Operating Revenue
The Philadelphia Inquirer and Philadelphia Daily News 17.3% 18.3% 18.8%
The Miami Herald and el Nuevo Herald 10.9 10.3 10.4
The Kansas City Star 9.0 8.6 8.5
San Jose Mercury News 8.7 10.3 9.5
Fort Worth Star-Telegram 7.7 7.4 7.3
The Charlotte Observer 6.0 5.8 6.1
Contra Costa Newspapers 4.4 4.5 4.1
Saint Paul Pioneer Press 3.9 3.8 4.0
Akron Beacon Journal 3.1 3.2 3.3
All other 29.0 27.8 28.0
- --------------------------------------------------------------------- -------------- -------------- -------------
100.0% 100.0% 100.0%
===================================================================== ============== ============== =============
Newspapers
Fiscal year 2000 included a 53rd week, a once-every-five-year occurrence
coinciding with the newspaper industry's accounting calendar. Therefore, revenue
figures discussed in this section are presented on a 52-week basis, unless
otherwise noted.
Newsprint
Knight Ridder, excluding Detroit, consumed approximately 661,000 metric tons of
newsprint in 2001. Approximately 15.4% of the company's total operating expenses
during the year were for newsprint. Purchases are made under long-term
agreements with 16 newsprint producers. In 2001, Knight Ridder purchased
approximately 67.9% of its consumption from 15 mills in the United States, 31.8%
from 17 mills in Canada and 0.3% from other offshore sources. Management
believes that current sources are more than adequate to meet current demands.
Approximately 81% of the newsprint consumed by the company contained some
recycled content; the average content of these rolls was 49.8% recycled fiber.
This translates into an overall recycled newsprint average of 40.3%.
Knight Ridder is a one-third partner with Cox Enterprises and Media General,
Inc. in SP Newsprint Co., formerly Southeast Paper Manufacturing Co (SP). It is
the fourth-largest newsprint manufacturing company in North America.
SP's mill in Dublin, Georgia, produces more than 500,000 metric tons per year of
100% recycled-content newsprint. Its plant in Newberg, Oregon, produces more
than 363,000 metric tons per year of newsprint with at least 40% recycled
content.
SP provides recycled-content newsprint to its owners and more than 200
publishers and commercial printers. Its SP Recycling Corp. subsidiary recycles
more than 1.2 million short tons of recovered material annually.
Knight Ridder also owns a 13.5% equity interest in Ponderay Newsprint Company in
Usk, Washington, which produced more than 242,000 metric tons of newsprint in
2001.
2
Knight Ridder expects that its purchases from these two newsprint companies will
represent approximately 46% of its annual consumption, providing an important
hedge against price volatility and a secure source of supply.
Technology
The company's focus in 2001 was on launching the implementation of new
technology standards created by several task forces. Network security was also a
major focus, leading to the replacement of several key network security devices
and the documentation of many standards and security policies. As a result, a
well developed, centralized security infrastructure able to develop, implement
and monitor security policy was put in place.
The Tallahassee Democrat, Lexington Herald-Leader and The (Fort Wayne)
News-Sentinel implemented new advertising systems, and the Saint Paul Pioneer
Press installed a new editorial system.
General Advertising Sales
Knight Ridder newspapers depend most heavily on two agents for the sale of
general advertising.
Newspapers First, a national advertising sales cooperative, is the primary sales
representative for many of Knight Ridder's newspapers, many of the leading
newspaper groups and several leading independents. It acts as an interface to
national advertisers across the country.
Newspaper National Network, Knight Ridder's second general sales agent, was
established in 1994 to focus national selling on behalf of the newspaper
industry. It represents all Knight Ridder newspapers and more than 500 others.
Like Newspapers First, it offers "one-stop shopping" and "one-order, one-bill."
Knight Ridder/Tribune
Knight Ridder/Tribune Information Services, Inc. (KRT), a joint venture between
Knight Ridder and Tribune Co., offers stories, graphics, illustrations, photos
and paginated pages for print publishers; news animations, graphics and news
specials for TV broadcasters; and Web-ready content for online publishers.
In 2001, KRT again improved its profitability by improving margins for its
business, general news and photo services and by reducing the cost of delivering
its products through the Web. Working with Newscom, another Knight
Ridder-Tribune joint venture, KRT improved its Web delivery site, KRT Direct,
resulting in gains in spot sales in the fourth quarter and opening up new sales
and promotion opportunities for 2002.
The Philadelphia Inquirer and Philadelphia Daily News
Philadelphia Newspapers, Inc. (PNI), publishes two of the nation's most
respected newspapers: The Philadelphia Inquirer and the Philadelphia Daily News.
They are sold in nine counties in Pennsylvania and southern New Jersey. The
weekly net cumulative penetration of the newspapers is 63% of all adults in the
region. Together, the papers have won 20 Pulitzer Prizes. Operating revenue in
2001 was $526.9 million.
The Philadelphia Primary Metropolitan Statistical Area (PMSA) population is
expected to grow 1.1% between 2001 and 2006; the U.S. average is 4.3%. In 2001,
Philadelphia had income per capita 13.5% above the U.S. average; by 2006, it is
projected to be 12.6% above the U.S. average.
The Miami Herald/el Nuevo Herald
The Miami Herald is Florida's largest newspaper. el Nuevo Herald is America's
premier Spanish language newspaper. Both are published by the Miami Herald
Publishing Company (MHPC). The Miami Herald is sold in South Florida and in 28
3
Latin American and Caribbean countries, primarily through its International
Edition. el Nuevo Herald serves the growing Spanish-speaking population of
Miami-Dade and Broward counties. Operating revenue in 2001 was $300.9 million
for The Miami Herald and $30.7 million for the el Nuevo Herald.
The Miami-Fort Lauderdale combined market population is expected to grow 6.6%
between 2001 and 2006. In 2001, the area had income per capita 11.7% below the
U.S. average; by 2006, it is projected to be 18.6% below the U.S. average.
San Jose Mercury News
The San Jose Mercury News, the newspaper of Silicon Valley, serves one of the
most historically prosperous and diverse markets in the nation. Circulation is
concentrated in Santa Clara County, which encompasses San Jose - California's
third-largest city - and surrounding communities. The region is the world leader
in high technology and ranks fourth nationally in exports. Operating revenue in
2001 was $266.7 million.
The population of the San Jose Primary Metropolitan Statistical Area is expected
to grow 4.2% between 2001 and 2006. In 2001, San Jose had income per capita that
was 57.6% above the U.S. average; by 2006, it is projected to be 62.7 % above
the U.S. average.
The Kansas City Star
The Kansas City Star serves the Kansas City metropolitan area. The Star's
primary market consists of 11 counties in Kansas and Missouri. Operating revenue
in 2001 was $274.3 million.
The Kansas City Metropolitan Statistical Area population is expected to grow
3.9% between 2001 and 2006. In 2001, Kansas City had income per capita 6.9%
above the U.S. average; by 2006, it is projected to be 7.6% above the U.S.
average.
Fort Worth Star-Telegram
The Star-Telegram serves the western portion of the Dallas/Fort Worth market.
The four-county Fort Worth/Arlington market is the third largest in Texas and is
projected to be one of the nation's 10 fastest-growing major metropolitan areas
over the next five years. Operating revenue in 2001 was $236.1 million.
Fort Worth/Arlington's population is expected to grow 7.4% between 2001 and
2006. In 2001, Fort Worth/Arlington had income per capita 8.3% above the U.S.
average; by 2006, it is projected to be 9.8% above the U.S. average.
Detroit Free Press
The Detroit Free Press, Michigan's largest daily newspaper, is sold primarily in
the six-county area surrounding Detroit. It is also sold throughout the state of
Michigan, in Windsor, Ontario, and in Toledo, Ohio.
The Detroit Free Press is published in combination with The Detroit News by
Detroit Newspapers (DN), a joint operating agency formed in 1989 to combine the
business operations of the two partners, Knight Ridder and Gannett Co. The
profits (or losses) are split equally. The Free Press, owned by Knight Ridder,
is a morning paper; The News, owned by Gannett, is an evening paper. On weekends
and holidays, they publish combined editions. The Sunday edition ranks seventh
in circulation in the nation.
The population of the Detroit Primary Metropolitan Statistical Area is expected
to grow 1.1% between 2001 and 2006. In 2001, Detroit had per capita income 10.8%
above the U.S. average; in 2006, it is projected to be 11.4% above the U.S.
average.
4
The Charlotte Observer
The Charlotte Observer, the largest-circulation daily between Washington D.C.
and Atlanta, is sold primarily in a 15-county region across the two Carolinas.
Operating revenue in 2001 was $182.4 million.
Population in the Charlotte Metropolitan Statistical Area is projected to grow
8.3% between 2001 and 2006. In 2001, Charlotte had per capita income 9.9% above
the U.S. average; in 2006, it is projected to be 13.8% above the U.S. average.
Online Activities
During the first quarter of 2000, the company consolidated all its Internet
operations under a wholly-owned subsidiary, Knight Ridder Digital, formerly
KnightRidder.com. Previously, Knight Ridder's Internet activities were reported
and managed as a part of the company's newspaper operations. Knight Ridder
Digital controls all of Knight Ridder's online efforts, including the Web sites
previously operated by the newspapers. Knight Ridder Digital operates and
manages the Real Cities Network, which consists of all Knight Ridder Web sites
and those of several other media affiliates.
Employees
The company has more than 19,000 full-time equivalent employees, of which
approximately 37% are represented by approximately 70 local unions and work
under multiyear collective bargaining agreements. Individual newspapers that
have one or more collective bargaining agreements are in Akron, Detroit, Duluth,
Fort Wayne, Grand Forks, Kansas City, Lexington, Monterey, Philadelphia, St.
Paul, San Jose, State College and Wichita. During 2002, there will be
negotiations to extend collective bargaining agreements at six newspapers.
Item 2. Properties
Knight Ridder has daily newspaper facilities in 28 markets situated in 17
states. These facilities vary in size from 8,000 square feet at The Buyer's
Guide in Warner Robins, Georgia, to 2.9 million square feet in Philadelphia. In
total, they occupy about 8.1 million square feet. Approximately 1.7 million of
the total square footage is leased from others. Virtually all of 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, Georgia, Kansas City, Kansas
and Detroit, Michigan.
Knight Ridder properties are maintained in excellent condition and are suitable
for current and foreseeable operations. During the three years ended December
30, 2001, the company spent approximately $295.1 million for additions to
property, plant and equipment.
Item 3. Legal Proceedings
The company's wholly-owned subsidiary, MediaStream, Inc. ("MediaStream"), was
named as one of a number of defendants in two separate class action lawsuits
that have been consolidated with one other similar lawsuit by the Judicial Panel
on Multi-District Litigation under the caption "In re Literary Works in
Electronic Databases Copyright Litigation," M.D.L. Docket No. 1379 (the
"Multi-District Litigation"). The two lawsuits originally filed against
MediaStream in September 2000 were: The Authors Guild, Inc. et al. v. The Dialog
Corporation et al., and Posner et al. v. Gale Group Inc. et al. These lawsuits
were brought by or on behalf of freelance authors who allege that the defendants
have infringed plaintiffs' copyrights by making plaintiffs' works available on
databases operated by the defendants. The plaintiffs are seeking to be certified
as class representatives of all similarly-situated freelance authors.
5
The two lawsuits were initially stayed pending disposition by the U.S. Supreme
Court of New York Times Company et al. v. Tasini et al., No. 00-21. On June 25,
2001, the U.S. Supreme Court ruled that the defendants in Tasini did not have a
privilege under Section 201 of the Copyright Act to republish articles
previously appearing in print publications absent the author's separate
permission for electronic republication. The judge has ordered the parties in
the Multi-District Litigation to try to resolve the claims through mediation,
which commenced November 2001, and the parties have agreed to a limited stay to
respond to the complaint during such mediation, which may be terminated by the
plaintiffs upon 30 days prior written notice. In September 2001, the plaintiffs
submitted an amended complaint, which named the company as an additional
defendant and makes reference to Knight Ridder Digital, a subsidiary of the
company.
Plaintiffs in the Multi-District Litigation seek actual damages, statutory
damages and injunctive relief, among other remedies. The company and MediaStream
intend to contest liability and vigorously defend their positions in the
litigation, including opposing class certification. In addition, MediaStream has
indemnity agreements from various content providers supplying articles to
MediaStream's databases that could mitigate its potential exposure. Management
is currently unable to predict whether an unfavorable outcome is likely or the
magnitude of any potential loss.
Various libel and copyright infringement 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
such other legal proceedings will not be material to its financial position or
results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of Knight Ridder
Management Committee*
P. ANTHONY RIDDER, 61, Chairman of the Management Committee since 1995; Knight
Ridder chairman and CEO since 1995. Served as president 1989 to 1995; president
of the Newspaper Division 1986 to 1995. Served as publisher, San Jose Mercury
News, 1977 to 1986; general manager 1975 to 1977. B.A., economics, University of
Michigan, 1962.
JERRY CEPPOS, 55, Vice president/news since 1999. Oversees news operations of
Knight Ridder's 32 daily newspapers; responsible for the Knight Ridder
Washington Bureau and the content of Knight Ridder/Tribune Information Services.
Served as vice president and executive editor, San Jose Mercury News, 1995 to
1999; managing editor 1983 to 1995; various editing positions 1981 to 1983.
B.S., journalism, University of Maryland, 1969.
MARY JEAN CONNORS, 49, Senior vice president/human resources since 1996; vice
president/human resources 1989 to 1996. Oversees human resources for Knight
Ridder; manages annual strategy and goal-setting. Served as vice president/human
resources, Philadelphia Newspapers, Inc., 1988 to 1989; assistant to the senior
vice president/news, Knight Ridder, 1988; assistant managing editor/personnel,
The Miami Herald, 1985 to 1988. Stanford Executive Program, Stanford University,
1999; B.A., English, Miami University in Oxford, Ohio, 1973.
GARY R. EFFREN, 45, Senior vice president/CFO since May 2001. Oversees all
finance functions of the company and helps develop strategy and evaluate
business opportunities. Served as controller 1995 to 2001; 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, Viewdata Corporation of America, 1984 to 1986.
M.B.A., University of Miami, 1989; B.S., accounting, Rider College, 1978; CPA.
6
STEVEN B. ROSSI, 52, President/Newspaper Division since 2001. Responsible for
all Knight Ridder newspaper operations. Also directly oversees newspapers in
Akron, Charlotte, Columbia, Contra Costa, Detroit, Fort Worth, Kansas City,
Lexington, Miami, Olathe, Philadelphia, St. Paul and San Jose; publishers report
to him. Served as senior vice president/operations Knight Ridder, 1998 to 2001;
executive vice president and general manager, Philadelphia Newspapers, Inc.,
1992 to 1998. M.B.A., The Wharton School of the University of Pennsylvania,
1974; B.A., economics, Ursinus College, 1971.
JOSEPH (CHIP) VISCI, 48, Vice president/operations since 2000. Oversees
operations for newspapers in Aberdeen, Belleville, Biloxi, Bradenton, Columbus,
Duluth, Fort Wayne, Grand Forks, Macon, Monterey, Myrtle Beach, San Luis Obispo,
State College, Tallahassee, Warner Robins, Wichita and Wilkes-Barre; publishers
report to him. Served as assistant to the chairman and CEO, Knight Ridder, 1996
to 2001; managing editor, Detroit Free Press, 1996, and in various newsroom
positions 1978 to 1996. M.A., journalism, Ohio State University, 1977; B.A.,
journalism, Ohio Wesleyan University, 1975.
GORDON YAMATE, 46, Vice president and general counsel since 2000. Manages
companywide legal affairs. Served as vice president, general counsel and
corporate secretary at Liberate Technologies, 1999 to 2000; partner in the law
firm of McCutchen, Doyle, Brown & Enersen, LLP, in Palo Alto and San Jose, 1988
to 1999; associate 1983 to 1988. J.D., Santa Clara University School of Law,
1980; B.A., economics and political science, University of California, Davis,
1977.
Officers*
MARSHALL W. ANSTANDIG, 53, Vice president/senior labor and employment counsel
since 1998. Advises and assists Knight Ridder and its companies on legal matters
related to labor relations and employment law. Served as partner in the law firm
of Brown & Bain, P.A., 1996 to 1998; managing partner in the law firm of Bryan
Cave in Phoenix, 1990 to 1996. J.D., Detroit College of Law, Michigan State
University, 1974; B.A., political science, Hope College, 1971.
VIRGINIA DODGE FIELDER, 53, Vice president/research since 1989. Responsible for
market research for Knight Ridder, including its annual reader, advertiser and
Internet surveys; consults with the newspapers on local research projects.
Served as vice president/news and circulation research 1986 to 1989;
director/news and circulation research 1981 to 1985; editorial research manager,
Chicago Sun-Times, 1979 to 1981. Ph.D., mass communications, Indiana University,
1976; M.A., journalism, Indiana University, 1974; B.A., psychology, Transylvania
University, 1970.
