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<SEC-DOCUMENT>0001019056-98-000127.txt : 19980317

<SEC-HEADER>0001019056-98-000127.hdr.sgml : 19980317

ACCESSION NUMBER:     0001019056-98-000127

CONFORMED SUBMISSION TYPE:   10-K

PUBLIC DOCUMENT COUNT:       8

CONFORMED PERIOD OF REPORT:  19971228

FILED AS OF DATE:     19980313

SROS:         NYSE

 

FILER:

 

    COMPANY DATA:

       COMPANY CONFORMED NAME:          KNIGHT RIDDER INC

       CENTRAL INDEX KEY:           0000205520

       STANDARD INDUSTRIAL CLASSIFICATION:    NEWSPAPERS:  PUBLISHING OR PUBLISHING & PRINTING [2711]

       IRS NUMBER:              380723657

       STATE OF INCORPORATION:         FL

       FISCAL YEAR END:         1231

 

    FILING VALUES:

       FORM TYPE:    10-K

       SEC ACT:     

       SEC FILE NUMBER:  001-07553

       FILM NUMBER:      98565486

 

    BUSINESS ADDRESS:

       STREET 1:     ONE HERALD PLZ

       CITY:         MIAMI

       STATE:        FL

       ZIP:          33132

       BUSINESS PHONE:       3053763800

 

    MAIL ADDRESS:

       STREET 1:     ONE HERALD PLZ

       CITY:         MIAMI

       STATE:        FL

       ZIP:          33132

 

    FORMER COMPANY:  

       FORMER CONFORMED NAME:   KNIGHT RIDDER NEWSPAPERS INC /FL/

       DATE OF NAME CHANGE:  19860707

</SEC-HEADER>

<DOCUMENT>

<TYPE>10-K

<SEQUENCE>1

<DESCRIPTION>FORM 10-K

<TEXT>

 

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-K

 

                ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

 

    For the fiscal year ended DECEMBER 28, 1997 Commission file number 1-7553

 

                               KNIGHT-RIDDER, INC.

             (Exact name of registrant as specified in its charter)

 

                      A Florida corporation NO. 38-0723657

      (State or other jurisdiction of (I.R.S. Employer Identification No.)

                         incorporation or organization)

 

                      One Herald Plaza Miami, Florida 33132

                    (Address of principal executive offices)

 

        Registrant's telephone number, including area code (305) 376-3800

 

           Securities registered pursuant to Section 12(b) of the Act:

 

      Title of each  class          Name of each  exchange  on which  registered

Common Stock, $.02 1/12 Par Value             New York Stock Exchange

                                              Frankfurt Stock Exchange

 

           Securities registered pursuant to Section 12(g) of the Act:

                                      none

 

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the  preceding 12 months (or for such  shorter  period that the  registrant  was

required  to file  such  reports),  and  (2) has  been  subject  to such  filing

requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405

of Regulation  S-K is not contained  herein,  and will not be contained,  to the

best of registrant's  knowledge,  in definitive proxy or information  statements

incorporated  by  reference in Part III of this Form 10-K or any  amendments  to

this Form 10-K. [ ]

 

State the aggregate market value of the voting stock held by  non-affiliates  of

the  registrant.  (The  aggregate  market  value is computed by reference to the

price at which the stock was sold as of March 6, 1998:  $4,480,605,092.

 

Indicate the number of shares outstanding of each of the registrant's classes of

common stock, as of the latest  practicable date: March 6, 1998 - 79,302,745 one

class Common Stock, $.02 1/12 Par Value

 

                       DOCUMENTS INCORPORATED BY REFERENCE

 

(1)   Portions of definitive Proxy Statement dated March 27, 1998, in connection

      with the Annual Meeting of  Shareholders to be held on April 28, 1998, are

      incorporated into Part III.

(2)   Portions of the Company's Form 10-K filed March 10, 1997 are  incorporated

      into Part IV.

(3)   Portions of the Company's Form 10-K filed March 20, 1996 are  incorporated

      into Part IV.

(4)   Portions of the Company's Form 10-K filed March 24, 1995 are  incorporated

      into Part IV.

(5)   Portions of the Company's Form 10-K filed March 23, 1994 are  incorporated

      into Part IV.

(6)   Rights Agreement filed July 9, 1996 on Form 8-A is incorporated  into Part

      IV.

(7)   Registration  Statement No. 33-28010 on Form S-3 is incorporated into Part

      IV.

(8)   Registration Statement No. 333-37603 on Form S-3 is incorporated into Part

      IV.

 

                                       1

<PAGE>

<TABLE>

<CAPTION>

 

                      Table of Contents for 1997 Form 10-K

                                                                                                       Page

PART I

 

<S>     <C>                                                                                             <C>

 Item 1.  Business .................................................................................    3-8

 Item 2.  Properties ...............................................................................      8

 Item 3.  Legal Proceedings ........................................................................      9

 Item 4.  Submission of Matters to a Vote of Security Holders ......................................      9

 

PART II

 

 Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters .....................   9-10

 Item 6.  Selected Financial Data ..................................................................  11-14

 Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations ....  15-26

 Item 8.  Financial Statements and Supplementary Data ..............................................  27-48

 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....     49

 

 

PART III

 

 Item 10. Directors and Executive Officers of the Registrant .......................................  49-51

 Item 11. Executive Compensation ...................................................................     52

 Item 12. Security Ownership of Certain Beneficial Owners and Management ...........................     52

 Item 13. Certain Relationships and Related Transactions ...........................................     52

 

 

PART IV

 

 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..........................  52-55

 

SIGNATURES .........................................................................................  56-58

 

SCHEDULES ..........................................................................................     59

 

EXHIBITS ...........................................................................................     59

</TABLE>

 

                                       2

<PAGE>

PART I

 

Item 1. BUSINESS

 

 

                                  THE COMPANY

 

Knight-Ridder,  Inc., was formed in 1974 by a merger between Knight  Newspapers,

Inc., and Ridder Publications, Inc.

 

In 1903,  Charles  Landon  Knight  purchased  the Akron Beacon  Journal.  Knight

Newspapers was founded by John S. Knight,  who inherited the Beacon Journal from

his father in 1933.  Ridder  Publications was founded in 1892 when Herman Ridder

acquired the German-language Staats-Zeitung in New York. Both groups flourished,

each  taking  its  stock  public in 1969.  The  merger  created  a company  with

operations coast to coast.

 

Knight-Ridder,  Inc., was  incorporated in Florida in 1976, is  headquartered in

Miami, Florida, and employs about 22,000 people.

 

Recent Developments

 

In 1997,  Knight Ridder  acquired four newspapers  indirectly  owned by The Walt

Disney Company, exchanged its newspaper in Boulder, Colo., for two newspapers in

California owned by the E.W. Scripps Co. and sold four of its newspapers.  Also,

in 1997,  Knight  Ridder  sold  Knight-Ridder  Information,  Inc.  (KRII) and in

December  the  company  announced  its intent to sell  Technimetrics,  Inc.  The

company's  announcement  to  divest  KRII  and  Technimetrics  resulted  in  the

reclassification  of its former Business  Information  Services (BIS) segment as

discontinued operations.

 

                                   NEWSPAPERS

 

Knight Ridder has 31 daily newspapers and 18 nondaily newspapers.

 

Operating revenue is derived  primarily from the sale of newspaper  advertising.

Due to seasonal  factors such as heavier  retail  selling  during the winter and

spring holiday seasons,  advertising income fluctuates  significantly throughout

the year.  Consecutive  quarterly  results are not uniform or comparable and are

not indicative of the results over an entire year.

 

Each of Knight  Ridder's  newspapers is operated on a  substantially  autonomous

basis by local  management  appointed by corporate  headquarters in Miami.  Each

newspaper  is free  to  manage  its own  news  coverage,  set its own  editorial

policies  and  establish  most  business  practices.  Basic  business  policies,

however, are set by the corporate staff in Miami. Editorial services and quality

control also are provided by the corporate staff.

 

Each newspaper is served by the company-owned news bureau in Washington,  D.C. A

supplemental  news service provided by KRT Information  Services,  a partnership

between Knight Ridder and Tribune Co.,  distributes  editorial material produced

by all Knight Ridder  newspapers and by 16 foreign  correspondents.  The service

also distributes  editorial computer graphics and deadline photos via the Knight

Ridder-owned PressLink Online.

 

All of the company's  newspapers  compete for  advertising and readers' time and

attention with broadcast, satellite and cable television, the Internet and other

computer  services,  radio,  magazines,   nondaily  suburban  newspapers,   free

shoppers, billboards and direct mail. In some cases, the newspapers also compete

with other  newspapers  published in nearby cities and towns--  particularly  in

Miami,  St. Paul and Fort Worth.  In Detroit and Fort Wayne,  Knight  Ridder has

joint operating agreements with a second newspaper.  The rest of Knight Ridder's

newspapers are the only daily and Sunday papers of general circulation published

in their communities.

 

The  newspapers  rely on local sales  operations for local retail and classified

advertising.  The larger  papers are  assisted  by  Newspapers  First and by the

Newspaper  National  Network,  a sales force created by a group of some 50 major

newspapers, in obtaining national or general advertising.

 

                                       3

<PAGE>

                   Source of Knight Ridder Operating Revenue

 

The table below  presents the relative  percentage  contributions  by individual

papers to the company's  overall  operating  revenue in 1997, 1996 and 1995. The

percentage  contributions of each paper to operating revenue are not necessarily

indicative of contributions to operating profit.

 

                                           1997           1996         1995

                                           ----           ----         ----

  The Philadelphia Inquirer and

    Philadelphia Daily News .............  19.0%          21.3%        21.7%

  The Miami Herald ......................  11.4           13.3         14.3

  San Jose Mercury News .................  10.4           12.0         11.9

  The Kansas City Star(1) ...............   6.1

  Fort Worth Star-Telegram(1) ...........   4.9

  Detroit Free Press(2) .................   7.0            7.7          8.5

  The Charlotte Observer ................   6.2            6.9          6.8

  Saint Paul Pioneer Press ..............   4.1            4.7          4.8

  Contra Costa Newspapers(3) ............   3.9            4.4          1.0

  Akron Beacon Journal ..................   3.6            4.0          4.0

  All other .............................  23.4           25.7         27.0

                                          -----          -----        -----

                                          100.0%         100.0%       100.0%

                                          =====          =====        =====

 

 

(1) The Kansas City Star and Fort Worth Star-Telegram were acquired on May 9,

    1997.  This table presents their partial year contribution percentage.

(2) Knight Ridder portion of Detroit Newspapers.

(3) Contra Costa Newspapers was acquired on Oct. 31, 1995.

 

                                   Newsprint

 

Knight Ridder consumed  752,000 metric tons of newsprint in 1997.  Approximately

16.8%  of the  company's  total  operating  expenses  during  the  year  was for

newsprint.  Purchases  are made under  long-term  agreements  with 18  newsprint

producers.  Knight Ridder purchases  approximately 70% of its annual consumption

from mills in the  United  States  with the  remainder  purchased  from mills in

Canada and one in Korea.  In the opinion of management,  sources are adequate to

meet current demands.

 

Approximately  83% of the  newsprint  consumed  by the  company  contained  some

recycled  content;  the average  content of these rolls was 47% recycled  fiber.

This translates into an overall recycled newsprint average of 39%.

 

Knight  Ridder is a  one-third  partner  with Cox  Newspapers,  Inc.,  and Media

General, Inc., in Southeast Paper Manufacturing Co., a newsprint mill in Dublin,

Ga. The mill produced  456,000 metric tons in 1997, using more than 600,000 tons

of recycled  newsprint  as the  principal  raw  material and coal as the primary

energy  source.  Knight  Ridder  also  owns a 13.5%  equity  share  of  Ponderay

Newsprint Company in Usk, Wash., which produced more than 232,000 metric tons in

1997. Knight Ridder's purchases from these two mills reached 22.6% of our annual

consumption for 1997, proving an important hedge against price volatility.

 

                                   Technology

 

Efforts to improve the quality of products  continued  during 1997.  The company

completed the  installation of new publishing  systems in Duluth,  Contra Costa,

Columbia and Grand Forks (made  necessary by the flood).  Systems  installations

are under way in Akron, Biloxi, Macon, Myrtle Beach,  Philadelphia and San Jose,

and have been approved for Charlotte.

 

The Charlotte Observer completed a full conversion to Flexographic printing, and

a press replacement project was completed in Duluth.

 

Major press  replacement  projects are well under way at The Miami Herald and in

Akron.  New presses were approved for Fort Worth.  Significant  renovations  are

continuing at the business and editorial offices in Detroit and Philadelphia.

 

                           General Advertising Sales

 

Knight  Ridder  newspapers  depend most  heavily on three agents for the sale of

general advertising.

 

                                       4

<PAGE>

 

Newspapers First, a national advertising sales cooperative, is the primary sales

representative for the larger Knight Ridder  newspapers,  Detroit Newspapers and

several leading independents.  It allows customers to place ads in a combination

of newspapers.

 

Newspaper  National  Network (NNN),  Knight Ridder's second general sales agent,

was established in 1994 to focus on national  selling on behalf of the newspaper

industry.  It represents  all the Knight Ridder  newspapers,  plus more than 500

others. Like Newspapers First, it makes the purchase of newspaper  advertising a

"one-stop shopping," "one-order, one-bill" prospect.

 

Sawyer,   Ferguson   and  Walker,   Inc.,  a  private   company,   sells  sales-

representative  services for Knight  Ridder's  medium to small markets and helps

with regional retail advertising sales.

 

                             Knight Ridder/Tribune

 

Knight  Ridder/Tribune  Information  Services (KRT) is a joint venture of Knight

Ridder and Tribune Co. that offers news  stories,  graphics,  illustrations  and

photos for print and online publishers and animations for TV broadcasters.  This

year, KRT added three new products: graphic packages and news animations for Web

publishers and a regional news service for the Southeast.

 

The daily  interactive  packages and graphics help Web  publishers  offer unique

content,  complete with sound and motion.  KRT also provides  newspaper  clients

with complementary stories, photos and graphics that they can use to promote the

online content.  This lets them use print  circulation to build traffic on their

Web sites.

 

For print  customers,  KRT  expanded  coverage of news,  features,  business and

sports in the Southeastern United States,  creating a premium service called KRT

South.

 

 

             The Philadelphia Inquirer and Philadelphia Daily News

 

1997 Revenue was $546.5 million.  Philadelphia Newspapers, Inc. (PNI), publisher

of The  Philadelphia  Inquirer and  Philadelphia  Daily News reached an all-time

record profit level in 1997. PNI also reported year-over-year  circulation gains

for the Sunday and daily  Inquirer and the Daily News for the  six-month  period

ended Sept. 30, 1997.

 

The  year's  achievements  include  the  launch  of a New  Business  Development

Department  for  entrepreneurial  projects,  which  resulted in the  start-up or

acquisition  of new  revenue-producing  enterprises;  implementing  a  strategic

planning process;  winning a Pulitzer Prize, The Inquirer's 18th, and publishing

two record-breaking  recruitment  advertising  sections,  in terms of volume and

revenue dollars.  Also in 1997, both newspapers moved into new,  technologically

advanced  newsrooms,  part of the $30 million  renovation  of PNI's  Center City

Philadelphia location.

 

Advertising  revenue was up 11.1% in 1997, with particularly strong performances

in classified and general, up 16.8% and 22.3%, respectively. Retail strengthened

in the last months of the year, and is expected to continue to perform well.

 

Opportunities  to grow  advertising  in PNI's  products  within the  nine-county

Philadelphia  Metropolitan  market remain  attractive  as the market  features a

diverse economy,  including the state's largest  manufacturing center, more than

80 higher  education  institutions  and an  extensive  hospital  and health care

industry.

 

In 1996,  Philadelphia  had income per capita 15.2% above the U.S.  average;  by

2015 it is projected to be 9.1% above.

 

                                       5

<PAGE>

                                The Miami Herald

 

1997 Revenue was $324.4 million. The Miami Herald,  Florida's largest newspaper,

is sold primarily in Miami-Dade,  Broward and Monroe counties. Its International

Satellite  Edition is  distributed  in 29  countries  in Latin  America  and the

Caribbean.

 

El Nuevo Herald, an award-winning  Spanish-language newspaper (102,744 daily and

127,028 Sunday),  is available to Herald subscribers for a 7-cent daily delivery

charge or through single-copy sales.

 

Retail  expansion  in 1997 was fueled by a wave of new  entertainment  retailing

projects like  BeachPlace in Broward;  more are planned for both  Miami-Dade and

Broward.

 

Several retailers are expanding:  Bloomingdale's  opened a new store;  Dillard's

will occupy 10 former Mervyn's  locations;  Nordstrom and OfficeMax each plan to

open several stores.

 

Advertising revenue was up 3.1% in 1997. Retail was significantly better for the

first time since the  aftermath  of  Hurricane  Andrew.  Classified  was up only

slightly, reflecting Miami's relatively high unemployment rate.

 

In 1997, The Herald launched three new online  products:  HomeHunter,  CarHunter

and an entertainment  guide,  JustGo. On its 10th  anniversary,  el Nuevo Herald

extended solo  distribution  to more than 1,000  single-copy  racks.  The Herald

retooled its Sunday magazine,  Tropic.  It expanded  partnerships with NBC 6 and

Channel 23 and agreed to produce a pilot  program with Silver King  Broadcasting

featuring  the Herald  newsroom.  Attendance  was  strong at the first  Americas

Conference.  A partnership  with the Florida Marlins  contributed to the largest

single-copy  sales day in  Herald  history  when the team won the World  Series.

Installation of state-of-the-art offset presses is ongoing.

 

The Miami/Fort  Lauderdale DMA population is expected to grow 26.7% between 1996

and 2015, compared with 18.0% for the U.S.

 

The  Miami/Fort  Lauderdale  market in 1996 had income per capita 0.7% above the

U.S. average; by 2015 it is projected to be 6.8% above.

 

                             San Jose Mercury News

 

1997  Revenue was $299.3  million.  In 1997,  Time  magazine  named the San Jose

Mercury News the "most tech-savvy" newspaper in America. The Mercury News serves

Silicon Valley, which encompasses San Jose, California's third-largest city, and

surrounding communities. The region became the national leader in exports and is

the world  leader in high  technology.  Business  Week  reported:  "In 1996,  on

average,  one Valley company went public every five  days...More than 50,000 new

jobs were created, while wages grew five times the national average."

 

Sharing in Silicon  Valley's  economic  boom, the Mercury News has introduced or

developed  products  in the past year to  compensate  for a retail  market  that

didn't grow as quickly as other segments.

 

Advertising  revenue was up 5.0% in 1997.  Classified was up just slightly after

the  major  gains  of  1996  and  1995,  and  retail  rebounded  strongly  after

year-earlier  consolidations in the market.  General,  up 25%, has been the high

point,  driven  by  high-tech  products  and  services,  telecommunications  and

exports.

 

Mercury  Center  reflects the  newspaper's  innovative  initiatives.  The online

edition added Just Go/Bay Area, an online  entertainment  guide;  HomeHunter,  a

real estate  site;  and Bay Area Yellow  Pages,  an online  directory.  Existing

products expanded: the Talent Scout recruitment site, for example,  introduced a

branded job fair.

 

Founded in 1993, Mercury Center  (www.mercurycenter.com)  averaged more than 1.2

million  users  per month in 1997.  The  site's  stature  as a news  source  was

demonstrated during October's market tremors, registering over 2 million hits in

a single day.

