SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number 0-16914
THE E. W. SCRIPPS COMPANY(Exact name of registrant as specified in its charter)
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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of Class A Common Shares of the Registrant held by nonaffiliates of the Registrant, based on the $75.20 per share closing price for such stock on February 28, 2002, was approximately $1,693,000,000. As of February 28, 2002, nonaffiliates held approximately 1,441,000 Common Voting Shares. There is no active market for such stock.
As of February 28, 2002, there were 60,312,116 of the Registrant's Class A Common Shares, $.01 par value per share, outstanding and 19,096,913 of the Registrant's Common Voting Shares, $.01 par value per share, outstanding.
INDEX TO THE E. W. SCRIPPS COMPANY
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
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PART I
ITEM 1. BUSINESS
The E. W. Scripps Company ("Company") operates in three reportable segments: newspapers, cable television networks (referred to as "Scripps Networks") and broadcast television.
Newspapers include 21 daily newspapers in the U.S.
Scripps Networks includes three national television networks that are distributed by cable and satellite television systems: Home & Garden Television ("HGTV"), Food Network and Do It Yourself ("DIY"), and the Company's 12% interest in FOX SportsSouth, a regional television network. The Company launched Fine Living, its fourth national network, in March 2002.
Broadcast Television includes ten television stations, nine of which are affiliated with national television networks.
Each of the Company's businesses relies upon advertising as a primary source of revenue. Advertising comprises 75% to 80% of the Company's total revenues. Declines in advertising spending, particularly in recessionary periods, adversely affect the newspaper, cable television network and broadcast television businesses.
A summary of segment information for the three years ended December 31, 2001, is set forth on page F-36 of this Form 10-K. Licensing and other media aggregates the Company's operating segments that are too small to warrant separate reporting, primarily syndication and licensing of news features and comics.
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Newspapers
Operations - The Company acquired or divested the following newspaper operations in the five years ended December 31, 2001:
The Company publishes daily newspapers in 21 markets. From its Washington bureau the Company operates the Scripps Howard News Service, a supplemental wire service covering stories in the capital, other parts of the United States and abroad.
The Company's newspapers operate Internet sites focusing on local news content. The Internet sites include expanded coverage of stories in the newspapers and content that is not in the newspapers.
Many of the Company's newspapers provide services such as total-market-coverage advertising products, direct-mail advertising and commercial printing.
Revenues - Operating revenues for the five years ended December 31, 2001, were as follows:
Daily newspaper operating revenues are derived primarily from advertising and circulation. Other newspaper operating revenues include commercial printing.
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Advertising revenues are derived from run-of-paper ("ROP") advertisements included with news stories in the body of the newspaper, preprinted advertisements that are generally produced by advertisers and inserted into the newspaper, and on-line advertising appearing on the newspapers' Internet sites.
ROP is further broken down among "local," "classified" and "national" advertising. Local refers to advertising that is not in the classified advertising section and is purchased by in-market advertisers. Classified refers to advertising that generally is grouped by type of advertising, e.g., automotive and help wanted. National refers to advertising purchased by businesses that operate beyond the local market and purchase advertising from many newspapers, primarily through advertising agencies. A given volume of ROP advertisements is generally more profitable to the Company than the same volume of preprinted advertisements.
Advertising rates and revenues vary among the Company's newspapers depending on circulation, type of advertising, local market conditions and competition. Contracts with advertisers, which are typically for one-year terms, may provide for discounted rates based upon advertising volume.
On-line advertising, which is included in "preprint and other," ranges from simple static banners that appear at the top and bottom of a Web page to more complex advertisements that use animation and allow users to interact with the advertisements.On-line advertising also includes an allocation of classified advertising revenues that appear in both the printed editions of the newspapers and on the newspapers' Internet sites, direct response campaigns and links to commercial sites. The newspapers generally receive fees for these links and advertisements. On-line advertising revenues were $6,500,000 in 2001, $8,300,000 in 2000, $5,400,000 in 1999, $1,800,000 in 1998 and $100,000 in 1997.
The first and third quarters generally have lower advertising revenues than the second and fourth quarters. Print advertising rates and volume are highest on Sundays, primarily because circulation and readership is greatest on Sundays.
5
Circulation revenues are derived from home-delivery sales of newspapers to subscribers and from single-copy sales made through retail outlets and vending machines. Circulation information for the Company's newspapers is as follows:
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Joint Operating Agencies - A JOA combines all but the editorial operations of two competing newspapers in a market in order to reduce aggregate expenses and take advantage of economies of scale, thereby allowing the continuing operation of both newspapers in that market. The Newspaper Preservation Act of 1970 ("NPA") provides a limited exemption from anti-trust laws, generally permitting the continuance of JOAs in existence prior to the enactment of the NPA and the formation, under certain circumstances, of new JOAs between newspapers.
The Company is a partner in JOAs in four markets. The JOA between the Company's Denver Rocky Mountain News and MediaNews Group Inc.'s Denver Post ("MediaNews") was approved by the U.S. Attorney General in January 2001. The JOA commenced operations on January 22, 2001, and is jointly managed by the Company and MediaNews. The other partner manages each of the Company's other JOAs.
JOA revenues less JOA expenses, as defined in each JOA, equals JOA profits, which are split between the partners. In each case JOA expenses exclude editorial expenses. The Denver Publishing Company, a wholly-owned subsidiary of the Company, received a 50% interest in the JOA in exchange for the contribution of most of its assets to the JOA and the payment of $60 million to MediaNews. The Company receives between 20% and 40% of the operating profits in the other three markets.
The table below provides certain information about the Company's JOAs.
A JOA in Evansville, Indiana, which was managed by the Company, expired in 1998 and was not renewed. The Company had received approximately 80% of JOA profits. The Company continues to operate its Evansville newspaper.
Newspaper Production - The Company's daily newspapers are printed using offset presses and use computer systems for writing, editing and composing and producing the advertising and news material printed in each edition. The Company is constructing a new production facility for its Knoxville, Tennessee, daily newspaper.
Raw Materials and Labor Costs - The Company consumed approximately 231,000 metric tons of newsprint in 2001, including 50% of the newsprint consumed by the Denver JOA. The Company consumed 281,000 metric tons in 2000 and 270,000 metric tons in 1999. Substantially all of the Company's newspapers have converted to a 50-inch web format, and the Knoxville newspaper will convert to the 50-inch format upon construction of the new production facility. Conversion to the 50-inch format has reduced newsprint consumption by approximately 5%.