DAN FINNIGAN, 39, Vice president since 1999 and president of Knight Ridder
Digital. Heads the company's Internet operations and helps lead the company's
interactive strategies and investments. Served as president and CEO, SBC
Interactive, 1998 to 1999; held various positions at SBC Communications, Inc.,
1995 to 1998; group manager for product development, ESS Ventures, LLC, 1994 to
1995. M.B.A., finance and marketing, The Wharton School of the University of
Pennsylvania, 1993; B.A., communication studies, University of California, Los
Angeles, 1984.
STEVE HANNAH, 43, Vice president/technology since 2000. Responsible for creating
the vision for technology while setting the standards in implementing new
technology. Served as vice president/technology and CIO, Gazette Communications,
1996 to 2000; director of management information systems 1993 to 1996; computer
services manager, Journal/Sentinel, Inc., 1986 to 1993. B.A., business
administration, Eastern Michigan University, 1982.
7
POLK LAFFOON IV, 56, Vice president/corporate relations since 1994 and corporate
secretary since 1999. Oversees the investor relations, public and media
relations and corporate secretary functions, including contact with the
financial community. Served as assistant to the president 1992 to 1994;
assistant circulation director/distribution, The Miami Herald, 1991 to 1992.
Served as director and vice president/investor relations, Taft Broadcasting Co.,
1982 to 1987. M.B.A., marketing, The Wharton School of the University of
Pennsylvania, 1970; B.A., English, Yale, 1967.
LARRY D. MARBERT, 48, Vice president/production and facilities since 1998.
Oversees capital investments in facilities and manufacturing systems; tracks and
promotes advances in newspaper production technology and acts as an internal
consultant. Served as vice president/technology, Knight Ridder, 1994 to 1998;
senior vice president/operations, Philadelphia Newspapers, Inc., 1991 to 1994;
vice president/operations research and planning 1988 to 1991; vice
president/production 1986 to 1988. M.S., management science, Auburn University,
1977; B.S., University of North Carolina, business administration, 1976.
JACQUI LOVE MARSHALL, 53, Vice president/human resources/diversity and
development since 2000. Oversees recruiting, corporate learning and diversity.
Served as assistant vice president/human resources 1996 to 2000; vice
president/human resources, The Miami Herald Publishing Co., 1993 to 1996;
various roles, The Washington Post, 1986 to 1993. Ed.M., educational counseling,
Harvard University, 1970; B.A., education, Trenton State College, 1969.
MIKE PETRAK, 43, Vice president/marketing since 2001. Oversees planning and
implementation of strategic marketing initiatives including sales, branding
efforts, reader and advertising research, new product initiatives and database
marketing across the company. Served as executive vice president and general
manager of The Kansas City Star, 1997 to 2001; vice president of marketing and
advertising, 1994 to 1997; director of marketing for Consumer Power Marketing,
1992 to 1994; advertising director for the Wisconsin State Journal and The
Capital Times and The (Tacoma, Wash.) News Tribune, 1987 to 1992. M.B.A.,
marketing, University of Iowa, 1982; B.A., journalism, University of Iowa, 1980.
MARGARET RANDAZZO, 34, Vice president and controller since 2001. Responsible for
all financial reporting, corporate accounting and risk management. Served as
vice president and CFO of the Fort Worth Star-Telegram, 1998 to 2001, and
financial planning manager, 1996 to 1998; manager, Audit and Business Advisory
Division of Arthur Andersen LLP, 1990 to 1996. B.B.A., accounting, University of
Oklahoma, 1990; CPA.
STEVEN J. STEIN, 48, Vice president/human resources/compensation and benefits
since 2000. Oversees benefits, compensation and human resources information
systems, and works with companies on succession planning, organizational
development and employee research activities. Served as assistant vice
president/human resources 1995 to 2000; vice president/human resources for
Knight Ridder Business Information Services, 1989 to 1995. Ph.D., psychology,
University of Florida, 1981; B.A., psychology, George Washington University,
1974.
*Ages as of February 1, 2002
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
KRI Stock
Knight Ridder common stock is registered on the New York Stock Exchange and the
Frankfurt Stock Exchange under the symbol KRI.
The stock is also traded on exchanges in Philadelphia, Chicago, Boston, San
Francisco, Los Angeles and Cincinnati and through the Intermarket Trading
System. Options are traded on the Philadelphia Exchange.
The company's 83,782,317 shares outstanding on March 19, 2002 were held in all
50 states by 8,720 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 $69.01 on March 19, 2002.
The average stock trading volume of shares per day for the years 2001, 2000 and
1999 was 406,000, 398,000 and 417,000, respectively. The following table
presents the high and low sale price of the company's common stock by fiscal
quarter for the two most recent fiscal years:
----------2001---------- ----------2000----------
Quarter High Low High Low
- ------- ---- --- ---- ---
1st 60.48 52.02 59.81 44.19
2nd 59.04 52.02 55.88 45.88
3rd 63.32 53.76 56.69 49.38
4th 65.17 53.77 57.63 44.13
Treasury Stock Purchases
The table below is a summary of treasury stock purchases since 1990:
Stock Cost Average Price
Purchased (000s) Per Share
- -------------------------------------------------------------------------------
2001 2,993,567 $ 171,795 $57.39
2000 9,048,895 464,835 51.37
1999 3,704,378 210,141 56.73
1998 4,725,000 255,533 54.08
1997 13,824,300 643,375 46.54
1996 6,219,100 221,768 35.66
1995 11,508,600 319,363 27.75
1994 5,044,600 136,977 27.15
1993 1,500,000 40,693 27.13
1992*
1991*
1990 5,325,400 129,909 24.39
*There were no treasury stock purchases in 1991 and 1992.
9
Dividends
Quarterly cash dividends declared on the company's common stock were $.25 per
share in 2001 and $.23 per share in 2000. Total cash dividends declared on
common stock by the company were $84,197,805 in 2001 and $81,002,426 in 2000.
10
Item 6. Selected Financial Highlights
11-YEAR FINANCIAL HIGHLIGHTS
The following information was compiled from the consolidated financial
statements of Knight Ridder and its subsidiaries. The consolidated financial
statements and related notes and discussions for the year ended December 30,
2001 (pages 14 through 47), should be read to obtain a better understanding of
this information.
- ----------------------------------------------------------------- --------------------- ------------ ------------- ------------
Compound Growth Rate December December December
--------------------- 30 31 26
(In thousands, except per share data and ratios) 5-Year 10-Year 2001 2000 1999
- ----------------------------------------------------------------- ---------- ---------- ------------ ------------- ------------
Summary of Operations
Operating Revenue
Advertising 6.3% 5.8% $2,254,422 $ 2,507,836 $2,353,520
Circulation 2.3 2.9 512,309 523,856 525,686
Other 15.2 14.3 133,478 180,075 154,569
- ----------------------------------------------------------------- ------------ ------------- ------------
Total Operating Revenue 5.9 5.4 2,900,209 3,211,767 3,033,775
- ----------------------------------------------------------------- ------------ ------------- ------------
Operating Costs
Labor, newsprint and other operating costs 5.4 4.9 2,253,881 2,355,398 2,229,410
Depreciation and amortization 10.2 8.5 184,573 187,597 182,943
- ----------------------------------------------------------------- ------------ ------------- ------------
Total Operating Costs 5.7 5.1 2,438,454 2,542,995 2,412,353
- ----------------------------------------------------------------- ------------ ------------- ------------
Operating Income 6.7 7.5 461,755 668,772 621,422
Interest expense 6.6 3.9 (100,833) (116,652) (97,444)
Other, net 1.3 4.1 (53,523) (26,830) 44,037
Income taxes, net (0.4) 6.1 (122,575) (210,927) (228,076)
- ----------------------------------------------------------------- ------------ ------------- ------------
Income from continuing operations (0.1) 4.2 184,824 314,363 339,939
Discontinued BIS operations (1)
Cumulative effect of changes in accounting principles (2)
- ----------------------------------------------------------------- ------------ ------------- ------------
Net Income (7.2) 3.4 $ 184,824 $ 314,363 $ 339,939
================================================================= ========== ========== ============ ============= ============
Operating income percentage (profit margin) 15.9% 20.8% 20.5%
- ----------------------------------------------------------------- ---------- ---------- ------------ ------------- ------------
Share Data
Basic weighted-average number of shares 76,074 75,370 80,025
Diluted weighted-average number of shares 85,694 89,105 97,460
Earnings per share
Basic: Continuing operations 3.8 7.0 $2.33 $4.02 $4.07
Discontinued BIS operations (1)
Cumulative effect of changes in accounting
principles (2)
Net income (3.5) 6.1 2.33 4.02 4.07
Diluted:Continuing operations 2.6 6.2 $2.16 $3.53 $3.49
Discontinued BIS operations (1)
Cumulative effect of changes in accounting
principles (2)
Net income (4.7) 5.5 2.16 3.53 3.49
Dividends declared per common share (3) 11.3 3.6 1.00 0.92 0.89
Common stock price: High 65.17 59.81 65.00
Low 52.02 44.13 46.00
Close 65.17 56.88 58.94
Shareholders' equity per common share 8.8 5.6 $18.50 $18.09 $19.07
Price/earnings ratio (4) 30.2 16.1 16.9
Adjusted price/earnings ratio (5) 23.4 15.4 17.9
- ----------------------------------------------------------------- ---------- ---------- ------------ ------------- ------------
Other Financial Data
Treasury Stock Purchases: Number of shares 2,994 9,049 3,704
Cost $ 171,795 $ 464,835 $ 210,141
Cash dividends declared 84,198 81,002 85,526
Ratio of earnings to fixed charges (6) 4.1 5.3 6.2
At year end
Total assets $4,213,376 $ 4,243,526 $4,192,334
Total debt 1,613,954 1,672,272 1,300,754
Shareholders' equity 1,560,288 1,541,470 1,780,684
Return on average shareholders' equity (7) 11.9% 18.9% 19.7%
Total debt/total capital ratio 50.8% 52.0% 42.2%
- ----------------------------------------------------------------- ---------- ---------- ------------ ------------- ------------
11
(Table Continued)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
December December December December
27 28 29 31
(In thousands, except per share data and ratios) 1998 1997 1996 1995
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Summary of Operations
Operating Revenue
Advertising $ 2,222,597 $ 2,060,772 $ 1,659,336 $ 1,534,761
Circulation 533,340 521,135 457,306 444,506
Other 139,617 103,515 65,913 32,789
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Total Operating Revenue 2,895,554 2,685,422 2,182,555 2,012,056
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Operating Costs
Labor, newsprint and other operating costs 2,209,819 2,029,587 1,735,639 1,691,655
Depreciation and amortization 181,112 149,802 113,778 92,134
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Total Operating Costs 2,390,931 2,179,389 1,849,417 1,783,789
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Operating Income 504,623 506,033 333,138 228,267
Interest expense (105,936) (102,662) (73,137) (59,512)
Other, net 109,229 290,481 50,208 14,062
Income taxes, net (202,285) (297,348) (124,829) (72,861)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Income from continuing operations 305,631 396,504 185,380 109,956
Discontinued BIS operations (1) 60,226 16,511 82,493 57,426
Cumulative effect of changes in accounting principles (2) (7,320)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Net Income $ 365,857 $ 413,015 $ 267,873 $ 160,062
================================================================= ============== ============== ============== ==============
Operating income percentage (profit margin) 17.4% 18.8% 15.3% 11.3%
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Share Data
Basic weighted-average number of shares 78,882 88,475 96,021 99,451
Diluted weighted-average number of shares 98,176 101,314 97,420 100,196
Earnings per share
Basic: Continuing operations $3.70 $4.40 $1.93 $1.11
Discontinued BIS operations (1) 0.77 0.19 0.86 0.57
Cumulative effect of changes in accounting (0.07)
principles (2) 4.47 4.59 2.79 1.61
Net income
Diluted:Continuing operations $3.11 $3.91 $1.90 $1.10
Discontinued BIS operations (1) 0.62 0.17 0.85 0.57
Cumulative effect of changes in accounting (0.07)
principles (2) 3.73 4.08 2.75 1.60
Net income
Dividends declared per common share (3) 0.80 0.80 0.58 1/2 0.74
Common stock price: High 59.63 57.13 42.00 33.31
Low 40.50 35.75 29.88 25.13
Close 50.81 50.19 39.25 31.25
Shareholders' equity per common share $17.33 $15.65 $12.12 $11.43
Price/earnings ratio (4) 13.6 12.3 14.3 19.5
Adjusted price/earnings ratio (5) 19.3 21.8 21.6 28.4
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Other Financial Data
Treasury Stock Purchases: Number of shares 4,725 13,824 6,219 11,509
Cost $ 255,533 $ 643,375 $ 221,768 $ 319,363
Cash dividends declared 77,152 78,335 74,262 74,377
Ratio of earnings to fixed charges (6) 5.3 7.1 4.0 3.2
At year end
Total assets $ 4,257,097 $ 4,355,142 $ 2,860,907 $ 2,966,321
Total debt 1,527,278 1,668,830 821,335 1,013,850
Shareholders' equity 1,662,731 1,551,673 1,131,508 1,110,970
Return on average shareholders' equity (7) 22.8% 30.8% 23.9% 14.3%
Total debt/total capital ratio 47.9% 51.8% 42.1% 47.7%
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
(Table Continued)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
December December December December
25 26 27 29
(In thousands, except per share data and ratios) 1994 1993 1992 1991
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Summary of Operations
Operating Revenue
Advertising $ 1,414,343 $ 1,324,312 $ 1,294,944 $ 1,284,748
Circulation 426,799 418,726 406,388 386,363
Other 91,818 69,689 47,747 35,100
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Total Operating Revenue 1,932,960 1,812,727 1,749,079 1,706,211
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Operating Costs
Labor, newsprint and other operating costs 1,534,496 1,460,563 1,408,480 1,401,750
Depreciation and amortization 90,310 90,712 84,144 81,375
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Total Operating Costs 1,624,806 1,551,275 1,492,624 1,483,125
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Operating Income 308,154 261,452 256,455 223,086
Interest expense (44,216) (44,403) (52,358) (68,806)
Other, net 1,799 2,987 13,855 35,820
Income taxes, net (106,493) (83,281) (82,496) (67,965)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Income from continuing operations 159,244 136,755 135,456 122,135
Discontinued BIS operations (1) 11,656 11,334 10,630 9,933
Cumulative effect of changes in accounting principles (2) (105,200)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Net Income $ 170,900 $ 148,089 $ 40,886 $ 132,068
================================================================= ============== ============== ============== ==============
Operating income percentage (profit margin) 15.9% 14.4% 14.7% 13.1%
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Share Data
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 $1.48 $1.25 $1.24 $1.19
Discontinued BIS operations (1) 0.10 0.10 0.11 0.10
Cumulative effect of changes in accounting (0.97)
principles (2) 1.58 1.35 0.38 1.29
Net income
Diluted:Continuing operations $1.47 $1.24 $1.22 $1.18
Discontinued BIS operations (1) 0.10 0.10 0.10 0.09
Cumulative effect of changes in accounting (0.95)
principles (2) 1.57 1.34 0.37 1.27
Net income
Dividends declared per common share (3) 0.73 0.70 0.70 0.70
Common stock price: High 30.50 32.50 32.06 28.75
Low 23.25 25.31 25.38 21.88
Close 25.44 29.69 29.06 25.38
Shareholders' equity per common share $11.58 $11.33 $10.75 $10.72
Price/earnings ratio (4) 16.2 22.2 78.5 20.0
Adjusted price/earnings ratio (5) 17.3 23.9 23.8 21.5
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Other Financial Data
Treasury Stock Purchases: Number of shares 5,045 1,500
Cost $ 136,977 $ 40,693 $ - $ -
Cash dividends declared 77,942 76,787 75,992 71,087
Ratio of earnings to fixed charges (6) 5.2 4.4 3.8 2.8
At year end
Total assets $ 2,409,239 $ 2,399,067 $ 2,431,307 $ 2,305,731
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 (7) 13.9% 12.2% 12.0% 12.9%
Total debt/total capital ratio 25.2% 26.6% 32.2% 34.6%
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
12
(1) Results of operations of the company's Business Information Services
(BIS) Division (discontinued in 1997) and the gains on the sales of BIS
companies are presented as "discontinued BIS operations."
(2) For 1995, the cumulative effect of change in accounting principle
relates to the implementation of FAS 116-Accounting for Contributions
Received and Contributions Made. For 1992, the cumulative effect of
change in accounting principle relates to the implementation of FAS
109-Accounting for Income Taxes and FAS 106-Accounting for
Postretirement Benefits Other Than Pensions.
(3) On January 28, 1997, the Board of Directors declared a $.20 per share
dividend. The quarterly dividend previously paid in January was paid on
February 24, 1997, to shareholders of record as of the close of
business on February 12, 1997. Prior to January 1997, the quarterly
dividends were historically declared in the prior December.