 

                                       6

<PAGE>

 

Nuevo Mundo, serving the nation's fourth-largest Hispanic market, celebrated its

first anniversary.  The Spanish-language free weekly ended the year with average

circulation of 56,900 copies.

 

The  population  of the San Jose  Metropolitan  Statistical  Area  (MSA),  which

includes  only Santa Clara  County,  is expected to grow 21.0%  between 1996 and

2015; the U.S. average is 18.0%.

 

In 1996, San Jose had income per capita 33.7% above the U.S. average; by 2015 it

is projected to be 32.6% above.

 

                              The Kansas City Star

 

1997  Revenue  was $265.4  million.  The Kansas City Star serves the Kansas City

metro and outlying  areas on both sides of the Kansas and Missouri  state lines.

The Star's primary market area consists of 11 counties in the two states.

 

After a relatively slow period of economic growth, Kansas City became a boomtown

in 1996.  Higher  personal  incomes,  stronger  economic  output  and  increased

employment  in retail and  service  industries  have led to a tight job  market.

Recruitment for the more than 19,000 new jobs created in 1997 brought an upsurge

in help-wanted advertising, with a nearly 20% increase in revenue.

 

Kansas  City's  retail  landscape  has also been  changing  with the addition of

several major retailers.  Kohl's, Jacobson's,  Target and Home Depot entered the

market in late 1996 and early 1997,  with  Nordstrom set to debut in early 1998.

Coupled with the addition of a major mall, retail advertising  increased 9.5% in

1997.

 

Advertising revenue was up 10.1% in 1997 and is expected to increase about 7% in

1998. The profit margin was in the low 30s and is expected to remain steady.

 

The  Star's  online   community  site,   kansascity.com,   and  online  product,

kcstar.com,  continue to grow and improve.  The kansascity.com site won the 1997

Newspaper  Association of America  Digital Edge award for best use of classified

online.  The site saw a 461%  year-over-year  increase in traffic for  November.

StarDirect,  a subsidiary offering turnkey database marketing  solutions,  saw a

108%  increase  in  revenue.  Additionally,  revenue  increased  44%  for  Grand

Communications, the event marketing subsidiary.

 

Kansas City in 1996 had income per capita 3.4% above the U.S.  average;  by 2015

it is projected to be 2.5% above.

 

                            Fort Worth Star-Telegram

 

1997 Revenue was $212.6  million.  The  Star-Telegram  is located in the western

portion of the Dallas/Fort  Worth market.  The four-county Fort  Worth/Arlington

PMSA  metropolitan  area ranks as the 32nd most  populous in the U.S.  and third

largest in Texas in 1997.

 

The number of jobs hit a historic  high in 1997,  with 2% growth  projected  for

1998.  Unemployment  is just over 3%. In far North Fort  Worth,  the Texas Motor

Speedway and a FedEx national distribution hub opened. Intel Corp. plans to open

a $1.3 billion  manufacturing  facility by the year 2000, and Nokia and Motorola

Fort Worth are expanding,  making the area a new national technology center. The

area  is  home to  such  Fortune  500  companies  as  American  Airlines,  Tandy

Corporation and Burlington Northern Santa Fe Railroad.

 

The 1.8  million-square-foot  Grapevine  Mills  opened and a major  expansion of

North East Mall is under way,  including new Nordstrom and JCPenney stores.  The

Bass  Performing Arts Hall will open in 1998.  Renovation of historic  buildings

and  construction of new housing are driving  development of Sundance Square and

downtown Fort Worth.

 

Ad revenue was up 6.5% in 1997,  and we project about a 6% gain in 1998.  Profit

margin was in the mid-20s.

 

                                       7

<PAGE>

The  Star-Telegram  continues  its  intensely  zoned  approach  to  local  news,

advertising  and  customer   service.   The  Arlington   Star-Telegram  set  new

circulation  and  advertising  records in the face of aggressive  competition in

1997. In 1998, Northeast Tarrant County will be served by four distinct editions

of the successful weekly Hometown Star. Star-Telegram Online Services, under the

banner  Star-Telegram.com,  is undergoing a major  strategic  repositioning  and

expansion  of  advertising  opportunities.  La  Estrella,  with its two distinct

bilingual and Spanish-predominant weekly editions, continues to develop.

 

Fort  Worth/Arlington's  population has grown 57% since 1980, and is expected to

grow 39.9% between 1996 and 2015, compared with 18.0% for the U.S.

 

                               Detroit Free Press

 

1997 Revenue (Knight Ridder's share) was $201.7 million.  The Detroit Free Press

is the largest newspaper in Michigan.  The combined Sunday edition,  The Detroit

News and Free Press, ranks sixth in circulation in the nation.

 

The two newspapers are published by Detroit Newspapers (DN), an agency combining

the business operations of the two newspapers. This joint operating agency (JOA)

was formed in 1989.  The profits (or losses) are split  equally  between the two

partners,  Knight Ridder and Gannett Co. The Free Press is an a.m. paper and The

News is a p.m. paper. On weekends, they publish combined editions.

 

On July 13, 1995,  six of DN's 11 unions  struck over  proposed  changes in work

rules.  In February  1997, the unions made an  unconditional  offer to return to

work.

 

In normal  times,  Detroit will generate  approximately  $450 million in revenue

from its two newspapers.  Total  advertising at the end of 1997 was at about 90%

of prestrike levels.

 

Retail advertising was at nearly 80%; general was about the same, and classified

was slightly improved from prestrike levels.

 

Circulation  continued to improve;  as of the ABC Publisher's  Statement for the

six months ended Sept. 30, 1997, it was at approximately  71.6% of its prestrike

level for the daily  Free  Press and 74.4% for the  combined  Sunday  paper.  DN

continues to rebound in both advertising and  circulation.  The company returned

to profitability in the fourth quarter of 1996.

 

Detroit in 1996 had income per capita 15.3% above the U.S.  average;  in 2015 it

is projected to be 9.1% above.

 

                             The Charlotte Observer

 

1997 Revenue was $171.9 million. The Charlotte Observer, the largest-circulation

daily in North and South  Carolina,  is sold  primarily  in a  15-county  region

across the two states.  The Observer enjoyed strong  advertising growth in 1997,

with retail  revenue up 8.7%,  general up 2.2% and classified up 13.3% over last

year. Continued growth is expected in 1998.

 

Population in the Charlotte  Metropolitan  Statistical Area (MSA) is expected to

grow 26.9% between 1996 and 2015, compared with the U.S. average of 18.0%.

 

 

Item 2. PROPERTIES

 

The company has daily  newspaper  facilities in 28 markets located in 18 states.

These  facilities  vary in size  from  7,300  square  feet at the  Florida  Keys

Keynoter   operation  in  Marathon,   Fla.,  to  2.8  million   square  feet  in

Philadelphia.   In  total,   they  occupy  about  10.5   million   square  feet.

Approximately  2.1 million of the total  square  footage is leased from  others.

Virtually all the owned property is owned in fee. The company owns substantially

all of its production  equipment,  although  certain office equipment is leased.

The company  also owns land for future  expansion  in Columbus  and Macon,  Ga.,

Detroit and San Jose.

 

Knight Ridder properties are maintained in excellent operating condition and are

suitable for present and  foreseeable  operations.  During the three years ended

Dec.  28,  1997,  the company  spent  approximately  $311.6  million for capital

additions  and  improvements  to  its  properties,  excluding  discontinued  BIS

operations.

 

                                       8

<PAGE>

 

Item 3.  LEGAL PROCEEDINGS

 

On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and

the Detroit Newspaper Agency, which operates both newspapers.  Subsequently, the

unions filed numerous  unfair labor practice  charges against the newspapers and

the Agency.  In June 1997,  after a lengthy trial,  a National  Labor  Relations

Board  (NLRB)  administrative  law judge ruled that the strike was caused by the

unfair labor practices of the Agency and The Detroit News and  recommended  that

the Agency and the  newspapers  reinstate  all  strikers,  displacing  permanent

replacements  if  necessary.  The Agency and the  newspapers  have  appealed the

decision, which is pending before the NLRB.

 

Various libel actions and  environmental  and other legal  proceedings that have

arisen in the ordinary  course of business  are pending  against the company and

its subsidiaries.  In the opinion of management,  the ultimate  liability to the

company and its  subsidiaries  as a result of all legal  proceedings,  including

Detroit,  will  not  be  material  to  its  financial  position  or  results  of

operations.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters  were  submitted  to the vote of security  holders of  Knight-Ridder,

Inc., during the quarter ended December 28, 1997.

 

 

PART II

 

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

                                   KRI Stock

 

Knight  Ridder  common  stock is listed on the New York Stock  Exchange  and the

Frankfurt Stock Exchange under the symbol KRI.

 

The stock is also traded in  exchanges in  Philadelphia,  Chicago,  Boston,  San

Francisco,  Los Angeles and  Cincinnati,  and  through the  Intermarket  Trading

System.  Options are traded on the Philadelphia Exchange.

 

Knight Ridder stock split two-for-one in 1996. The company's 81.6 million shares

outstanding  at  December  28,  1997,  were  held  in all 50  states  by  11,723

shareholders of record.

 

                          Market Price of Common Stock

 

The last closing price of the company's common stock prior to the preparation of

this report was $55.06 on Jan. 30, 1998.

 

The average stock trading volume per day for the years 1997,  1996, and 1995 was

271,016,  181,805, and 132,300,  respectively.  The following table presents the

company's common stock market data:

 

<TABLE>

<CAPTION>

                         1997                  1996                    1995

                 -------------------     ----------------      --------------------

Quarter            High        Low        High      Low         High         Low

                 --------     ------     -------  -------      -------     --------

 

<S>              <C>          <C>        <C>      <C>          <C>         <C>    

1st ...........  42 3/8       37 3/8     36 1/16  29 7/8       28 1/16     25 1/8

2nd ...........  49           35 3/4     38 7/16  32 11/16     28 7/8      26 3/16

3rd ...........  55 13/16     48 3/4     38       32 7/16      29 3/16     27 5/8

4th ...........  57 1/8       49 1/8     42       35 3/8       33 5/16     28 1/8

</TABLE>

 

                                       9

<PAGE>

 

                            Treasury Stock Purchases

 

The table below is a summary of treasury stock purchases since 1987:

 

                               Shares                         Cost

                              Purchased                      (000s)

                             ----------                    ----------

1997 ......................  13,824,300                    $  643,375

1996 ......................   6,219,100                       221,768

1995 ......................  11,508,600                       319,363

1994 ......................   5,044,600                       136,977

1993 ......................   1,500,000                        40,693

1992

1991

1990 ......................   5,325,400                       129,909

1989 ......................   5,522,200                       131,885

1988 ......................   9,099,200                       198,279

1987 ......................   2,000,000                        38,728

 

 

                                   Dividends

 

Common stock  dividend  history and policy appears in Item 6. "11 Year Financial

Highlights",   Item  7.  "Management's  Discussion  and  Analysis  of  Financial

Condition  and  Results  of  Operations",  Quarterly  Operations,  and  Item  8.

"Financial  Statements and Supplementary  Data", Note E, incorporated  herein by

reference.

 

                                       10

<PAGE>

<TABLE>

<CAPTION>

Item 6. SELECTED FINANCIAL DATA

 

11-YEAR FINANCIAL HIGHLIGHTS

 

The following data was compiled from the  consolidated  financial  statements of Knight Ridder and  subsidiaries.  The  consolidated

financial  statements and related notes and  discussions for the year ended Dec. 28, 1997 (Items 7 and 8) should be read in order to

obtain a better understanding of this data.

- ------------------------------------------------------------------------------------------------------------------------------------

                                           Compound

                                          Growth Rate

(In thousands, except per share        ----------------            Dec. 28              Dec. 29              Dec. 31

data and ratios)                       5-Year   10-Year             1997                 1996                 1995

                                       ------   -------          -----------          -----------          -----------

<S>                                   <C>       <C>          <C>                  <C>                  <C>       

SUMMARY OF OPERATIONS

Operating Revenue

  Advertising ........................   8.8%      4.2%         $ 2,202,251          $ 1,793,424          $ 1,672,970

  Circulation ........................   4.3       4.7              567,757              501,826              495,315

  Other ..............................  21.7       8.6              106,777               78,974               81,897

                                                                -----------          -----------          -----------

    Total Operating Revenue ..........   8.2       4.4            2,876,785            2,374,224            2,250,182

                                                                -----------          -----------          -----------

Operating Costs

  Labor, newsprint and other

    operating costs ..................   6.7       4.0            2,214,026            1,920,444            1,923,179

  Depreciation and amortization ......  11.8       7.1              156,731              120,647               98,741

                                                                -----------          -----------          -----------

    Total Operating Costs ............   7.0       4.2            2,370,757            2,041,091            2,021,920

                                                                -----------          -----------          -----------

Operating Income .....................  14.6       5.5              506,028              333,133              228,262

  Interest expense ...................  12.4       6.6             (102,662)             (73,137)             (59,512)

  Other, net(1) ......................  82.6      30.2              290,486               50,213               14,067

  Income taxes, net ..................  29.2       9.7             (297,348)            (124,829)             (72,861)

                                                                -----------          -----------          -----------

Income from continuing operations(1)..  24.0      10.3              396,504              185,380              109,956

Discontinued BIS operations(2) .......                               16,511               82,493               57,426

Discontinued broadcast operations(2)

Cumulative effect of changes in

  accounting principles(3) ...........                                                                      (7,320)

                                                                -----------          -----------          -----------

Net Income(1) ........................  58.8      10.3          $   413,015          $   267,873          $   160,062

                                                                ===========          ===========          ===========

Operating income percentage (profit

  margin) ............................                                 17.6%                14.0%                10.1%

- -----------------------------------------------------------------------------------------------------------------------

SHARE DATA(4)

Basic weighted-average number of

  shares .............................                               88,475               96,021               99,451

Diluted weighted-average number of

  shares .............................                              101,314               97,420              100,196

Earnings per share

Basic:

Continuing operations(1)..............  29.3      13.2          $      4.48          $      1.93          $      1.11

Discontinued BIS operations(2) .......                                 0.19                 0.86                 0.57

Discontinued broadcast operations(2)

Cumulative effect of changes in

  accounting principles(3) ...........                                                                          (0.07)

Net income(1) ........................  65.2      13.2                 4.67                 2.79                 1.61

Diluted:

Continuing operations(1)..............  26.3      11.9          $      3.91          $      1.90                $1.10

Discontinued BIS operations(2) .......                                 0.17                 0.85                 0.57

Discontinued broadcast operations(2)

Cumulative effect of changes in

  accounting principles(3) ...........                                                                          (0.07)

Net income(1) ........................  61.6      11.9                 4.08                 2.75                 1.60

Dividends declared per common

  share(5) ...........................   2.7       4.5                 0.80                 0.58-1/2             0.74

Common stock price

  High ...............................                                   57-1/8               42                   33-5/16

  Low ................................                                   35-3/4               29-7/8               25-1/8

  Close ..............................                                   50-3/16              39-1/4               31-1/4

Shareholders' equity per common

  share ..............................   7.8       7.0          $     15.65          $     12.12          $     11.43

Price/earnings ratio(6) ..............                               21.8:1               21.6:1               28.4:1

- -----------------------------------------------------------------------------------------------------------------------

OTHER FINANCIAL DATA

Common stock acquired ................                          $   643,375          $   221,768          $   319,363

Payment of cash dividends ............                               78,335               74,262               74,377

Ratio of earnings to fixed

  charges (7) ........................                                7.1:1                4.0:1                3.2:1

At Year End

  Total assets .......................                          $ 4,355,142          $ 2,860,907          $ 2,966,321

  Long-term debt (excluding current

    maturities) ......................                            1,599,133              771,335            1,000,721

  Total debt .........................                            1,668,830              821,335            1,013,850

  Shareholders' equity ...............                            1,551,673            1,131,508            1,110,970

  Return on average shareholders'

    equity(8) ........................                                 30.8%                23.9%                14.3%

  Current ratio ......................                                1.2:1                1.0:1                1.1:1

  Total debt/total capital ratio .....                                 51.8%                42.1%                47.7%

</TABLE>

 

                                                                  11

<PAGE>

<TABLE>

<CAPTION>

- -----------------------------------------------------------------------------------------------------------

(In thousands, except per share           Dec. 25          Dec. 26          Dec. 27          Dec. 29     

data and ratios)                           1994              1993             1992             1991      

                                        -----------      -----------      -----------      -----------

<S>                                     <C>              <C>              <C>              <C>            

SUMMARY OF OPERATIONS

Operating Revenue

  Advertising .....................     $ 1,583,373      $ 1,481,631      $ 1,444,144      $ 1,429,661    

  Circulation .....................         484,581          474,420          460,014          439,029    

  Other ...........................          66,968           56,772           39,932           35,127    

                                        -----------      -----------      -----------      -----------

    Total Operating Revenue .......       2,134,922        2,012,823        1,944,090        1,903,817    

                                        -----------      -----------      -----------      -----------

Operating Costs

  Labor, newsprint and other

    operating costs ...............       1,730,158        1,655,138        1,597,983        1,593,847    

  Depreciation and amortization ...          96,613           96,233           89,665           86,896    

                                        -----------      -----------      -----------      -----------

    Total Operating Costs .........       1,826,771        1,751,371        1,687,648        1,680,743    

                                        -----------      -----------      -----------      -----------

Operating Income ..................         308,151          261,452          256,442          223,074    

  Interest expense ................         (44,216)         (44,403)         (52,358)         (68,806)   

  Other, net(1) ...................           1,802            2,987           13,868           35,832    

  Income taxes, net ...............        (106,493)         (83,281)         (82,496)         (67,965)   

                                        -----------      -----------      -----------      -----------

Income from continuing operations(1)        159,244          136,755          135,456          122,135    

Discontinued BIS operations (2) ...          11,656           11,334           10,630            9,933    

Discontinued broadcast operations (2)                                                                     

Cumulative effect of changes in

  accounting principles(3) ........                                          (105,200)

                                        -----------      -----------      -----------      -----------

Net Income(1) .....................     $   170,900      $   148,089      $    40,886      $   132,068    

                                        ===========      ===========      ===========      ===========    

Operating income percentage (profit

  margin) .........................            14.4%            13.0%            13.2%            11.7%   

- -----------------------------------------------------------------------------------------------------------

SHARE DATA(4)

Basic weighted-average number

  of shares .......................         107,888          109,702          108,948          102,586    

Diluted weighted-average number of

  shares ..........................         108,551          110,663          110,356          103,594    

Earnings per share

Basic:

Continuing operations(1)...........     $      1.48      $      1.25      $      1.24      $      1.19    

Discontinued BIS operations(2) ....            0.10             0.10             0.11             0.10    

Discontinued broadcast operations(2)

Cumulative effect of changes in

  accounting principles(3) ........                                             (0.97)

Net income(1) .....................            1.58             1.35             0.38             1.29

Diluted: 

Continuing operations(1)...........     $      1.47      $      1.24      $      1.22      $      1.18    

Discontinued BIS operations(2)                 0.10             0.10             0.10             0.09    

Discontinued broadcast operations(2)

Cumulative effect of changes in

  accounting principles(3) ........                                             (0.95)

Net income(1) .....................            1.57             1.34             0.37             1.27    

Dividends declared per common

  share(5) ........................            0.73             0.70             0.70             0.70    

Common stock price

  High ............................              30-1/2           32-1/2           32-1/16          28-3/4