The Company purchases newsprint from various suppliers, many of which are Canadian. Management believes that the Company's sources of supply of newsprint are adequate for its anticipated needs. Newsprint is a basic commodity and its price is sensitive to the worldwide balance of supply and demand. Because of the capital commitment to construct and operate a newsprint mill, the supply of newsprint is relatively stable except for temporary disruptions caused by labor stoppages. However, the demand for newsprint can change quickly, resulting in wide swings in the price of newsprint. Newsprint prices fluctuated between $450 and $590 from 1998 through 2001. The average newsprint price was approximately $514 per metric ton in the fourth quarter of 2001.
Labor costs accounted for approximately 47% of the Company's newspaper operating expenses in 2001, 45% in 2000 and 43% in 1999. A substantial number of the Company's newspaper employees are represented by labor unions. See "Employees."
Competition - The Company's newspapers compete for advertising revenues primarily with other local media, including other local newspapers, television and radio stations, cable television, telephone directories, other Internet sites and direct mail. The rate of development of opportunities in, and competition from, electronic communications services, including the Internet, is increasing. Competition for advertising revenues is based upon audience size and demographics, price and effectiveness.
The Company's newspapers and Internet sites compete with all other information and entertainment media for consumers' discretionary time.
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Scripps Networks
Operations - Programming is telecast on cable and satellite television systems under long-term network distribution contracts.
HGTV features programming focusing on home repair and remodeling, gardening, decorating and other activities associated with the home. Food Network features programming focusing on food and entertaining. DIY features step-by-step instructions, in-depth demonstrations and tips on various topics associated with home improvement, gardening and crafts. Fine Living, which began telecasting in March 2002, targets an upper demographic audience and advertisers in the luxury consumer goods and services markets.
The Company acquired the following operations in the five years ended December 31, 2001:
The Company owned 68% of Food Network at December 31, 2001. Food Network began telecasting in December 1993 and HGTV in December 1994. DIY began telecasting in the fourth quarter of 1999.
According to the Nielsen Homevideo Index ("Nielsen"), HGTV was telecast to 76.4 million homes in December 2001, 67.1 million homes in December 2000 and 59.0 million homes in December 1999. Food Network was telecast to 71.5 million homes in December 2001, 54.4 million homes in December 2000 and 44.2 million homes in December 1999. DIY is not yet rated by Nielsen, however based upon Company records DIY was telecast to approximately 9.5 million homes in December 2001.
Each of the Company's networks operates an Internet site featuring content from its programs and additional information and products of interest to the network's viewers. The Internet sites also permit users to post comments in response to programs and features, and provide applications to enable users to communicate with each other and receive updates in subject areas of their choosing.
Advertising on Scripps Networks is primarily from nationally recognized consumer products and brands. Advertising time on the networks is sold in both the up-front and scatter markets. Advertising contracts generally have terms of one year or less. The ability to sell time for commercial announcements and the rates received are dependent primarily on the size and demographics of the audience, as well as overall demand for advertising time.
On-line advertising primarily includes banner ads and other advertisements. Advertising opportunities on the Internet sites range from simple static banners that appear at the top and bottom of a Web page to more complex advertisements that use animation and allow users to interact with the advertisements. The Internet sites also provide advertisers with sponsorship opportunities, promotions, direct response campaigns and links to commercial sites. The networks generally receive fees for these links and advertisements. On-line advertising revenues were $3,900,000 in 2001, $5,100,000 in 2000, $3,400,000 in 1999 and $700,000 in 1998.
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Affiliate fees represent monthly payments received from cable and satellite television systems pursuant to the terms of the network distribution contracts. Affiliate fees are reported net of amortization of incentive payments (referred to as "launch incentives") that are given to cable and satellite television systems in exchange for long-term distribution contracts. Such contracts may provide for an initial period wherein affiliate fees are waived (referred to as a "free period"). In markets where the Company has broadcast television stations, distribution of the networks may be obtained in exchange for granting cable or satellite television systems the right to carry the local television stations' signals.
In 2001 the Company renewed and extended its distribution contracts with AT&T and AOL Time Warner. The contracts expanded distribution of the networks and provided for distribution of DIY and Fine Living to an additional five million homes. In addition, the contracts provide for the payment of affiliate fees to Food Network beginning in 2004. Food Network's distribution contracts generally provided the network to cable television systems without charge through 2003.
Popularity of the programming with subscribers is a primary factor in obtaining and retaining distribution by cable and satellite television systems. While no assurance can be given regarding renewal of the Company's distribution contracts, the Company has successfully renewed expiring distribution agreements for HGTV and Food Network.
Programming - The cost of programming is a significant portion of cable television network operating expenses. The Company both produces and purchases programming for Scripps Networks. The Company has continually improved the quality and variety of programming and expanded the hours of original programming presented on its networks. The expense recognized for purchased and produced programs for the networks totaled $92,000,000 in 2001, $72,000,000 in 2000, $46,000,000 in 1999 and $31,000,000 in 1998. The Company owns substantially all of the programming presented on its networks.
Competition - In addition to competing with other networks for distribution on cable and satellite television systems, Scripps Networks competes for advertising revenues with other local and national media, including other cable television networks, television stations, radio stations, newspapers, Internet sites and direct mail. Competition for advertising revenues is based upon audience size and demographics, price and effectiveness. Scripps Networks compete for consumers' discretionary time with all other information and entertainment media.
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Broadcast Television
Operations - The Company acquired television station KMCI in Lawrence, Kansas, in 2000. The Company had operated the station under a Local Marketing Agreement ("LMA") since 1996. Revenues from KMCI were included in the Company's results of operations while the station was operated under the LMA.
Broadcast television includes nine network-affiliated television stations. The stations rely on local sales operations for local advertising and national advertising agencies for obtaining national advertising.
Revenues are derived primarily from the sale of time to businesses for commercial messages that appear during entertainment and news programming. Local and national advertising refer to time purchased by local, regional and national businesses; political refers to time purchased by campaigns for elective office and campaigns for political issues. Automobile advertising accounts for approximately one-fourth of the Company's local and national advertising revenues.
Advertising rates are dependent primarily on the size and demographics of the audience as well as overall demand for advertising time.