(4) Price/earnings ratio is computed by dividing closing market price by
diluted earnings per share.
(5) Adjusted price/earnings ratio is computed by dividing closing market
price by diluted earnings per share from continuing operations. For
comparability purposes, diluted earnings per share from continuing
operations was adjusted to exclude relocation and severance costs and
gains and losses on sales, exchanges and write-downs of investments.
(6) 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.
(7) 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
1988 through 1998, 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.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
Certain statements in this annual report on Form 10-K are forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results and events to differ materially
from those anticipated.
Potential risks and uncertainties that could adversely affect the company's
ability to obtain these results include, without limitations, the following
factors: (a) increased consolidation among major retailers or other events that
may adversely affect business operations of major customers and depress the
level of local and national advertising; (b) an accelerated economic downturn in
some or all of the company's principal newspaper markets that may lead to
decreased circulation or decreased local or national advertising; (c) a decline
in general newspaper readership patterns as a result of competitive alternative
media or other factors; (d) an increase in newsprint costs over the levels
anticipated; (e) labor disputes or shortages that may cause revenue declines or
increased labor costs; (f) disruptions in electricity and natural gas supplies
and increases in energy costs; (g) acquisitions of new businesses or
dispositions of existing businesses; (h) increases in interest or financing
costs or availability of credit; (i) rapid technological changes and frequent
new product introductions prevalent in electronic publishing, including the
evolution of the Internet; and (j) acts of war, terrorism or other events that
may adversely affect the company's operations or the operations of key suppliers
to the company.
GLOSSARY OF 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 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 same 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.
UNIQUE VISITORS Number of persons who visited a site or network of sites at
least once in the month. Visitors to multiple sites in a network in a given
month are counted only once as a unique visitor for that network. In separate,
individual site tallies, they are counted once as a unique visitor for each site
visited.
PAGE VIEWS Total requests for HTML pages or unique screens of information as
presented to the user, including co-branded pages from partner sites.
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL. The company's discussion and analysis of its financial condition and
results of operations are based upon the company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
company evaluates its estimates, including those related to incentives, bad
debts, inventories, investments, intangible assets, income taxes, financing
operations, restructuring, long-term service contracts, pensions and other
post-retirement benefits, and contingencies and litigation. The company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
REVENUE RECOGNITION. Revenue recognition varies by source. Advertising revenue
is recognized when ads are published. Circulation revenue is recognized when the
newspaper is delivered to the customer. Other revenue is recognized when the
related product or service has been delivered. Revenues are recorded net of
estimated incentive offerings including special pricing agreements, promotions
and other volume-based incentives. Revisions to these estimates are charged to
income in the period in which the facts that give rise to the revision become
known.
BAD DEBTS. The company maintains a reserve account for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. The company uses a combination of the percentage of sales and the
aging of accounts receivable to establish reserves for losses on accounts
receivable. Payment in advance for advertising and circulation revenue and
credit background checks have assisted the company in maintaining historical bad
debt losses to less than 1% of revenue.
EQUITY AND COST METHOD INVESTMENT VALUATION AND ACCOUNTING. The company holds
minority interests in companies having operations or technology in areas within
its strategic focus and are recorded at cost. The company records an investment
impairment charge when it believes an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future.
GOODWILL AND INTANGIBLE IMPAIRMENT. In assessing the recoverability of the
company's goodwill and other intangibles the company must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
asset is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, the company may be required to record
impairment charges for these assets. The company has adopted Statement of
Financial Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002 and will be required to analyze its goodwill
and indefinite lived intangible assets for impairment during the first six
months of fiscal 2002, and then on at least an annual basis thereafter. The
adoption of FAS 142 is not expected to have a material impact on the company's
consolidated financial statements. During the year ended December 30, 2001,
Knight Ridder did not record any impairment losses related to goodwill and other
intangible assets.
15
RESTRUCTURING. During fiscal year 2001, the company recorded significant
reserves in connection with a restructuring of its workforce announced in the
second quarter of 2001. These reserves include estimates pertaining to employee
separation costs and the settlements of contractual obligations resulting from
this restructuring. Although the company does not anticipate significant
changes, the actual costs may differ from these estimates.
PENSION AND POSTRETIREMENT BENEFITS. The company has significant pension and
postretirement benefit costs and credits that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates and expected return on plan assets. For an explanation of these
assumptions, see "Note 10. Pension and Other Postretirement Benefit Plans" on
page 42. The company is required to consider current market conditions,
including changes in interest rates, in selecting these assumptions. Changes in
the related pension and postretirement benefit costs or credits may occur in the
future in addition to changes resulting from fluctuations in the company's
related headcount due to changes in the assumptions.
SELF-INSURANCE. The company is self-insured for the majority of its group health
insurance costs. The company relies on claims experience and the advice of
consulting actuaries and administrators in determining an adequate liability for
self-insurance claims.
ANALYSIS BY SEGMENT
The following sections discuss the results of the company's two operating
segments, newspaper and online. Online results are included in the "Other
revenue" line of total revenue and consist primarily of Web banner, classified
and recruitment advertising.
Newspaper revenue is derived principally from advertising and newspaper sales.
Advertising revenue accounted for about 77.7% of consolidated revenue in 2001.
This revenue comes from the three basic categories of advertising - retail,
general and classified. 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. By using part-run
advertising, advertisers can target their messages to selected geographically
zoned market segments.
Circulation revenue results from the sale of newspapers. Circulation of daily
and Sunday newspapers accounted for 17.7% of consolidated revenue in 2001. 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 and by delivery agents who are paid a fee for delivery of the
newspapers.
Other revenue comes from commercial job printing, niche and book publications,
online services, newsprint waste sales and other miscellaneous sources.
16
SUMMARY OF OPERATIONS
A summary of the company's operations, certain share data and other financial
information for the past 11 years is provided on pages 11 through 13. 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 on
pages 2 through 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 raw materials used in operations.
RESULTS OF OPERATIONS: 2001, 2000 and 1999
The company's fiscal year ends on the last Sunday of the calendar year. Results
for 2001 are for the 52 weeks ended December 30, results for 2000 are for the 53
weeks ended December 31, and results for 1999 are for the 52 weeks ended
December 26. The following tables set forth the results of operations for the
periods ended December 30, 2001, December 31, 2000, and December 26, 1999, which
are discussed in more detail on pages 18 and 20.
- ----------------------------------------------------------- ------------- ------------- ------------- ------------------
Change
------------------
(In thousands of dollars, except per share amounts) 2001 2000 1999 01-00 00-99
- ----------------------------------------------------------- ------------- ------------- ------------- ---------- -------
Operating revenue $ 2,900,209 $ 3,211,767 $ 3,033,775 (9.7)% 5.9%
Operating income 461,755 668,772 621,422 (31.0)% 7.6%
Income
Before gains (losses) on investments and assets,
work force reduction, severance and
relocation costs 239,023 329,436 321,146 (27.4)% 2.6%
Gains (losses) on investments and assets, work force
reduction, severance and relocation costs (54,199) (15,073) 18,793
------------- ------------- -------------
Net income $ 184,824 $ 314,363 $ 339,939 (41.2)% (7.5)%
============= ============= =============
Diluted earnings per share
Before gains (losses) on investments and assets,
severance and relocation costs 2.79 3.70 3.30 (24.6)% 12.1%
Gains (losses) on investments and assets, severance
and relocation costs (0.63) (0.17) 0.19
------------- ------------- -------------
Net income $2.16 $3.53 $3.49 (38.8)% 1.1%
- ----------------------------------------------------------- ============= ============= ============= ---------- -------
17
In 2001, Knight Ridder earned $2.16 per diluted share compared with $3.53 per
diluted share in 2000, down $1.37, or 38.8%. Excluding gains and losses on
investments and asset sales and work force reduction charges, the company earned
$2.79 per diluted share in 2001, down $0.91, or 24.6%, from the $3.70 earned in
2000. On the same basis, the company's earnings per diluted share in 2000 was up
$0.40, or 12.1%, from the $3.30 earned in 1999.
NEWSPAPER DIVISION
OPERATING REVENUE The following table summarizes the results of Operating
Revenue, average circulation and related full-run ROP linage statistics for the
periods ended December 30, 2001, December 31, 2000, and December 26, 1999.
- ---------------------------------- -------------- ------------------------- ------------ -----------------------
2000 Change
------------------------- -----------------------
In thousands 2001 53 Weeks 52 Weeks 1999 01-00* 00-99*
- ---------------------------------- -------------- ------------ ------------ ------------ ----------- -----------
Operating revenue
Advertising
Retail $ 1,073,789 $ 1,104,766 $ 1,081,188 $ 1,065,970 (0.7)% 1.4%
General 297,033 336,613 331,010 289,894 (10.3)% 14.2%
Classified 883,600 1,066,457 1,052,956 997,656 (16.1)% 5.5%
-------------- ------------ ------------ ------------
Total 2,254,422 2,507,836 2,465,154 2,353,520 (8.5)% 4.7%
-------------- ------------ ------------ ------------
Circulation 512,309 523,856 514,053 525,686 (0.3)% (2.2)%
Other 91,443 136,527 135,364 123,173 (32.4)% 9.9%
-------------- ------------ ------------ ------------
Total operating revenue $ 2,858,174 $ 3,168,219 $ 3,114,571 $ 3,002,379 (8.2)% 3.7%
============== ============ ============ ============
Average circulation (1)
Daily 3,811 3,903 - 3,934 (2.4)% (0.8)%
Sunday 5,155 5,300 - 5,376 (2.7)% (1.4)%
Advertising linage (1)
Full-run
Retail 16,959 18,231 - 18,355 (7.0)% (0.7)%
General 2,843 3,432 - 2,730 (17.2)% 25.7%
Classified 19,364 20,798 - 19,847 (6.9)% 4.8%
-------------- ------------ ------------ ------------
Total full-run 39,166 42,461 - 40,932 (7.8)% 3.7%
- ---------------------------------- ============== ============ ============ ============ ----------- -----------
* Excluding the 53rd week in 2000 for revenue amounts only
(1) Circulation and linage statistics are not presented on a 52-week basis.
Compared with 2000 on a 52-week basis, retail advertising revenue decreased 0.7%
due to a 7.0% full-run ROP linage decrease during 2001, partially offset by a
.9% increase in the full-run average rate and from total market coverage (TMC),
specialized publications and database marketing products. Akron, San Jose and
Philadelphia were responsible for most of the decrease, down 5.9%, 5.8% and
5.4%, respectively. From 1999 to 2000, retail revenue increased 1.4% due to an
increase in revenue from TMC, specialized publications and alternative
distribution products, offset by a full-run ROP decline of 0.7%. The weak
results from 2000 to 2001 and from 1999 to 2000 were due primarily to
consolidations and bankruptcies in most major markets.
General advertising revenue on a 52-week basis declined 10.3% in 2001 from 2000
due to a 17.2% decrease in full-run ROP, partially offset by a 5.9% increase in
the average rate and from TMC and specialized publications products. Contra
Costa, San Jose and Philadelphia had the largest impact, with declines of 41.3%,
32.0% and 12.1%, respectively. General advertising saw an 85% fall-off in
dot-com advertising, which had yielded about $18 million in 2000, as well as a
decline in airline and hotel advertising following the September 11, 2001
terrorist attacks. National auto, finance, pharmaceuticals and computers were
only slightly less affected. From 1999 to 2000, general advertising was up 14.2%
on a full-run ROP linage increase of 25.7% due to growth of e-commerce and
Internet-related advertising and strength in telecommunications, financial and
travel advertising.
18
Classified advertising revenue was down 16.1% in 2001 from 2000 due to a
full-run ROP linage decrease of 6.9% and a 12.5% decrease in rate largely due to
a decline in the higher rated recruitment revenue, partially offset by increases
in revenue from TMC and specialized publications products. A decline in
classified recruitment in the largest markets was responsible, with San Jose
down 55.0% and Philadelphia down 34.9%. Classified real estate revenue increased
23.4% overall, slightly offsetting the declines in recruitment. From 1999 to
2000, classified advertising was up 5.5% on a full-run ROP linage increase of
4.8%. This increase reflected a relatively strong first half of 2000, up 7.8%,
with recruitment providing the majority of the growth.
Circulation revenue decreased 0.3% from 2001 to 2000 on a 2.4% decrease in daily
circulation and a 2.7% decrease in Sunday circulation. From 1999 to 2000,
circulation revenue decreased 2.2% on a 0.8% decrease in daily circulation and a
1.4% decrease in Sunday circulation. The company expects circulation to remain
essentially flat in 2002.
Other revenue declined 32.4% in 2001 due to a decline in earnings from Detroit
and the absence of Professional Exchange, MediaStream and Cable Connection,
which were sold in late 2000. From 1999 to 2000, other revenue increased $10.6
million, or 9.9%, due to an increase in commercial print revenue and newsprint
waste sales.
OPERATING COSTS The following table summarizes operating costs for the periods
ended December 30, 2001, December 31, 2000, and December 26, 1999.
- -------------------------------------- ------------ ------------------------- ------------ -------------------
2000 Change
------------------------- -------------------
In thousands 2001 53 Weeks 52 Weeks 1999 01-00* 00-99*
- -------------------------------------- ------------ ------------ ------------ ------------ --------- ---------
Operating costs
Labor and employee benefits $ 1,134,584 $ 1,167,216 $ 1,133,601 $ 1,099,932 0.1% 3.1%
Newsprint, ink and supplements 451,547 473,724 465,534 449,577 (3.0)% 3.5%
Other operating costs 575,914 605,447 598,339 593,208 (3.7)% 0.9%
Depreciation and amortization 176,029 179,278 179,203 176,340 (1.8)% 1.6%
------------ ------------ ------------ ------------
Total operating costs $ 2,338,074 $ 2,425,665 $ 2,376,677 $ 2,319,057 (1.6)% 2.5%
- -------------------------------------- ============ ============ ============ ============ --------- ---------
* Excluding the 53rd week in 2000
On a 52-week basis, labor and employee benefits increased 0.1% during 2001 from
2000, primarily as a result of a restructuring charge related to a work force
reduction. Due to the slowing economy and the resulting decline in advertising
revenue and increases in newsprint expense, the company announced a work force
reduction program in the second quarter of 2001 that affected the majority of
its newspapers. The work force reduction plan eliminated approximately 1,600
positions through early retirement, voluntary and involuntary buyouts and
attrition. As a result of this plan, the company incurred charges of
approximately $78.5 million related to employee severance costs and benefits
during 2001. Excluding this restructuring charge, labor and employee benefits
decreased 6.8% as a result of a 7.2% decrease in full-time equivalents (FTEs)
and an 11.7% decrease in bonus and incentive costs, partially offset by a 1.4%
increase in the average wage rate per employee. The increase in labor and
employee benefits in 2000 from 1999 resulted from a 4.5% increase in the average
wage per employee, an increase of 0.5% in the number of FTEs and an increase in
benefit costs of 12.3%, partially offset by bonus and incentive costs, which
were down 2.5%.
Newsprint, ink and supplements decreased 3.0% in 2001 from 2000 due to a 13.2%
decline in consumption offset by a 10.4% increase in the average cost per ton.
The increase in the cost of newsprint, ink and supplements from 1999 to 2000 was
due primarily to a 2.0% increase in consumption and a 3.3% increase in the
average cost per ton.
Other operating costs were down 3.7% in 2001 compared with 2000, due primarily
to a decrease in circulation promotion, advertising and promotion expense,
contribution expense and travel expense. From 1999 to 2000, other operating
costs remained relatively constant, increasing only 0.9%.
Depreciation and amortization decreased 1.8% in 2001 from the 2000 due to a $3.9
million write-down of presses offset by a $1.6 million adjustment recorded on
the sale of a building, both occurring in 2000. From 1999 to 2000, depreciation
and amortization expense increased 1.6% due to a slightly larger asset base. The
19
company expects to implement FAS 142, "Goodwill and Other Intangible Assets" in
the first quarter of fiscal year 2002. Application of the nonamortization
provisions of the Statement is expected to result in an increase in net income
of approximately $55 million ($.65 per diluted share) per year beginning in
fiscal year 2002.
ONLINE DIVISION
ONLINE ACTIVITIES During the first quarter of 2000, the company consolidated all
its Internet operations under a wholly-owned subsidiary, Knight Ridder Digital
(KRD). Previously, Knight Ridder's Internet activities were reported and managed
as a part of the company's newspaper operations. KRD controls all of Knight
Ridder's online efforts, including the Web sites previously operated by the
newspapers. KRD operates and manages the Real Cities Network, which consists of
all Knight Ridder Web sites and those of several other media affiliates. The
company expects significant growth from these operations in 2002.
OPERATING REVENUE AND COSTS FOR THE ONLINE DIVISION The following table
summarizes operating revenue and costs for the periods ended December 30, 2001,
December 31, 2000, and December 26, 1999.