  Low .............................              23-1/4           25-5/16          25-3/8           21-7/8

  Close ...........................              25-7/16          29-11/16         29-1/16          25-3/8

Shareholders' equity per common

  share ...........................     $     11.58      $     11.33      $     10.75      $     10.72    

Price/earnings ratio(6) ...........          17.3:1           23.9:1           23.8:1           21.5:1    

- -----------------------------------------------------------------------------------------------------------

OTHER FINANCIAL DATA

Common stock acquired .............     $   136,977      $    40,693      $        --      $        --    

Payment of cash dividends .........          77,942           76,787           75,992           71,087    

Ratio of earnings to fixed

  charges(7) ......................           5.2:1            4.4:1            3.8:1            2.8:1    

At Year End

  Total assets ....................     $ 2,409,239      $ 2,399,067      $ 2,431,307      $ 2,305,731    

  Long-term debt (excluding current

    maturities) ...................         411,504          410,388          495,941          556,797    

  Total debt ......................         411,504          451,075          560,245          606,840    

  Shareholders' equity ............       1,224,654        1,243,169        1,181,812        1,148,620    

  Return on average shareholders'

    equity(8) .....................            13.9%            12.2%            12.5%            12.9%   

  Current ratio ...................           1.0:1            1.0:1            1.1:1            1.1:1    

  Total debt/total capital ratio ..            25.2%            26.6%            32.2%            34.6%   

</TABLE>

 

                                                      12

<PAGE>

<TABLE>

<CAPTION>

- -------------------------------------------------------------------------------------------------------

(In thousands, except per share         Dec. 30          Dec. 31        Dec. 31        Dec. 31

data and ratios)                          1990            1989            1988           1987

                                      -----------      -----------     ----------    -----------

<S>                                   <C>              <C>            <C>            <C>       

SUMMARY OF OPERATIONS

Operating Revenue

  Advertising .....................   $ 1,556,932      $ 1,577,449     $1,523,030    $ 1,464,447

  Circulation .....................       403,188          385,214        370,898        357,553

  Other ...........................        31,981           32,212         29,743         46,922

                                      -----------      -----------     ----------    -----------

    Total Operating Revenue .......     1,992,101        1,994,875      1,923,671      1,868,922

                                      -----------      -----------     ----------    -----------

Operating Costs

  Labor, newsprint and other

    operating costs ...............     1,617,138        1,593,186      1,571,525      1,494,003

  Depreciation and amortization ...        91,553           91,780         84,657         78,807

                                      -----------      -----------     ----------    -----------

    Total Operating Costs .........     1,708,691        1,684,966      1,656,182      1,572,810

                                      -----------      -----------     ----------    -----------

Operating Income ..................       283,410          309,909        267,489        296,112

  Interest expense ................       (71,784)         (84,492)       (62,456)       (49,550)

  Other, net(1) ...................        17,019           57,505         26,732         20,053

  Income taxes, net ...............       (88,076)        (108,883)       (86,484)      (117,369)

                                      -----------      -----------     ----------    -----------

Income from continuing operations(1)      140,569          174,039        145,281        149,246

Discontinued BIS operations (2) ...         8,476            5,797          1,494           (512)

Discontinued broadcast operations (2)                       67,366          9,608          6,429

Cumulative effect of changes in

  accounting principles(3) ........

                                      -----------      -----------     ----------    -----------

Net Income(1) .....................   $   149,045      $   247,202     $  156,383    $   155,163

                                      ===========      ===========     ==========    ===========

Operating income percentage (profit

  margin) .........................          14.2%            15.5%          13.9%          15.8%

- -------------------------------------------------------------------------------------------------------

SHARE DATA(4)

Basic weighted-average number

  of shares .......................       100,098          103,110        111,842        114,794

Diluted weighted-average number of

  shares ..........................       101,366          104,878        113,406        117,292

Earnings per share

Basic:

Continuing operations(1)...........   $      1.40      $      1.69     $     1.30    $      1.30

Discontinued BIS operations(2) ....          0.09             0.06           0.01          (0.01)

Discontinued broadcast operations(2)                          0.65           0.09           0.06

Cumulative effect of changes in

  accounting principles(3) ........

Net income(1)......................          1.49             2.40           1.40           1.35

Diluted:

Continuing operations(1)...........   $      1.39      $      1.66     $     1.28    $      1.27

Discontinued BIS operations(2).....          0.08             0.06           0.01

Discontinued broadcast operations(2)                          0.64           0.09           0.05

Cumulative effect of changes in

  accounting principles(3) ........

Net income(1) .....................          1.47             2.36           1.38           1.32

Dividends declared per common

  share(5) ........................          0.67             0.62-1/4       0.57-1/4       0.51-1/2

Common stock price

  High ............................            29               29-3/16        23-7/8         30-5/8

  Low .............................            18-1/2           21-7/16        17-7/8         16-5/8

  Close ...........................            22-15/16         29-3/16        22-11/16       20-1/16

Shareholders' equity per common

  share ...........................   $      9.05      $      8.92     $     7.74    $      7.93

Price/earnings ratio(6) ...........        16.5:1           21.2:1         17.7:1         15.8:1

- -------------------------------------------------------------------------------------------------------

OTHER FINANCIAL DATA

Common stock acquired .............   $   129,909      $   131,885     $  198,279    $    38,728

Payment of cash dividends .........        66,422           63,260         62,990         57,426

Ratio of earnings to fixed

  charges(7) ......................         3.3:1            3.6:1          3.8:1          5.3:1

At Year End

  Total assets ....................   $ 2,244,919      $ 2,112,184     $2,340,576    $ 1,904,117

  Long-term debt (excluding current

    maturities) ...................       803,914          660,900        727,043        508,203

  Total debt ......................       823,958          712,940      1,037,075        553,235

  Shareholders' equity ............       894,913          917,145        821,625        901,498

  Return on average shareholders'

    equity(8) .....................          16.5%            28.4%          18.2%          18.1%

  Current ratio ...................         1.2:1            1.2:1          1.1:1          1.2:1

  Total debt/total capital ratio ..          47.9%            43.7%          55.8%          38.0%

</TABLE>

 

                                                    13

<PAGE>

 

(1) Other,  net, Income from Continuing  Operations and Net Income include:  the

    gains from the sales of TKR Cable and our newspapers in Long Beach,  Calif.,

    Boca Raton,  Fla.,  Milledgeville,  Ga., and Newberry,  S.C., as well as the

    gain on the Boulder,  Colo., exchange in 1997; the gain on Netscape in 1996;

    and the gain from the sale of Pasadena  Star-News  in 1989.  Net income also

    includes the gains on the sales of KRII in 1997, KRF in 1996, and the JoC in

    1995.

(2) All years have been  restated to present the Business  Information  Services

    Division  (BIS) as  discontinued  operations.  Results of  operations of the

    company's  BIS  Division  (discontinued  in 1997),  and  Broadcast  Division

    (discontinued  in  1989)  and the  gains on the  sales of BIS and  broadcast

    assets are presented as  "discontinued  BIS  operations"  and  "discontinued

    broadcast operations," respectively.

(3) For 1995, the cumulative effect of change in accounting principle represents

    an  adjustment  from  the   implementation   of  FAS   116--Accounting   for

    Contributions  Received and  Contributions  Made.  For 1992,  the cumulative

    effect of change in accounting  principle  represents  adjustments  from the

    implementation   of  FAS   109--Accounting   for   Income   Taxes   and  FAS

    106--Accounting for Postretirement Benefits Other than Pensions.

(4) All share data is restated for a stock split in 1996.

(5) The Board of Directors declared a $0.20 per share dividend on Jan. 28, 1997.

    The quarterly dividend previously paid in January was paid in February.

(6) Price/earnings ratio is computed by dividing closing market price by diluted

    earnings  per  share  from  continuing  operations.  1995 and 1992  earnings

    exclude  the  effects of changes in  accounting  principles.  Earnings  also

    exclude the gains from the sales of TKR Cable,  our four  newspapers in Long

    Beach, Calif., Boca Raton, Fla., Milledgeville,  Ga., and Newberry, S.C., as

    well as the gain on the Boulder  exchange  in 1997;  the gain on Netscape in

    1996; and the gain from the sale of the Pasadena Star-News in 1989.

(7) The ratio of earnings to fixed charges is computed by dividing  earnings (as

    adjusted   for  fixed   charges  and   undistributed   equity   income  from

    unconsolidated  subsidiaries) by fixed charges for the period. Fixed charges

    include the interest on debt  (before  capitalized  interest),  the interest

    component of rental expense, and the proportionate share of interest expense

    on  guaranteed  debt  of  certain  equity-method  investees  and on  debt of

    50%-owned companies.

(8) Return on average  shareholders'  equity is computed by dividing  net income

    before the cumulative effect of changes in accounting principles in 1995 and

    1992, including the results of discontinued operations in 1987 through 1997,

    by average shareholders' equity. Average shareholders' equity is the average

    of  shareholders'  equity on the  first  day and the last day of the  fiscal

    year.

 

                                       14

<PAGE>

 

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

        OF OPERATIONS

 

                    Glossary of Newspaper Advertising Terms

 

The following  definitions may be helpful when reading  Management's  Discussion

and Analysis of Operations.

 

RETAIL. Display advertising from local merchants, such as department and grocery

stores, selling goods and services to the public.

GENERAL.  Display advertising by national  advertisers that promotes products or

brand names on a nationwide basis.

CLASSIFIED. Small, locally placed ads listed together and organized by category,

such as real estate sales,  employment  opportunities  or automobile  sales, and

display-type advertisements in these categories.

FULL-RUN. Advertising appearing in all editions of a newspaper.

PART-RUN.  Advertising  appearing in select  editions or zones of a  newspaper's

market.  Part-run  advertising  is translated  into full-run  equivalent  linage

(referred to as factored)  based on the ratio of the circulation in a particular

zone to the total circulation of a newspaper.

RUN-OF-PRESS (ROP).  All   advertising  printed  on Knight  Ridder  presses  and

appearing within a newspaper.

PREPRINT.  Advertising  supplements  prepared by advertisers and inserted into a

newspaper.

 

Knight  Ridder is the nation's  second-largest  newspaper  publisher in terms of

revenue  and  circulation,  with  products  in print  and  online.  The  company

publishes 31 daily newspapers in 28 U.S.  markets,  reaching 9.0 million readers

daily and 12.6 million on Sunday. It maintains 34 associated Web sites.

 

In 1997,  the gross revenue from these  businesses  was about $2.9 billion.  The

company  is  also  involved  in  other   newspaper   businesses   and  newsprint

manufacturing  through  business  arrangements,  including  joint  ventures  and

partnerships.

 

Newspaper  revenue is derived  principally  from  advertising and newspaper copy

sales.  Newspaper  advertising  currently accounts for about 77% of consolidated

revenue.  This revenue comes from the three basic  categories of  advertising --

retail, general and classified discussed herein.

 

Newspaper  advertising  volume is  categorized as either  run-of-press  (ROP) or

preprint.  Volume for ROP advertising is measured in terms of either full-run or

part-run advertising linage and reported in six-column inches. A six-column inch

consists of one inch of  advertising in one column of a newspaper page when that

page is divided into six columns of equal size. By using  part-run  advertising,

advertisers can direct their messages to selected market segments.

 

Circulation  revenue  results from the sale of newspapers.  Circulation of daily

and Sunday newspapers currently accounts for about 20% of consolidated  revenue.

It is reported at the net wholesale  price for  newspapers  delivered or sold by

independent contractors and at the retail price for newspapers delivered or sold

by employees.

 

Other newspaper revenue comes from commercial job printing,  alternate  delivery

services,  niche  publications,  online  services,  newsprint waste sales,  book

publishing,  newspaper  trucking  services,  audiotext  and other  miscellaneous

sources.

 

                                       15

<PAGE>

On April 4, 1997,  the  company  announced  that it would  divest  Knight-Ridder

Information,  Inc. (KRII). On Dec. 11, 1997, the company announced that it would

sell Technimetrics,  Inc., its global diversified information subsidiary.  These

announcements   resulted  in  the   reclassification   of  the  former  Business

Information Services (BIS) segment as discontinued operations.  KRII was sold to

M.A.I.D plc on Nov. 14, 1997, for $420 million plus a working  capital  purchase

price  adjustment  of  approximately  $15 million.  Prior to July 1996,  the BIS

segment included  Knight-Ridder  Financial (KRF). KRF was sold on July 26, 1996,

to Global  Financial  Information  Corporation for $275 million.  Prior to April

1995, the BIS segment  included the Journal of Commerce (JoC).  The JoC was sold

on April 3, 1995, to the Economist Group of London for $115 million.

 

                             Results of Operations

 

SUMMARY OF OPERATIONS. A summary of the company's operations, certain share data

and other  financial  data for the past 11 years is provided in Item 6. Compound

growth  rates for the past  five- and  10-year  periods  are also  included,  if

applicable. A review of this summary and of the supplemental information in Item

6 will provide a better  understanding of the following  discussion and analysis

of  operating  results  and  of  the  financial   statements  as  a  whole.  The

supplemental  information  contains  financial  data for the  company's  largest

newspapers and information  regarding the company's  properties,  technology and

the raw materials used in operations.

 

RESULTS OF OPERATIONS: 1997 VS. 1996

 

Diluted  earnings per share from continuing  operations was $3.91, up $2.01 from

the $1.90  reported in 1996. The $3.91 includes three one-time gains on sales: a

$1.27 gain on the sale of TKR Cable,  a $.24 gain on the  exchange  of the Daily

Camera in Boulder,  Colo., and a $.10 gain on the sale of four  newspapers.  The

$1.90  includes  an  $.08  gain  on  the  sale  of our  Netscape  Communications

Corporation (Netscape),  investment, net of adjustments in the carrying value of

certain  investments.  Excluding the one-time gains from 1997 and 1996,  diluted

EPS for 1997 was $2.30,  which was up $.48,  or 26.4%,  from the $1.82 earned in

1996.

 

Operating income in 1997 was $506.0 million,  up $172.9 million,  or 51.9%, from

1996. The results include operations from four newspapers acquired from The Walt

Disney  Company in May and from two  newspapers  received in exchange  from E.W.

Scripps Co. for the Boulder,  Colo.  newspaper in August.  They exclude  results

from the  Boulder  Daily  Camera  after  August and for the Long Beach  (Calif.)

Press-Telegram,   the  Boca  Raton  (Fla.)  News,   The   (Milledgeville,   Ga.)

Union-Recorder  and the Suburban  Newberry  (S.C.)  Observer after their date of

sale in December  1997.  On a pro forma basis for the former  Disney and Scripps

newspapers (that is, including full-year results in 1997 and 1996) and excluding

the sold newspapers from both 1997 and 1996 (comparable basis), operating income

was up $122.9  million,  or 30.2%,  from 1996.  The  increase was due to an 8.0%

increase  in total  advertising  revenue  offset in part by a 2.7%  increase  in

operating costs.

 

OPERATING REVENUE. Total company revenue of $2.9 billion was up 21.2% from 1996.

On a comparable basis, total operating revenue was up 6.7%.

 

Newspaper  advertising revenue increased by $408.8 million, or 22.8%, in 1997 on

a  full-run  ROP  linage  increase  of  18.0%.  On  a  comparable  basis,  total

advertising revenue improved by 8.0% from 1996 on a full-run ROP linage increase

of 6.7%. The following  table  summarizes  the percentage  change in revenue and

full-run ROP linage from 1996 as reported in our financial  statements,  as well

as results on a comparable basis.

 

                                                       Pro Forma But Excluding

                                                         Divested Newspapers*

                                                     -------------------------

                                         % Change                     % Change

                           % Change   in Full-Run      % Change    in Full-Run

Advertising Category     in Revenue    ROP Linage    in Revenue     ROP Linage

                         ----------   -----------    ----------    -----------

Retail .................     22.8          19.0           5.7           5.6

General ................     23.8          16.7          11.8           8.4

Classified .............     22.6          17.3           9.6           7.6

  Total ................     22.8          18.0           8.0           6.7

 

* Including full-year results in 1997 and 1996 for the former Disney and Scripps

  newspapers and excluding the sold newspapers from both 1997 and 1996.

 

                                       16

<PAGE>

 

Retail advertising  revenue improved by $187.0 million, or 22.8%, from 1996 on a

19.0% increase in full-run ROP linage. On a comparable basis, retail advertising

revenue  increased  5.7% from  1996,  with  increases  seen at almost all of our

newspapers.

 

General advertising revenue was up $47.3 million, or 23.8%, from 1996 on a 16.7%

increase in full-run ROP linage.  On a  comparable  basis,  general  advertising

revenue was up 11.8%.

 

Classified  advertising  revenue was up $174.6 million, or 22.6%, from 1996 on a

17.3%  increase  in full-run  ROP  linage.  On a  comparable  basis,  classified

advertising revenue was up 9.6%. The increase was due primarily to help wanted.

 

Circulation  revenue improved by $65.9 million, or 13.1%. On a comparable basis,

circulation  revenue increased 0.5% on an average daily circulation  increase of

16,912 copies,  or 0.4%, and an average  Sunday  circulation  decrease of 27,719

copies, or 0.5%.

 

Other revenue increased $27.8 million, or 35.2%, during 1997 due to increases in

commercial print and augmentation revenue.

 

OPERATING EXPENSES. Labor and employee benefits costs were up $165.2 million, or

17.1%. On a comparable  basis,  labor and employee  benefits costs were up $67.7

million,  or 6.2%, on a 2.9% increase in the work force and an average wage rate

increase of 4.2%.

 

Newsprint,  ink and supplements costs decreased by $5.9 million, or 1.2%, due to

a 20.7%  decrease in the average  cost per ton of  newsprint,  offset in part by

increased   newsprint   consumption  of  129,000  tons  for  the  year,  due  to

acquisitions, greater ad volume and some increased newshole.

 

Depreciation  and  amortization  increased  $36.1  million,  or  29.9%,  due  to

amortization  expense  associated  with the  acquisition  of the  former  Disney

newspapers.

 

Other operating expenses increased by $134.3 million,  or 27.9%. On a comparable

basis,  other operating expenses were up $71.6 million,  or 12.6%.  Expenditures

for circulation promotion accounted for a large part of the increase.

 

NON-OPERATING  ITEMS.  Net interest expense  increased $33.6 million,  or 55.8%,

from 1996, due to higher debt levels associated with the Disney acquisition. The

average debt balance for the year increased $150.8 million from 1996, due to the

debt assumed with the former Disney newspaper acquisition.

 

Equity in earnings of unconsolidated  companies and joint ventures  decreased by

$19.1  million,  or  63.8%,  due to the  absence  of  earnings  from  the  cable

investment  (sold in January  1997) and lower  income  from our  newsprint  mill

investments.

 

The "Other, net" line of the non-operating section increased $265.7 million over

1996, due to the gain on TKR Cable, the Boulder exchange and the four newspapers

sold in  December.  The  1996  results  included  the  gain  on the  sale of our

investment in Netscape,  net of the  reduction in the carrying  value of certain

other investments.

 

INCOME TAXES. The effective income tax rate on a continuing operations basis for

1997 was 42.9%,  up from 40.2% in 1996.  The rate increase was due to additional

nondeductible goodwill amortization from the Disney acquisition.

 

OTHER.  Net income in 1997  includes  an  after-tax  gain on the sale of Knight-

Ridder  Information,  Inc., of $15.3 million,  or $.15 per share (diluted),  and

income from  discontinued  BIS  operations,  net of  applicable  taxes,  of $1.3

million, or $.02 per share (diluted).