The first and third quarters of each year generally have lower advertising revenues than the second and fourth quarters. The magnitude of political advertising in even-numbered years, when congressional and presidential elections occur, makes it difficult to achieve year-over-year increases in operating results in odd-numbered years.
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Network Affiliation and Programming - Nine of the Company's ten television stations are affiliated with national television networks. The networks offer a variety of programs to affiliated stations, which have the right of first refusal before such programming may be offered to other television stations in the same market. Networks sell most of the advertising within the programs and compensate affiliated stations for carrying network programming.
In 2001 the Company renegotiated and extended its affiliation agreements with NBC, which were originally scheduled to expire in 2004. Under the new agreements, which extend though 2009, network compensation will be substantially reduced. Network compensation revenue at the Company's three NBC affiliates is expected to be approximately $300,000 in 2002. These stations recognized network compensation revenue totaling $1,400,000 in 2001 and $2,400,000 in 2000. The Company's six ABC network affiliation agreements expire from 2004 through 2006.
In addition to network programs, the Company's television stations broadcast locally produced programs, syndicated programs, sports events, movies, public service programs and "niche" programs focusing on topics of interest in the stations' local markets. The costs of locally produced and syndicated programming are a significant portion of broadcast television operating expenses. The price of syndicated programming is based primarily upon demand for the programming from other television stations within the market.
News is the focus of the Company's locally produced programming. Advertising during local news programs on the Company's stations account for approximately 30% of revenues.
Competition - The Company's television stations compete for advertising revenues primarily with other local media, including other television stations, radio stations, cable television networks, newspapers, other Internet sites and direct mail. Competition for advertising revenue is based upon audience size and demographics, price and effectiveness. Television stations compete for consumers' discretionary time with all other information and entertainment media.
The Company's television stations have experienced declines in their average audience share in recent years due to the creation of new networks and increased audience share of alternative service providers such as traditional cable, "wireless" cable and direct broadcast satellite television. Continuing technological advances will improve the capability of alternative service providers to offer video services in competition with terrestrial broadcasting. The degree of competition from such service providers is expected to increase. The Company intends to undertake upgrades in its services, including development of digital television broadcasting, to maintain its competitive posture as well as to comply with government requirements. Technological advances in interactive media services will further increase these competitive pressures.
The Company's stations have emphasized locally produced news and entertainment programming in recent years to distinguish the stations from the competition and to control programming costs.
Federal Regulation of Broadcasting - Television broadcasting is subject to the jurisdiction of the Federal Communications Commission ("FCC") pursuant to the Communications Act of 1934, as amended ("Communications Act"). The Communications Act prohibits the operation of television broadcasting stations except in accordance with a license issued by the FCC and empowers the FCC to revoke, modify and renew broadcasting licenses, approve the transfer of control of any corporation holding such licenses, determine the location of stations, regulate the equipment used by stations and adopt and enforce necessary regulations. The FCC also adopts and enforces regulations concerning station programming, including children's and political programming.
The Telecommunications Act of 1996 (the "1996 Act") significantly relaxed the regulatory environment applicable to broadcasters. Under the 1996 Act, television broadcast licenses may be granted for a term of eight years, rather than five, and they remain renewable upon request. While there can be no assurance regarding the renewal of the Company's television broadcast licenses, the Company has never had a license revoked, has never been denied a renewal and all previous renewals have been for the maximum term.
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FCC regulations govern the multiple ownership of television stations and other media. Under the multiple ownership rule, a license for a television station will generally not be granted or renewed if the grant of the license would result in (i) the applicant owning more than one, or in some markets under certain conditions, two television stations in the same market, or (ii) the grant of the license would result in the applicant's owning, operating, controlling, or having an interest in television stations whose total national audience reach exceeds 35% of all television households. The FCC rules also generally prohibit "cross-ownership" of a television station and daily newspaper or cable television system in the same service area. The Company's television station and daily newspaper in Cincinnati were owned by the Company at the time the cross-ownership rules were enacted and enjoy "grandfathered" status. These properties would become subject to the cross-ownership rules upon their sale. The 1996 Act directed the FCC to periodically review all its ownership rules, and a review of the newspaper/broadcast television cross-ownership is now underway. Also, the D.C. Circuit Court of Appeals has recently directed the FCC to repeal its restriction on a cable television system owning a television station in the same market and has directed the FCC to reconsider its decision not to rescind the limit on television station owners' national audience reach.
The FCC has adopted a series of orders to implement a transition from the current analog system of broadcast television to a digital transmission system. It has granted each television station a second channel on which to begin offering digital service and it currently plans for the transition to be completed by 2006, at which time each station should have returned one of its two channels. The FCC can extend this deadline, and most observers expect that the deadline will be extended.
A substantial number of technical, regulatory and market-related issues remain unresolved regarding digital television, including the timing of the transition, programming and other rules the FCC may adopt, the willingness of cable systems to carry the broadcasters' digital offerings and the level of consumer demand for the new service. The Company cannot predict the effect of these uncertainties on the Company's offering of digital service or the Company's business.
Under the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Act"), each television broadcast station gained "must-carry" rights on any cable system defined as "local" with respect to that station. Stations may waive their must-carry rights and instead negotiate retransmission consent agreements with local cable companies. The Company's stations have generally elected to negotiate retransmission consent agreements with cable companies. While the FCC has recently announced that a station's primary video transmission will enjoy must-carry rights after the transition to digital broadcasting, the FCC has so far declined to require carriage of a digital signal in addition to the station's analog signal.
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Licensing and Other Media
Operations - Licensing and other media aggregates the Company's operating segments that are too small to warrant separate reporting, including syndication and licensing of news features and comics, and the divested television program production and independent telephone directories.
The Company acquired or divested the following operations in the five years ended December 31, 2001:
The Company, under the trade name United Media, is a leading distributor of news columns, comics and other features for the newspaper industry. Included among these features is "Peanuts," one of the most successful strips in the history of comic art.
United Media owns and licenses worldwide copyrights relating to "Peanuts," "Dilbert" and other character properties for use on numerous products, including plush toys, greeting cards and apparel, for promotional purposes and for exhibit on television and other media. Charles Schulz, the creator of "Peanuts," died in February 2000. The Company continues syndication of previously published "Peanuts" strips, and retains the rights to license the characters. "Peanuts" provides approximately 85% of the Company's licensing revenues. Approximately 60% of licensing revenues are earned in international markets, with the Japanese market providing approximately two-thirds of international revenue.
