Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 29, 2003

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 1-7553

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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [  ]

As of August 4, 2003, 80,397,082 shares of Common Stock, $.02 1/12 par value, were outstanding.

Table of Contents for Form 10-Q

2

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET
(In 000's of dollars, except per share data)

See "Notes to Consolidated Financial Statements."

3

CONSOLIDATED BALANCE SHEET
(In 000's of dollars, except per share data)

See "Notes to Consolidated Financial Statements."

4

CONSOLIDATED STATEMENT OF INCOME
(Unaudited in thousands, except per share data)

See "Notes to Consolidated Financial Statements."

5

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)

See "Notes to Consolidated Financial Statements."

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Knight-Ridder, Inc. (Knight Ridder or the company) have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and two quarters ended June 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 28, 2003. For further information, refer to the consolidated financial statements and footnotes thereto, as well as the critical accounting policies in Management’s Discussion and Analysis, included in the company’s annual report on Form 10-K for the year ended December 29, 2002.

Amounts in 2002 and 2003 have been reclassified to conform to the current presentation of outside printing costs within newsprint, ink and supplements instead of other operating costs.

NOTE 2.  COMPREHENSIVE INCOME

For all periods presented, there are no reconciling items for comprehensive income. Net income as presented on the Consolidated Income Statement is the same as total comprehensive income.

7

NOTE 3.  DEBT

Debt consisted of the following (in thousands)

(a) Commercial paper is supported by $895 million revolving credit facility which matures in 2006.
(b) Represents $200 million of 9.875% debentures due in 2009.
(c) Represents $100 million of 7.15% debentures due in 2027.
(d) Represents $300 million of 6.875% debentures due in 2029.
(e) Represents $100 million of 6.625% notes due in 2007.
(f) Represents $300 million of 7.125% notes due in 2011.
(g) Represents $100 million of 6.3% senior notes due in 2005.
(h) Interest payments for the two quarters ended June 29, 2003 and June 30, 2002 were $33.4 million and $39.9 million, respectively.

The company guarantees 13.5% of up to $125 million of Ponderay Newsprint Company’s credit facility. The guarantee arose in April 2000 when Ponderay restated its credit agreement with a bank consortium for a facility originally used to finance construction of the newsprint mill. The company guarantees the portion of the credit facility that matures in April 2006. The guarantee could be triggered by Ponderay’s failure to meet any or all of its bank covenants, at which time the company could be liable for the full portion of its guarantee. The company accounts for these guarantees as off-balance sheet instruments, that for the quarter ended June 29, 2003, and year ended December 29, 2002, totaled $15.3 million and $16.2 million, respectively.

The company is a one-third partner of SP Newsprint Co. In November 2002, SP amended and restated its credit agreement with certain of its lenders. The agreement stipulates that should SP’s consolidated liquidity fall below $5 million, it would be in default of its covenant. The company, along with the other partners, would then be required to make an equity contribution in sufficient amount to cure the default. The company’s contribution is limited to approximately $6.7 million. The obligation ends when SP first meets certain conditions including, but not limited to, predetermined leverage and fixed-charge coverage ratios and certain liquidity requirements. The company also has a demand obligation to SP Newsprint Co. for $6.7 million. The obligation arose in August 1985 in connection with an advance to Knight Ridder (and the other partners) by SP. SP has the right to request repayment of these funds at any time for any reason. The advance has been reflected as a reduction in the investment on the company’s Consolidated Balance Sheet and no interest expense is associated with the obligation.

8

NOTE 4.  INCOME TAX PAYMENTS

Income tax payments for the two quarters ended June 29, 2003 and June 30, 2002 were $5.4 million and $34.1 million, respectively.

NOTE 5.  EQUITY

Earnings per Share:

The following table sets forth the computation of basic and diluted earnings per share in accordance with GAAP (in thousands, except per share data):

9

In December 2002, the FASB issued SFAS 148 – “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends SFAS 123 – “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair-value for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements issued for 2003. As allowed by SFAS 123, the company follows the disclosure requirements of SFAS 123, but continues to account for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings when options are issued at fair market value.

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 company’s Employee Stock Purchase Plan is treated as compensation expense for pro forma purposes. The company’s GAAP and pro forma information follows (in thousands, except for earnings per share data):

10

NOTE 6.  BUSINESS SEGMENTS

Financial data for each of the company’s business segments are as follows (in thousands):

11

NOTE 7.  GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 – “Goodwill and Other Intangible Assets.” Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed at least annually for impairment. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the company has applied the new accounting rules beginning December 31, 2001.

The company completed the initial evaluation of its goodwill and other intangible assets during the second quarter of 2002 and no impairment was indicated. As of October 1, 2002, the company performed its annual evaluation of goodwill and other intangibles and again no impairment was indicated. All goodwill and indefinite lived intangible assets are reported by the newspaper segment.