 

RESULTS OF OPERATIONS: 1996 VS. 1995

 

Diluted  earnings per share from continuing  operations were $1.90, up $.80 from

the $1.10  reported in 1995.  The $1.90 includes an $.08 gain on the sale of our

Netscape  investment,  net of  adjustments  in the  carrying  value  of  certain

investments.  Excluding this gain,  diluted EPS for 1996 was $1.82, which was up

$.72 from $1.10 earned in 1995.

 

                                       17

<PAGE>

 

Operating income in 1996 was $333.1 million,  up $104.9 million,  or 45.9%, from

1995. The results include Detroit, which was rebuilding throughout the year from

a  strike  that  began  on July 13,  1995.  They  also  include  a full  year of

operations for Contra Costa  Newspapers  (CCN),  which was purchased on Oct. 31,

1995. And, finally, they reflect a 52-week year for 1996 as opposed to a 53-week

year for 1995,  an anomaly of our  fiscal-year  reporting  convention.  On a pro

forma basis for CCN (that is, full-year  results for 1995,  including the period

in which the company did not own CCN), but excluding Detroit from both years and

the 53rd  week from  1995  (comparable  basis),  operating  income  was up $72.8

million,  or 27.0%,  from 1995. The increase was due to a 5.2% increase in total

advertising  revenue and  improvement in operating  profit in  Philadelphia  and

other large markets.

 

OPERATING REVENUE.  Total company revenue of $2.4 billion was up 5.5% from 1995.

On a comparable basis, total operating revenue was up 4.0%.

 

Advertising revenue increased by $120.5 million, or 7.2%, in 1996 on a full- run

ROP linage increase of 10.0%. On a comparable basis,  total advertising  revenue

improved by 5.2% from 1995. The following table summarizes the percentage change

in revenue  and  full-run  ROP linage  from 1995 as  reported  in our  financial

statements,  as well as  results  on a pro forma  basis for CCN,  but  excluding

Detroit:

 

                                                              Pro Forma

                                                       Contra Costa Newspapers

                                                        But Excluding Detroit

                                                     -------------------------

                                         % Change                     % Change

                           % Change   in Full-Run      % Change    in Full-Run

Advertising Category     in Revenue    ROP Linage    in Revenue*    ROP Linage

                         ----------   -----------    -----------   -----------

Retail ...............        1.7           4.7          (0.3)         (4.6)

General ..............        8.9          21.5           7.5           5.0

Classified ...........       13.2          14.3          10.9           4.3

  Total ..............        7.2          10.0           5.2           0.1

 

* Excludes the 53rd week from 1995 results.

 

Retail  advertising  revenue improved by $14.0 million,  or 1.7%, from 1995 on a

4.7% increase in full-run ROP linage. On a comparable basis,  retail advertising

revenue  decreased  0.3% from 1995,  primarily as a result of  department  store

consolidations in Philadelphia and Northern California.  Excluding these markets

and Detroit, retail was up 1.9% in the rest of the markets on a 52-week basis.

 

General  advertising revenue was up $16.3 million, or 8.9%, from the prior year,

with an increase in full-run ROP linage of 21.5%. On a comparable basis, general

advertising revenue was up 7.5%.

 

Classified  revenue improved by $90.2 million,  or 13.2%, on a 14.3% increase in

full-run ROP volume from 1995. Employment  advertising revenue, up 22.8% for the

year, was the strength of our classified  revenue  performance.  On a comparable

basis,  classified  advertising revenue was up 10.9%.  Philadelphia and San Jose

contributed more than half of the classified revenue improvement.

 

Circulation  revenue  improved by $6.5  million,  or 1.3%,  on an average  daily

circulation  decrease  of  217,957  copies,  or  5.9%,  and  an  average  Sunday

circulation  decrease of 307,088 copies,  or 6.0%. The circulation  copy decline

reflects the impact of the Detroit strike.

 

Other revenue  decreased $2.9 million,  or 3.6%,  during 1996, partly due to the

decline of newsprint waste sales and one less week in the fiscal year.

 

OPERATING EXPENSES. Labor and employee benefits costs were down $2.4 million, or

0.2%, with a 4.3% decrease in the work force, excluding Detroit. The decrease in

labor and employee benefits costs was due primarily to the reduction in the work

force,  the fourth quarter 1995 charge for buyouts and separation  costs and the

impact of the 53rd week.  These  reductions were partly offset by an increase in

the average wage per employee of 3.8%, (excluding Detroit and CCN).

 

                                       18

<PAGE>

 

Newsprint, ink and supplements costs increased by $25.4 million, or 5.7%, due to

an 11.5%  increase in the  average  cost per ton of  newsprint  offset by a 4.0%

decrease in newsprint consumption from the prior year.

 

Depreciation and amortization  increased $21.9 million,  or 22.2%, due mostly to

the acquisition of CCN.

 

Other  operating  costs  decreased 5.1% from 1995. On a pro forma basis for CCN,

but excluding  Detroit and the impact of the 53rd week,  other  operating  costs

were down 1.6% from the prior year.

 

NON-OPERATING  ITEMS.  Net interest expense  increased $11.2 million,  or 22.8%,

from 1995, due primarily to higher debt levels. The average debt balance for the

year  increased  $325.2  million  from 1995,  due largely to the $221.8  million

repurchase of 6.2 million shares in 1996 and the $360 million acquisition of CCN

in the fourth quarter of 1995.

 

Equity in earnings of unconsolidated  companies and joint ventures  increased by

$9.2 million  during 1996 due to earnings  improvements  from our newsprint mill

investments, which benefited from the rise in newsprint prices.

 

The "Other, net" line of the non-operating  section increased $25.0 million over

1995,  mostly  as a result  of the 1996  gain on the sale of our  investment  in

Netscape,  net  of the  reduction  in  the  carrying  values  of  certain  other

investments.

 

INCOME TAXES. The effective income tax rate on a continuing operations basis for

1996 was 40.2%,  up from 39.9% in 1995.  The increase was due to a change in the

distribution of income to states with higher income tax rates.

 

OTHER.  Net income in 1996  includes a  one-time  after-tax  gain on the sale of

Knight-Ridder  Financial of $86.3 million,  or $.89 per share  (diluted),  and a

loss from discontinued BIS operations, net of applicable taxes, of $3.8 million,

or $.04 per share (diluted).

 

RESULTS OF OPERATIONS: 1995 VS. 1994

 

Diluted earnings per share from continuing  operations was $1.10,  down $.37, or

25.2%, from $1.47 per share in 1994. The decline in earnings per share from 1994

was due to the  impact  of the  Detroit  strike,  the  increase  in the  cost of

newsprint from 1994 and fourth quarter  charges related to buyout and separation

expenses.

 

Operating income in 1995 was $228.3 million, down from $308.2 million in 1994 on

a $115.3 million, or 5.4%, increase in revenue. Operating income as a percentage

of revenue was 10.1%,  compared  with 14.4% in 1994.  The  decline in  operating

income from 1994 was due primarily to:

 

  - A $72.7 million  decline from Detroit's  prior year  operating  profit  as a

    result of the strike that began on July 13, 1995.

 

  - A nearly 40% increase in the cost of newsprint from 1994,  which resulted in

    a $105.9 million expense increase.

 

  - Charges related to buyout and separation  expenses of about $16 million,  of

    which $15.3 million was charged in the fourth quarter of 1995.

 

Excluding the Detroit  operations  and buyout and  separation  charges from both

years, operating income would have been up 1.8% from 1994.

 

OPERATING  REVENUE.  Total  operating  revenue  of $2.3  billion  was up  $115.3

million, or 5.4%, from 1994.

 

                                       19

<PAGE>

Advertising  revenue increased by $89.6 million, or 5.7%, in 1995 on a full- run

ROP linage increase of 2.8%. The 1995 results reflect:  reduction in revenue due

to the  Detroit  strike,  two  months  of  revenue  recorded  for  Contra  Costa

Newspapers  (CCN),  acquired on Oct. 31, 1995, and an additional week of revenue

(53 weeks vs. 52 weeks) in 1995.  Excluding  the impact of these items from 1995

results,  advertising  revenue would have increased by 5.8%. The following table

summarizes the percentage change in revenue and full-run ROP linage from 1994 as

reported in our financial  statements,  as well as results excluding Detroit and

CCN:

 

                                                       Excluding Detroit and

                                                      Contra Costa Newspapers

                                                     -------------------------

                                         % Change                     % Change

                           % Change   in Full-Run      % Change    in Full-Run

Advertising Category     in Revenue    ROP Linage    in Revenue     ROP Linage

                         ----------   -----------    ----------    -----------

Retail ................       1.9          (0.6)          3.8          (2.4)

General ...............      (1.1)          2.9           0.6           1.3

Classified ............      12.6           6.7          14.3           5.4

  Total ...............       5.7           2.8           7.5           1.3

 

Retail advertising  revenue improved $15.3 million, or 1.9%, from 1994 on a 0.6%

decrease in full-run  ROP linage.  The  increase in average  rates and  preprint

revenue offset the decrease in full-run ROP linage.

 

General  advertising  revenue was $182.5  million,  down from the $184.5 million

reported in 1994, with an increase in full-run ROP linage of 2.9%.

 

Classified  revenue  improved by $76.3 million,  or 12.6%, on a 6.7% increase in

full-run ROP volume.  San Jose contributed nearly half of the classified revenue

improvement.  Employment  advertising  revenue,  up 24.6% for the year,  was the

strength of our classified revenue performance.

 

Circulation  revenue  improved by $10.7  million,  or 2.2%,  on an average daily

circulation   increase  of  52,866  copies,  or  1.5%,  and  an  average  Sunday

circulation  increase of 10,754 copies, or 0.2%.  Circulation copies reflect the

impact of the Detroit strike, offset by additional circulation from CCN.

 

Other revenue increased $14.9 million,  or 22.3%,  during 1995, due primarily to

increased  revenue from  newsprint  waste sales,  commercial  printing and other

lines of  business  developed  to  augment  the  revenue  of our core  newspaper

business.

 

OPERATING EXPENSES.  Labor and employee benefits costs were up $41.8 million, or

4.5%, with a 4.5% increase in the work force. The increase in the work force was

due to the CCN  acquisition.  The increase in labor and employee  benefits costs

was due primarily to a fourth quarter  charge for buyouts and separation  costs,

the impact of the 53rd week and the addition of CCN. This was partly offset by a

decrease in labor costs as a result of the Detroit strike.  The average wage per

employee, excluding severance, Detroit and CCN, increased 2.9% from 1994.

 

Newsprint,  ink and supplements costs increased by $110.9 million, or 33.0%, due

to a nearly 40%  increase in the  average  cost of  newsprint,  offset by a 0.2%

decrease in newsprint consumption from the prior year.

 

Depreciation and amortization increased $2.1 million, or 2.2%, due mostly to the

acquisition of CCN.

 

Other operating costs increased 8.6% from 1994, due primarily to  strike-related

costs in Detroit.

 

NON-OPERATING  ITEMS.  Net interest expense  increased $11.0 million,  or 29.0%,

from 1994, due primarily to higher debt levels. The average debt balance for the

year  increased  $146.0  million  from 1994,  due largely to the $319.4  million

repurchase of 11.5 million  shares in 1995 and the $360 million  acquisition  of

CCN in the fourth quarter of 1995.

 

Equity in earnings of unconsolidated  companies and joint ventures  increased by

$13.0 million during 1995 due to earnings  improvements  from our newsprint mill

investments, which benefited from the rise in newsprint prices.

 

The "Other, net" line  of the non-operating  section decreased $6.6 million from

1994, due to the reduction in the carrying value of certain investments.

 

INCOME TAXES. The effective income tax rate from continuing  operations for 1995

was 39.9%, down slightly from 40.1% in 1994.

 

                                       20

<PAGE>

 

OTHER. Net income in 1995 includes a one-time  after-tax gain on the sale of the

Journal of Commerce (JoC) of $53.8  million,  or $.54 per share  (diluted),  and

income from  discontinued  BIS  operations,  net of  applicable  taxes,  of $3.7

million, or $.03 per share (diluted).

 

In the first quarter of 1995, the company adopted Financial  Accounting Standard

(FAS) 116 -- Accounting for Contributions Received and Contributions Made. Under

this  standard,   unconditional  promises,  including  multiyear  promises,  are

recognized  in the period in which the promise is made.  The adoption of FAS 116

resulted in a $7.3 million charge (net of tax) to operations,  or $.07 per share

(diluted), and was recorded as a cumulative effect adjustment.

 

                                  A Look Ahead

 

As we look ahead, we expect another strong year in 1998.  Advertising revenue on

a pro forma basis will likely  increase in the  mid-single  digits and newspaper

profits will continue to grow,  most notably in Detroit,  where all the momentum

is positive.

 

The average price of newsprint for 1998 is expected to increase in the mid teens

compared to 1997.  This will be offset,  in part, by improved  earnings from our

newsprint mill investments.

 

The company  expects to buy back close to 4 million  common  shares in the first

part  of  1998.  After  those  purchases  are  completed,  we  plan  to use  our

substantial free cash flow to reduce our debt level.

 

IMPACT OF YEAR 2000.  The Year 2000 issue results from computer  programs  using

two digits  rather than four to define the  applicable  year.  Company  computer

programs  that have  time-sensitive  software may recognize a date using "00" as

the year 1900 rather than the year 2000.  This could result in a system failure,

disruption  of  operations,  and/or a  temporary  inability  to  conduct  normal

business  activities.  Based  on a  recent  assessment,  the  company  currently

believes that with  modifications  to existing  software and  conversions to new

software, the Year 2000 issue will not pose significant operational problems. If

such  modifications  and  conversions  are not made,  or are not  completed in a

timely way, the Year 2000 issue could have a material  impact on operations.  In

addition,  formal  communications  with all significant  suppliers and customers

have been  initiated to determine  the extent to which related  interfaces  with

company  systems are  vulnerable if these third parties fail to remediate  their

own Year 2000 issues.  There can be no assurance that these third-party  systems

will be converted on a timely basis and that they will not adversely  affect the

company's systems.

 

The company will utilize  both  internal and external  resources to complete and

test Year 2000 modifications and expects to substantially  complete this process

no later than mid-1999.  The total  estimated cost of this project is in a range

of  $70  million  to  $80  million,   funded   through   operating  cash  flows.

Approximately  50% of the total will relate to purchased  hardware and software,

which will be capitalized.  The remainder will be expensed as incurred.  Through

1997,  related costs incurred were not material.  In certain cases, an expedited

system  replacement  schedule will also bring enhanced  functionality and should

serve to reduce future capital requirements.

 

Certain  statements  contained  herein and in other  sections of this report are

forward-looking statements. These are based on management's current knowledge of

factors  affecting  Knight  Ridder's  business.   Actual  results  could  differ

materially from those currently  anticipated.  Investors are cautioned that such

forward-looking  statements  involve risk and  uncertainty,  including,  but not

limited to, the effects of national and local economies on revenue, negotiations

and relations with labor unions,  unforeseen  changes to newsprint  prices,  the

effects of acquisitions and the evolution of the Internet.

 

                   Significant Acquisitions and Divestitures

 

In January  1997,  the  company  and  Tele-Communications,  Inc.,  closed on the

previously  announced  sale of the  company's  interest  in all but one of their

jointly owned cable investments. The remaining system, in Kentucky, accounts for

a small  portion of the  original  investment.  That sale is  expected  to close

later. The after-tax gain on the sale of TKR Cable was $128.3 million.  The sale

yielded net after-tax proceeds of $270 million.

 

                                       21

<PAGE>

On May 9,  1997,  the  company  completed  the  acquisition  of four  newspapers

indirectly  owned by The Walt Disney Company for $1.65 billion.  The acquisition

was  accomplished  through the merger of a wholly owned subsidiary with and into

Cypress Media,  Inc.,  formerly known as ABC Media,  Inc., the owner of the four

newspapers.  The  newspapers  are:  The Kansas  City Star,  the Fort Worth Star-

Telegram,  the Belleville  (Ill.)  News-Democrat and The Times Leader in Wilkes-

Barre,  Pa. The four  newspapers  have combined daily and Sunday  circulation of

635,000 and 898,000, respectively.

 

On Aug. 24, 1997,  the company  exchanged its newspaper in Boulder,  Colo.,  the

Daily Camera, for two newspapers in California owned by the E.W. Scripps Co.

 

On Nov. 14, 1997, the company  completed the sale of Knight-Ridder  Information,

Inc., (KRII) to M.A.I.D plc for $420 million.  The after-tax gain on the sale of

KRII was $15.3 million.

 

In December 1997, the company  closed on the sale of four  newspapers,  the Long

Beach  Press-Telegram,  the Boca Raton News, The (Milledgeville)  Union-Recorder

and the suburban  Newberry  (S.C.)  Observer.  The sale of these four newspapers

resulted  in an  after-tax  gain of $10.3  million.  The sale of the Boca Raton,

Milledgeville and Newberry  newspapers to Community  Newspaper  Holdings,  Inc.,

also  included  the  transfer  to the  company of The Daily Sun and the  Buyer's

Guide, a shopper,  in Warner Robins,  Ga., and the Byron (Ga.) Gazette, a weekly

newspaper,  all of which  are  located  in  fast-growing  suburbs  in our  Macon

newspapers'  market.  The sale of a fifth  newspaper,  the Post-Tribune in Gary,

Ind., to Hollinger International, Inc., closed on Feb. 2, 1998.

 

Also in December 1997, the company announced the intended sale of Technimetrics,

Inc.,   its  global   diversified   information   subsidiary.   The  results  of

Technimetrics have been reclassified as Discontinued BIS Operations,  along with

the rest of the former BIS segment.

 

In July 1996, the company sold Knight-Ridder Financial (KRF) to Global Financial

Information  Corporation for $275 million. The after-tax gain on the sale of KRF

was $86.3 million.

 

In October 1995, the company  acquired 100% of the outstanding  shares of Lesher

Communications,  Inc. (Lesher), for $360 million. Lesher, based in Walnut Creek,

Calif.,  publishes four daily newspapers in contiguous  Contra Costa and eastern

Alameda County markets in the East Bay area of Northern  California.  Lesher was

renamed Contra Costa Newspapers, Inc. (CCN), in November 1995.

 

In April 1995,  the company  sold the JoC to the  Economist  Group of London for

$115 million. The after-tax gain on the sale of the JoC was $53.8 million.

 

                            Capital Spending Program

 

The  company's   capital   spending   program   includes  normal   replacements,

productivity  improvements,   capacity  increases,   building  construction  and

expansion  and printing  press  equipment.  Over the past three  years,  capital

expenditures  have totaled  $311.6  million for  additions and  improvements  to

properties, excluding the discontinued BIS operations.

 

A large  portion of the 1997  expenditures  was for the Miami press project that

began in 1995. The $108.0 million press expansion is expected to be completed in

1998.  Another  large  component  of 1997  expenditures  was the  $32.0  million

renovation of the Philadelphia  Broad Street facility that began in 1995 and the

$27.2 million  replacement of three presses at Akron. Both of these projects are

expected to be completed in 1998.

 

Also  included  in capital  expenditures  is an $11.5  million  project  (before

insurance  recoveries) for the replacement of the Grand Forks  production  plant

and building that were destroyed by a flood in April 1997.