Merchandise, literary and exhibition licensing revenues are generally a negotiated percentage of the licensee's sales. The Company generally negotiates a fixed fee for the use of its copyrighted characters for promotional and advertising purposes. The Company generally pays a percentage of gross syndication and licensing royalties to the creators of these properties.
Competition - The Company's newspaper feature distribution operations compete for a limited amount of newspaper space with other distributors of news columns, comics and other features. Competition is primarily based on price and popularity of the features. Popularity of licensed characters is a primary factor in obtaining and renewing merchandise and promotional licenses.
Venture Capital and Other Investments
Through its Scripps Ventures Funds and other entities the Company invests in businesses focusing on new media technology. The Company recognized gains (losses), net of fund management expenses, totaling $5,100,000 in 2001, ($24,800,000) in 2000, $500,000 in 1999 and ($2,700,000) in 1997. Included in 2001 net investment results are net gains of $36,900,000 related to the Company's investment in AOL Time Warner.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" and Note 7 to the Consolidated Financial Statements.
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Employees
As of December 31, 2001, the Company had approximately 7,400 full-time employees, of whom approximately 5,000 were with newspapers, 800 with Scripps Networks, 1,300 with broadcast television and 100 with licensing and other media. Various labor unions represent approximately 1,100 employees, primarily in newspapers. The present operations of the Company have not experienced any work stoppages since 1985. The Company considers its relationship with employees to be generally satisfactory.
ITEM 2. PROPERTIES
Newspapers require business and editorial offices and printing plants.
Scripps Networks requires offices and studios and other real and personal property to produce programs and to transmit the network programming via satellite. Scripps Networks operates from a production facility in Knoxville and leased facilities in New York.
Broadcast Television requires offices and studios and other real property for towers upon which broadcasting transmitters and antenna equipment are located.
The Company owns substantially all of the properties used by its operations. Management believes the Company's facilities are generally well maintained and are sufficient to serve its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of business, such as defamation actions and various governmental and administrative proceedings primarily relating to renewal of broadcast licenses, none of which is expected to result in material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common shares are traded on the New York Stock Exchange ("NYSE") under the symbol "SSP." There are approximately 11,500 owners of the Company's Class A Common shares, based on security position listings, and 18 owners of the Company's Common Voting shares (which do not have a public market). The Company has declared cash dividends in every year since its incorporation in 1922. Future dividends are, however, subject to the Company's earnings, financial condition and capital requirements.
The range of market prices of the Company's Class A Common shares, which represents the high and low sales prices for each full quarterly period, and quarterly cash dividends are as follows:
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this item is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers
Executive officers serve at the pleasure of the Board of Directors. Certain information about such officers appears in the table below.
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Directors
The information required by Item 10 of Form 10-K relating to directors of the Company is incorporated by reference to the material captioned "Election of Directors" in the Company's definitive proxy statement for the Annual Meeting of Shareholders ("Proxy Statement"). The Proxy Statement will be filed with the Securities and Exchange Commission on or before April 28, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the material captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference to the material captioned "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference to the material captioned "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Supplemental Schedules
Exhibits
The information required by this item appears at page E-1 of this Form 10-K.
Reports on Form 8-K
No Current Reports on Form 8-K were filed in the fourth quarter of 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on March 28, 2002.
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THE E. W. SCRIPPS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENT INFORMATION
F - 1
Note: Certain amounts may not foot as each is rounded independently.
F-2
Notes to Selected Financial Data
The income statement and cash flow data for the eleven years ended December 31, 2001, and the balance sheet data as of the same dates have been derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere herein. All per share amounts are presented on a diluted basis. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. See page F-7.
(2) Operating units other than cable television systems sold prior to December 31, 2001.
F-3
F-4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates in three reportable segments: newspapers, cable television networks (referred to as "Scripps Networks"), and broadcast television. Each of the Company's businesses relies upon advertising as a primary source of revenue. Advertising comprises 75% to 80% of the Company's total revenues. Declines in advertising spending, particularly in recessionary periods, adversely affect the newspaper, cable television network and broadcast television business.
ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make a variety of decisions which affect the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant circumstances. Note 1 to the Consolidated Financial Statements provides a summary of the significant accounting policies followed in the preparation of the financial statements; other footnotes describe various elements of the financial statements and the assumptions on which specific amounts were determined. While actual results could, in fact, differ from those estimated at the time of preparation of the financial statements, management is committed to preparing financial statements incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
FORWARD-LOOKING STATEMENTS
This discussion and the information contained in the notes to the consolidated financial statements contain certain forward-looking statements that are based on management's current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond the Company's control, include changes in advertising demand and other economic conditions; consumers' taste; newsprint prices; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words "believe," "expect," "anticipate," "estimate," "intend" and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty.
RESULTS OF OPERATIONS
Acquisitions and divestitures can affect the comparability of year-over-year reported results. The accompanying tables include the results of operations for acquired operations from the dates of acquisition. Divested operating units are removed from segment operating results and reported separately because management believes they impede analysis of the Company's on-going operations.
See Note 3 to the Consolidated Financial Statements on page F-27 regarding acquisitions and divestitures in the three years ending December 31, 2001.
The application for a 50-year Joint Operating Agency ("JOA") between the Company's Denver Rocky Mountain News ("RMN") and MediaNews Group Inc.'s ("MediaNews") Denver Post was approved in January 2001 by the U.S. Department of Justice. The JOA commenced operations on January 22, 2001. Denver Publishing Company, a wholly-owned subsidiary of the Company, received a 50% interest in the JOA in exchange for the contribution of most of its assets to the JOA and the payment of $60 million to MediaNews.
The Company's 50% share of the operating profit (loss) of the Denver JOA is reported as "Share of Joint Operating Agency Profits" in its financial statements. Editorial costs associated with the RMN are included in operating expenses. The Company's financial statements do not include advertising and other revenue of the JOA, nor the costs to produce, distribute and market the newspapers, nor related depreciation. To enhance comparability of year-over-year operating results, the Company reports the RMN separately in Management's Discussion and Analysis.
All per share disclosures are on a diluted basis. Consolidated results of operations are presented on the following page.