- ----------------------------------------- ----------- ----------------------- --------------------
Change
----------------------- --------------------
In thousands 2001 2000 1999 01-00 00-99
- ----------------------------------------- ----------- ----------- ----------- --------- ----------
Operating revenue $ 42,035 $ 43,548 $ 31,396 (3.5)% 38.7%
Operating costs
Labor and employee benefits $ 31,859 $ 38,993 $ 27,279 (18.3)% 42.9%
Other operating costs 38,877 47,956 26,339 (18.9)% 82.1%
Depreciation and amortization 2,801 2,620 1,819 6.9% 44.0%
----------- ----------- -----------
Total operating costs $ 73,537 $ 89,569 $ 55,437 (17.9)% 61.6%
=========== =========== ===========
Operating loss $ (31,502) $ (46,021) $ (24,041) 31.5% (91.4)%
Average monthly page views 176,749 153,541 104,246 15.1% 47.3%
- ----------------------------------------- ----------- ----------- ----------- --------- ----------
Revenue for the online division was down 3.5% primarily due to a 23.4% decrease
in banners and sponsorship ads, offset by an increase in revenue from
CareerBuilder and Classified Ventures and from an increase in upsell revenue.
From 1999 to 2000, revenue grew 38.7% due to the expansion of the Real Cities
network into six new cities and the purchase, along with Tribune Co., of
CareerBuilder.
The decrease in the cost of labor and employee benefits in 2001 from 2000 was
due primarily to reductions in the number of full-time employees. Other
operating costs decreased primarily as a result of lower promotion-related
expenses and volume-related fees paid to advertising and content providers.
Depreciation and amortization expense increased due to the acquisition of
additional equipment. From 1999 to 2000, labor and employee benefits increased
due primarily to increases in full-time employees. Other operating costs
increased primarily as a result of increased promotion-related expenses and
volume-related fees paid to advertising and content providers. Depreciation and
amortization expense increased due to the acquisition of additional equipment.
NON-OPERATING ITEMS
Net interest expense decreased $14.9 million, or 13.2%, in 2001 from 2000 as a
result of a lower weighted-average interest rate. For 2000, net interest expense
increased $23.1 million, or 25.7% from 1999, due to higher debt levels. The
average debt balance increased $103.8 million from 2000 to 2001, and increased
$152.0 million from 1999 to 2000.
20
From 2000 to 2001, equity in losses of unconsolidated companies and joint
ventures increased $7.6 million due to a full year of losses from Career
Holdings, Inc. (acquired in the third quarter of 2000), offset slightly by an
increase in earnings from newsprint paper mills. From 1999 to 2000, equity in
earnings of unconsolidated companies decreased $21.1 million due to losses from
Career Holdings, Inc., and a decrease in earnings from investments in the
Seattle Times Company and newsprint mills.
The "Other, net" line of the non-operating section decreased $21.4 million in
2001 from 2000. The 2001 decline was due almost entirely to the write-down of
certain Internet-related assets, while 2000 results included a gain on the sale
of a building in Philadelphia.
ACQUISITIONS
In August 2000, Career Holdings, Inc., a company jointly controlled by Knight
Ridder Digital and Tribune Co., acquired CareerBuilder, Inc., and
CareerPath.com, Inc., respectively. In the CareerBuilder acquisition, a
wholly-owned subsidiary of Career Holdings made a tender offer for all of
CareerBuilder's common stock at a price of $8 per share in cash. The tender
offer, which began on July 25, 2000, and expired on August 21, 2000, was
followed by the merger of the subsidiary into CareerBuilder on August 24, 2000.
The CareerPath.com acquisition was accomplished by the merger of a wholly-owned
subsidiary of Career Holdings into CareerPath.com on August 31, 2000. The total
purchase price for the CareerBuilder and CareerPath.com acquisitions was
approximately $250 million. The company, through Knight Ridder Digital,
currently owns a 48.1% interest in Career Holdings, Inc.
In November 2001, Career Holdings, Inc. acquired Headhunter.net, an online
recruitment and career development business, for $9.25 per share in cash, or
approximately $217 million. The company's share was $108.5 million to fund this
acquisition. Headhunter.net now operates as a wholly owned subsidiary of Career
Holdings, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the company's primary source of liquidity.
Management is focused on growing cash flow and on managing cash effectively. In
addition, the company uses financial leverage to minimize the overall cost of
capital and maintain adequate operating and financial flexibility.
Management monitors leverage through its interest coverage and cash flow-to-debt
ratios. The following schedule summarizes these ratios for the years ended
December 30, 2001, and December 31, 2000:
- --------------------------------------- -------------- ---------------
2001 2000
- --------------------------------------- -------------- ---------------
Interest coverage ratio (a) 6.4:1 7.3:1
Cash flow to debt (b) 22.9% 30.0%
- --------------------------------------- -------------- ---------------
(a) Defined as operating income plus depreciation and amortization divided by
interest expense
(b) Defined as net income plus depreciation and amortization divided by debt
The company's financial position remained strong throughout 2001, with cash and
cash equivalents and short-term investments of $37.3 million at December 30,
2001, compared with $41.7 million at December 31, 2000. During 2001, cash flows
from operating activities were used to fund treasury stock purchases of $171.8
million. In addition, the company paid dividends of $84.2 million during 2001.
Cash provided by operating activities was $481.5 million in 2001, compared with
$417.2 million in 2000. The increase was due partially to a reduction of the
funding required for a health and welfare trust, an increase in distributions
relative to earnings from equity investments and the timing of payments on
certain current assets and liabilities.
21
At December 30, 2001, working capital was $55.5 million, compared with $67.7
million at December 31, 2000. The decrease in working capital from 2000 to 2001
was due primarily to a decline in accounts receivable of $24.7 million and
inventories of $9.5 million and an increase in accrued income taxes of $13.9
million, partially offset by a decline in short-term borrowings of $39.7
million.
Cash required for investing activities was primarily for the purchase of $94.6
million of property and equipment and $135.8 million for acquisition of
businesses, including Headhunter.net, Inc., in November 2001, partially offset
by proceeds of $21.0 million from the sale of investments.
The company invests excess cash in short- and long-term investments, depending
on projected cash needs from operations, capital expenditures and other business
purposes. The company supplements internally generated cash flow with a
combination of short- and long-term borrowings. Average outstanding commercial
paper during the year was $639.1 million, with an average effective interest
rate of 4.6%. At December 30, 2001, the company's revolving credit agreement,
which backs up the commercial paper outstanding, had a remaining availability of
$317.0 million. The revolving credit facility matures in 2006.
The company uses derivatives to hedge certain exposures, including interest
rates and newsprint. The company does not trade or engage in hedges for
investment purposes.
At year end, the company's short- and long-term debt was rated by the three
major credit-rating agencies as provided below, which did not reflect any change
from the prior year:
- --------------------------------------- ----------------- ----------------
Short-Term Long-Term
Debt Debt
- --------------------------------------- ----------------- ----------------
Moody's P1 A2
Standard & Poor's A-1 A
Fitch F1 A
- --------------------------------------- ----------------- ----------------
The company believes it has adequate access to the capital debt markets to meet
its short- and long-term capital needs. Such access includes the company's
$895.0 million revolving credit facility and term loan agreement, which support
its commercial paper, and its $200 million extendable commercial notes. The
company's future ability to borrow funds and the interest rates on those funds
could be adversely impacted by a decrease in its debt ratings and by negative
conditions in the capital debt markets.
During 2001, the company repurchased 3.0 million common shares at a total cost
of $171.8 million and an average cost of $57.39 per share. At year end,
authorization remained to purchase 5.5 million shares.
The company's operations have historically generated strong positive cash flow,
which, along with the company's commercial paper program, revolving credit lines
and ability to issue public debt, has provided adequate liquidity to meet the
company's short- and long-term cash requirements, including requirements for
working capital and capital expenditures.
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 $295.1 million for additions and improvements to
properties.
Additions to property, plant and equipment decreased by $13.4 million to $94.6
million in 2001 from $108.0 million in 2000, due primarily to lower expenditures
for year 2001 capital projects. Expenditures in 2001 included $7.1 million for a
mailroom system in St. Paul and $7.4 million for the development of Knight
Ridder Digital's new technology platform. In 2001, $5.9 million was spent to
complete the $109.2 million Miami press expansion, and the $11.8 million
Lexington mailroom and insertion facility project is scheduled to be completed
in 2002. In 2001, $6.9 million was spent for the Lexington project. During 2001,
$4.7 million was spent on a $27.7 million press project at The Wichita Eagle
that is scheduled for completion in 2003. The press replacement projects are
expected to significantly improve reliability, speed, print quality and page and
color capacity, and reduce waste.
22
The following table summarizes the company's contractual obligations and
commercial commitments as of December 31, 2001:
- ---------------------------------------------------------------------------------------------------------------
Payments Due By Period
- ---------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less Than 1 1-3 Years 4-5 Years After 5 Years
Year
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt 1,086,806 850 99,604 986,352
- ---------------------------------------------------------------------------------------------------------------
Commercial Paper (a) 527,148 39,849 487,299
- ---------------------------------------------------------------------------------------------------------------
Operating Leases 102,548 22,206 47,051 9,128 24,163
- ---------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations 1,716,502 62,905 146,655 496,427 1,010,515
- ---------------------------------------------------------------------------------------------------------------
(a) Commercial paper is supported by $895 million revolving credit facility
which matures on June 15, 2006.
- ---------------------------------------------------------------------------------------------------------------
Payments Due By Period
- ---------------------------------------------------------------------------------------------------------------
Other Commercial Commitments Total Less Than 1 1-3 Years 4-5 Years After 5 Years
Year
- ---------------------------------------------------------------------------------------------------------------
Standby Letters of Credit (b) 50,000 50,000
- ---------------------------------------------------------------------------------------------------------------
Guarantees (c) 17,227 17,227
- ---------------------------------------------------------------------------------------------------------------
Total Commercial Commitments 67,227 17,227 50,000
- ---------------------------------------------------------------------------------------------------------------
(b) In connection with the company's insurance program, letters of credit are
required to support certain projected worker compensation obligations.
(c) The company guarantees 13.5% of the debt of Ponderay Newsprint Company, a
newsprint mill investment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Borrowings - By balancing the mix of variable- versus fixed-rate borrowings, the
company manages the interest-rate risk of its debt. Note 3 to the Consolidated
Financial Statements includes information related to the contractual interest
rates and fair value of the individual borrowings. In 2001, the company entered
into interest rate swap agreements for interest rate risk exposure management
purposes. The company accounts for its interest rate swap agreements as fair
value hedges. The fair value of the swaps at December 30, 2001 was $9.6 million.
There was no ineffectiveness associated with the swaps during fiscal year 2001.
The company does not trade or engage in hedging for investment purposes. A
hypothetical 10% increase in interest rates would increase interest expense
associated with both fixed- and variable-rate borrowings by approximately $8.2
million. This hypothetical interest rate change would also decrease the fair
value of the fixed debt by $95.2 million.
Newsprint - The company, excluding Detroit, consumed approximately 661,000
metric tons of newsprint in 2001. This represents 15.4% of the company's 2001
total operating expenses. Under the caption "Newsprint" on page 2, the company
has included information on its suppliers, the long-term purchase agreements
used to manage the related risk of price increases, and natural hedges the
company has in place through its investment in newsprint mills.
Collective Bargaining Agreements - About 37% of the company's more than 19,000
full-time equivalent employees are represented by approximately 70 local unions
and work under multiyear collective bargaining agreements. These agreements are
typically renegotiated in the years in which they expire.
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 3% each
year since 1991. 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 costs. Subject to normal competitive conditions, the company generally
has demonstrated the ability to raise sales prices to offset these cost
increases.
23
Item 8. Financial Statements and Supplementary Data
Selected quarterly financial data is presented in Note 8 to the Consolidated
Financial Statements. Schedule II - Valuations and Qualifying Accounts is
included in Item 14 of this report and incorporated herein by reference.
Consolidated Balance Sheet (In thousands, except share data)
- ---------------------------------------------------------------------------------------- ------------------- ------------------
December 30, December 31,
2001 2000
- ---------------------------------------------------------------------------------------- ------------------- ------------------
ASSETS
Current Assets
Cash, including short-term cash investments of $1 in 2001 and $7,001 in 2000 $ 37,287 $ 41,661
Accounts receivable, net of allowances of $23,811 in 2001 and $20,238 in 2000 391,788 416,498
Inventories 43,240 52,786
Prepaids 35,464 30,767
Other current assets 27,792 34,382
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total Current Assets 535,571 576,094
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Investments and Other Assets
Equity in unconsolidated companies and joint ventures 393,777 304,486
Other 215,325 202,951
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total Investments and Other Assets 609,102 507,437
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Property, Plant and Equipment
Land and improvements 99,605 96,925
Buildings and improvements 492,576 460,770
Equipment 1,301,826 1,265,866
Construction and equipment installations in progress 43,772 57,694
- ---------------------------------------------------------------------------------------- ------------------- ------------------
1,937,779 1,881,255
Less accumulated depreciation (922,453) (841,812)
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Net Property, Plant and Equipment 1,015,326 1,039,443
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Goodwill and Other Identified Intangible Assets
Less accumulated amortization of $464,091 in 2001 and $396,307 in 2000 2,053,377 2,120,552
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total $ 4,213,376 $ 4,243,526
======================================================================================== =================== ==================
See "Notes to Consolidated Financial Statements."
24
- ---------------------------------------------------------------------------------------- ------------------- ------------------
December 30, December 31,
2001 2000
- ---------------------------------------------------------------------------------------- ------------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 110,333 $ 121,300
Accrued expenses and other liabilities 112,946 101,660
Accrued compensation and amounts withheld from employees 107,842 114,810
Federal and state income taxes 30,844 16,928
Deferred revenue 77,368 73,300
Short-term borrowings and current portion of long-term debt 40,699 80,362
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total Current Liabilities 480,032 508,360
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Noncurrent Liabilities
Long-term debt 1,573,255 1,591,910
Deferred federal and state income taxes 255,266 269,702
Postretirement benefits other than pensions 136,134 137,791
Employment benefits and other noncurrent liabilities 207,081 191,847
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total Noncurrent Liabilities 2,171,736 2,191,250
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Minority Interests in Consolidated Subsidiaries 1,320 2,446
Commitments and Contingencies (Note 11)
Shareholders' Equity
Preferred stock, $1.00 par value; shares authorized - 20,000,000; 1,111
shares issued - 0 in 2001 and 1,110,500 in 2000
Common stock, $.02 1/12 par value; shares authorized - 250,000,000; 1,750 1,542
shares issued - 84,012,749 in 2001 and 74,036,046 in 2000
Additional capital 984,830 919,582
Retained earnings 575,649 622,801
Accumulated other comprehensive loss (1,301)
Treasury stock, at cost; 34,757 shares in 2001 and 41,009 shares in 2000 (1,941) (2,265)
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total Shareholders' Equity 1,560,288 1,541,470
- ---------------------------------------------------------------------------------------- ------------------- ------------------
Total $ 4,213,376 $ 4,243,526
======================================================================================== =================== ==================
See "Notes to Consolidated Financial Statements."
25
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Year Ended December 30, December 31, December 26,
2001 2000 1999
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Operating Revenue
Advertising
Retail $ 1,073,789 $ 1,104,766 $ 1,065,970
General 297,033 336,613 289,894
Classified 883,600 1,066,457 997,656
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Total 2,254,422 2,507,836 2,353,520
Circulation 512,309 523,856 525,686
Other 133,478 180,075 154,569
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Total Operating Revenue 2,900,209 3,211,767 3,033,775
================================================================= ================= ================ =================
Operating Costs
Labor and employee benefits 1,177,554 1,220,221 1,152,432
Newsprint, ink and supplements 440,782 460,463 437,054
Other operating costs 635,545 674,714 639,924
Depreciation and amortization 184,573 187,597 182,943
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Total Operating Costs 2,438,454 2,542,995 2,412,353
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Operating Income 461,755 668,772 621,422
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Other Income (Expense)
Interest expense (100,833) (116,652) (97,444)
Interest expense capitalized 1,961 2,230 5,197
Interest income 938 1,553 2,425
Equity in earnings (losses) of unconsolidated companies
and joint ventures (16,095) (8,506) 12,571
Minority interests in losses of consolidated subsidiaries (9,675) (12,814) (11,984)
Other, net (30,652) (9,293) 35,828
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Total (154,356) (143,482) (53,407)
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Income before income taxes 307,399 525,290 568,015
Income taxes 122,575 210,927 228,076
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Net Income $ 184,824 $ 314,363 $ 339,939
================================================================= ================= ================ =================
Earnings Per Share
Basic $2.33 $4.02 $4.07
Diluted $2.16 $3.53 $3.49
Average Shares Outstanding (000s)
Basic 76,074 75,370 80,025
Diluted 85,694 89,105 97,460
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
See "Notes to Consolidated Financial Statements."