 

                                       22

<PAGE>

                              Quarterly Operations

 

The company's  largest source of revenue,  retail  advertising,  is seasonal and

tends to fluctuate  with retail sales in markets  served.  Historically,  retail

advertising is higher in the second and fourth  quarters.  General  advertising,

while not as seasonal as retail,  is lower during the summer months.  Classified

advertising revenue has in the past been a reflection of the overall economy and

has not been  significantly  affected by seasonal  trends.  The following  table

summarizes the company's  quarterly results of operations (in thousands,  except

per share data):

 

<TABLE>

<CAPTION>

 

                                                                                QUARTER

                                             ---------------------------------------------------------------------------------

Description                                      First                 Second                 Third                 Fourth

                                             ------------           -----------           -------------           ------------

<S>                                          <C>                    <C>                    <C>                    <C>     

1997

Operating revenue .........................  $ 600,830              $ 711,598              $ 748,747              $ 815,610

Operating income ..........................     98,169                136,977                107,936                162,946

Income from continuing operations .........    175,458(a)              60,950                 73,467(b)              86,629(c)

Net gain on sale of BIS operations                                                                                   15,261(d)

Income (loss) from BIS operations, net ....       (726)                   350                    545                  1,081

Net income ................................    174,732                 61,300                 74,012                102,971

Earnings per share(1)

Basic:

Income from continuing operations .........       1.88(a)                0.67                   0.85(b)                1.04(c)

Net gain on sale of BIS operations                                                                                     0.18(d)

Income from BIS operations, net                                                                                        0.01

Net income ................................       1.88                   0.67                   0.85                   1.23

Diluted:

Income from continuing operations .........       1.85(a)                0.60                   0.69(b)                0.84(c)

Net gain on sale of BIS operations                                                                                     0.15(d)

Income from BIS operations, net                                                                                        0.01

Net income ................................       1.85                   0.60                   0.69                   1.00

Dividends declared per common share .......       0.20                   0.20                   0.20                   0.20

 

1996

Operating revenue .........................  $ 570,756              $ 595,582              $ 576,887              $ 630,999

Operating income ..........................     49,639                 78,647                 73,948                130,899

Income from continuing operations .........     22,994                 41,481                 39,340                 81,565(f)

Net gain (adjustment) on sale of BIS

  operations                                                                                  90,901(e)              (4,646)(e)

Income (loss) from BIS operations, net ....        523                    872                 (3,984)                (1,173)

Net income ................................     23,517                 42,353                126,257                 75,746

Earnings per share(1)

Basic:

Income from continuing operations .........       0.23                   0.42                   0.41                   0.87(f)

Net gain (adjustment) on sale of BIS

  operations                                                                                    0.96(e)               (0.05)(e)

Income (loss) from BIS operations, net ....       0.01                   0.01                  (0.04)                 (0.01)

Net income ................................       0.24                   0.43                   1.33                   0.81

Diluted:

Income from continuing operations .........       0.23                   0.42                   0.41                   0.86(f)

Net gain (adjustment) on sale of BIS

  operations ..............................                                                     0.94(e)               (0.05)(e)

Income (loss) from BIS operations, net ....       0.01                   0.01                  (0.04)                 (0.02)

Net income ................................       0.24                   0.43                   1.31                   0.79

Dividends declared per common share .......       0.18-1/2               0.20                   0.20                        (g)

</TABLE>

 

                                                                 23

 

<PAGE>

<TABLE>

<CAPTION>

Quarterly Operations (Continued)

                                                                                QUARTER

                                             ---------------------------------------------------------------------------------

Description                                      First                 Second                 Third                 Fourth

                                             ------------           -----------           -------------           ------------

<S>                                          <C>                    <C>                    <C>                    <C>     

 

1995

Operating revenue .........................  $ 537,133              $ 565,726              $ 515,975              $ 631,348

Operating income ..........................     64,323                 81,642                 15,438                 66,859

Income from continuing operations .........     29,356                 42,278                  3,793                 34,529

Net gain on sale of BIS operations ........                            53,765(h)

Income (loss) from BIS operations, net ....      6,317                 (1,923)                 2,797                 (3,530)

Income before cumulative effect of

  change in accounting principle ..........     35,673                 94,120                  6,590                 30,999

Cumulative effect of change in

  accounting principle for

  contributions ...........................     (7,320)

Net income ................................     28,353                 94,120                  6,590                 30,999

Earnings per share(1)

Basic:

Income from continuing operations .........       0.28                   0.43                   0.04                   0.36

Net gain on sale of BIS operations ........                              0.54(h)

Income (loss) from BIS operations, net ....       0.06                  (0.02)                  0.03                  (0.04)

Income before cumulative effect of

  change in accounting principle ..........       0.34                   0.95                   0.07                   0.32

Cumulative effect of change in

  accounting principle for

  contributions ...........................      (0.07)

Net income ................................       0.27                   0.95                   0.07                   0.32

Diluted:

Income from continuing operations .........       0.28                   0.42                   0.04                   0.35

Net gain on sale of BIS operations ........                              0.54(h)

Income (loss) from BIS operations, net ....       0.06                  (0.02)                  0.03                  (0.03)

Income before cumulative effect of

  change in accounting principle ..........       0.34                   0.94                   0.07                   0.32

Cumulative effect of change in

  accounting principle for

  contributions ...........................      (0.07)

Net income ................................       0.27                   0.94                   0.07                   0.32

Dividends declared per common share .......       0.18-1/2               0.18-1/2               0.18-1/2               0.18-1/2

</TABLE>

 

(1)  Amounts do not total to the annual  earnings per share because each quarter

     and the year are calculated  separately based on average outstanding shares

     (basic) and average  outstanding and equivalent shares (diluted) during the

     periods.

(a)  Includes  the  after-tax  gain of $128.3  million  on the sale of TKR Cable

     ($1.38 per share, basic; $1.36 per share, diluted).

(b)  Includes  the  after-tax  gain of  $24.5  million  on the  Boulder,  Colo.,

     exchange ($.28 per share, basic; $.23 per share, diluted).

(c)  Includes the after-tax gain of $10.3 million on the sale of four newspapers

     ($.12 per share, basic; $.10 per share, diluted).

(d)  Gain on the sale of KRII.

(e)  Gain  (adjustment)  on the sale of KRF. 

(f)  Includes the after-tax gain of $8.1 million on the sale of Netscape, net of

     adjustments in the carrying value of certain  investments  ($.09 per share,

     basic and diluted).

(g)  The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997.

     The  quarterly  dividend  previously  paid in January was paid on Feb.  24,

     1997,  to  shareholders  of record as of the close of business on Feb.  12,

     1997.

(h)  Gain on the sale of the Journal of Commerce.

 

                                       24

 

<PAGE>

                        Financial Position and Liquidity

 

1997 VS. 1996. The principal change in the company's  financial  position during

1997 was the acquisition of four newspapers  indirectly owned by The Walt Disney

Company for $1.65 billion.  The transaction was financed through the issuance of

$660 million of the company's  convertible preferred stock and the assumption of

$990 million of pre-existing debt.

 

Also during  1997,  the company  authorized a common  stock  buyback  program to

repurchase in the open market a minimum of 15 million shares over 12 months.  In

1997, 13.8 million shares were bought back.

 

The company  utilized  proceeds from the sale of its cable investment in January

1997, its subsidiary Knight-Ridder Information,  Inc., in November 1997 and four

of its  newspapers in December  1997 to fund the stock  buyback  program and pay

down debt. In November  1997,  the company  issued $100 million of notes payable

that mature in 2007 and $100  million of  debentures  maturing in 2027.  The new

debt  was  used  to  reduce   commercial  paper   borrowings.   The  total-debt-

to-total-capital ratio increased to 51.8%, from 42.1% in 1996. Standard & Poor's

and Moody's downgraded the company's commercial paper and long-term bonds during

the year. The downgrades  resulted from the increased  leverage  associated with

the Disney  newspaper  acquisition  combined  with the  company's  common  stock

repurchase  program.  Standard & Poor's and Moody's commercial paper rating went

from  A1+ and P1 to A1 and P2,  respectively.  Standard  &  Poor's  and  Moody's

long-term  bond  ratings went from AA- and A to A and A3,  respectively.  During

1997,  Duff & Phelps  Credit  Rating Co. began rating the  company's  commercial

paper and long-term  bonds.  The commercial paper and long-term bonds were rated

D1 and A, respectively.

 

Average outstanding  commercial paper during the year was $286.7 million, with a

weighted-average  interest  rate of 5.6%.  At year-end  1997,  commercial  paper

outstanding  was $30.0  million and  aggregate  unused  credit lines were $612.3

million.

 

During 1997, net cash provided by operating activities increased $5.2 million to

$231.7 million.  The  increase was  attributed  to higher  earnings,  operating

profits from the former Disney newspapers, and other changes in working capital.

 

Cash and short-term investments were $160.3 million at the end of 1997, a $137.4

million increase from last year. The increased cash level will be used for stock

repurchases in the first quarter of 1998. The ratio of current assets to current

liabilities was 1.2:1 at year end vs. 1.0:1 at the end of 1996.

 

The company's operations have historically  generated strong positive cash flow,

which, along with the company's commercial paper program, revolving credit lines

and ability to issue public debt,  has provided  adequate  liquidity to meet the

company's short-term and long-term cash requirements, including requirements for

acquisitions. 

 

1996 VS. 1995. The principal change in the company's  financial  position during

1996  was the  application  of some  KRF  after-tax  sale  proceeds  toward  the

repurchase of 6.2 million shares for $221.8 million and the reduction of debt by

$193 million.  The  total-debt-to-total-capital  ratio decreased to 42.1%,  from

47.7% in 1995.

 

Average outstanding  commercial paper during the year was $495.0 million, with a

weighted-average  interest rate of 5.5%.  During 1996,  the company's  revolving

credit and term loan  agreement,  which backed up the commercial  paper program,

decreased from $800 million to $650 million. At year-end 1996,  commercial paper

outstanding  was $366.5  million and  aggregate  unused credit lines were $283.5

million.

 

During 1996, net cash provided by operating activities increased $114.0 million,

to $226.5 million.  The increase was attributed to higher  earnings,  reflecting

the improvements in Detroit's and Philadelphia's operations and other changes in

working capital.

 

Cash and  short-term  investments  were $22.9 million at the end of 1996, a $3.1

million  decrease from 1995. The ratio of current assets to current  liabilities

was 1.0:1 at year end vs. 1.1:1 at the end of 1995. 

 

1995 VS. 1994. The principal changes in the company's  financial position during

1995 were an  increase  of $602.3  million of debt in  connection  with the $360

million CCN acquisition and the $319.4 million repurchase of 11.5 million shares

of the company's  common stock. In early 1995, the company sold the JoC for $115

million.   The   after-tax   proceeds   offset   other   debt   increases.   The

total-debt-to-total-capital  ratio  increased to 47.7% in 1995, up from 25.2% in

1994.

 

Average outstanding  commercial paper during the year was $263.8 million, with a

weighted-average  interest rate of 5.9%.  During 1995,  the company's  revolving

credit and term loan agreement, which backs up the commercial paper program, was

increased from $500 million to $800 million. At year-end 1995,  commercial paper

outstanding  was $563.2  million and  aggregate  unused credit lines were $236.8

million.

 

                                       25

<PAGE>

 

In December  1995,  the company  issued $100  million  principal  amount of 6.3%

senior notes due Dec. 15, 2005.

 

During 1995, net cash provided by operating  activities decreased $201.6 million

to $112.6 million. After excluding the gain on the sale of JoC, the decrease was

attributed to lower earnings as a result of the Detroit strike,  newsprint price

increases, severance costs and other changes in working capital.

 

Cash and short-term  investments  were $26.0 million at the end of 1995, a $16.8

million  increase from 1994. The ratio of current assets to current  liabilities

was 1.1:1 at year end vs. 1.0:1 at the end of 1994.

 

Shareholders' equity reflected  unrealized gains on investments,  net of tax, of

$42.9 million. This represents the unrealized gains on investments available for

sale that are  carried  on the  balance  sheet at fair  market  value,  with the

unrealized gains (net of tax) reported as a separate  component of shareholders'

equity.

 

                           Effect of Changing Prices

 

The  Consumer  Price  Index,  a widely  used  measure of the impact of  changing

prices, has increased only moderately in recent years, up between 2% and 6% each

year since 1990.  Historically,  when inflation was at higher levels, the impact

on the company's operations was not significant.

 

The  principal  effect of inflation  on the  company's  operating  results is to

increase reported costs. Subject to normal competitive  conditions,  the company

generally  has  demonstrated  the ability to raise sales  prices to offset these

cost increases.

 

                                       26

<PAGE>

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See  Quarterly  Operations in Item 7 and Schedule II,  Valuation and  Qualifying

Accounts

 

CONSOLIDATED BALANCE SHEET

 

(In thousands of dollars,               Dec. 28        Dec. 29        Dec. 31

except share data)                        1997           1996          1995

                                      -----------    -----------    -----------

ASSETS

Current Assets

  Cash, including short-term

    cash investments of

    $140,210 in 1997, $50 in

    1996 and 1995 ................   $   160,291    $    22,880    $    26,012

  Accounts receivable, net of

    allowances of $14,963 in

    1997, $12,685 in 1996 and

    $14,348 in 1995 ..............       374,746        356,079        339,264

  Inventories ....................        50,332         42,941         73,349

  Prepaid expense ................        15,844         90,314         21,543

  Other current assets ...........        39,902         53,513         42,754

                                     -----------    -----------    -----------

        Total Current Assets .....       641,115        565,727        502,922

                                     -----------    -----------    -----------

Investments and Other Assets

  Equity in unconsolidated

    companies and joint

    ventures .....................       197,585        330,267        321,658

  Net assets of discontinued

    BIS operations ...............        24,673        352,102        453,189

  Other ..........................       172,859        132,425        222,593

                                     -----------    -----------    -----------

        Total Investments and

          Other Assets ...........       395,117        814,794        997,440

                                     -----------    -----------    -----------

Property, Plant and Equipment

  Land and improvements ..........        89,375         77,526         77,617

  Buildings and improvements .....       444,952        387,509        384,314

  Equipment ......................     1,127,875        994,455        991,263

  Construction and equipment

    installations in progress ....       111,883        110,590         55,845

                                     -----------    -----------    -----------

                                       1,774,085      1,570,080      1,509,039

  Less accumulated depreciation ..      (727,571)      (701,232)      (667,210)

                                     -----------    -----------    -----------

        Net Property, Plant and

          Equipment ..............     1,046,514        868,848        841,829

                                     -----------    -----------    -----------

Excess of Cost Over Net Assets

Acquired and Other Intangibles

  Less accumulated amortization

    of $197,966 in 1997,

    $150,491 in 1996 and

    $131,992 in 1995 .............     2,272,396        611,538        624,130

                                     -----------    -----------    -----------

        Total ....................   $ 4,355,142    $ 2,860,907    $ 2,966,321

                                     ===========    ===========    ===========

 

               See "Notes to Consolidated Financial Statements."

 

                                       27

<PAGE>

CONSOLIDATED BALANCE SHEET (Continued)

 

(In thousands of dollars,                  Dec. 28        Dec. 29      Dec. 31

except share data)                           1997           1996         1995

                                         -----------    -----------  -----------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

  Accounts payable ...................   $  172,021   $  223,962   $  127,532

  Accrued expenses and other

    liabilities ......................      131,491      103,730      105,317

  Accrued compensation and

    amounts withheld from

    employees ........................      119,036       96,426      101,357

  Federal and state income

    taxes ............................       33,920                       195

  Deferred revenue ...................       72,491       70,452       72,134

  Dividends payable ..................                                 17,978

  Short-term borrowings and

    current portion of long-

    term debt ........................       69,697       50,000       13,129

                                         ----------   ----------   ----------

        Total Current

          Liabilities ................      598,656      544,570      437,642

                                         ----------   ----------   ----------

Noncurrent Liabilities

  Long-term debt .....................    1,599,133      771,335    1,000,721

  Deferred federal and state

    income taxes .....................      282,695      142,727      134,460

  Postretirement benefits other

    than pensions ....................      150,485      158,811      169,057

  Employment benefits and other

    noncurrent liabilities ...........      171,225      109,909      112,713

                                         ----------   ----------   ----------

        Total Noncurrent

          Liabilities ................    2,203,538    1,182,782    1,416,951

                                         ----------   ----------   ----------

Minority Interests in

Consolidated Subsidiaries ............        1,275        2,047          758

                                         ----------   ----------   ----------

Commitments and Contingencies (Note I)

Shareholders' Equity

  Preferred  stock,  $1.00 par

    value;  shares  authorized --

    2,000,000;  shares issued --

    1,754,930 in 1997, and 0 in

    1996 and 1995 ....................        1,755

  Common stock, $.02-1/12

    par value; shares

    authorized -- 250,000,000;

    shares issued -- 81,597,631

    in 1997, 93,340,652 in 1996

    and 97,196,308 in 1995 ...........        1,700        1,945        2,025

  Additional capital .................      911,572      308,320      295,360

  Retained earnings ..................      636,646      819,572      770,643

  Unrealized gains on

    investments ......................                     1,671       42,942

                                         ----------   ----------   ----------

        Total Shareholders'

          Equity .....................    1,551,673    1,131,508    1,110,970

                                         ----------   ----------   ----------

        Total ........................   $4,355,142   $2,860,907   $2,966,321

                                         ==========   ==========   ==========

 

                                       28

 

<PAGE>

CONSOLIDATED STATEMENT OF INCOME

                                                     Year Ended

                                     -----------------------------------------

(In thousands of dollars,              Dec. 28        Dec. 29        Dec. 31

except per share data)                   1997           1996           1995

                                     -----------    -----------    -----------

Operating Revenue

  Advertising

    Retail .......................   $ 1,008,736    $   821,768    $   807,758

    General ......................       246,096        198,797        182,516

    Classified ...................       947,419        772,859        682,696

                                     -----------    -----------    -----------

        Total ....................     2,202,251      1,793,424      1,672,970

    Circulation ..................       567,757        501,826        495,315

    Other ........................       106,777         78,974         81,897

                                     -----------    -----------    -----------

        Total Operating Revenue ..     2,876,785      2,374,224      2,250,182

                                     -----------    -----------    -----------

Operating Costs

  Labor and employee benefits ....     1,132,227        967,069        969,476

  Newsprint, ink and

    supplements ..................       466,329        472,207        446,841

  Other operating costs ..........       615,470        481,168        506,862

  Depreciation and amortization ..       156,731        120,647         98,741

                                     -----------    -----------    -----------

        Total Operating Costs ....     2,370,757      2,041,091      2,021,920

                                     -----------    -----------    -----------

Operating Income .................       506,028        333,133        228,262

                                     -----------    -----------    -----------

Other Income (Expense)

  Interest expense ...............      (102,662)       (73,137)       (59,512)

  Interest expense capitalized ...         5,376          6,397          1,889

  Interest income ................         3,404          6,488          8,576

  Equity in earnings of

    unconsolidated companies

    and joint ventures ...........        10,800         29,868         20,661

  Minority interests in

    earnings of consolidated

    subsidiaries .................       (11,503)        (9,293)        (8,809)

  Other, net (Note G) ............       282,409         16,753         (8,250)

                                     -----------    -----------    -----------

        Total ....................       187,824        (22,924)       (45,445)

                                     -----------    -----------    -----------

Income before income taxes .......       693,852        310,209        182,817

Income taxes .....................       297,348        124,829         72,861

                                     -----------    -----------    -----------

Income From Continuing

Operations .......................       396,504        185,380        109,956

Net gain on sale of

  discontinued BIS operations,

  net of applicable income

  taxes of $8,365 in 1997,

  $69,631 in 1996 and $38,933

  in 1995 (Notes B and G) ........        15,261         86,255         53,765

Income/(loss) from discontinued

  BIS operations, net of

  applicable income taxes of

  $1,119 in 1997, $4,305 in

  1996 and $8,608 in 1995 (Note G)         1,250         (3,762)         3,661

                                     -----------    -----------    -----------

Income Before Cumulative Effect

of Change in Accounting

Principle ........................       413,015        267,873        167,382

Cumulative effect of change in

  accounting principle for

  contributions ..................                                      (7,320)

                                     -----------    -----------    -----------

        Net Income ...............   $   413,015    $   267,873    $   160,062

                                     ===========    ===========    ===========

 

                                       29

<PAGE>

CONSOLIDATED STATEMENT OF INCOME (Continued)

 

                                                      Year Ended

                                       ----------------------------------------

                                         Dec. 28        Dec. 29        Dec. 31

                                           1997           1996           1995

                                       -----------   -----------    -----------

Earnings Per Share

  Basic:

    Income from continuing

      operations ................      $      4.48   $      1.93    $      1.11

    Net gain on sale of

      discontinued BIS

      operations (Notes B

      and G) ....................              .17           .90            .54

    Income/(loss) from

      discontinued BIS

      operations, net (Note G) ..              .02          (.04)           .03

                                       -----------   -----------    -----------

    Income before cumulative

      effect of change in

      accounting principle ......             4.67          2.79           1.68

    Cumulative effect of change

      in accounting principle

      for contributions .........                                         (.07)

                                       -----------   -----------    -----------

        Net Income ..............      $      4.67   $      2.79    $      1.61

                                       ===========   ===========    ===========

  Diluted:

    Income from continuing

      operations ................      $      3.91   $      1.90    $      1.10

    Net gain on sale of

      discontinued BIS

      operations (Notes B

      and G) ....................              .15           .89            .54

    Income/(loss) from

      discontinued BIS

      operations, net (Note G) ..              .02          (.04)           .03

                                       -----------   -----------    -----------

    Income before cumulative

      effect of change in

      accounting principle ......             4.08          2.75           1.67

    Cumulative effect of change

      in accounting principle

      for contributions .........                                         (.07)

                                       -----------   -----------    -----------

        Net Income ..............      $      4.08   $      2.75    $      1.60

                                       ===========   ===========    ===========

Average Shares Outstanding

(000s)

  Basic .........................           88,475        96,021         99,451

                                       ===========   ===========    ===========

  Diluted .......................          101,314        97,420        100,196

                                       ===========   ===========    ===========

 

               See "Notes to Consolidated Financial Statements."