F - 5
F - 6
Earnings before interest, income taxes, depreciation and amortization ("EBITDA") is included in the discussion of results of operations because:
EBITDA should not, however, be construed as an alternative measure of the amount of the Company's income or cash flows from operating activities.
Interest expense decreased in 2001 primarily due to lower rates on variable rate credit facilities, and increased in 2000 primarily due to higher short-term interest rates. The weighted-average interest rate was 4.2% in 2001, 6.4% in 2000, and 5.3% in 1999. The Company is currently rolling over short-term debt at an effective 90-day yield of 1.8%. Average daily borrowings under short-term credit facilities were $504,000,000 in 2001, $527,000,000 in 2000 and $537,000,000 in 1999. The average balance of all interest bearing obligations was $741,000,000 in 2001, $767,000,000 in 2000 and $780,000,000 in 1999.
Amortization of intangible assets reduced earnings per share approximately $.39 in 2001, $.37 in 2000 and $.35 in 1999.
The Company adopted Financial Accounting Standard ("FAS") No. 142 – Goodwill and Other Intangible Assets effective January 1, 2002. See Note 2 to the Consolidated Financial Statements. If FAS No. 142's provisions regarding not amortizing goodwill and other intangible assets had been effective in 2001, amortization of goodwill and other intangible assets would have been $38,000,000 less, increasing earnings per share by $.35. The effective income tax rate on core operations would have been 39.4% under the same pro forma assumptions. The effective income tax rate in 2002 is expected to be approximately 39%.
Capital expenditures in 2002 are estimated to be approximately $78,000,000.
F - 7
NEWSPAPERS - RMN operating results are presented separately as a single line item to enhance comparability of year-over-year results. Excluding Divested Operating Units and unusual items, operating results were as follows:
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The demand for advertising was weak in most of the Company's markets in 2001, particularly local retail and help-wanted classified advertising. On a pro forma basis, assuming all acquisitions had been completed as of January 1, 1999, local advertising decreased 5.6% in 2001 and increased 1.9% in 2000; classified advertising decreased 7.3% in 2001 and increased 5.8% in 2000; circulation revenue increased 2.6% in 2001 and decreased 1.2% in 2000.
The average price of newsprint increased 6% in 2001 and 7% in 2000, after declining 15% in 1999. The average price of newsprint was $573 per metric ton in 2001, and $514 per metric ton in the fourth quarter.
Circulation and distribution costs increased primarily due to efforts to gain circulation at the Company's larger newspapers.
Operating losses in Denver were $15,900,000 in 2001 and $24,100,000 in 2000. In the fourth quarter, operating losses narrowed to $1,700,000 in 2001 from $3,100,000 in 2000. The Company's operating results in Denver have improved due to advertising and circulation rate increases and cost-cutting measures implemented by the JOA, including publication of combined weekend editions and a single classified advertising section distributed in both newspapers. However, in addition to the soft demand for advertising in general, major metropolitan markets in the U.S., including Denver, have experienced sharp decreases in help-wanted advertising. The weak demand for advertising has reduced the immediate improvement in operating results that was expected at the outset of the JOA.
Capital expenditures in 2002 are estimated to be approximately $39,000,000. Expected capital expenditures in 2002 include construction of a new production facility for the Knoxville newspaper. Depreciation is expected to be approximately $25,000,000. Amortization is expected to be approximately $700,000.
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SCRIPPS NETWORKS - Operating results, excluding unusual items, were as follows:
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According to the Nielsen Homevideo Index, HGTV was telecast to 76.4 million homes in December 2001, 67.1 million homes in December 2000, 59.0 million homes in December 1999, and 48.4 million homes in December 1998. Food Network was telecast to 71.5 million homes in December 2001, 54.4 million homes in December 2000, 44.2 million homes in December 1999, and 37.1 million homes in December 1998.
The advertising recession in 2001 contributed to Scripps Networks' reduced growth in advertising revenue.
The Company recognizes affiliate fees received from cable and satellite television systems pursuant to network distribution contracts over the terms of the contracts, including any initial free period. Launch incentives are amortized based upon the percentage of the current period's total revenues earned on the contract to the estimated total of such revenues over the duration of the contract. See Note 1 to the Consolidated Financial Statements.
In 2001 Food Network renewed and extended its network distribution contracts with AT&T and AOL Time Warner. The agreements expand distribution of Food Network and provide for payment of affiliate fees to Food Network beginning in 2004. Food Network's network distribution contracts generally provided the network to cable television systems without charge through 2003. In exchange for the agreement to pay affiliate fees and expanded distribution, Food Network agreed to make additional launch incentive payments.
Affiliate fee revenue for HGTV and Food Network is expected to increase approximately 9% in 2002.
Programming and production expense has increased as the Company improves the quality and variety of programming and expands the hours of original programming presented on its networks. The Company owns the rights to substantially all of the programming it produces and expects to telecast the programs over several years. Programming and production expense in 2002 is expected to increase approximately 13% for HGTV and approximately 27% for Food Network, and approximately 18% for the two networks combined.
The Company launched DIY, its third network, in the fourth quarter of 1999, and launched a fourth network, Fine Living, in the first quarter of 2002. Start-up costs associated with DIY and Fine Living reduced EBITDA by $22,100,000 in 2001, $10,900,000 in 2000, and $3,700,000 in 1999. Operating losses for DIY and Fine Living are expected to reduce EBITDA by approximately $28,000,000 to $33,000,000 in 2002. The cash required by DIY and Fine Living will substantially exceed the reported operating losses in 2002 because of investments in programming and launch incentive payments to cable television systems.
Excluding losses associated with the launch of new networks, EBITDA increased 23% in 2001 and more than doubled in 2000.
Capital expenditures in 1999 included expansion of the studio and office facilities for HGTV and DIY. Capital expenditures in 2002 are expected to be approximately $14,000,000. Depreciation is expected to be approximately $10,000,000. Amortization is expected to be approximately $3,000,000.
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BROADCAST TELEVISION - Operating results, excluding unusual items, were as follows:
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Average audience shares for broadcast television stations have declined in recent years due to competition from new broadcast television networks and increases in the audience share of cable television networks. Technological advancement in interactive media services is expected to further increase these competitive pressures. In addition, the Company continues to be adversely affected by its relatively high exposure to the ABC television network, for which audience levels have generally declined in recent years. Six of the Company's 10 television stations are ABC affiliates. Those six stations provide more than 75% of the Company's total broadcast television revenues.