26
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of dollars)
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Year Ended December 30, December 31, December 26,
2001 2000 1999
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Cash Provided by Operating Activities
Net income $ 184,824 $ 314,363 $ 339,939
Noncash items deducted from (included in) income:
Depreciation 111,717 111,124 101,444
Amortization of goodwill 67,784 68,567 67,503
Amortization of other assets 5,072 7,906 13,996
Losses (gains) on sales, exchange and write-down of
investments 30,191 19,401 (37,655)
Benefit for deferred taxes (8,414) (8,759) (1,895)
Provision for bad debts 31,958 27,070 24,440
Distributions in excess of earnings from investees 32,519 1,505 2,506
Minority interests in earnings of consolidated subsidiaries 9,675 12,814 11,984
Other items, net 1,929 15,200 7,913
Change in certain assets and liabilities:
Accounts receivable (7,248) (20,767) (64,221)
Inventories 9,126 (13,548) 19,871
Other assets (10,353) (97,390) (22,452)
Accounts payable (11,189) (21,160) (22,098)
Federal and state income taxes 15,969 3,976 16,176
Other liabilities 17,983 (3,062) 48,253
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Net Cash Provided by Operating Activities 481,543 417,240 505,704
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Cash Required for Investing Activities
Proceeds from sales of investments 21,038 35,058 119,810
Proceeds from sale of building 15,694
Acquisition of businesses (135,827) (194,476) (38,403)
Other investments (38,227)
Additions to property and equipment (94,587) (107,956) (92,563)
Other items, net 311 23,685 33,205
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Net Cash Required for Investing Activities (209,065) (227,995) (16,178)
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Cash Required for Financing Activities
Net increase (decrease) in debt, net of unamortized discount (316,675) 367,557 (483,737)
Proceeds from issuance of long-term debt 297,107 296,446
Repayment of long-term debt (40,000) (40,000) (40,000)
Payment of cash dividends (84,198) (81,002) (85,526)
Issuance of common stock to employees and directors 76,742 29,867 50,335
Purchase of treasury stock (171,795) (464,835) (210,141)
Other items, net (38,033) 6,745 (9,655)
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Net Cash Required for Financing Activities (276,852) (181,668) (482,278)
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Net Increase (Decrease) in Cash (4,374) 7,577 7,248
Cash and short-term cash investments at beginning of year 41,661 34,084 26,836
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
Cash and short-term cash investments at end of year $ 37,287 $ 41,661 $ 34,084
========================================================================= ================ =============== ================
Supplemental Cash Flow Information
Noncash investing activities
Securities received on the sale of investees $ - $ 195,624 $ -
Write-down of Internet-related investments (167,827)
Unrealized gains (net of tax) on investments available for sale 109,442 23,346
Noncash financing activities
Conversion of preferred stock held by Disney to common stock
Preferred stock (1,111) (263) (381)
Additional capital (416,530) (98,872) (142,842)
Issuance of common stock upon conversion of preferred stock
Common stock 231 55 79
Additional capital 417,410 99,080 143,144
- ------------------------------------------------------------------------- ---------------- --------------- ----------------
See "Notes to Consolidated Financial Statements."
27
Consolidated Statement of Shareholders' Equity
(In thousands of dollars, except share data)
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Preferred Common Treasury
Shares Shares Shares
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Balance at December 27, 1998 1,754,930 78,374,195 (46,667)
Issuance of common shares under stock option plan 840,375
Issuance of common shares under stock purchase plan 336,001
Conversion of preferred shares (380,830) 3,808,300
Issuance of treasury shares to nonemployee directors 4,157
Purchase of treasury shares (3,704,378)
Retirement of treasury shares (3,704,378) 3,704,378
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized gains on securities available
for sale, net of tax of $15,564
Comprehensive income
Cash dividends declared
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Balance at December 26, 1999 1,374,100 79,654,493 (42,510)
Issuance of common shares under stock option plan 447,453
Issuance of common shares under stock purchase plan 344,800
Conversion of preferred shares (263,600) 2,636,000
Issuance of treasury shares to nonemployee directors 3,696
Purchase of treasury shares (9,048,895)
Retirement of treasury shares (9,046,700) 9,046,700
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized losses on securities available
for sale, net of tax of $28,923
Comprehensive income
Cash dividends declared
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Balance at December 31, 2000 1,110,500 74,036,046 (41,009)
Issuance of common shares under stock option plan 1,603,450
Issuance of common shares under stock purchase plan 264,015
Conversion of preferred shares (1,110,500) 11,105,000
Issuance of treasury shares to nonemployee directors 4,057
Purchase of treasury shares (2,993,567)
Retirement of treasury shares (2,995,762) 2,995,762
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized losses on securities available
for sale, net of tax of $868
Comprehensive income
Cash dividends declared
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Balance at December 30, 2001 - 84,012,749 (34,757)
================================================================= ================= ================ =================
(Table Continued)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Preferred Common Additional Retained
Stock Stock Capital Earnings
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 27, 1998 $ 1,755 $ 1,633 $ 908,078 $ 735,132
Issuance of common shares under stock option plan 17 25,893
Issuance of common shares under stock purchase plan 7 14,996
Conversion of preferred shares (381) 79 302
Issuance of treasury shares to nonemployee directors
Purchase of treasury shares
Retirement of treasury shares (77) (19,490) (190,574)
Tax benefits arising from employee stock plans 9,190
Comprehensive income:
Net income 339,939
Change in unrealized gains on securities available
for sale, net of tax of $15,564
Comprehensive income
Cash dividends declared (85,526)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 26, 1999 $ 1,374 $ 1,659 $ 938,969 $ 798,971
Issuance of common shares under stock option plan 9 14,672
Issuance of common shares under stock purchase plan 7 14,991
Conversion of preferred shares (263) 55 208
Issuance of treasury shares to nonemployee directors (18)
Purchase of treasury shares
Retirement of treasury shares (188) (53,345) (409,531)
Tax benefits arising from employee stock plans 4,105
Comprehensive income:
Net income 314,363
Change in unrealized losses on securities available
for sale, net of tax of $28,923
Comprehensive income
Cash dividends declared (81,002)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 31, 2000 $ 1,111 $ 1,542 $ 919,582 $ 622,801
Issuance of common shares under stock option plan 33 63,294
Issuance of common shares under stock purchase plan 6 13,179
Conversion of preferred shares (1,111) 231 880
Issuance of treasury shares to nonemployee directors 4
Purchase of treasury shares
Retirement of treasury shares (62) (24,053) (147,778)
Tax benefits arising from employee stock plans 11,944
Comprehensive income:
Net income 184,824
Change in unrealized losses on securities available
for sale, net of tax of $868
Comprehensive income
Cash dividends declared (84,198)
- ----------------------------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 30, 2001 $ - $ 1,750 $ 984,830 $ 575,649
================================================================= ============== ============== ============== ==============
(Table Continued)
- ----------------------------------------------------------------- ------------------ ---------------- ----------------
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
- ----------------------------------------------------------------- ------------------ ---------------- ----------------
Balance at December 27, 1998 $ 18,738 $ (2,605) $ 1,662,731
Issuance of common shares under stock option plan 25,910
Issuance of common shares under stock purchase plan 15,003
Conversion of preferred shares
Issuance of treasury shares to nonemployee directors 232 232
Purchase of treasury shares (210,141) (210,141)
Retirement of treasury shares 210,141
Tax benefits arising from employee stock plans 9,190
Comprehensive income:
Net income 339,939
Change in unrealized gains on securities available
for sale, net of tax of $15,564 23,346 23,346
-----------
Comprehensive income 363,285
-----------
Cash dividends declared (85,526)
- ----------------------------------------------------------------- ------------------ ---------------- ----------------
Balance at December 26, 1999 $ 42,084 $ (2,373) $ 1,780,684
Issuance of common shares under stock option plan 14,681
Issuance of common shares under stock purchase plan 14,998
Conversion of preferred shares
Issuance of treasury shares to nonemployee directors 206 188
Purchase of treasury shares (464,835) (464,835)
Retirement of treasury shares 464,737 1,673
Tax benefits arising from employee stock plans 4,105
Comprehensive income:
Net income 314,363
Change in unrealized losses on securities available
for sale, net of tax of $28,923 (43,385) (43,385)
------------
Comprehensive income 270,978
------------
Cash dividends declared (81,002)
- ----------------------------------------------------------------- ------------------ ---------------- ----------------
Balance at December 31, 2000 $ (1,301) $ (2,265) $ 1,541,470
Issuance of common shares under stock option plan 63,327
Issuance of common shares under stock purchase plan 13,185
Conversion of preferred shares
Issuance of treasury shares to nonemployee directors 226 230
Purchase of treasury shares (171,795) (171,795)
Retirement of treasury shares 171,893
Tax benefits arising from employee stock plans 11,944
Comprehensive income:
Net income 184,824
Change in unrealized losses on securities available
for sale, net of tax of $868 1,301 1,301
-----------
Comprehensive income 186,125
-----------
Cash dividends declared (84,198)
- ----------------------------------------------------------------- ------------------ ---------------- ----------------
Balance at December 30, 2001 $ - $ (1,941) $ 1,560,288
================================================================= ================== ================ ================
See "Notes to Consolidated Financial Statements."
28
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The company reports on a fiscal year ending on the last Sunday in the calendar
year. Results are for the 52 weeks ended December 30, 2001, the 53 weeks ended
December 31, 2000, and the 52 weeks ended December 26, 1999, respectively.
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.
Revenue recognition varies by source. Advertising revenue is recognized when ads
are published. Circulation revenue is recognized when the newspaper is delivered
to the customer. Other revenue is recognized when the related product or service
has been delivered.
The company owns a 50% equity interest in Detroit Newspapers (DN), 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 Detroit Free Press and The Detroit
News were transferred to DN under a joint operating agreement that expires in
2089. The company shows its share of revenue and expenses as a net amount in the
"Other revenue" line.
Investments in entities in which Knight Ridder has an equity interest of at
least 20% but not more than 50% are accounted for under the equity method. The
company records its share of earnings as income and increases the investment by
the equivalent amount. Dividends and losses 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 DN; 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; SP Newsprint Co. and
Ponderay Newsprint Company, two newsprint mill partnerships; InfiNet Company, a
joint venture that provides Web-hosting services; Career Holdings, Inc., a
company in the business of providing recruitment services through the Internet
via its wholly-owned subsidiaries, CareerBuilder, Inc. and Headhunter.net;
Classified Ventures, Inc., an online classified listings service; and Newscom, a
company that provides online access to news wires, features, graphics and
photographic content to the media.
The company owns 49.5% of the voting common stock and 65% of the nonvoting
common stock of the Seattle Times Company; 31.1% of the voting stock of
Newspapers First; a 48.1% equity share of Career Holdings, Inc.; a 19.2% equity
interest in Classified Ventures; a 50% equity interest in Newscom; a 13.5%
equity interest in Ponderay Newsprint Company; and 33.3% of the voting stock of
InfiNet Company. It is a one-third partner in the SP Newsprint Co.
The company owns a 55% equity interest in Fort Wayne Newspapers, Inc., and
consolidates 100% of its revenues and expenses. 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
losses of consolidated subsidiaries." Also included in this caption is a
contractual minority interest resulting from a joint operating agreement that
runs through 2021 between The Miami Herald Publishing Co. and Cox Newspapers,
Inc., covering the publication of The Herald and of The Miami News, which ceased
publication in 1988. The related effects are included in the Consolidated
Balance Sheet caption "Minority Interests in Consolidated Subsidiaries."
"Cash, including 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. Cash and short-term
investments are recorded at cost. Due to the short-term nature of marketable
securities, cost approximates market value.
29
Most of the company's "Accounts receivable" is 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 are written off
to a reserve account at the time they are deemed uncollectible. The company uses
a combination of the percentage of sales and the aging of accounts receivable to
establish reserves for losses on accounts receivable. Credit losses have
historically been within management's expectations.
"Inventories" are priced at the lower of cost (first-in, first-out FIFO method)
or market value. Most of the inventory is newsprint, ink and other supplies used
in printing newspapers. Newsprint inventory varies from approximately a 30-day
to a 45-day supply, depending on availability and market conditions. Damaged
newsprint is generally returned to the manufacturer or supplier within 30 days
for full credit. Obsolete inventory is generally not a factor. The price of
newsprint has varied significantly over the past three years; however, the
company is able to mitigate price volatility through its newsprint mill
investments.
"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
"Accumulated other comprehensive loss," a separate component of shareholders'
equity. 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 as follows:
- ------------------------------------------ ------------------------------
Depreciation or
Type of Asset Amortization Period
- ------------------------------------------ ------------------------------
Buildings and improvements 10 to 40 years
Machinery, equipment and fixtures Three to 25 years
Automobile and trucks Three to eight years
Software Three to seven years, not to
exceed the remaining useful
life of the related hardware
- ------------------------------------------ ------------------------------
The company capitalizes interest costs as part of the cost of constructing major
facilities and equipment. Expenditures for maintenance, repairs and minor
renewals are charged to expense as incurred.
"Goodwill and Other Identified Intangible Assets" 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. The goodwill is
amortized over a 40-year period on a straight-line basis, unless management
concludes that a shorter term is more appropriate. Identified acquired
intangibles of approximately $400 million consisting of trademarks, subscriber
and advertiser lists, and mastheads are amortized on a straight-line basis over
periods ranging from five to forty years, with a weighted-average life of 25.7
years. If, in the opinion of management, an impairment in value occurs, any
additional write-down of assets will be charged to expense. Management uses the
undiscounted cash flow method to determine impairment. See also Recent
Accounting Pronouncements on page 33.
"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 that management does not intend to
refinance, and the portion of long-term debt payable within 12 months. The
30
carrying amounts of short-term borrowings approximate fair value. "Long-term
debt" represents the carrying amounts of debentures, notes payable, other
indebtedness with maturities longer than one year and commercial paper backed by
a revolving credit and term loan agreement that management intends to refinance
at maturity. Fair values, disclosed in Note 3, are estimated using the
discounted cash flow analysis based on the company's current incremental
borrowing rates for similar types of borrowing arrangements.
In accordance with the Statement of Financial Accounting Standards (FAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the company reviews long-lived assets and related intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. To date, no such
impairment has been indicated. If this review indicates that the carrying value
of these assets would not be recoverable as measured based on estimated
undiscounted cash flows over their remaining life, the carrying amount would be
adjusted to fair value. The cash flow estimates used contain management's best
estimates, using appropriate and customary assumptions and projections.
The company accounts for stock-based compensation plans in accordance with
Accounting Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" and discloses the general and pro forma financial information
required by FAS 123. See Note 6.
Under FAS 128, "Earnings Per Share (EPS)," "basic earnings per share" is
computed by dividing net income attributable to common stock (net income less
preferred stock dividends) by the weighted-average number of common shares
outstanding. Net income attributable to common shares was $177.3 million in
2001, $303.0 million in 2000 and $325.7 million in 1999. "Diluted earnings per
share" is computed by dividing net income by the weighted-average number of
common and common equivalent shares outstanding. See Note 6.
The following table sets forth the calculation of basic and diluted
weighted-average shares outstanding (in thousands).
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
2001 2000 1999
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Basic weighted-average shares outstanding 76,074 75,370 80,025
Effect of dilutive securities:
Assumed conversion of convertible preferred stock 8,272 12,597 15,948
Treasury stock effect of outstanding stock options 1,348 1,138 1,487
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Diluted weighted-average shares outstanding 85,694 89,105 97,460
================================================================= ================= ================ =================
Under FAS 130, "Reporting Comprehensive Income," the company presents unrealized
gains or losses on the company's available-for-sale securities as an element of
"Accumulated other comprehensive income," a separate component of shareholders'
equity. See Note 12.
The company is a newspaper company with products in print and online. It
maintains operations and local management in the markets it serves, including
the metropolitan areas of Philadelphia, Miami, San Jose, Kansas City, Fort
Worth, Detroit and Charlotte. Revenue is earned through the sale of advertising
and circulation and related activities. Newspapers are distributed in print
through local distribution channels, as well as online through Knight Ridder
Digital's Real Cities Network (see "Management's Discussion and Analysis of
Operations: Online Activities" on page 20).
Although not required to do so, the company has elected to report its online
operations as a reportable business segment separate from its newspaper
operations pursuant to FAS 131, "Disclosures About Segments of an Enterprise and
Related Information". See Note 5.
The company has entered into interest rate swap agreements for interest rate
risk exposure management purposes. In accordance with FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," the company accounts for its
interest rate swap agreements as fair value hedges. The fair value of the swaps
at December 30, 2001 was $9.6 million. There was no ineffectiveness associated
31
with the swaps during fiscal year 2001. The company does not trade or engage in
hedging for investment purposes. In certain circumstances, the company may use
derivatives to hedge certain exposures.
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.