 

                                       30

<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS

                                                       Year Ended

                                        --------------------------------------

                                          Dec. 28      Dec. 29       Dec. 31

(In thousands of dollars)                   1997         1996          1995

                                        ----------    ----------    ----------

Cash Provided by (Required for)

Operating Activities

  Net income .........................   $ 413,015    $ 267,873    $ 160,062

    Noncash items deducted from

      (included in) income:

      Cumulative effect of

        change in accounting

        principle ....................                                 7,320

      Gains on sales/exchanges

        of investee/

        subsidiaries (Note G) ........    (283,126)

      Net gain on sale of

        discontinued BIS

        operations ...................     (15,261)     (86,255)     (53,765)

      Depreciation ...................      94,138       86,976       75,197

      Amortization of excess of

        cost over net assets

        acquired .....................      47,475       18,500       11,504

      Amortization of other

        assets .......................      15,118       15,171       12,040

      Provision (benefit) for deferred

        taxes ........................     (14,750)      40,647       (7,367)

      Earnings of investees in

        excess of distributions ......     (14,658)     (21,293)     (16,250)

      Minority interests in

        earnings of

        consolidated

        subsidiaries .................      11,503        9,293        8,809

      Other items, net ...............      38,656       (9,648)      34,996

  Change in certain assets and

        liabilities:

    Accounts receivable ..............     (33,853)     (42,908)     (18,620)

    Inventories ......................        (326)      30,474      (32,292)

    Other current assets .............         380     (159,718)       2,227

    Accounts payable .................     (83,969)      86,251      (19,235)

    Federal and state income

      taxes ..........................       9,623          972      (55,078)

    Other liabilities ................      47,724       (9,826)       3,006

                                         ---------    ---------    ---------

       Net Cash Provided by

         Operating Activities ........     231,689      226,509      112,554

                                         ---------    ---------    ---------

Cash Provided by (Required for)

Investing Activities

  Proceeds from sale of

    investee, net (Note G) ...........     130,654

  Proceeds from sale of

    subsidiaries, net (Note G) .......      50,491

  Proceeds from sale of

    discontinued BIS

    operations, net (Note G) .........     416,983      271,859      114,907

  Change in net noncurrent

    assets of discontinued BIS

    operations .......................       1,996        4,249        4,523

  Acquisition of Contra Costa

    Newspapers, Inc. (Note G) ........                              (335,755)

  Proceeds from sales of

    securities available for

    sale .............................     241,894

  Additions to property, plant

    and equipment ....................    (106,614)    (112,896)     (92,086)

  Other items, net ...................      (8,165)      45,142      (46,081)

                                         ---------    ---------    ---------

       Net Cash Provided by

         (Required for)

         Investing Activities ........     727,239      208,354     (354,492)

                                         ---------    ---------    ---------

 

                                       31

<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

                                                     Year Ended

                                      ----------------------------------------

                                        Dec. 28        Dec. 29        Dec. 31

(In thousands of dollars)                 1997           1996           1995

                                      ----------     ----------     ----------

Cash Provided by (Required for)

Financing Activities

  Proceeds from sale of

    commercial paper, notes

    payable and senior notes

    payable .......................      833,600        601,010      1,092,620

  Reduction of total debt .........     (976,611)      (793,525)      (490,274)

                                      ----------     ----------     ----------

       Net Change in Total Debt ...     (143,011)      (192,515)       602,346

  Payment of cash dividends .......      (78,335)       (74,262)       (74,377)

  Sale of common stock to

    employees .....................       70,531         72,202         75,437

  Purchase of treasury stock ......     (643,375)      (221,768)      (319,363)

  Other items, net ................      (27,327)       (21,652)       (25,346)

                                      ----------     ----------     ----------

       Net Cash Provided by

         (Required for)

         Financing Activities .....     (821,517)      (437,995)       258,697

                                      ----------     ----------     ----------

         Net Increase

           (Decrease) in Cash .....      137,411         (3,132)        16,759

Cash and short-term cash

  investments at beginning of

  the year ........................       22,880         26,012          9,253

                                      ----------     ----------     ----------

Cash and short-term cash

  investments at end of the

  year ............................   $  160,291     $   22,880     $   26,012

                                      ==========     ==========     ==========

Supplemental Cash Flow

Information

  Noncash investing activities

    (Note G)

    Securities received as

      proceeds on the sale of

      investee ....................   $  229,163

  Noncash financing activities

    (Note G)

    Issuance of preferred stock

      for the acquisition of

      the Disney newspapers

        Preferred stock ...........        1,755

        Additional capital ........      658,245

    Long-term debt assumed on

      the acquisition of the

      Disney newspapers ...........      990,000

 

               See "Notes to Consolidated Financial Statements."

 

                                       32

<PAGE>

<TABLE>

<CAPTION>

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

 

                                   Preferred      Common

(In thousands of dollars, except     Shares       Shares        Preferred       Common     Additional     Retained      Treasury

share data)                       Outstanding   Outstanding       Stock          Stock       Capital      Earnings       Stock

                                  -----------   -----------     ---------       -------    ----------     ---------    ----------

<S>                               <C>           <C>             <C>             <C>         <C>           <C>          <C>      

Balance at Dec. 25, 1994 ........          --   105,785,440     $      --       $ 2,204     $ 326,392     $ 896,058    $       --

  Issuance of common shares

    under stock option plans ....                   152,150                           2         3,429

  Issuance of treasury shares

    under stock option plans ....                 2,167,760                                    (9,712)                   (62,712)

  Issuance of treasury shares

    under stock purchase plan ...                   599,558                                    (2,407)                   (16,925)

  Purchase of treasury shares ...               (11,508,600)                                                             319,363

  Retirement of 8,741,282

    treasury shares..............                                                  (181)      (26,830)     (212,715)    (239,726)

  Tax benefits arising from

    employee stock plans ........                                                               4,488

  Unrealized gains on

    investments .................                                                                            42,942

  Net income ....................                                                                           160,062

  Cash dividends declared on

    common stock -- $.74 per

    share .......................                                                                           (72,762)

                                    ---------    ----------     ---------       -------     ---------     ---------    ---------

Balance at Dec. 31, 1995 ........          --    97,196,308     $      --       $ 2,025     $ 295,360     $ 813,585    $      --

  Issuance of common shares

    under stock option plans ....                 1,040,938                          22        26,589           (11)

  Issuance of common shares

    under stock purchase plan ...                   126,808                           3         3,724            (1)

  Issuance of treasury shares

    under stock option plans ....                   868,752                                    (7,661)                   (30,783)

  Issuance of treasury shares

    under stock purchase plan ...                   326,946                                    (1,278)                   (11,645)

  Purchase of treasury shares ...                (6,219,100)                                                             221,768

  Retirement of 5,023,402

    treasury shares .............                                                  (105)      (16,586)     (162,649)    (179,340)

  Expenses related to capital

    transactions ................                                                                (203)

  Tax benefits arising from

    employee stock plans ........                                                               8,375

  Reductions in unrealized gains

    on investments ..............                                                                           (41,271)

  Net income ....................                                                                           267,873

  Cash dividends declared on

    common stock -- $.58-1/2

    per share(1) ................                                                                           (56,283)

                                    ---------    ----------     ---------       -------     ---------     ---------    ---------

Balance at Dec. 29, 1996 ........          --    93,340,652     $      --       $ 1,945     $ 308,320     $ 821,243    $      --

  Issuance of common shares

    under stock option plans ....                    89,318                           2         2,395

  Issuance of treasury shares

    under stock option plans ....                 1,604,447                                   (28,149)                   (70,785)

  Issuance of treasury shares

    under stock purchase plan ...                   387,514                                    (2,222)                   (17,218)

  Issuance of convertible

    preferred shares ............   1,754,930                       1,755                     658,245

  Purchase of treasury shares ...               (13,824,300)                                                             643,375

  Retirement of 11,832,339

    treasury shares .............                                                  (247)      (37,519)     (517,606)    (555,372)

  Tax benefits arising from

    employee stock plans ........                                                              10,502

  Reductions in unrealized gains

    on investments ..............                                                                            (1,671)

  Net income ....................                                                                           413,015

  Cash dividends declared on

    common stock -- $.80 per

    share .......................                                                                           (78,335)

                                    ---------    ----------     ---------       -------     ---------     ---------    ---------

Balance at Dec. 28, 1997 ........   1,754,930    81,597,631     $   1,755       $ 1,700     $ 911,572     $ 636,646    $      --

                                    =========    ==========     =========       =======     =========     =========    =========

 

(1)  The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly  dividend previously paid in January

     was paid on Feb. 24, 1997, to shareholders of record as of the close of business on Feb. 12, 1997.

 

                                        See "Notes to Consolidated Financial Statements."

 

                                                                33

</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Knight  Ridder is the nation's  second-largest  newspaper  publisher in terms of

circulation  and  revenue,  with  products  in print  and  online.  The  company

publishes 31 daily newspapers in 28 U.S.  markets,  reaching 9.0 million readers

daily and 12.6 million on Sunday.  It maintains 34 associated  Web sites and has

investments in two newsprint mills.

 

The company  reports on a fiscal  year,  ending the last Sunday in the  calendar

year.  Results for 1997 and 1996 are for the 52 weeks ended Dec. 28 and Dec. 29,

respectively, and results for 1995 are for the 53 weeks ended Dec. 31.

 

The  BASIS  OF  CONSOLIDATION  is  to  include  in  the  consolidated  financial

statements  all the  accounts  of  Knight  Ridder  and  its  more-than-50%-owned

subsidiaries.  All significant  intercompany  transactions  and account balances

have been eliminated in consolidation.

 

The company is a 50%  partner in the DETROIT  NEWSPAPER  AGENCY  (DNA),  a joint

operating agency between Detroit Free Press,  Inc., a wholly owned subsidiary of

Knight Ridder,  and The Detroit News, Inc., a wholly owned subsidiary of Gannett

Co.,  Inc. In 1989,  business  operations of the Free Press and The Detroit News

were  transferred to the DNA. Under the joint operating  agreement that  expires

in the year 2089,  as of Dec. 26, 1994,  profits are split  equally  between the

partners.  The  Consolidated  Statement of Income  includes,  on a  line-by-line

basis, the company's pro rata share of the revenue and expense  generated by the

operation of the agency.

 

INVESTMENTS  in companies in which  Knight  Ridder has an equity  interest of at

least 20% but not more than 50% are accounted for under the equity method. Under

this method,  the company  records its share of earnings as income and increases

the investment by the equivalent  amount.  Dividends are recorded as a reduction

in the investment.

 

The investment  caption "EQUITY IN UNCONSOLIDATED  COMPANIES AND JOINT VENTURES"

in the  Consolidated  Balance Sheet  represents the company's  equity in the net

assets of DNA; the Seattle Times Company and  subsidiaries;  Newspapers First, a

company  responsible  for  the  sales  and  servicing  of  general,  retail  and

classified  advertising  accounts  for a group of  newspapers;  Southeast  Paper

Manufacturing   Co.  and  Ponderay   Newsprint   Company,   two  newsprint  mill

partnerships;  TKR Cable Company and TKR Cable Partners,  cable television joint

ventures   (all   but  one  of  the   cable   companies   jointly   owned   with

TeleCommunications,  Inc. (TCI),  were sold in January 1997);  InfiNet,  a joint

venture  that  allows  newspapers  to  offer  Internet  access  to  subscribers;

Destination  Florida, a company that provided online travel information services

(ceased  operation  in  1997);  and  Interealty  (formerly  known as PRC  Realty

Systems, Inc.), a software system producer for the real estate industry.

 

The company  owns 49-1/2% of the voting  common  stock and 65% of the  nonvoting

common  stock of the  SEATTLE  TIMES  COMPANY,  owns 32% of the voting  stock of

NEWSPAPERS  FIRST, is a one-third  partner in the SOUTHEAST PAPER  MANUFACTURING

CO., and owns a 13-1/2% equity share of PONDERAY NEWSPRINT COMPANY.  The company

is a one-third partner in INFINET and owns a 25% interest in INTEREALTY.

 

The investment in unconsolidated  companies and joint ventures at Dec. 28, 1997,

includes  $171.0  million  representing  the  company's  share of  undistributed

earnings  (excluding  the DNA)  accumulated  since  the  investment  dates.  The

company's share of the earnings of the unconsolidated  companies (except for the

DNA) of $10.8  million in 1997,  $29.9 million in 1996 and $20.7 million in 1995

is included in the caption "EQUITY IN EARNINGS OF  UNCONSOLIDATED  COMPANIES AND

JOINT  VENTURES" in the  Consolidated  Statement of Income.  Dividends  and cash

distributions  received from the  unconsolidated  companies  and joint  ventures

(excluding  the DNA) were $3.1 million in 1997,  $18.6  million in 1996 and $3.2

million in 1995 and were offset against the investment account.

 

FORT WAYNE  NEWSPAPERS,  INC.  is the only  consolidated  subsidiary  that has a

minority  ownership  interest.  The minority  shareholders'  interest in the net

income of this  subsidiary has been reflected as an expense in the  Consolidated

Statement  of  Income  in  the  caption  "MINORITY   INTERESTS  IN  EARNINGS  OF

CONSOLIDATED  SUBSIDIARIES."  Also  included  in this  caption is a  contractual

minority  interest  resulting from a JOA that runs through the year 2021 between

The Miami  Herald  Publishing  Company and Cox  Newspapers,  Inc.,  covering the

publication of The Herald and The Miami News, which ceased  publication in 1988.

The company's liability to the minority interest shareholders is included in the

Consolidated   Balance  Sheet  caption,   "MINORITY  INTERESTS  IN  CONSOLIDATED

SUBSIDIARIES."

 

                                       34

<PAGE>

 

"CASH AND SHORT-TERM  CASH  INVESTMENTS"  includes  currency and checks on hand,

demand  deposits  at  commercial  banks,   overnight  repurchase  agreements  of

government  securities and investment-grade  commercial paper with maturities of

90 days or less.  Cash and short-term  investments  are recorded at cost. Due to

the short-term nature of marketable securities, cost approximates market value.

 

The majority of the company's  "ACCOUNTS  RECEIVABLE" as of Dec. 28, 1997,  Dec.

29, 1996, and Dec. 31, 1995, are from  advertisers,  newspaper  subscribers  and

information users.  Credit is extended based on the evaluation of the customer's

financial condition, and generally collateral is not required. Credit losses are

provided  for in the  financial  statements  and  consistently  have been within

management's expectations.

 

"INVENTORIES" are priced at the lower of cost (first-in,  first-out FIFO method)

or market.  Most of the inventory is newsprint,  ink and other  supplies used in

printing newspapers.

 

"OTHER  ASSETS"  includes  investments  in companies in which Knight Ridder owns

less  than a 20%  interest.  These  investments  are  reviewed  for  appropriate

classification at the time of purchase and re-evaluated as of each balance sheet

date.  Investments  available  for sale are carried on the balance sheet at fair

market  value,  with the  unrealized  gains/losses  (net of tax)  reported  as a

separate component of shareholders'  equity.  Unrealized gains (net of tax) were

zero at Dec. 28, 1997,  $1.7 million at Dec. 29, 1996, and $42.9 million at Dec.

31, 1995. Upon the sale of an investment,  the gain/loss is calculated  based on

the original cost,  less the proceeds from the sale.  Investments are classified

as  "held-to-maturity"  when the company has the positive  intent and ability to

hold the investment to maturity.

 

"PROPERTY,  PLANT AND  EQUIPMENT"  is recorded at cost,  and the  provision  for

depreciation  for financial  statement  purposes is computed  principally by the

straight-line method over the estimated useful lives of the assets.

 

"EXCESS OF COST OVER NET ASSETS  ACQUIRED  AND OTHER  INTANGIBLES"  includes the

unamortized  excess of cost over the fair  market  value on the  purchase  of at

least a 50% interest in a company's net tangible and  intangible  assets arising

from  these  acquisitions.  The  excess of cost  over net  assets  acquired  and

intangible  assets from  acquisitions  accounted  for as purchases and occurring

subsequent  to Oct. 31, 1970,  totaled,  at Dec.  28, 1997,  approximately  $2.5

billion,  including $390.9 million of intangible assets. The excess of cost over

net assets  acquired is being amortized over a 40-year period on a straight-line

basis,  unless management  concludes a shorter term is more  appropriate.  Other

intangibles acquired through acquisitions, consist of trademarks, subscriber and

advertiser  lists and  mastheads  which are being  amortized on a  straight-line

basis over periods ranging from 5 to 40 years, with a  weighted-average  life of

26.5 years.  If, in the opinion of  management,  an  impairment in value occurs,

based on the undiscounted cash flow method, any necessary additional write-downs

will be charged to expense.

 

"DEFERRED REVENUE" arises as a normal part of business from advance subscription

payments  for  newspapers.  Revenue is  recognized  in the period in which it is

earned.