Year-over-year revenue comparisons are difficult because of the political advertising revenue in even-numbered years. Demand for advertising was weak in the Company's television markets in 2001. The return of political advertising and the Olympics are expected to boost EBITDA in 2002.
In 2001 the Company renegotiated and extended its affiliation agreements with NBC. Originally scheduled to expire in 2004, network compensation will be sharply reduced under the new agreements, which extend through 2009. The Company's three NBC affiliates recognized $2,400,000 in network compensation in 2000 and $1,400,000 in 2001. Network compensation at the Company's NBC affiliates is expected to be approximately $300,000 in 2002. The Company's ABC affiliation agreements expire in 2004 through 2006.
Operating expenses, excluding depreciation and amortization, are expected to increase approximately 2% in 2002.
Capital expenditures include the construction of a new building for the West Palm Beach station in 2000. Capital spending was also higher in 2000 and 1999 as five of the Company's stations were equipped to broadcast a digital signal. The Company is required to begin digital broadcasting in all of its markets by May 2002. Capital expenditures in 2002 are expected to be approximately $23,000,000. Depreciation in 2002 is expected to be approximately $21,000,000. Amortization is expected to be approximately $100,000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operating activities. Advertising provides 75% to 80% of the Company's total revenues, so the Company's cash flow from operating activities is adversely affected during recessionary periods. The Company's cash flow from operating activities was $206,000,000 in 2001 and $256,000,000 in 2000. Lower advertising revenues, investments in Scripps Network's programming and increased launch incentive payments for Scripps Networks were the primary causes of the decrease. The Company expects to continue to make similar investments in programming and to continue to increase the distribution of Scripps Networks.
Despite the advertising recession in 2001, cash flow from operating activities exceeded capital expenditures and cash dividends by $87,100,000, and is expected to substantially exceed capital expenditures and cash dividends in 2002, as it has since 1992.
The excess cash flow from existing businesses and the Company's substantial borrowing capacity have been used primarily to fund acquisitions, investments, and to develop new businesses. There are essentially no legal or other restrictions on the transfer of funds among the Company's business segments.
A summary of the Company's contractual cash commitments as of December 31, 2001, is as follows:
Repurchase of a total of 6,000,000 Class A Common shares was authorized by the Board of Directors in 1998. The balance remaining on this authorization is 1,730,000 shares.
Net debt (borrowings less cash equivalent and other short-term investments) increased $8,000,000 in 2001, to $722,000,000 at December 31, 2001. Net debt includes commercial paper borrowings totaling $514,000,000, with average maturities of 90 days or less. Commercial paper borrowings are supported by bank credit facilities which permit maximum borrowings of $675,000,000 and expire in September 2002. This facility is expected to be replaced with a similar facility prior to expiration. The Company's access to commercial paper markets can be affected by macroeconomic factors outside of its control. In addition to macroeconomic factors, the Company's access to commercial paper markets and its borrowing costs are affected by short and long-term debt ratings assigned by independent rating agencies.
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MARKET RISK
The Company's earnings and cash flow can be affected by, among other things, economic conditions, interest rate changes, foreign currency fluctuations (primarily in the exchange rate for the Japanese yen) and changes in the price of newsprint. See "Business - Newspapers - Raw Materials and Labor Costs." The Company is also exposed to changes in the market value of its investments.
The Company may use foreign currency forward and option contracts to hedge its cash flow exposures that are denominated in Japanese yen and forward contracts to reduce the risk of changes in the price of newsprint on anticipated newsprint purchases. The Company held no foreign currency or newsprint derivative financial instruments at December 31, 2001, or during the year then ended.
The following table presents additional information about the Company's market-risk-sensitive financial instruments:
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See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The E. W. Scripps Company ("Company") operates in three reportable segments: newspapers, cable television networks (referred to as "Scripps Networks") and broadcast television.
Newspapers include 21 daily newspapers in the U.S., and derive revenue primarily from the sale of advertising space to local and national advertisers and from the sale of the newspapers to readers.
Scripps Networks includes three national television networks that are distributed by cable and satellite television systems: Home & Garden Television ("HGTV"), Food Network and Do It Yourself ("DIY"), and the Company's 12% interest in FOX SportsSouth, a regional television network. The Company owned 68.0% of Food Network on December 31, 2001. The Company will launch Fine Living, its fourth national network, in March 2002. The Company owns 94% of Fine Living. Revenues are derived primarily from the sale of advertising time and from affiliate fees paid by distributors.
Broadcast television includes ten stations, nine of which are affiliated with national broadcast networks. Broadcast television derives revenue from the sale of advertising time to local and national advertisers and from affiliated networks for broadcasting their programs.
The relative importance of each line of business is indicated in the segment information presented in Note 13. Licensing and other media aggregates the Company's operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.
The Company's operations are geographically dispersed and its customer base is diverse. However, more than 75% of the Company's operating revenues are derived from advertising. Operating results can be affected by changes in the demand for advertising both nationally and in individual markets.
The Company grants credit to substantially all of its customers. Management believes bad debt losses resulting from default by a single customer, or defaults by customers in any depressed region or business sector, would not have a material effect on the Company's financial position.
Use of Estimates - Preparation of the financial statements requires the use of estimates. The Company's financial statements include estimates for such items as income taxes payable and self-insured risks. The Company self-insures for employees' medical and disability income benefits, workers' compensation and general liability. The recorded liability for self-insured risks is calculated using actuarial methods and is not discounted. The recorded liability for self-insured risks totaled $22,700,000 at December 31, 2001. Management does not believe it is likely that its estimates for such items will change materially in the near term.
Consolidation - The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary companies.
Revenue Recognition - Significant revenue recognition policies are as follows:
Program Rights and Production Costs - Program rights are recorded when licensed programs become available for broadcast. Amortization is computed using the straight-line method based on the license period or based on usage, whichever yields the greater accumulated amortization for each program. The liability for program rights is not discounted for imputed interest.
Production costs are primarily costs incurred in the production of internally developed programming. These costs are amortized on a straight-line basis over the estimated useful lives of the programs, generally three years. Program and production costs are stated at the lower of unamortized cost or fair value. The portion of the unamortized balance expected to be amortized within one year is classified as a current asset.