Recent Accounting Pronouncements. In June 2001, FASB issued FAS 141, "Business
Combinations" (FAS 141). This statement requires that all business combinations
initiated after June 30, 2001, be accounted for under the purchase method of
accounting. Use of the pooling-of-interests method is no longer permitted. The
company will adopt FAS 141 in the first quarter of 2002. The issuance of FAS 141
has no impact on the company's consolidated financial statements.
In June 2001, FASB issued FAS 142, "Goodwill and Other Intangible Assets" (FAS
142). This statement continues to require recognition of goodwill as an asset,
but amortization of goodwill as currently required by APB Opinion No. 17,
"Intangible Assets," is no longer permitted. In lieu of amortization, goodwill
must be tested for impairment using a fair-value-based approach. This impairment
test requires the determination of the fair value of the intangible asset. If
the fair value of the intangible asset is less than its carrying value, an
impairment loss should be recognized in an amount equal to the difference. The
company is currently assessing the impact that this new pronouncement will have
on the recorded amounts of goodwill and other intangibles; however, the adoption
of FAS 142 is not expected to have a material impact on the company's
consolidated financial statements. Amortization of goodwill and other
intangibles totaled $72,855,000, $76,473,000 and $81,499,000, respectively, for
the fiscal years ended in 2001, 2000 and 1999. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of approximately $55 million ($.65 per diluted share) per year.
FAS 142 must be implemented for fiscal years beginning after December 15, 2001.
The company expects to implement FAS 142 in the first quarter of fiscal 2002.
Under the transition provisions of FAS 142, goodwill acquired after June 30,
2001 is subject to the nonamortization provisions of the statement and therefore
no amortization of goodwill has been recorded for the year ended December 30,
2001 relating to the acquisition of Headhunter.net.
In October 2001, FASB issued FAS 144, "Impairment on Disposal of Long-Lived
Assets" (FAS 144). Under the new rules, the criteria required for classifying an
asset as held for sale have been significantly changed. Assets held for sale are
stated at the lower of their fair values or carrying amounts, and depreciation
is no longer recognized. In addition, more dispositions will qualify for
discontinued operations treatment in the statement of operations. FAS 144 is
required to be implemented for fiscal years beginning after December 15, 2001.
The company is evaluating the impact of FAS 144; however, the adoption of FAS
144 is not expected to have a material impact on the company's consolidated
financial statements.
Note 2. Income Taxes
The company's income tax expense is determined under the provisions of FAS 109,
"Accounting for Income Taxes," which requires the use of the liability method in
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.
32
Federal, state and local income taxes (benefits) consist of the following (in
thousands):
- -------------------------------- -------------------------- ------------------------- -------------------------
2001 2000 1999
-------------------------- ------------------------- -------------------------
Current Deferred Current Deferred Current Deferred
- -------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
Federal income taxes $ 113,810 $ (6,306) $ 191,635 $ (3,241) $ 203,101 $ (6,447)
State and local income taxes 17,179 (2,108) 28,051 (5,518) 26,870 4,552
- -------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
Total $ 130,989 $ (8,414) $ 219,686 $ (8,759) $ 229,971 $ (1,895)
================================ ============= ============ ============ ============ ============ ============
Cash payments of income taxes for the years 2001, 2000 and 1999 were $112.6
million, $209.9 million and $213.1 million, respectively.
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):
- --------------------------------------------------------------- ----------------- ---------------- -----------------
2001 2000 1999
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Federal statutory income tax $ 107,590 $ 183,851 $ 198,805
State and local income taxes, net of federal benefit 9,796 14,664 20,425
Statutory rate applied to nondeductible amortization of the
excess of cost over net assets acquired 14,903 15,058 15,016
Tax settlements and other, net (9,714) (2,646) (6,170)
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Total $ 122,575 $ 210,927 $ 228,076
=============================================================== ================= ================ =================
The deferred tax asset and liability at the fiscal year end consist of the
following components (in thousands):
- --------------------------------------------------------------------------------- ---------------- -----------------
2001 2000
- --------------------------------------------------------------------------------- ---------------- -----------------
Deferred Tax Asset
Postretirement benefits other than pensions (including amounts
related to partnerships in which the company participates) $ 78,624 $ 80,812
Accrued interest 8,248 8,885
Compensation and benefit accruals 727 (20,068)
Other nondeductible accruals 55,680 80,498
- --------------------------------------------------------------------------------- ---------------- -----------------
Gross deferred tax asset $ 143,279 $ 150,127
================================================================================= ================ =================
Deferred Tax Liability
Depreciation and amortization $ 352,754 $ 354,239
Equity in partnerships and investees 13,004 36,806
Unrealized loss in equity securities 0 (867)
Other 10,020 40
- --------------------------------------------------------------------------------- ---------------- -----------------
Gross deferred tax liability 375,778 390,218
- --------------------------------------------------------------------------------- ---------------- -----------------
Net deferred tax liability $ 232,499 $ 240,091
================================================================================= ================ =================
The components of deferred taxes included in the Consolidated Balance Sheet are
as follows (in thousands):
- --------------------------------------------------------------------------------- ---------------- -----------------
2001 2000
- --------------------------------------------------------------------------------- ---------------- -----------------
Current asset $ 22,767 $ 29,611
Noncurrent liability 255,266 269,702
- --------------------------------------------------------------------------------- ---------------- -----------------
Net deferred tax liability $ 232,499 $ 240,091
================================================================================= ================ =================
33
Note 3. Debt
Debt consisted of the following (in thousands):
- --------------------------------------------------------------------------------- ---------------- -----------------
December 30 December 31
2001 2000
- --------------------------------------------------------------------------------- ---------------- -----------------
Commercial paper due at various dates through March 27, 2002, at an effective
interest rate of 4.62% as of December 30, 2001 and 6.55% as of December 31,
2000. Amounts are net of unamortized discounts of $735 in
2001 and $2,951 in 2000 (a) $ 527,148 $ 843,027
Debentures due on April 15, 2009, bearing interest at 9.875%, net of
unamortized discount of $1,205 in 2001 and $1,370 in 2000 198,795 198,630
Debentures due on November 1, 2027, bearing interest at 7.15%, net of
unamortized discount of $5,073 in 2001 and $5,269 in 2000 94,927 94,731
Debentures due on March 15, 2029, bearing interest at 6.875%, net of
unamortized discount of $3,314 in 2001 and $3,436 in 2000 296,686 296,564
Notes payable, bearing interest at 8.5%, subject to mandatory pro rata
amortization of 25% annually commencing September 1, 1998, through maturity on
September 1, 2001, net of unamortized discount of $0 in 2001
and $32 in 2000 39,969
Notes payable due on November 1, 2007, bearing interest at 6.625%, net of
unamortized discount of $1,333 in 2001 and $1,562 in 2000 98,667 98,438
Notes payable due on June 1, 2011, bearing interest at 7.125%, net of
unamortized discount of $2,723 in 2001 297,277
Senior notes payable due on December 15, 2005, bearing interest at 6.3%, net of
unamortized discount of $395 in 2001 and $495 in 2000 99,604 99,505
Notes payable, other 850 1,408
- --------------------------------------------------------------------------------- ---------------- -----------------
1,613,954 1,672,272
Less amounts payable in one year 40,699 80,362
- --------------------------------------------------------------------------------- ---------------- -----------------
Total long-term debt $ 1,573,255 $ 1,591,910
================================================================================= ================ =================
(a) Commercial paper is supported by $895 million revolving credit facility
which matures on June 15, 2006. Interest payments during 2001 and 2000
were $118.4 million and $100.6 million, respectively.
The company guarantees 13.5% of the debt of Ponderay Newsprint Company, a
newsprint mill investment. For the year ended December 30, 2001, and December
31, 2000, these guarantees totaled $17.2 million and $19.6 million,
respectively.
34
The carrying amounts and fair values of debt as of December 30, 2001, are as
follows (in thousands):
- -------------------------------- ------------- --------------
Carrying Fair
Amount Value
- -------------------------------- ------------- --------------
Commercial paper $ 527,148 $ 527,148
9.875% Debentures 198,795 237,402
7.15% Debentures 94,927 97,292
6.875% Debentures 296,686 282,123
6.625% Notes payable 98,667 101,925
7.125% Notes payable 297,277 308,486
6.3% Senior notes payable 99,604 101,481
Notes payable, other 850 850
- -------------------------------- ------------- --------------
Total $ 1,613,954 $ 1,656,707
================================ ============= ==============
The following table presents the approximate annual maturities of debt, net of
discounts, for the years after 2001 (in thousands):
- ------------------------------ -------------
2002 $ 40,699
2003
2004
2005 99,604
2006 487,299
2007 and thereafter 986,352
- ------------------------------ -------------
Total $1,613,954
============================== =============
Note 4. 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):
- --------------------------------------------------------------- ----------------- ---------------- -----------------
2001 2000 1999
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Current assets $ 308,822 $ 307,945 $ 226,155
Property, plant and equipment and other assets 1,769,702 1,627,313 1,458,029
Current liabilities 235,452 192,030 199,114
Long-term debt and other noncurrent liabilities 579,473 669,911 645,555
Net sales 1,319,245 1,393,426 1,202,978
Gross profit 168,219 103,469 31,116
Net income (loss) (4,584) 9,832 (2,026)
Company's share of:
Net assets 393,777 304,486 206,880
Net income (16,095) (8,506) 12,571
- --------------------------------------------------------------- ----------------- ---------------- -----------------
In 1989, the Detroit Free Press and The Detroit News began operating under a
joint operating agreement as Detroit Newspapers (DN). Balance sheet and net
sales amounts for DN at December 30, 2001, December 31, 2000, and December 26,
1999, are included in the preceding table, and the net assets contributed to DN
are included in "Equity in unconsolidated companies and joint ventures" in the
Consolidated Balance Sheet. Excluding DN, net sales of the unconsolidated
companies and joint ventures were $904.3 million in 2001, $936.8 million in 2000
and $740.5 million in 1999. Excluding DN, the company's investment in
unconsolidated subsidiaries includes $393.8 million of net assets accumulated
since the investment dates. Dividends and cash distributions received from
unconsolidated companies and joint ventures (excluding DN) were $3.4 million in
2001, $9.5 million in 2000 and $10.8 million in 1999.
35
Note 5. Business Segments
Financial data for the company's segments are as follows (in thousands):
- --------------------------------------------------------------- ----------------- ---------------- -----------------
2001 2000 1999
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Operating revenue
Newspapers $ 2,858,174 $ 3,168,219 $ 3,002,379
Online 42,035 43,548 31,396
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Total $ 2,900,209 $ 3,211,767 $ 3,033,775
=============================================================== ================= ================ =================
Operating income (loss)
Newspapers $ 520,100 $ 742,554 $ 683,322
Online (31,502) (46,021) (24,041)
Corporate (26,843) (27,761) (37,859)
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Total $ 461,755 $ 668,772 $ 621,422
=============================================================== ================= ================ =================
Depreciation and amortization
Newspapers $ 176,029 $ 179,278 $ 176,340
Online 2,801 2,620 1,819
Corporate 5,743 5,699 4,784
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Total $ 184,573 $ 187,597 $ 182,943
=============================================================== ================= ================ =================
Note 6. Capital Stock
The company has 20 million shares of preferred stock authorized and available
for future issuance.
In 1997, the Board of Directors authorized 1,758,242 shares of Series B
preferred stock, $1.00 par value per share, and issued 1,754,930 preferred
shares in connection with the acquisition of four newspapers that were
indirectly owned by The Walt Disney Company. Each share of Series B preferred
stock was convertible into 10 shares of common stock. During 2000, 263,600
shares of preferred stock were converted into approximately 2.6 million common
shares. During 2001, the remaining balance of 1,110,500 shares of preferred
stock were converted into approximately 11.1 million common shares.
The company has a stock rights agreement. 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.
36
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 1,500,000 preferred shares for issuance upon exercise of the
rights.
In 2001, 2000 and 1999, the Series B preferred stock, each share of which was
convertible into 10 shares of common stock, and shares of common stock issuable
upon exercise of stock options are included in the diluted earnings per share
calculation, but excluded from the basic earnings per share calculation. The
2001, 2000 and 1999 diluted earnings per share calculations include 8,272,458,
12,596,170 and 15,947,916 weighted-average shares of Series B convertible
preferred stock, respectively, and 1,347,968, 1,138,199 and 1,487,231
weighted-average shares of common stock issuable upon exercise of stock options,
respectively.
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 264,015 shares in 2001, 344,800 shares in 2000 and 336,001 shares in
1999. The purchase price of shares issued in 2001 under this plan ranged from
$46.86 to $51.29, and the market value on the purchase dates of such shares
ranged from $55.13 to $60.35.
The Employee Stock Option Plan provides for the issuance of nonqualified stock
options and incentive stock options. Options are issued at prices not less than
fair market value at date of grant. Options granted vest in one year or three
years from the date of grant. Options vesting over three years vest annually in
three equal installments. Options 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. Shares of common stock relating to options outstanding under this plan
are reserved at the date of grant.
Transactions under the Employee Stock Option Plan are summarized as follows:
- ---------------------------------- ----------------- -----------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
- ---------------------------------- ----------------- -----------------------
Outstanding
December 27, 1998 6,616,038 $39.74
1999: Exercised (840,375) 30.88
Expired (24,907) 43.38
Forfeited (140,295) 45.55
Granted 1,652,850 57.82
Outstanding
December 26, 1999 7,263,311 44.75
2000: Exercised (448,447) 32.75
Expired (26,849) 55.45
Forfeited (237,571) 53.66
Granted 3,578,075 54.64
Outstanding
December 31, 2000 10,128,519 48.59
2001: Exercised (1,604,985) 39.51
Expired (99,867) 54.83
Forfeited (568,307) 55.17
Granted 2,144,250 61.57
Outstanding
December 30, 2001 9,999,610 52.39
- ---------------------------------- ----------------- -----------------------
The company also maintains 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
37
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, there were
200,000 shares authorized for issuance under the plan.. The expiration dates for
these options are from December 16, 2007, to December 12, 2011.
Transactions under the Compensation Plan for Nonemployee Directors are
summarized as follows:
- ---------------------------------- ----------------- -----------------------
Weighted-Average
Number of Exercise Price
Shares Per Share
- ---------------------------------- ----------------- -----------------------
Outstanding
December 27, 1998 48,000 $50.68
1999: Exercised
Expired
Forfeited
Granted 20,000 57.97
Outstanding
December 26, 1999 68,000 52.82
2000: Exercised
Expired
Forfeited
Granted 32,000 54.81
Outstanding
December 31, 2000 100,000 53.46
2001: Exercised
Expired
Forfeited
Granted 32,000 62.25
Outstanding
December 30, 2001 132,000 55.59
- ---------------------------------- ----------------- -----------------------
The following table summarizes information about stock options outstanding under
the Employee Stock Option Plan and the Compensation Plan for Nonemployee
Directors at December 30, 2001:
- --------------------------------------- ------------------------------------------------ ------------------------------
Outstanding Exercisable
- --------------------------------------- ------------------------------------------------ ------------------------------
Stock Options Outstanding
- --------------------------------------- ------------- Average Average Average
Exercise Price Range Shares Life (a) Exercise Price Shares Exercise Price
- --------------------------------------- ------------- ----------------- ---------------- ------------- ----------------
$24.56 - $33.47 967,887 3.0 $ 29.27 967,887 $ 29.27
39.31 - 49.63 1,694,554 6.3 45.85 1,642,232 45.77
50.00 - 54.48 1,072,089 6.3 51.99 963,357 51.79
54.81 - 54.81 3,000,519 9.0 54.81 1,871,575 54.81
56.33 - 58.88 1,418,629 8.0 57.91 895,457 57.97
58.91 - 62.45 1,978,450 9.9 62.12 -- 0.00
- --------------------------------------- ------------- ----------------- ---------------- ------------- ----------------
Total 10,132,128 7.7 $ 52.44 6,340,508 $ 48.56
======================================= ============= ================= ================ ============= ================
(a) Average contractual life remaining in years.
At year-end 2001, options with an average exercise price of $48.56 were
exercisable on 6.3 million shares; at year-end 2000, options with an average
exercise price of $48.64 were exercisable on 5.1 million shares.
The company maintains a Long-Term Incentive Plan. Under the plan, an executive's
ability to receive a stock award is contingent upon and related directly to the
total return received by shareholders on their investment (TSR) in the company's
stock over a three-year period, compared to the return received by holders of
stock in the other companies that comprise the S&P Publishing/Newspapers Index.
The plan provides that none of the shares will vest unless the company's TSR is
38
positive and at least equal to the median TSR of the other companies in the S&P
Newspaper Index during this performance period. If these conditions are met, 15%
of the shares will vest if the company's TSR is equal to the peer group median
and 100% of the shares will vest if the company's TSR is at the 90th percentile
or more of the peer TSR or higher.