 

"SHORT-TERM  BORROWINGS  AND  CURRENT  PORTION OF LONG TERM DEBT"  includes  the

carrying  amounts  of  commercial  paper and other  short-term  borrowings  with

original  maturities  of less than one year,  and the portion of long-term  debt

payable  within twelve  months.  The carrying  amounts of short-term  borrowings

approximate  fair value.  "LONG-TERM  DEBT"  represents the carrying  amounts of

debentures, notes payable and other indebtedness with maturities longer than one

year. Fair values, disclosed in Note C, are estimated using discounted cash flow

analyses based on the company's current incremental  borrowing rates for similar

types of borrowing arrangements.

 

In the first  quarter of 1995,  the company  adopted FAS 116 --  ACCOUNTING  FOR

CONTRIBUTIONS  RECEIVED AND  CONTRIBUTIONS  MADE.  Under FAS 116,  unconditional

promises, including multiyear promises, are recognized in the period the promise

is made.  The adoption of FAS 116 resulted in a $7.3 million charge (net of tax)

to  operations,  or $.07 per share,  and was  recorded  as a  cumulative  effect

adjustment.

 

                                       35

<PAGE>

In 1996,  the  company  adopted  FAS 121 --  ACCOUNTING  FOR THE  IMPAIRMENT  OF

LONG-LIVED  ASSETS.  FAS  121  requires  impairment  losses  to be  recorded  on

long-lived assets when indicators of impairment are present and the undiscounted

cash flows  estimated  to be generated by those assets are less than the assets'

carrying amount. The adoption of FAS 121 did not materially impact the financial

statements.  Also in 1996,  the company  implemented  FAS 123 -- ACCOUNTING  FOR

STOCK-BASED  COMPENSATION.  Under  this  statement,  the  company  accounts  for

stock-based  compensation plans under the provisions of APB 25 -- Accounting for

Stock Issued to Employees,  and  discloses  the general and pro forma  financial

information required by FAS 123 (see Note E).

 

In 1997,  the  company  adopted  FAS 128 -- EARNINGS  PER SHARE  (EPS).  FAS 128

replaced the calculation of primary and fully diluted EPS with basic and diluted

EPS. Unlike primary EPS, basic EPS will typically be higher than primary EPS due

to the exclusion of any dilutive  effects of options,  warrants and  convertible

securities from the  calculation.  Diluted EPS is very similar to the previously

reported fully diluted EPS. All EPS amounts for all periods  presented have been

restated where appropriate, to conform to the FAS 128 requirements.

 

"BASIC   EARNINGS  PER  SHARE"  is  computed  by  dividing  net  income  by  the

weighted-average  number of common  shares  outstanding.  "DILUTED  EARNINGS PER

SHARE" is  computed  by dividing  net income by the  weighted-average  number of

common and common equivalent shares  outstanding.  Quarterly  earnings per share

may not add to the total  for the  year,  since  each  quarter  and the year are

calculated separately based on average outstanding shares during the period.

 

In 1997,  the company also adopted FAS 129 --  DISCLOSURE OF  INFORMATION  ABOUT

CAPITAL  STRUCTURE.  FAS 129  establishes  standards for disclosing  information

about an entity's  capital  structure.  The adoption of this  statement  did not

result in additional required  disclosures.  FAS 130 -- REPORTING  COMPREHENSIVE

INCOME and FAS 131 --  DISCLOSURES  ABOUT  SEGMENTS OF AN ENTERPRISE AND RELATED

INFORMATION are effective  beginning in 1998. FAS 130 establishes  standards for

reporting  and  displaying  comprehensive  income,  while FAS 131  abandons  the

"industry segment approach" in favor of the "management approach" for disclosure

purposes.  Adoption of FAS 130 is not expected to result in a significant change

from  the  current  required  disclosures  and  the  adoption  of FAS 131 is not

expected to result in additional disclosures.

 

USE OF ESTIMATES -- The  preparation of financial  statements in conformity with

generally accepted  accounting  principles requires management to make estimates

and assumptions that affect the amounts reported in the financial statements and

accompanying notes. Actual results could differ from those estimates.

 

Certain  amounts in 1996 and 1995 have been  reclassified to conform to the 1997

presentation.

 

B. INCOME TAXES

 

The company's income tax expense is determined under the liability method, which

requires adjusting previously deferred taxes for changes in tax rates.

 

Substantially all of the company's earnings are subject to domestic taxation. No

material foreign income taxes have been imposed on reported earnings.

 

Federal, state and local income taxes consist of the following (in thousands):

 

<TABLE>

<CAPTION>

                                                    1997                          1996                          1995

                                          ------------------------      ------------------------      -------------------------

                                           Current        Deferred       Current        Deferred        Current       Deferred

                                          ---------      ---------      ---------      ---------      ---------      ----------

<S>                                       <C>            <C>            <C>             <C>           <C>            <C>      

Federal income taxes ...................  $ 286,645      $ (33,176)     $ 127,610       $ 28,075      $ 100,568       $(10,128)

State and local income taxes ...........     64,519        (11,156)        29,913         13,167         26,721          3,241

                                          ---------      ---------      ---------       --------      ---------       ---------

  Total ................................  $ 351,164      $ (44,332)     $ 157,523       $ 41,242      $ 127,289       $ (6,887)

                                          =========      =========      =========       ========      =========       ========

Provision for:

  Continuing operations ................  $ 312,098      $ (14,750)      $ 84,182       $ 40,647      $  80,228       $ (7,367)

  Discontinued operations ..............     39,066        (29,582)        73,341            595         47,061            480

                                          ---------      ---------      ---------       --------      ---------       ---------

    Total ..............................  $ 351,164      $ (44,332)     $ 157,523       $ 41,242      $ 127,289       $ (6,887)

                                          =========      =========      =========       ========      =========       ========

</TABLE>

 

                                                                 36

<PAGE>

 

Cash  payments  of income  taxes for the years  1997,  1996 and 1995 were $278.5

million, $147.2 million and $130.1 million, respectively. Payments in 1997, 1996

and 1995 include the tax impact  resulting from one-time gains. The 1997 payment

included the tax impact from the sale of our cable  investment,  Knight-  Ridder

Information,  Inc.,  and our  newspaper  in Long Beach,  Calif.,  as well as the

Boulder  exchange.  Payments in 1996 and 1995  included  the tax impact from the

sale of Knight-Ridder Financial and the Journal of Commerce, respectively.

 

                           Effective Income Tax Rates

 

The differences  between income tax expense for continuing  operations  shown in

the  financial  statements  and the amounts  determined  by applying the federal

statutory rate of 35% in each year are as follows (in thousands):

 

                                            1997          1996        1995

                                         ---------     ---------    --------

Federal statutory income tax .........   $ 242,848    $ 108,573    $  63,986

State and local income taxes, net of

  federal benefit ....................      34,300       13,612       11,421

Statutory rate applied to

  nondeductible amortization of the

  excess of cost over net assets

  acquired ...........................      13,482        2,781        2,712

Other items, net .....................       6,718         (137)      (5,258)

                                         ---------    ---------    ---------

  Total ..............................   $ 297,348    $ 124,829    $  72,861

                                         =========    =========    =========

 

The  deferred  tax asset and  liability  at the fiscal  year end  consist of the

following components (in thousands):

 

                                            1997         1996         1995

                                         ---------    ---------    ---------

Deferred Tax Assets

Postretirement benefits other than

  pensions (including amounts relating

  to partnerships in which the company

  participates) ......................   $  88,016    $  95,764    $  85,789

Compensation and benefit accruals ....     (15,855)      (6,802)      21,768

Accrued interest .....................       8,165       10,576        8,073

Other nondeductible accruals .........      51,651       43,594       30,068

                                         ---------    ---------    ---------

  Gross deferred tax assets ..........   $ 131,977    $ 143,132    $ 145,698

                                         =========    =========    =========

 

Deferred Tax Liability

Depreciation and amortization ........   $ 341,872    $ 196,116    $ 154,242

Equity in partnerships and investees .      46,845       73,499       52,708

Unrealized appreciation in equity

  securities .........................       1,210       33,478

Research and experimental expenditures      10,964       12,232

Other ................................       4,010       11,066       31,924

                                         ---------    ---------    ---------

  Gross deferred tax liability .......   $ 392,727    $ 292,855    $ 284,584

                                         ---------    ---------    ---------

  Net deferred tax liability .........   $ 260,750    $ 149,723    $ 138,886

                                         =========    =========    =========

 

The components of deferred taxes included in the Consolidated  Balance Sheet are

as follows (in thousands):

 

                                            1997         1996         1995

                                         ---------    ---------    ---------

Current asset ........................   $  23,445    $  24,296    $  26,160

Noncurrent liability .................     282,695      142,727      134,460

Discontinued BIS operations - net

  liability ..........................       1,500       31,292       30,586

                                         ---------    ---------    ---------

  Net deferred tax liability .........   $ 260,750    $ 149,723    $ 138,886

                                         =========    =========    =========

 

                                       37

<PAGE>

 

C. DEBT

 

Debt consisted of the following (in thousands):

 

<TABLE>

<CAPTION>

                                                 Dec. 28           Dec. 29          Dec. 31

                                                   1997              1996             1995

                                               -----------         ---------      -----------

<S>                                               <C>              <C>              <C>     

Commercial paper due at various dates

  through March 25, 1998, at an

  effective interest rate of 5.6% as

  of Dec. 28, 1997. Amounts are net of

  unamortized discounts of $207 in 1997,

  $1,683 in 1996 and $5,502 in 1995(a) ....... $    29,793         $ 364,817      $   557,698

Senior secured bank debt due on Sept.

  15, 1999,  advanced  under a $1.2

  billion  credit  agreement  with a variable

  interest rate indexed to

  LIBOR plus 27  1/2 basis points(b) .........     990,000

Debentures due on April 15, 2009,

  bearing interest at 9.875%, net of

  unamortized discount of $1,867 in

  1997, $2,032 in 1996 and $2,211 in

  1995 .......................................     198,133           197,968          197,789

Debentures due on Nov. 1, 2027,

  bearing interest at 7.15%, net of

  unamortized discount of $5,739 in

  1997 .......................................      94,261

Notes payable, bearing interest at

  8.5%, subject to mandatory pro rata

  amortization of 25% annually

  commencing Sept. 1, 1998, through

  maturity on Sept. 1, 2001, net of

  unamortized discount of $383 in

  1997, $555 in 1996 and $726 in 1995 ........     159,617           159,445          159,274

Notes payable due on Nov. 1, 2007,

  bearing interest at 6.625%, net of

  unamortized discount of $2,179 in

  1997 .......................................      97,821

Senior notes payable due on Dec. 15,

  2005, bearing interest at 6.3%, net

  of unamortized discount of $795 in

  1997, $895 in 1996 and $911 in 1995 ........      99,205            99,105           99,089

                                               -----------         ---------      -----------

                                                 1,668,830           821,335        1,013,850

Less amounts payable in one year(c) ..........      69,697            50,000           13,129

                                               -----------         ---------      -----------

    Total long-term debt ..................... $ 1,599,133         $ 771,335      $ 1,000,721

                                               ===========         =========      ===========

</TABLE>

 

(a)  Commercial  paper is  supported by $642.3  million of revolving  credit and

     term loan  agreements, $400 million of which matures on Oct. 25, 2001,  and

     $242.3  million of which matures on Oct. 23, 1998. 

(b)  Senior secured bank debt is  collateralized by all personal property assets

     and four recorded first  mortgages of Cypress  Media,  Inc., a wholly owned

     subsidiary.

(c)  In 1997,  this  represents  $39.9  million for the 8.5% note payable due on

     Sept. 1, 1998, and $29.8 million of commercial paper due within the next 12

     months and which management does not intend to refinance.

 

Interest  payments during 1997, 1996 and 1995 were $87.2 million,  $70.9 million

and $45.4 million, respectively.

 

                                       38

<PAGE>

The following table presents the approximate  annual  maturities of debt for the

years after 1997 (in thousands):

 

1998 ..................................... $    69,697

1999 .....................................   1,029,904

2000 .....................................      39,904

2001 .....................................      39,904

2002

2003 and thereafter ......................     489,421

                                           -----------

  Total .................................. $ 1,668,830

                                           ===========

 

The carrying amounts and fair values of debt as of Dec. 28, 1997, are as follows

(in thousands):

 

                                          Carrying               Fair

                                           Amount                Value

                                        -----------          -----------

Commercial paper .....................  $    29,793          $    29,793

Senior secured bank debt .............      990,000              990,000

9.875% Debentures ....................      198,133              249,878

7.15% Debentures .....................       94,261              102,234

8.5% Notes payable ...................      159,617              171,775

6.625% Notes payable .................       97,821              100,598

6.3% Senior notes payable ............       99,205               99,013

                                        -----------          -----------

  Total ..............................  $ 1,668,830          $ 1,743,291

                                        ===========          ===========

 

D. UNCONSOLIDATED COMPANIES AND JOINT VENTURES

 

Summary  financial  information for the company's  unconsolidated  companies and

joint  ventures that are accounted for under the equity method is as follows (in

thousands):

 

<TABLE>

<CAPTION>

                                                    1997                     1996                   1995

                                                ----------               ----------             ----------

<S>                                             <C>                      <C>                    <C>      

Current assets ................................ $  212,939               $  258,037             $  274,815

Property, plant and equipment and

  other assets ................................  1,158,224                4,076,604              3,671,364

Current liabilities ...........................    143,683                  287,782                323,199

Long-term debt and other noncurrent

  liabilities .................................    394,253                2,893,716              2,572,060

Net sales .....................................    806,587                1,417,668              1,248,694

Gross profit ..................................    124,650                  449,383                376,545

Net income ....................................     24,428                   55,104                  6,517

Company's share of:

  Net assets ..................................    197,585                  330,267                321,658

  Net income ..................................     10,800                   29,868                 20,661

</TABLE>

 

In 1989,  the Detroit  Free Press and The Detroit News began  operating  under a

joint operating  agreement as the Detroit Newspaper Agency (DNA).  Balance sheet

amounts for the DNA at Dec. 28, 1997,  Dec.  29,  1996,  and Dec. 31, 1995,  are

included  above,  and the net  assets  contributed  to the DNA are  included  in

"Equity in  unconsolidated  companies  and joint  ventures" in the  Consolidated

Balance Sheet.

 

In January 1997, the company and Tele-Communications, Inc. closed on the sale of

the company's  interest in all but one of their jointly owned cable investments.

See Note G.

 

E. CAPITAL STOCK

 

In 1991,  shareholders  authorized 2 million shares of Series B preferred  stock

for future  issuance  (which is  convertible  into 20  million  shares of common

stock).

 

                                       39

<PAGE>

 

In 1997,  the Board of  Directors  authorized  1,758,242  of Series B  preferred

stock,  $1.00  par  value  per  share,  for  issuance  in  connection  with  the

acquisition of four  newspapers  that were  indirectly  owned by The Walt Disney

Company on May 9, 1997.  The Series B  preferred  stock is  convertible  into 10

shares of common  stock.  If and when  dividends  and  other  distributions  are

declared  by the Board of  Directors,  holders of the Series B  preferred  stock

shall be entitled to receive the  dividends  or other  distribution  paid on the

number of shares of the corporation's common stock into which such share of this

series is  convertible.  Each  holder of this  series is  entitled  to vote with

respect to all matters upon which holders of the corporation's  common stock are

entitled to vote.

 

On June 21, 1996, the Board of Directors  declared a two-for-one  stock split in

the form of a 100% common stock  dividend  that was payable on July 31, 1996, to

shareholders  of record on July 10, 1996.  The  financial  statements  have been

restated to give retroactive  recognition to the stock split in prior periods by

reclassifying  from  retained  earnings  to  common  stock  the par value of the

additional  shares  arising from the split.  In addition,  all references in the

financial  statements  to  number  of shares  and per  share  amounts  have been

restated.

 

Concurrent  with the stock  split,  the company  executed a rights  agreement to

replace a similar  agreement that expired on July 10, 1996. The agreement grants

each holder of a common share a right,  under  certain  conditions,  to purchase

from the company a unit consisting of one  one-hundredth of a share of preferred

stock, at a price of $150, subject to adjustment. The rights provide that in the

event the company is a surviving corporation in a merger, each holder of a right

will be entitled to receive,  upon exercise,  common shares having a value equal

to two times the exercise price of the right.  In the event the company  engages

in a merger or other  business  combination  transaction in which the company is

not the  surviving  corporation,  the  rights  agreement  provides  that  proper

provision  shall be made so that each  holder  of a right  will be  entitled  to

receive,  upon the exercise  thereof at the  then-current  exercise price of the

right,  common stock of the acquiring  company having a value equal to two times

the exercise  price of the right.  No rights  certificates  will be  distributed

until  10 days  following  a  public  announcement  that a  person  or  group of

affiliated or associated persons has acquired, or obtained the right to acquire,

beneficial  ownership of 20% or more of the company's  outstanding common stock,

or 10 business  days  following the  commencement  of a tender offer or exchange

offer for 20% or more of the company's  outstanding  stock. Until such time, the

rights are evidenced by the common share certificates of the company. The rights

are not exercisable  until  distributed and will expire on July 10, 2006, unless

earlier redeemed or exchanged by the company.

 

The company has the option to redeem the rights in whole,  but not in part, at a

price of $.01 per right subject to adjustment.  The company's Board of Directors

has  reserved  for  issuance  upon  exercise of the rights  1,500,000  preferred

shares.

 

The  Employees  Stock  Purchase  Plan  provides  for the sale of common stock to

employees  of the  company and its  subsidiaries  at a price equal to 85% of the

market value at the end of each  purchase  period.  Participants  under the plan

received  387,514  shares in 1997,  453,754 shares in 1996 and 599,558 shares in

1995. The purchase price of shares issued in 1997 under this plan ranged between

$34.00 and $43.46,  and the market  value on the  purchase  dates of such shares

ranged from $40.00 to $51.13.

 

The Employee Stock Option Plans provide for the issuance of  nonqualified  stock

options and incentive stock options.  Options are issued at prices not less than

market  value at date of grant and until 1994 were  exercisable  at issue  date.

Options  granted after March 1994 are  exercisable  in three equal  installments

vesting over a three-year period from the date of grant.  There is no expiration

date for the granting of options, but options must expire no later than 10 years

from the date of grant. The option plan provides for the discretionary  grant of

stock  appreciation  rights (SARs) in tandem with  previously  granted  options,

which  allow a holder to  receive in cash,  stock or  combinations  thereof  the

difference  between the exercise price and the fair market value of the stock at

date of exercise.

 

Proceeds  from the  issuance  of  shares  under  these  plans  are  included  in

shareholders' equity and do not affect income.