The company owned 50% of CareerBuilder (formerly Career Holdings, Inc.), when it completed its evaluation of goodwill in the second quarter of 2002. The company records its investment in CareerBuilder under the equity method of accounting. The company reflected its share of CareerBuilders’ impairment of goodwill, $24.3 million, or $.28 per diluted share, arising from its adoption of SFAS 142 in the second quarter ended June 30, 2002, as a year-to-date cumulative effect of a change in accounting principle consistent with CareerBuilders’ characterization of the write-down. No further impairment was identified as a result of CareerBuilder’s annual evaluation of goodwill and other intangible assets. The company will reassess the carrying value of its goodwill and intangible assets each year as of October 1, unless indicators of impairment become apparent earlier.

Goodwill and other intangible assets along with their weighted-average life, at June 29, 2003 consisted of the following (in thousands):

Estimated annual aggregate amortization expense will be approximately $6.8 million for 2003 through 2006 and $4.1 million in 2007.

12

During 2002, the defined benefit pension plans sponsored by the company were affected by stock market declines as well as declines in interest rates. As a result, at December 29, 2002, the accumulated benefit obligation exceeded the fair value of plan assets for many of the company’s pension plans. SFAS 87 – “Employers’ Accounting for Pension Plans,” required recognition of an additional minimum liability for those plans. In addition, the company recorded, as an intangible pension asset, an increase of $27.0 million in December 2002 in goodwill and other intangible assets no longer being amortized category in connection with the minimum liability.

During the quarter ended June 29, 2003, the company amended its agreement with the Journal Gazette Company to extend their joint operating agreement in Fort Wayne, Ind., to the year 2050. Under the amended terms, the company increased its partnership interest from 55% to 75%. The transaction resulted in a $42 million increase to the company’s goodwill.

A summary of the balances of goodwill, newspaper mastheads and other intangible assets as of December 29, 2002 and June 29, 2003 and for the six months ended June 29, 2003 were (in thousands):

NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board issued SFAS No. 149 – “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.” SFAS 149 is effective for contracts with derivative instruments and hedging relationships entered into or modified after June 30, 2003. SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. This statement also amends the definition of an underlying security to conform it to language used in FIN 45 – “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Currently, the company accounts for its hedges with comparable characteristics similarly and does not expect the adoption of SFAS 149 to have a material impact on the company’s results of operations or financial positions.

In May 2003, the Financial Accounting Standards Board issued SFAS 150 – “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity. SFAS 150 requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material impact on the company’s financial statements.

13

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (“FIN 46”) – “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The company has not invested in any new VIEs created after January 31, 2003. The adoption of FIN 46 is not expected to have a material impact on the company’s financial statements.

NOTE 9. COMMITMENTS AND CONTIGENCIES

The company is involved in certain claims and litigation related to its operations, including ordinary routine litigation incidental to its business. There have been no material developments in these claims and litigation subsequent to those described under “Note 14. Commitments and Contingencies” in the company’s Form 10-K for the year ended December 29, 2002.

The company has future commitments for capital expenditures relating to its properties in Kansas City, and Detroit. Kansas City has future commitments totaling approximately $122 million for building, plant and presses. Detroit has future commitments of approximately $30 million for presses and related equipment.

14

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

FORWARD LOOKING STATEMENTS

Certain statements contained in this Form 10-Q are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated.

Potential risks and uncertainties that could adversely affect the company’s ability to obtain these results include, without limitation, the following factors: (a) increased consolidation among major retailers and other events that may adversely affect business operations of major customers and depress the level of local and national advertising; (b) a further 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, natural disaster or other events that may adversely affect the company’s operations or the operations of key suppliers to the company.

Critical Accounting Policies and Estimates

General. Management’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, revenue and expenses, cash flows and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to incentives, bad debts, inventories, investments, intangible assets, income taxes, financing arrangements, restructuring, long-term service contracts, pensions and other postretirement benefits, and contingencies and litigation. Management 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.

Management 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 advertisements 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. Revenue is 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.

15

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 methods to establish allowances for losses on accounts receivable. Payment in advance for some 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 records these investments 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. In these cases, an impairment charge could be required in the future.

Goodwill and intangible impairment. The company must assess, at least annually, potential impairment of its goodwill and purchased intangible assets. This asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. Such evaluations of impairment of long-lived assets including goodwill and purchased intangible assets are an integral part of, but not limited to, the company’s strategic reviews of the business and operations performed in conjunction with restructuring actions. If the estimated fair value of the 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 must also record its share of impairment charges recorded by its equity method investees.

Pension and postretirement benefits. The company has significant pension and postretirement benefit costs and credits that are developed from actuarial valuations. These valuation assumptions include health care cost trend rates, salary growth, long term return on plan assets, discount rates and other factors. The company’s health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The salary growth assumptions reflect the company’s long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical results of the portfolio and management’s expectation of the current economic environment. The discount rate assumption is based on current investment yields on AA-rated corporate long-term bond yields. Actual results that differ from these assumptions are accumulated and amortized over the future life of the plan participants. For an explanation of these assumptions, see “Note 11. Pension and Other Postretirement Benefit Plans” in the company’s Form 10-K for the year ended December 29, 2002. While the company believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the company’s pension and other postretirement benefits costs and obligations.