The plan originally covered a three-year performance period from January 1,
1997, through December 31, 1999. The initial performance period ended on
December 31, 1999, and no shares vested because the company did not meet the
specified performance targets. The plan was extended for an additional
three-year period beginning on January 1, 2000 and ending on December 31, 2002,
with an initial grant of 342,012 restricted shares to participants. The grant of
such shares are restricted, as the vesting of these shares is triggered upon the
achievement of certain performance goals as described above. As of December 30,
2001, there were 359,974 shares included as contingently issuable. The company
accrues compensation expense for the plan, based upon the average December
closing price, over the performance period, when it is probable that performance
goals will be met. Total compensation expense recognized in 2001 was
approximately $12 million and the total accrual related to the plan is
approximately $15 million, which is included in accrued compensation at December
30, 2001.
Proceeds from the issuance of shares under these plans are included in
shareholders' equity and do not affect income.
Due to the financial upheaval in the Internet industry and other severe market
conditions negatively affecting the company's wholly-owned subsidiary, Knight
Ridder Digital, the company's compensation and corporate governance committee
approved a program in 2001 to allow all Knight Ridder Digital optionholders to
voluntarily surrender their options granted under the Knight Ridder Digital 2000
Stock Option Plan in exchange for a commitment by Knight Ridder Digital to grant
in the future new options to purchase the same number of shares of Knight Ridder
Digital common stock covered by the surrendered option at an exercise price
based on the fair market value on the new date of grant. At the time the
exchange program was approved, the value of the options originally granted in
March 2000 (approximately $5.23) had declined to approximately $2.77 per share,
and many options were underwater, i.e., the current fair market value of the
shares underlying options were below the option exercise price.
In accordance with the program, the new grant could occur no earlier than six
months and one day from the end of a specified waiting period during which an
optionholder could elect to participate in the program. Vesting credit was
accorded to the replacement options based on the actual vesting of the existing
options earned as of the date of cancellation. During the period following the
surrender and cancellation of the existing options and prior to the grant of new
options, no options vested. In March 2001, the company's officers (in addition
to most of the Knight Ridder Digital employees) surrendered for cancellation all
existing options held by them. Replacement options were granted on October 3,
2001 at $1.18 per share, the fair market value of the underlying Knight Ridder
Digital shares on the new date of grant.
At December 30, 2001, shares of the company's authorized but unissued common
stock were reserved and available for issuance as follows:
- -------------------------------------------- -----------------
Shares
- -------------------------------------------- -----------------
Employee Stock Option Plan 2,702,458
Employees Stock Purchase Plan 1,088,202
Nonemployee Directors Plan 68,000
- -------------------------------------------- -----------------
Total 3,858,660
============================================ =================
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 stock
options under the fair value method of that statement.
39
Disclosures required by FAS 123 are as follows (in dollars):
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Option value information (a) 2001 2000 1999
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Fair value per option (b) $ 10.53 $ 11.29 $ 14.67
Valuation assumptions
Expected option term (years) 3.0 4.0 5.6
Expected volatility 21.0% 20.0% 16.0%
Expected dividend yield 1.6% 1.8% 1.5%
Risk-free interest rate 4.3% 6.1% 6.2%
- --------------------------------------------------------------- ----------------- ---------------- -----------------
(a) Weighted averages of option grants during each period.
(b) Estimated using Black-Scholes option pricing model.
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 stock options have characteristics significantly different from
those of 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 stock options.
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 2001, 2000 and 1999
pro forma information follows (in thousands, except for earnings per share
information):
- --------------------------------------------------------------- ----------------- ---------------- -----------------
2001 2000 1999
- --------------------------------------------------------------- ----------------- ---------------- -----------------
Pro forma net income $ 169,651 $ 288,408 $ 329,689
Pro forma basic earnings per share 2.13 3.68 3.94
Pro forma diluted earnings per share 1.98 3.24 3.38
- --------------------------------------------------------------- ----------------- ---------------- -----------------
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.
Note 7. Work Force Reduction Program
Due to the slowing economy and the resulting decline in advertising revenue and
increases in the price of newsprint expense, the company announced a work force
reduction program in the second quarter of 2001 that affected the majority of
its newspapers. The work force reduction plan eliminated approximately 1,600
positions through early retirement, voluntary and involuntary buyouts and
attrition. As a result of this plan, the company incurred charges of $78.5
million related to employee severance costs and benefits during 2001.
Substantially all of these charges were paid by December 30, 2001 and all target
positions were eliminated. There was approximately $15 million remaining as a
liability for the work force reduction plan as of December 30, 2001, the
majority of which will be paid in the first half of 2002. The plan was recorded
in accordance with the provisions of SEC Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges" and EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity."
Note 8. Related Party Transactions
The company has regular transactions in the normal course of business with
CareerBuilder, Inc. (owned by Career Holdings, Inc.) and Classified Ventures,
Inc. At December 30, 2001, the company owned 48.1% of Career Holdings and 19.2%
of Classified Ventures. In 2001, the company recorded $2.8 million in sales
related to CareerBuilder and $6.5 million to Classified Ventures. The company
also had expenses related to services provided by CareerBuilder and Classified
Ventures of $2.9 million and $5.1 million, respectively, for the year ended
December 30, 2001.
40
Note 9. Acquisitions and Dispositions
In August 2000, Career Holdings, Inc., a company jointly controlled by Knight
Ridder Digital and Tribune Co., acquired CareerBuilder, Inc., and
CareerPath.com, Inc., respectively. In the Career-Builder acquisition, a
wholly-owned subsidiary of Career Holdings made a tender offer for all of
CareerBuilder's common stock at a price of $8 per share in cash. The tender
offer, which began on July 25, 2000, and expired on August 21, 2000, was
followed by the merger of the subsidiary into CareerBuilder on August 24, 2000.
The CareerPath.com acquisition was accomplished by the merger of a wholly-owned
subsidiary of Career Holdings into CareerPath.com on August 31, 2000. The total
purchase price for the CareerBuilder and CareerPath.com acquisitions was
approximately $250 million. The company, through Knight Ridder Digital,
currently owns a 48.1% interest in Career Holdings, Inc.
In November 2001, Career Holdings, Inc. acquired Headhunter.net, an online
recruitment and career development business, for $9.25 per share in cash, or
approximately $217 million. The company's share was $108.5 million to fund this
acquisition. Headhunter.net now operates as a wholly owned subsidiary of Career
Holdings, Inc.
Note 10. Pension and Other Postretirement Benefit Plans
A summary of the components of net periodic benefit cost for the defined benefit
plans and postretirement benefit plans (other benefits) 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):
- ---------------------------------------------- ------------------------------------- ------------------------------------
Pension Benefits Other Benefits
------------------------------------- ------------------------------------
2001 2000 1999 2001 2000 1999
- ---------------------------------------------- ------------ ------------ ----------- ------------ ----------- -----------
Defined benefit plans:
Service cost and plan expenses $ 69,297 $ 42,324 $ 36,340 $ 1,686 $ 1,271 $ 2,516
Interest cost 81,235 75,897 71,900 8,625 8,186 7,812
Expected return on plan assets (110,251) (102,917) (93,141) (739) (702) (805)
Recognized net actuarial (gain)
loss (11,954) (10,508) 1,380 3,939 (519) (48)
Amortization of prior service cost 6,524 6,733 6,596 (4,104) (4,104) (4,103)
Amortization of transition asset 227 (3,128) (3,865)
- ---------------------------------------------- ------------ ------------ ----------- ------------ ----------- -----------
Net 35,078 8,401 19,210 9,407 4,132 5,372
Multi-employer union plans 11,500 11,218 10,860
Defined contribution plans 11,789 12,534 11,741
Other 1,731 1,413 1,812
- ---------------------------------------------- ------------ ------------ ----------- ------------ ----------- -----------
Net periodic benefit cost $ 60,098 $ 33,566 $ 43,623 $ 9,407 $ 4,132 $ 5,372
============================================== ============ ============ =========== ============ =========== ===========
Service cost in 2001 and 2000 included approximately $35.6 and $15.0 million,
respectively, related to accelerating the retirement of certain employees under
the work force reduction program.
41
Weighted-average assumptions used each year in accounting for defined benefit
plans and postretirement benefits were:
- ---------------------------------------------- ------------------------------------- ------------------------------------
Pension Benefits Other Benefits
------------------------------------- ------------------------------------
2001 2000 1999 2001 2000 1999
- ---------------------------------------------- ------------ ------------ ----------- ------------ ----------- -----------
Discount rate as of year end 7.5% 7.8% 7.8% 7.5% 7.8% 7.8%
Return on plan assets 9.0 9.0 9.0 6.5 6.5 6.5
Rate of compensation increase 4.1 4.3 3.5 4.5 4.5 3.5
Medical trend rate:
Projected 5.5 5.5 6.0
Reducing to this percentage
in 2002 and thereafter 5.5 5.5 5.5
- ---------------------------------------------- ------------ ------------ ----------- ------------ ----------- -----------
The assumed health-care-cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health-care-cost trend
rate would have the following effects:
- ---------------------------------------- ----------------------- --------------------
One-Percentage-Point One-Percentage-Point
Increase Decrease
- ---------------------------------------- ----------------------- --------------------
Effect on total of service and
interest cost components
in 2001 $ 667 $ (667)
Effect on postretirement
benefit obligation as of
December 30, 2001 $ 5,162 $ (4,492)
- ---------------------------------------- ----------------------- --------------------
42
The following table sets forth the funded status and amounts recognized in the
Consolidated Balance Sheet for the company's benefit plans (excluding
liabilities of Detroit Newspapers that are reported net in the Consolidated
Balance Sheet under the caption "Equity in unconsolidated companies and joint
ventures") (in thousands):
- ------------------------------------------ ------------------------------------------ ------------------------------------------
Pension Benefits Other Benefits
------------------------------------------ ------------------------------------------
2001 2000 1999 2001 2000 1999
- ------------------------------------------ ------------- -------------- ------------- ------------- ------------- --------------
Change in benefit obligation
Benefit obligation at beginning of year $ 1,063,691 $ 940,990 $ 1,020,113 $ 121,995 $ 120,819 $ 121,229
Service cost 64,520 40,717 35,143 1,685 1,271 2,516
Interest cost 81,235 75,897 71,900 8,625 8,186 7,812
Plan participants' contributions 1,428 1,297 1,102
Amendments 428 3,820 4,361
Actuarial loss (gain) 14,583 54,912 (136,868) 14,239 3,272 (1,575)
Benefits paid (99,604) (52,645) (53,659) (14,351) (12,850) (10,265)
- ------------------------------------------ ------------- -------------- ------------- ------------- ------------- --------------
Benefit obligation at end of year $ 1,124,853 $ 1,063,691 $ 940,990 $ 133,621 $ 121,995 $ 120,819
========================================== ============= ============== ============= ============= ============= ==============
Change in plan assets
Fair value of plan assets at beginning
of year $ 1,197,963 $ 1,171,546 $ 1,090,569 $ 11,803 $ 11,623 $ 12,701
Actual return on plan assets (24,954) 65,878 120,730 935 1,027 520
Company contributions 24,598 15,573 15,570 11,077 10,706 7,565
Plan participants' contributions 1,428 1,297 1,102
Benefits paid and administrative costs (117,652) (55,034) (55,323) (14,351) (12,850) (10,265)
- ------------------------------------------ ------------- -------------- ------------- ------------- ------------- --------------
Fair value of plan assets at end of year $ 1,079,955 $ 1,197,963 $ 1,171,546 $ 10,892 $ 11,803 $ 11,623
========================================== ============= ============== ============= ============= ============= ==============
Funded status of plan (underfunded) $ (44,898) $ 134,272 $ 230,556 $ (122,730) $ (110,192) $ (109,196)
Unrecognized net actuarial gain (4,222) (177,783) (273,818) (5,976) (16,292) (19,758)
Unrecognized prior service cost 31,598 43,369 40,693 (7,982) (12,085) (16,189)
Unrecognized transition obligation
(asset) (63) 306 (2,920)
- ------------------------------------------ ------------- -------------- ------------- ------------- ------------- --------------
Net prepaid (accrued) benefit cost $ (17,585) $ 164 $ (5,489) $ (136,688) $ (138,569) $ (145,143)
========================================== ============= ============== ============= ============= ============= ==============
Amounts recognized in the Consolidated Balance Sheet consist of:
- --------------------------------------- ------------------------------------------ -----------------------------------------
Pension Benefits Other Benefits
------------- ------------- -------------- ------------- ------------- -------------
2001 2000 1999 2001 2000 1999
- --------------------------------------- ------------- ------------- -------------- ------------- ------------- -------------
Prepaid benefit cost $ 63,428 $ 51,926 $ 44,263
Accrued benefit liability (81,013) (51,762) (49,752) $ (136,688) $ (138,569) $ (145,143)
Additional minimum liability (7,852) (9,282)
Intangible asset 7,852 9,282
- --------------------------------------- ------------- ------------- -------------- ------------- ------------- -------------
Net prepaid (accrued) benefit cost $ (17,585) $ 164 $ (5,489) $ (136,688) $ (138,569) $ (145,143)
======================================= ============= ============= ============== ============= ============= =============
Amounts applicable to the company's pension plans with accumulated benefit
obligations in excess of plan assets are as follows:
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
2001 2000 1999
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Projected benefit obligation $ 94,074 $ 122,878 $ 37,666
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Accumulated benefit obligation 78,129 106,057 26,462
Fair value of plan assets 42,840 79,552
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Unfunded accumulated benefit obligation $ 35,289 $ 26,505 $ 26,462
================================================================================== ============= ============= =============
43
Of the plans whose accumulated benefit obligations exceed plan assets, the
amounts applicable to qualified plans are as follows (none in 1999):
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
2001 2000 1999
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Projected benefit obligation $ 49,001 $ 85,838 $ -
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Accumulated benefit obligation 46,622 82,239
Fair value of plan assets 42,840 79,552
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
Unfunded accumulated benefit obligation $ 3,782 $ 2,687 $ -
================================================================================== ============= ============= =============
Net pension assets are included in "Other" noncurrent assets, and net pension
liabilities are included in "Employment benefits and other noncurrent
liabilities." Substantially all of the assets of the company-administered plans
are invested in listed stocks and bonds.
Employee Labor Arrangements
About 37% of the company's more than 19,000 full-time equivalent employees are
represented by approximately 70 local unions and work under multiyear collective
bargaining agreements. These agreements are renegotiated in the years in which
they expire. A six-year extension of all labor contracts in Philadelphia was
negotiated in January 2001 and ratified by all unions shortly thereafter.
Note 11. Quarterly Operations (Unaudited)
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
- ------------------------------------------------------- ----------------- ----------------- ---------------- -----------------
2001 Operating revenue $ 735,398 $ 738,437 $ 693,122 $ 733,252
Operating income 116,509 52,632 123,896 168,718
Net income 40,737 13,426 (a) 55,685 74,976
Earnings per share
Basic: Net Income 0.52 0.15 0.71 0.91
Diluted: Net Income 0.47 0.15 0.65 0.88
Dividends declared per common share 0.25 0.25 0.25 0.25
- ------------------------------------------------------- ----------------- ----------------- ---------------- -----------------
2000 Operating revenue $ 758,567 $ 806,168 $ 769,234 $ 877,798
Operating income 145,423 179,712 154,837 188,800
Net income (loss) 160,855 (b) 96,273 (c) 76,106 (18,871) (d)
Earnings per share
Basic: Net Income (loss) 2.03 1.23 0.99 (0.29)
Diluted: Net Income (loss) 1.74 1.08 0.87 (0.29)
Dividends declared per common share 0.23 0.23 0.23 0.23
- ------------------------------------------------------- ----------------- ----------------- ---------------- -----------------
1999 Operating revenue $ 720,568 $ 758,107 $ 737,201 $ 817,899
Operating income 125,664 152,653 150,980 192,125
Net income 62,867 (e) 86,586 (f) 76,209 114,277 (g)
Earnings per share
Basic: Net Income 0.76 1.04 0.90 1.37
Diluted: Net Income 0.65 0.88 0.78 1.18
Dividends declared per common share 0.20 0.23 0.23 0.23
- ------------------------------------------------------- ----------------- ----------------- ---------------- -----------------
44
(a) Includes after-tax work force reduction costs of $47.1 million.
(b) Includes after-tax gain of $92 million related to InfoSpace, Inc.'s,
acquisition of Prio, Inc., and GoTo.com, Inc.'s, acquisition of Cadabra,
Inc.
(c) Includes after-tax gain of $5.7 million on sale of a building in
Philadelphia.
(d) Includes after-tax severance costs of $10.4 million and after-tax loss of
$103.3 million on the write-down of investments primarily in InfoSpace,
Inc., and GoTo.com, Inc.
(e) Includes after-tax severance costs of $1.3 million and an after-tax gain of
$2.3 million on the sale of SportsLine USA, Inc.
(f) Includes after-tax severance costs of $1.4 million and after-tax gains on
the sale of Zip2 Corp. and AT&T Corporation stock (net of adjustments to
certain investments to write down permanent declines in their market value)
of $6.7 million.
(g) Includes an after-tax gain of $14.7 million on the sale of AT&T Corporation
stock.