 

                                       40

<PAGE>

Transactions under the Employee Stock Option Plans are summarized as follows:

 

                                                                 Weighted-

                                                                 Average

                                          Number of           Exercise Price

                                             Shares             Per Share

                                         -----------         ---------------

Outstanding

  Dec. 25, 1994 .......................   8,646,724              $ 25.68

    Exercised .........................  (2,319,910)               24.21

    Expired

    Forfeited .........................     (24,800)               26.24

    Granted ...........................   1,345,300                32.16

Outstanding

  Dec. 31, 1995 .......................   7,647,314                27.26

    Exercised .........................  (1,909,690)               25.95

    Expired ...........................      (8,650)               29.54

    Forfeited .........................    (148,579)               28.70

    Granted ...........................   1,324,450                39.25

Outstanding

  Dec. 29, 1996 .......................   6,904,845                29.89

    Exercised .........................  (1,693,765)               26.54

    Expired ...........................    (340,341)               29.00

    Forfeited .........................     (25,873)               32.55

    Granted ...........................   1,412,668                51.65

Outstanding

  Dec. 28, 1997 .......................   6,257,534                35.74

 

In 1997, the company  established a long-term  incentive  plan. The plan rewards

participants   whose   leadership  helps  the  company  reach  levels  of  total

shareholder return, as defined.  The plan covers a single three year performance

period from Jan. 1, 1997 through Dec. 31, 1999. Participants received an initial

grant of 252,406  shares of restricted  Knight Ridder common stock.  The initial

grant of common stock was restricted as the vesting of these shares is triggered

upon the occurrence of certain performance goals.

 

In 1997, the company established a compensation plan for nonemployee  directors.

The  purpose of the plan is to attract  and retain  the  services  of  qualified

individuals  who are not  employees  of the  company  to serve as members of the

Board of Directors. Part of the compensation plan includes the issuance of stock

options.  Options vest in three equal  installments over a three-year period and

expire no later than 10 years from the date of grant.  In 1997,  26,000  options

were granted.

 

At Dec. 28, 1997,  shares of the company's  authorized but unissued common stock

were reserved for issuance as follows:

 

                                               Shares

                                             ---------

Employee Stock Option Plans ................ 2,176,761

Employees Stock Purchase Plan .............. 1,421,106

Nonemployee Directors Stock Option

  Plan .....................................   174,000

                                             ---------

  Total .................................... 3,771,867

                                             =========

 

As required by FAS 123, pro forma information  regarding net income and earnings

per share has been  determined  as if the company had accounted for its employee

stock options under the fair value method of that statement.  The fair value for

these  options was estimated at the date of grant using a  Black-Scholes  option

pricing model with the following weighted-average assumptions for 1997, 1996 and

1995,  respectively:  risk-free rates of 5.7%, 6.1% and 5.5%; dividend yields of

1.6%,  2.0% and 2.5%;  volatility  factors of the  expected  market price of the

company's common stock of 0.14, 0.16 and 0.17; and a  weighted-average  expected

life of the option of 6.4, 6.5 and 6.5 years. The  weighted-average  fair values

of the stock  options  for 1997,  1996 and 1995 were  $12.44,  $9.65 and  $6.94,

respectively.

 

The Black-Scholes option valuation model was developed for use in estimating the

fair value of traded  options  that have no vesting  restrictions  and are fully

transferable.  In addition,  option valuation models require the input of highly

subjective assumptions,  including the expected stock price volatility.  Because

the  company's  employee  stock  options  have   characteristics   significantly

different from those traded options, and because changes in the subjective input

assumptions can materially affect the fair value estimate,  the existing models,

in management's opinion, do not necessarily provide a reliable single measure of

the fair value of its employee stock options.

 

                                       41

<PAGE>

 

For purposes of pro forma  disclosures,  the estimated fair value of the options

is amortized to expense over the options' vesting period.  In addition,  the 15%

discount in market value under the Employees  Stock  Purchase Plan is treated as

compensation  expense for pro forma purposes.  The company's 1997, 1996 and 1995

pro forma  information  follows (in  thousands,  except for  earnings  per share

information):

 

                                          1997           1996          1995

                                       ---------      ---------     ---------

Net income ..........................  $ 407,274      $ 264,600     $ 158,461

Basic earnings per share ............       4.60           2.76          1.59

Diluted earnings per share ..........       4.02           2.72          1.58

 

The pro forma  effect on net  income is not  necessarily  representative  of the

effect in future  years  because it does not take into  consideration  pro forma

compensation expense related to grants made prior to 1995.

 

The exercise  price of options  outstanding  at Dec. 28,  1997,  ranged  between

$22.66 and $52.78.  The  weighted-average  remaining  contractual  life of those

options  for  1997,  1996  and  1995 is 6.4,  7.3 and 7.1  years,  respectively.

3,643,950,  4,305,845 and 5,323,930 options were exercisable at the end of 1997,

1996 and 1995, respectively.

 

In 1997,  the company  adopted FAS 128 -- EARNINGS PER SHARE (EPS).  EPS amounts

for all periods  presented  have been restated as  appropriate to conform to the

FAS  128  requirements.  In  1997,  the  Series  B  preferred  stock,  which  is

convertible  into 10 shares of common  stock,  and stock options are included in

the diluted EPS calculation,  but excluded from the basic EPS  calculation.  The

1997 diluted EPS  calculation  includes  10,931,741  weighted-average  shares of

Series B preferred stock and 1,906,912  weighted-average  stock options. In 1996

and earlier,  the only difference between the basic and diluted EPS calculations

is the  dilutive  impact  of  options  that  are  included  in the  diluted  EPS

calculation.

 

F. RETIREMENT PLANS

 

The  company  and  its  subsidiaries   maintain   several   company-administered

noncontributory defined benefit plans covering most nonunion employees. Benefits

are based on years of service and  compensation  or stated amounts for each year

of  service.  The  company's  funding  policy for  defined  benefit  plans is to

contribute  annually not less than the ERISA minimum funding  standards nor more

than the maximum  amount which can be deducted for federal  income tax purposes.

The company also  contributes to certain  multi-employer  union defined  benefit

plans,  company-administered  and jointly administered negotiated plans covering

union  employees.  The  funding  policy  for  these  plans  is  to  make  annual

contributions in accordance with applicable agreements.

 

The  company  also  sponsors  certain  defined  contribution  plans  established

pursuant to Section  401(k) of the  Internal  Revenue  Code.  Subject to certain

dollar limits,  employees may contribute a percentage of their salaries to these

plans, and the company will match a portion of the employees' contributions.

 

A summary of the components of net periodic pension cost for the defined benefit

plans (both  company-administered  non-negotiated and single-employer negotiated

plans) is  presented  here,  along  with the total  amounts  charged  to pension

expense for  multi-employer  union defined benefit plans,  defined  contribution

plans and other agreements (in thousands):

 

                                          1997          1996         1995

                                       ---------     ---------    ---------

Defined benefit plans:

  Service cost ....................... $  30,116     $  28,562    $  21,550

  Interest cost ......................    61,458        56,698       51,725

  Actual return on plan assets .......  (173,445)     (106,651)    (137,554)

  Net amortization and deferral ......    99,825        43,681       84,042

                                       ---------     ---------    ---------

    Net ..............................    17,954        22,290       19,763

Multi-employer union plans ...........    11,125         9,157        9,484

Defined contribution plans ...........    10,742         9,022        8,389

Other ................................     1,968         1,412        1,808

                                       ---------     ---------    ---------

  Net periodic pension cost .......... $  41,789     $  41,881    $  39,444

                                       =========     =========    =========

 

                                       42

<PAGE>

 

Assumptions used each year in accounting for defined benefit plans were:

 

                                         1997        1996       1995

                                         -----       -----      -----

Discount rate as of year end ............ 7.0%        7.5%      7.25%

Expected long-term rate of return on

  assets assumed in determining

  pension expense ....................... 8.5         8.5       8.5

Rate of increase in compensation

  levels as of year end ................. 4.5         4.5       4.5

 

The following  table sets forth the funded status and amounts  recognized in the

Consolidated Balance Sheet for the defined benefit plans (in thousands):

 

<TABLE>

<CAPTION>

                                              Dec. 28, 1997                 Dec. 29, 1996                   Dec. 31, 1995

                                     -----------------------------  ----------------------------    ----------------------------

                                        Plans Whose    Plans Whose    Plans Whose    Plans Whose      Plans Whose    Plans Whose

                                      Assets Exceed    Accumulated  Assets Exceed    Accumulated    Assets Exceed    Accumulated

                                        Accumulated       Benefits    Accumulated       Benefits      Accumulated       Benefits

                                           Benefits  Exceed Assets       Benefits  Exceed Assets         Benefits  Exceed Assets

                                         (20 plans)      (7 plans)     (16 plans)      (9 plans)       (17 plans)     (11 plans)

                                        -----------  -------------  -------------  -------------    -------------  -------------

<S>                                       <C>             <C>           <C>             <C>             <C>             <C>    

Actuarial present value of benefit

obligations:

  Vested benefit obligations ........... $  767,330       $ 31,543      $ 601,284       $ 74,766        $ 564,319      $  83,275

                                         ==========       ========      =========       ========        =========      =========

  Accumulated benefit obligations ...... $  781,678       $ 32,484      $ 612,444       $ 77,021        $ 574,642      $  85,581

                                         ==========       ========      =========       ========        =========      =========

 

Projected benefit obligation ........... $  911,835       $ 43,497      $ 709,412       $ 87,467        $ 672,691      $ 100,273

Plan assets at fair value ..............  1,056,230          2,529        810,102         49,809          717,475         55,019

                                         ----------       --------      ---------       --------        ---------      ---------

Projected benefit obligation less

  than (in excess of) plan assets ......    144,395        (40,968)       100,690        (37,658)          44,784        (45,254)

Unrecognized net (gain) loss ...........   (138,206)        11,438        (96,564)        11,704          (15,441)        15,032

Prior service cost not yet

  recognized in net periodic pension

  cost .................................     38,940          3,971         33,135         11,283           24,865         12,522

Unrecognized net (asset) obligation

  at the date FAS 87 was adopted,

  net of amortization ..................    (13,441)           865        (18,592)         1,738          (23,689)         2,190

Adjustment required to recognize

  minimum liability ....................                    (5,922)                      (14,279)                        (18,071)

                                         ----------       --------      ---------       --------        ---------      ---------

Net pension asset (liability)

  recognized in the Consolidated

  Balance Sheet ........................ $   31,688       $(30,616)     $  18,669       $(27,212)       $  30,519      $ (33,581)

                                         ==========       ========      =========       ========        =========      =========

</TABLE>

 

Of the seven plans whose accumulated  benefits exceed assets, one is a qualified

pension plan. This qualified plan has vested benefits of $2.4 million and assets

of $2.5 million.

 

Net pension  assets are  included in "Other"  noncurrent  assets and net pension

liabilities   are  included  in  "Employment   benefits  and  other   noncurrent

liabilities." In 1995 and 1996, net pension  liabilities related to discontinued

operations were included in "Net assets of discontinued BIS  operations."  These

net pension liabilities were assumed by corporate in 1997.  Substantially all of

the assets of the  company-administered  plans are invested in listed stocks and

bonds.

 

G. ACQUISITIONS AND DISPOSITIONS

 

                                  Acquisitions

 

On May 9, 1997,  the  company  completed  the  acquisition  of four  newspapers,

indirectly owned by The Walt Disney Company,  for $1.65 billion. The acquisition

was  accomplished  through the merger of a wholly owned subsidiary with and into

Cypress Media, Inc.  ("Media"),  formerly known as ABC Media, Inc., the owner of

the four  newspapers.  Media owns  newspapers  in Kansas City,  Mo., Fort Worth,

Texas, Belleville,  Ill., and Wilkes-Barre,  Pa. The company intends to continue

to manage and operate Media as a newspaper  company.  The four  newspapers  have

combined daily and Sunday circulation of 635,000 and 898,000, respectively.

 

                                       43

<PAGE>

 

The acquisition was accounted for under the purchase method.  The purchase price

was  allocated  based on the  estimated  fair market  value of net  tangible and

intangible  assets  acquired.  The fair  market  value of the net  tangible  and

intangible assets of Media was approximately $317.3 million at date of purchase,

including  $351.6 million of intangible  assets,  which are being amortized on a

straight-line  basis over periods ranging from 10 years to 40 years.  The excess

of purchase price over these net assets,  of  approximately  $1.33 billion,  has

been recorded as goodwill and is being amortized on a  straight-line  basis over

40 years.

 

Pursuant to the  merger,  the company  issued  1,754,930  shares of its Series B

convertible  preferred stock.  Each share of preferred stock is convertible into

10 shares of common stock.  At the effective time of the merger,  Media had $990

million of bank debt, which was assumed by the company. The company's results of

operations include Media from May 9, 1997.

 

The pro forma  unaudited  results of  operations,  as though  the  former  Media

newspapers acquisition had occurred at the beginning of the fiscal year in which

the acquisition took place as well as for the comparable preceding year, were as

follows (in thousands of dollars, except share data):

 

                                           1997                     1996

                                       -----------              -----------

Operating revenue ...................  $ 3,058,791              $ 2,873,946

Income before income taxes ..........      695,466                  313,038

Net income ..........................      413,932                  255,602

Earnings per share

  Basic .............................  $      4.68              $      2.66

  Diluted ...........................         4.09                     2.22

 

On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two

newspapers  in  California  owned by the E.W.  Scripps Co. The  Monterey  County

Herald  has  circulation  of 34,000  daily and 38,000  Sunday,  and the San Luis

Obispo Telegram-Tribune has circulation of 36,000 Monday through Saturday.

 

The exchange was accounted for under the purchase method.  The fair market value

of the two newspapers  received in the exchange was approximately $56.6 million,

and that value was allocated to the net tangible and intangible  assets of these

newspapers.  The fair market value of the  identified  tangible  and  intangible

assets was  approximately  $51.5  million at date of exchange,  including  $16.7

million of intangible assets, which are being amortized on a straight-line basis

over periods ranging from 10 years to 40 years.  The excess of the fair value of

these newspapers over their net assets, of approximately $5.1 million,  has been

recorded as goodwill  and is being  amortized on a  straight-line  basis over 40

years. The company's results of operations  include Boulder through Aug. 24, and

Monterey  and San Luis Obispo from that same date  through the end of the fiscal

year.

 

On Oct. 31, 1995, the company acquired 100% of the outstanding  shares of Lesher

Communications,  Inc.,  ("Lesher") for $360 million.  The difference between the

purchase price of $360 million and the cash  distribution  of $335.8 million was

due to certain assumed  liabilities.  Lesher, a privately held newspaper company

based in Walnut Creek,  Calif.,  published  four daily  newspapers in contiguous

Contra Costa and eastern Alameda County markets in the East Bay area of Northern

California.  Lesher,  renamed Contra Costa  Newspapers,  Inc., (CCN) in November

1995, continues to publish four newspapers.

 

The acquisition was accounted for under the purchase method.  The purchase price

was allocated,  based on the estimated fair market value of the net tangible and

intangible  assets of CCN. The fair market value of the tangible and  intangible

assets was  approximately  $106.2 million at date of purchase,  including  $22.6

million of intangible assets, which are being amortized on a straight-line basis

over  periods  ranging  from 15 to 40 years.  The excess of purchase  price over

these net assets, of approximately $253.8 million, has been recorded as goodwill

and is being  amortized on a  straight-line  basis over 40 years.  The company's

results of operations include CCN from Oct. 31, 1995, forward.

 

The pro forma  unaudited  results  of  operations,  as  though  the  former  CCN

newspapers  acquisition  had  occurred at the  beginning of the 1995 fiscal year

were: (1) revenues,  $2.4 billion; (2) net income,  $161.7 million and (3) basic

earnings per share, $1.63, and diluted earnings per share, $1.61.

 

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<PAGE>

 

                                  Dispositions

 

Related to Continuing Operations:

 

In July 1997,  the company  announced  that it would sell its newspapers in Boca

Raton, Fla., Gary, Ind., Long Beach,  Calif.,  Milledgeville,  Ga. and Newberry,

S.C.  Combined daily and Sunday  circulation  for the Boca Raton,  Gary and Long

Beach  newspapers  is  188,448  and  213,487,  respectively.  The  Milledgeville

newspaper has circulation of 8,153 (five days a week) and the Newberry newspaper

has circulation of 6,500 (three days a week).

 

In December  1997,  the company sold all of these  newspapers  except the one in

Gary.  The sale of the Boca Raton,  Newberry  and  Milledgeville  newspapers  to

Community Newspaper Holdings, Inc., also included the transfer to the company of

The Daily Sun and the Buyer's Guide, a shopper,  in Warner Robins,  Ga., and the

Byron (Ga.) Gazette,  a weekly  newspaper.  The Long Beach newspaper was sold to

Garden State Newspapers,  an affiliate of Media News Group. On Feb. 2, 1998, the

company  closed on the sale of the Gary  newspaper to  Hollinger  International,

Inc.

 

The proceeds from the sale of the four newspapers were $50.7 million. The pretax

and  after-tax  gains  from their sale were  $18.1  million  and $10.3  million,

respectively.

 

On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two

newspapers in California owned by the E.W. Scripps Co. The exchange  resulted in

a pretax and an after-tax gain of $43.2 million and $24.5 million, respectively.

 

In January 1997, the company and  Tele-Communications,  Inc., closed on the sale

of the  company's  interest  in  all  but  one  of  their  jointly  owned  cable

investments.  The total sales price was $377.6  million and resulted in a pretax

and an after-tax gain of $221.8 million and $128.3  million,  respectively.  The

remaining  system,  in Kentucky,  accounts  for a small  portion of the original

investment. That sale is expected to close later.

 

In November  1996,  the company sold its  investment in Netscape  Communications

Corporation,  resulting in an after-tax gain of $8.1 million, net of adjustments

in the carrying value of certain other investments.

 

Related to Discontinued Operations:

 

On April 4,  1997,  the  company  announced  that it  would  sell  Knight-Ridder

Information,  Inc.  (KRII).  The  announcement  resulted in its former  Business

Information Services (BIS) segment (excluding one business called Technimetrics)

being  reclassified  as  discontinued  operations  in the quarter ended June 29,

1997.  On Dec.  11,  1997,  the  company  announced  that  it  would  also  sell

Technimetrics.  Since this business was previously  included in the BIS segment,

it was similarly reclassified and included in discontinued operations.

 

On Nov. 14,  1997,  the company sold KRII to M.A.I.D plc for $420 million plus a

working capital purchase price adjustment of approximately $15 million. The sale

resulted  in a  pretax  gain of $23.6  million  and an  after-tax  gain of $15.3

million.

 

On July 26,  1996,  the company  sold  Knight-Ridder  Financial  (KRF) to Global

Financial  Information  Corporation  for $275 million.  The pretax and after-tax

gains from the sale of KRF were $155.9 million and $86.3 million, respectively.

 

On April  3,  1995,  the  company  sold the  Journal  of  Commerce  (JoC) to the

Economist Group of London for $115 million.  The pretax and after-tax gains from

the sale of the JoC were $92.7 million and $53.8 million, respectively.

 

H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

 

The company and its subsidiaries have defined  postretirement benefit plans that

provide  medical and life  insurance for retirees and eligible  dependents.  The

company's  postretirement  benefit expense is determined under the provisions of

FAS  106  --  EMPLOYERS'  ACCOUNTING  FOR  POSTRETIREMENT  BENEFITS  OTHER  THAN

PENSIONS.  This statement  requires that the cost of these  benefits,  which are

primarily  for health care and life  insurance,  be  recognized in the financial

statements throughout the employees' active working careers.

 

                                       45

<PAGE>

The company valued the accumulated  postretirement  benefit obligation using the

following assumptions:

 

                                           1997           1996         1995

                                           -----          -----        -----

Discount rate at the end of the

  year .................................... 7.0%           7.5%        7.25%

Return on plan assets ..................... 8.5            8.5         8.5

Annual rate of increase in

  salaries ................................ 4.5            4.5         4.5

Medical trend rate:

  Projected ............................... 8.0            9.0        10.0

  Reducing to this percentage in

    2001 and thereafter ................... 5.5            5.5         5.5