Program rights liabilities payable within the next twelve months are included in accounts payable. Noncurrent program rights liabilities are included in other long-term obligations.
Long-Lived Assets - Long-lived assets used in business operations are recorded at unamortized cost. Management reviews long-lived assets, including related goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amounts of the assets may not be recoverable. Recoverability is determined by comparing the forecasted undiscounted cash flows of the operation to which the assets relate to the carrying amount of the assets. If the operation is determined to be unable to recover the carrying amount of its assets, then goodwill and other intangible assets are written down first, followed by other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Goodwill and Other Intangible Assets - Goodwill represents the cost of acquisitions in excess of the acquired businesses' tangible assets and identifiable intangible assets. Audience and newspaper subscriber base represents the cost of acquisitions assigned to the potential to deliver advertising to the viewers and readers of the acquired business' programming and publications. Amortization is calculated on a straight-line basis over 40 years. Upon adoption of Financial Accounting Standard ("FAS") No. 142 – Goodwill and Other Intangible Assets these assets will be subsumed into goodwill (see Note 2).
Broadcast television network affiliation represents the cost of acquisitions assigned to audience recognition of the acquired television station as a network affiliate. Broadcast television network affiliation and FCC licenses are amortized on a straight-line basis over 40 years. Upon adoption of FAS No. 142 amortization of these intangible assets will cease.
Cable network affiliation represents the cost of acquisitions assigned to the potential of the cable television network to deliver advertising to cable and satellite television subscribers during the terms of existing network distribution contracts. Amortization is calculated on a straight-line basis over the greater of five years or the remaining duration of the network distribution contracts. Customer lists and other intangible assets are amortized on a straight-line basis over periods of up to 20 years.
Property, Plant and Equipment - Depreciation is computed using the straight-line method over maximum estimated useful lives as follows:
Income Taxes - Deferred income taxes are provided for temporary differences between the tax basis and reported amounts of assets and liabilities that will result in taxable or deductible amounts in future years. The Company's temporary differences primarily result from accelerated depreciation and amortization for tax purposes, investment gains and losses not yet recognized for tax purposes and accrued expenses not deductible for tax purposes until paid.
Investments - The Company has invested in various securities, including public and private companies. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Consolidated Statements of Income.
The Company records its investments at fair value, except for securities accounted for under the equity method or that do not trade in a public market. All investments recorded at fair value have been classified as available for sale. The fair value of available-for-sale investments is determined by quoted market prices. The cost basis of available-for-sale securities is adjusted when a decline in market value is determined to be other than temporary, with the resulting adjustment charged against net income. The difference between adjusted cost basis and fair value, net of related tax effects, is recorded in the accumulated other comprehensive income component of stockholders' equity. Investments in private companies are recorded at cost, net of impairment write-downs, because no readily determinable market price is available.
Investments in 20%- to 50%-controlled companies and in all joint ventures are accounted for using the equity method.
The cost of securities sold is determined by specific identification.
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Newspaper Joint Operating Agencies - A JOA combines all but the editorial operations of two competing newspapers in a market in order to reduce aggregate expenses and take advantage of economies of scale, thereby allowing the continuing operation of both newspapers in that market. The Newspaper Preservation Act of 1970 provides a limited exemption from anti-trust laws, generally permitting the continuance of JOAs in existence prior to its enactment and the formation, under certain circumstances, of new JOAs between newspapers.
The Company is a partner in JOAs in four markets. The JOA between the Company's Denver Rocky Mountain News and MediaNews Group Inc.'s Denver Post was approved by the U.S. Attorney General in January 2001. The 50-year agreement created a new entity called the Denver Newspaper Agency L.L.C., which is 50%-owned by each partner. Both partners contributed certain assets used in the operations of their newspapers to the new entity. In addition, the Company paid $60,000,000 to MediaNews Group Inc. The JOA commenced operations on January 22, 2001.
The Company receives a 50% share of the operating profits of the Denver JOA, and between 20% and 40% of the operating profits in the other three markets. The Company includes its portion of JOA operating profits in operating revenues, and includes its residual interest in the net assets of the Denver and Albuquerque JOAs in Investments in the Consolidated Balance Sheets. The Company does not include any assets or liabilities related to its other JOAs in its Consolidated Balance Sheets because the Company has no residual interest in the net assets of those JOAs.
Inventories - Inventories are stated at the lower of cost or market. The cost of inventories is computed using the first in, first out ("FIFO") method.
Stock-Based Compensation - The Company's incentive plans provide for awards of options to purchase Class A Common shares and awards of Class A Common shares. Stock options are awarded to purchase Class A Common shares at not less than 100% of the fair market value on the date of the award. Stock options and awards of Class A Common shares vest over an incentive period conditioned upon the individual's employment through that period. The Company measures compensation expense using the intrinsic-value-based method (see Note 15).
Cash Equivalent and Short-term Investments - Cash equivalents represent debt instruments with an original maturity of less than three months. Short-term investments represent excess cash invested in securities not meeting the criteria to be classified as cash equivalents. Cash equivalent and short-term investments are carried at cost plus accrued income, which approximates fair value.
Risk Management Contracts - The Company does not hold derivative financial instruments for trading or speculative purposes, and does not hold leveraged contracts. The impact of risk management activities on the Company's financial position, its results of operations, and its cash flows is immaterial. The Company held no derivative financial instruments in the three years ended December 31, 2001.
Net Income Per Share - The following table presents additional information about basic and diluted weighted-average shares outstanding:
Reclassifications - For comparative purposes, certain 2000 and 1999 amounts have been reclassified to conform to 2001 classifications.
2. ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting Changes - The Company adopted FAS No. 133 – Accounting for Derivative Financial Instruments and Hedging Activities effective January 1, 2001. Adoption of this standard had no effect on the Company's financial statements.
The Company adopted FAS No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets in 2001. Adoption of this standard had no effect on the Company's financial statements.
In 2001 the Company adopted the accounting method prescribed in Emerging Issues Task Force Issue ("EITF") 00-25 – Vendor Income Statement Classification of Consideration Paid to a Reseller of the Vendor's Products. EITF 00-25 requires consideration paid to customers to be deducted from revenue. Prior to adoption of this accounting method, the Company had classified amortization of launch incentives paid to cable and satellite television systems as an operating expense in its Consolidated Statements of Income. Previously issued financial statements have been reclassified. The reclassification had no effect on the Company's reported net income or financial position.