Self-insurance. The company is self-insured for the majority of its group health care costs. The company relies on claims experience and the advice of consulting actuaries and administrators in determining an adequate liability for self-insurance claims.

16

Income taxes. The company records incomes taxes in accordance with SFAS 109 – “Accounting for Income Taxes.” The company maintains a liability to cover the cost of additional tax exposure items on the filing of federal and state income tax returns. The company files a federal consolidated income tax return and state consolidated, combined or separate returns depending upon the state requirements. Each of these filing jurisdictions may audit the tax returns filed and propose adjustments. Adjustments arise from a variety of factors, including different interpretation of statutes and regulations.

Legal. The company is involved in certain claims and litigation related to its operations, including ordinary routine litigation incidental to its business. See “Note 14. Commitments and Contingencies” in the company’s Form 10-K for the year ended December 29, 2002 for further information. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the company’s consolidated financial position, liquidity, results of operations or properties. Management assesses the likelihood of any adverse judgments or outcomes as well as potential ranges of probable losses. Determination of the amount of reserves required for these contingencies is made after analysis and discussion with counsel.

17

CONSOLIDATED RESULTS OF OPERATIONS: SECOND QUARTER ENDED JUNE 29, 2003 COMPARED TO SECOND QUARTER ENDED JUNE 30, 2002:

The following table sets forth the consolidated results of operations for the quarters ended June 29, 2003 and June 30, 2002 (in thousands, except per share amounts):

NEWSPAPER DIVISION

Operating Revenue

The table below presents operating revenue and related statistics for newspaper operations for the quarter ended June 29, 2003 compared to the quarter ended June 30, 2002 (in thousands):

Advertising revenue for the quarter ended June 29, 2003 was up $4.9 million, or 0.9%, compared to the same quarter of the prior year. The most significant increases were in Miami ($4.0 million or 5.7%), Philadelphia ($3.1 million or 3.2%) and Akron ($1.6 million or 9.0%). San Jose had the largest decrease ($3.6 million or 7.0%).

18

Retail advertising increased $3.1 million, or 1.2%, during the quarter ended June 29, 2003 compared to the same period last year, on a 13.3% increase in preprint advertising revenue, partially offset by a 4.9% decrease in full run linage. The largest increases were in Akron ($1.3 million or 16.7%), Kansas City ($918,000 or 3.4%) and Charlotte ($911,000 or 5.1%). San Jose had the largest decrease ($921,000 or 4.6%).

General advertising revenue for the quarter ended June 29, 2003 increased $15.0 million, or 20.8%, compared to the same quarter in 2002, on a 13.0% increase in full run linage, and a 14.1% increase in preprint advertising revenue. The largest increases were in Philadelphia ($5.1 million or 25.1%), San Jose ($2.7 million or 34.6%), Akron ($1.4 million or 33.7%), Miami ($1.4 million or 8.6%) and Fort Worth ($1.1 million or 20.8%). The telecommunications category was responsible for most of the growth, with additional increases from travel and automotive in most markets. San Jose and Contra Costa also benefited from increases in technology advertising.

Classified revenue was down $13.2 million, or 6.2%, in the second quarter of 2003 compared to the second quarter of 2002, due to classified recruitment advertising, down $15.2 million, or 23.0%, classified automotive advertising, down $1.5 million, or 2.2%. Increases in real estate advertising of $3.9 million, or 8.4%, partially offset this decline. The largest decreases were in San Jose ($5.4 million or 23.3%), Kansas City ($2.5 million or 13.4%), Charlotte ($1.8 million or 11.2%), Fort Worth ($1.6 million or 7.8%) and Philadelphia ($1.5 million or 4.5%), primarily due to decreases in employment and automotive revenue. San Jose also had decreases in real estate. Miami partially offset these shortfalls, with increases over the prior year of $2.6 million, or 11.8%, due to real estate, automotive and other.

Circulation revenue declined $4.8 million, or 3.9%, in the quarter ended June 29, 2003 compared to the same period last year, due to decreases in average daily copies of 14,318, or 0.4%, and Sunday copies of 12,087, or 0.2%. The decrease in circulation revenue was also due to (a) increased discounting of subscription rates, (b) reduced rates for Newspaper in Education (NIE) and (c) Sunday single copy price rollbacks in five markets.

Other revenue increased $1.3 million, or 5.8%, against the prior year due to commercial printing and alternate distribution categories.

Operating Costs

The table below presents operating costs for newspaper operations for the quarter ended June 29, 2003 compared to the quarter ended June 30, 2002 (in thousands):