Note 12. Comprehensive Income
The following table presents the components of other comprehensive income for
2001, 2000 and 1999 as shown in the Consolidated Statement of Shareholders'
Equity (in thousands):
- -------------------------------------------------------------------------- ------------- ------------- -------------
2001 2000 1999
- -------------------------------------------------------------------------- ------------- ------------- -------------
Net income $ 184,824 $ 314,363 $ 339,939
Total gains (losses) on securities available for sale, net of taxes (5,584) (144,559) 47,462
Less: reclassification adjustment for realized losses (gains), net of
taxes 6,885 101,174 (24,116)
- -------------------------------------------------------------------------- ------------- ------------- -------------
Change in accumulated comprehensive income 1,301 (43,385) 23,346
- -------------------------------------------------------------------------- ------------- ------------- -------------
Comprehensive income $ 186,125 $ 270,978 $ 363,285
========================================================================== ============= ============= =============
Note 13. Commitments and Contingencies
At December 30, 2001, the company had lease commitments currently estimated to
aggregate approximately $102.5 million that expire from 2002 through 2051 as
follows (in thousands):
- -------------------------- ------------------
2002 $ 22,206
2003 19,221
2004 16,032
2005 11,798
2006 9,128
2007 and thereafter 24,163
- -------------------------- ------------------
Total $102,548
========================== ==================
Payments under the lease contracts were $25.2 million in 2001, $23.1 million in
2000 and $24.7 million in 1999.
In connection with the company's insurance program, letters of credit are
required to support certain projected worker compensation obligations. At
December 30, 2001, the company had approximately $50 million of undrawn letters
of credit outstanding.
On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and
Detroit Newspapers (DN), which operates both newspapers. Subsequently, the
unions filed numerous unfair labor practice charges against the newspapers and
DN. In June 1997, after a long trial, a National Labor Relations Board (NLRB)
administrative judge ruled that the strike was caused by the unfair labor
practices of DN and The Detroit News and ordered that DN and the newspapers
reinstate all strikers, displacing permanent replacements if necessary. DN and
the newspapers appealed the decision to the NLRB.
45
On August 27, 1998, the NLRB affirmed certain unfair labor practice findings
against The Detroit News and DN and reversed certain findings of unfair labor
practices against DN. DN and the newspapers filed a motion to reconsider with
the NLRB, which was denied on March 4, 1999. The unions and DN filed appeals to
the U.S. Court of Appeals for the District of Columbia Circuit.
On July 7, 2000, the U.S. Court of Appeals unanimously reversed the NLRB,
holding that the strike was an economic strike. Thus, the NLRB order to
reinstate and pay back pay to the strikers was also set aside. The time to
appeal has expired and no appeal was filed.
The company's wholly-owned subsidiary, MediaStream, Inc. ("MediaStream"), was
named as one of a number of defendants in two separate class action lawsuits
that have been consolidated with one other similar lawsuit by the Judicial Panel
on Multi-District Litigation under the caption "In re Literary Works in
Electronic Databases Copyright Litigation," M.D.L. Docket No. 1379 (the
"Multi-District Litigation"). The two lawsuits originally filed against
MediaStream in September 2000 were: The Authors Guild, Inc. et al. v. The Dialog
Corporation et al., and Posner et al. v. Gale Group Inc. et al. These lawsuits
were brought by or on behalf of freelance authors who allege that the defendants
have infringed plaintiffs' copyrights by making plaintiffs' works available on
databases operated by the defendants. The plaintiffs are seeking to be certified
as class representatives of all similarly-situated freelance authors.
The two lawsuits were initially stayed pending disposition by the U.S. Supreme
Court of New York Times Company et al. v. Tasini et al., No. 00-21. On June 25,
2001, the Supreme Court ruled that the defendants in Tasini did not have a
privilege under Section 201 of the Copyright Act to republish articles
previously appearing in print publications absent the author's separate
permission for electronic republication. The judge has ordered the parties in
the Multi-District Litigation to try to resolve the claims through mediation,
which commenced November 2001, and the parties have agreed to a limited stay to
respond to the complaint during such mediation, which may be terminated by the
plaintiffs upon 30 days prior written notice. In September 2001, the plaintiffs
submitted an amended complaint, which named the company as an additional
defendant and makes reference to Knight Ridder Digital, a subsidiary of the
company.
Plaintiffs in the Multi-District Litigation seek actual damages, statutory
damages and injunctive relief, among other remedies. The company and MediaStream
intend to contest liability and vigorously defend their positions in the
litigation, including opposing class certification. In addition, MediaStream has
indemnity agreements from various content providers supplying articles to
MediaStream's databases that could mitigate its potential exposure. Management
is currently unable to predict whether an unfavorable outcome is likely or the
magnitude of any potential loss.
Various libel and copyright infringement 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
such other legal proceedings will not be material to its financial position or
results of operations on a consolidated basis.
DEBT GUARANTEES
The company guarantees 13.5% of the debt of Ponderay Newsprint Company, a
newsprint mill investment. For the year ended December 30, 2001, and December
31, 2000, these guarantees totaled $17.2 million and $19.6 million,
respectively. Management does not expect any material losses from these
off-balance sheet instruments as performance is not expected to be required. See
page 23, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
46
Report of Independent Auditors
To Shareholders of Knight-Ridder, Inc.
We have audited the accompanying consolidated balance sheets of Knight-Ridder,
Inc., as of December 30, 2001, and December 31, 2000, and the related
consolidated statements of income, cash flows and shareholders' equity for each
of the three years in the period ended December 30, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(d) for
the years ended December 30, 2001, December 31, 2000 and December 26, 1999.
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 auditing standards generally accepted
in the United States. 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., at December 30, 2001, and December 31, 2000, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
December 30, 2001, in conformity with accounting principles generally accepted
in the United States. 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.
San Jose, California
January 18, 2002
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
47
PART III
Item 10. Directors and Executive Officers of the Registrant
In addition to the information set forth under the caption "Executive Officers
of Knight Ridder" in Part I of this Form 10-K, the information required by this
section is incorporated by reference from the Proxy Statement for the 2002
Annual Meeting under the captions "Item 1: Election of Directors - Nominees for
Election for Three Year Terms Ending 2005," "Nominee for Election for One-Year
Term Ending 2003," "Directors Continuing in Office Until 2004," "Directors
Continuing in Office Until 2003," and "Section 16(a) Beneficial Ownership
Reporting Compliance."
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
Proxy Statement for the 2002 Annual Meeting under the captions "Item 1: Election
of Directors - How the Company Compensates Directors" and " Executive
Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
Proxy Statement for the 2002 Annual Meeting under the captions "Principal
Holders of the Company's Stock" and "Stock Ownership of Directors and Officers"
under the heading "Information About Knight Ridder Stock Ownership."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
Proxy Statement for the 2002 Annual Meeting under the captions "Compensation
Committee Interlocks and Insider Participation" and "Certain Relationships and
Related Transactions."
48
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 30,
2001, are included in Item 8:
Consolidated Balance Sheet - December 30, 2001 and December 31,
2000
Consolidated Statement of Income - Years ended December 30, 2001,
December 31, 2000, and December 26, 1999
Consolidated Statement of Cash Flows - Years ended December 30,
2001, December 31, 2000, and December 26, 1999
Consolidated Statement of Shareholders' Equity - Years ended
December 30, 2001, December 31, 2000, and December 26, 1999
Notes to consolidated financial statements - December 30, 2001
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.
3. Exhibits
Number Description
------ -----------
2 Disposition of Assets, dated as of March 18, 1998, is
incorporated by reference to the Company's Report on Form 8-K
filed March 31, 1998
3 (i) Amended and Restated Articles of Incorporation of
Knight-Ridder, Inc. (amended and restated as of February 3,
1998), are incorporated by reference to the Company's Form
10-K filed March 13, 1998
3 (ii) Bylaws of Knight-Ridder, Inc. (as amended July 25, 2000), are
incorporated by reference to the Company's Form 10-Q filed
August 9, 2000
4 (a) Indenture, dated as of February 15, 1986, between the Company
and Manufacturers Hanover Trust Company, as Trustee, is
incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-3 (No. 33-28010)
49
(b) First Supplemental Indenture dated as of April 15, 1989, to
the Indenture dated as of February 15, 1986, between the
Company and Chase Manhattan Bank (as successor to
Manufacturers Hanover Trust Company), as Trustee, is
incorporated by reference to the Company's Report on Form 8-K,
filed April 30, 1989
(c) Rights Agreement, dated as of June 21, 1996, between
Knight-Ridder, Inc. and ChaseMellon Shareholder Services,
L.L.C., is incorporated by reference to the Company's Report
on Form 8-K filed July 10, 1996
(d) First Amendment to Rights Agreement, dated as of July 25,
2000, between Knight-Ridder, Inc. and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, is incorporated by
reference to the Company's Report on Form 8-A/A filed August
10, 2000
(e) Indenture, dated as of November 4, 1997, between
Knight-Ridder, Inc. and The Chase Manhattan Bank of New York,
as Trustee, is incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (No. 333-37603)
(f) First Supplemental Indenture, dated June 1, 2001, between
Knight-Ridder, Inc., The Chase Manhattan Bank of New York, as
original Trustee and The Bank of New York, as series Trustee,
is incorporated by reference to Exhibit 4 to the Company's
Report on Form 8-K filed June 1, 2001
10 (a) Knight-Ridder, Inc. Employee Stock Option Plan (as amended
through January 22, 2002)*
(b) Knight-Ridder, Inc. Compensation Plan for Nonemployee
Directors effective July 1, 1997 (as amended through October
24, 2000), is incorporated by reference to the Company's Form
10-K filed March 28, 2001*
(c) Knight Ridder Annual Incentive Plan as amended and restated
effective January 1, 2002*
(d) Knight Ridder Long-Term Incentive Plan (as amended effective
January 1, 2000) is incorporated by reference to the Company's
Form 10-K/A filed April 12, 2000*
(e) Executive Officer's Retirement Agreement dated December 19,
1991, is incorporated by reference to the Company's Form 10-K
filed March 23, 1994*
(f) Executive Income Security Agreement (as amended effective
October 24, 2000) is incorporated by reference to the
Company's Form 10-K filed March 28, 2001*
(g) Knight-Ridder, Inc. Annual Incentive Deferral Plan (effective
as of November 1, 1996)*
(h) First Amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan*
(i) Second amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan (as amended effective January 1, 2000)*
(j) Third amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan (as amended effective October 1, 2000)*
12 Statement re. Computation of Earnings to Fixed Charges Ratio
from Continuing Operations
21 Table of Subsidiaries of Knight-Ridder, Inc.
23 Consent of Independent Auditors
24 Powers of Attorney
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K filed during the fourth quarter of 2001.
There were no reports on Form 8-K filed during the fourth
quarter of 2001.
50
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.
Dated March 28, 2002 /s/ P. Anthony Ridder
- ---------------------- -------------------------------------
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.
Dated March 28, 2002 /s/ P. Anthony Ridder
- ---------------------- -------------------------------------
P. Anthony Ridder
Chairman and
Chief Executive Officer
Dated March 28, 2002 /s/ Gary Effren
- ---------------------- -------------------------------------
Gary Effren
Senior Vice President/Finance
and Chief Financial Officer
Dated March 28, 2002 /s/ Margaret Randazzo
- ---------------------- -------------------------------------
Margaret Randazzo
Vice President/Controller
(Chief Accounting Officer)
51
/s/ James I. Cash, Jr.*
-------------------------------------
James I. Cash, Jr.
Director
/s/ Kathleen Foley Feldstein*
-------------------------------------
Kathleen Foley Feldstein
Director
/s/ Thomas P. Gerrity*
-------------------------------------
Thomas P. Gerrity
Director
/s/ Barbara Barnes Hauptfuhrer*
-------------------------------------
Barbara Barnes Hauptfuhrer
Director
/s/ Patricia Mitchell*
-------------------------------------
Patricia Mitchell
Director
/s/ M. Kenneth Oshman*
-------------------------------------
M. Kenneth Oshman
Director
/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
-------------------------------------
John Warnock
Director
/s/John L. Weinberg*
-------------------------------------
John L. Weinberg
Director
52
Dated March 28, 2002 /s/ Gary Effren
- ---------------------- -------------------------------------
Gary Effren
Attorney-in-fact
53
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
DESCRIPTION OF AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------- ----------------- --------------- -------------- ------------
YEAR ENDED DECEMBER 30, 2001:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE
ALLOWANCES $ 20,238 $ 31,958 $ 28,385 (1) $ 23,811
---------- ---------- ----------- --------- ----------
$ 20,238 $ 31,958 $ 0 $ 28,385 $ 23,811
========== ========== =========== ========= ==========
YEAR ENDED DECEMBER 31, 2000:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE
ALLOWANCES $ 15,917 $ 27,070 $ 22,749 (1) $ 20,238
---------- ---------- ----------- --------- ----------
$ 15,917 $ 27,070 $ 0 $ 22,749 $ 20,238
========== ========== =========== ========= ==========
YEAR ENDED DECEMBER 26, 1999:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE
ALLOWANCES $ 15,738 $ 25,135 $ 24,956 (1) $ 15,917
---------- ---------- ----------- --------- ----------
$ 15,738 $ 25,135 $ 0 $ 24,956 $ 15,917
========== ========== =========== ========= ==========
(1) Represents uncollectible accounts written-off, net of recoveries,
and dispositions of subsidiaries' balances.
54
EXHIBIT INDEX
Exhibits marked with an asterik are management contracts or compensatory plans
or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
Unless otherwise indicated, all other documents listed are filed with this
report.
Number Description
------ -----------
2 Disposition of Assets, dated as of March 18, 1998, is
incorporated by reference to the Company's Report on Form 8-K
filed March 31, 1998
3 (i) Amended and Restated Articles of Incorporation of
Knight-Ridder, Inc. (amended and restated as of February 3,
1998), are incorporated by reference to the Company's Form
10-K filed March 13, 1998
3 (ii) Bylaws of Knight-Ridder, Inc. (as amended July 25, 2000), are
incorporated by reference to the Company's Form 10-Q filed
August 9, 2000
4 (a) Indenture, dated as of February 15, 1986, between the Company
and Manufacturers Hanover Trust Company, as Trustee, is
incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-3 (No. 33-28010)
(b) First Supplemental Indenture dated as of April 15, 1989, to
the Indenture dated as of February 15, 1986, between the
Company and Chase Manhattan Bank (as successor to
Manufacturers Hanover Trust Company), as Trustee, is
incorporated by reference to the Company's Report on Form 8-K,
filed April 30, 1989
(c) Rights Agreement, dated as of June 21, 1996, between
Knight-Ridder, Inc. and ChaseMellon Shareholder Services,
L.L.C., is incorporated by reference to the Company's Report
on Form 8-K filed July 10, 1996
(d) First Amendment to Rights Agreement, dated as of July 25,
2000, between Knight-Ridder, Inc. and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, is incorporated by
reference to the Company's Report on Form 8-A/A filed August
10, 2000
(e) Indenture, dated as of November 4, 1997, between
Knight-Ridder, Inc. and The Chase Manhattan Bank of New York,
as Trustee, is incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (No. 333-37603)
(f) First Supplemental Indenture, dated June 1, 2001, between
Knight-Ridder, Inc., The Chase Manhattan Bank of New York, as
original Trustee and The Bank of New York, as series Trustee,
is incorporated by reference to Exhibit 4 to the Company's
Report on Form 8-K filed June 1, 2001
10 (a) Knight-Ridder, Inc. Employee Stock Option Plan (as amended
through January 22, 2002)*
55
(b) Knight-Ridder, Inc. Compensation Plan for Nonemployee
Directors effective July 1, 1997 (as amended through October
24, 2000), is incorporated by reference to the Company's Form
10-K filed March 28, 2001*
(c) Knight Ridder Annual Incentive Plan as amended and restated
effective January 1, 2002*
(d) Knight Ridder Long-Term Incentive Plan (as amended effective
January 1, 2000) is incorporated by reference to the Company's
Form 10-K/A filed April 12, 2000*
(e) Executive Officer's Retirement Agreement dated December 19,
1991, is incorporated by reference to the Company's Form 10-K
filed March 23, 1994*
(f) Executive Income Security Agreement (as amended effective
October 24, 2000) is incorporated by reference to the
Company's Form 10-K filed March 28, 2001*
(g) Knight-Ridder, Inc. Annual Incentive Deferral Plan (effective
as of November 1, 1996)*
(h) First Amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan*
(i) Second amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan (as amended effective January 1, 2000)*
(j) Third amendment to the Knight-Ridder, Inc. Annual Incentive
Deferral Plan (as amended effective October 1, 2000)*
12 Statement re. Computation of Earnings to Fixed Charges Ratio
from Continuing Operations
21 Table of Subsidiaries of Knight-Ridder, Inc.
23 Consent of Independent Auditors
24 Powers of Attorney
56