Recently Issued Accounting Standards - FAS No. 141 - Business Combinations and FAS No. 142 - Goodwill and Other Intangible Assets were issued in August 2001. FAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. FAS No. 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged are recognized as an asset apart from goodwill. Intangible assets that do not meet the requirements for recognition apart from goodwill are subsumed into goodwill.
The Company adopted FAS No. 142 effective January 1, 2002. Recorded goodwill and intangible assets with indefinite lives are no longer amortized, but instead are tested for impairment at least annually. Other intangible assets are reviewed for impairment in accordance with FAS No. 144. The Company must complete a transitional evaluation of whether goodwill is impaired prior to June 30, 2002. To complete the transitional impairment evaluation, the Company must (i) identify reporting units, (ii) determine the carrying value of each reporting unit by assigning the assets and liabilities, including existing goodwill and other intangible assets, to those reporting units, and (iii) determine whether the carrying value of the reporting unit exceeds its fair value. If the carrying value of any reporting unit exceeds its fair value, then detailed fair values for each of the assigned assets and liabilities (excluding goodwill) and liabilities will be determined to calculate the amount of goodwill impairment, if any. This second step is required to be completed as soon as possible, but no later than December 31, 2002. Any transitional impairment loss will be recorded as the cumulative effect of a change in accounting principle.
If the non-amortization provisions of FAS No. 142 had been effective for all periods presented, reported results of operations would have been as follows:
Information regarding the Company's goodwill and other intangible assets as of the date of adoption of FAS No. 142 is as follows:
Amortization for assets recorded as of December 31, 2001, for each of the five succeeding years is presented below. Amortization will be greater than the reported amounts because additional assets will be acquired.
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3. ACQUISITIONS AND DIVESTITURES
Acquisitions
The Company acquired an additional 4.0% interest in Food Network.
The Company acquired the daily newspaper in Fort Pierce, Florida, in exchange for its newspaper in Destin, Florida, and cash; the daily newspaper in Henderson, Kentucky; the weekly newspaper in Marco Island, Florida; and television station KMCI in Lawrence, Kansas.
The Company acquired an additional 6.9% interest in Food Network.
The following table presents additional information about the acquisitions:
The acquisitions have been accounted for as purchases. The allocations of the purchase prices in 2001 are based upon preliminary appraised values of the assets acquired and liabilities assumed, and are therefore subject to change. Operating results are included in the Consolidated Statements of Income from the dates of acquisitions, with the exception of KMCI whose results were included while the Company operated the station under a contract with the previous owner. Pro forma results are not presented because the combined results of operations would not be significantly different than the reported amounts.
Divestitures
The Company sold its independent telephone directories and traded its Destin, Florida, newspaper and cash for the daily newspaper in Fort Pierce, Florida. The sales and trade resulted in net gains of $6,196,000, $4,000,000 after-tax ($.05 per share).
Included in the consolidated financial statements were the following results of divested operating units (excluding gains on sales):
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5. INCOME TAXES
The Company's 1992 through 1995 consolidated federal income tax returns are currently under examination by the IRS. In 2000 the Company reduced its liability for prior year income taxes by $4,200,000. Management believes that adequate provision for income taxes has been made for all open years.
The approximate effects of the temporary differences giving rise to the Company's deferred income tax liabilities (assets) were as follows:
The Company's state net operating loss carryforwards expire from 2003 through 2016. At each balance sheet date management estimates the amount of state net operating loss carryforwards that are not expected to be used prior to expiration of the carryforward period. The tax effect of these unused state net operating loss carryforwards is included in the valuation allowance. Based upon expected taxable income of subsidiary companies with state net operating loss carryforwards during the carryforward periods, the Company reduced its valuation allowance by $3,000,000 in 2000.
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The provision for income taxes consisted of the following:
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6. LONG-TERM DEBT
Long-term debt consisted of the following:
The Company has a Competitive Advance and Revolving Credit Facility Agreement, which expires in September 2002 and permits aggregate borrowings up to $675,000,000 (the "Variable Rate Credit Facilities"). Borrowings are available on a committed revolving credit basis at the Company's choice of three short-term rates or through an auction procedure at the time of each borrowing. The Variable Rate Credit Facilities are also used by the Company in whole or in part, in lieu of direct borrowings, as credit support for its commercial paper. The weighted-average interest rates on the Variable Rate Credit Facilities at December 31 was 2.0% in 2001 and 6.6% in 2000.
Certain long-term debt agreements contain maintenance requirements for net worth and coverage of interest expense and restrictions on incurrence of additional indebtedness. The Company is in compliance with all debt covenants.
Current maturities of long-term debt are classified as long-term to the extent they can be refinanced under existing long-term credit commitments. The Variable Rate Credit Facilities are expected to be replaced with a similar facility prior to expiration.
Interest costs capitalized were $700,000 in 2001, $200,000 in 2000, and $400,000 in 1999.
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7. INVESTMENTS
Investments consisted of the following:
Investments available for sale represent securities in publicly traded companies. Investments available for sale are recorded at fair value. Fair value is based upon the closing price of the security on the reporting date.
The Company exchanged its investment in Time Warner for America Online, which acquired Time Warner, in the first quarter of 2001. The Company sold 1,092,000 shares of Centra Software in the second quarter of 2001.
Other equity investments include securities that do not trade in public markets, so they do not have readily determinable fair values. Management estimates the fair value of these securities is approximately $60,000,000. However, many of the investees have had no rounds of equity financing in the past two years and there can be no assurance as to the amounts the Company would receive if the securities were sold.
The Company's Scripps Ventures Funds I and II invest in new businesses focusing primarily on new media technology. Scripps Ventures I invested $54,000,000. The managers' compensation includes a share of that portfolio's cumulative net gain through December 2002 if a specified minimum return is achieved. The incentive compensation accrual was zero at December 31, 2001, and will be subject to change as the net gain changes through December 2002. Scripps Ventures II is authorized to invest up to $100,000,000, of which $44,000,000 was invested as of December 31, 2001. The managers have a minority equity interest in the return on Scripps Ventures II's investments if a specified minimum return is achieved.
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8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arising from business acquisitions consisted of the following:
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10. OTHER LONG-TERM OBLIGATIONS AND MINORITY INTERESTS
Other long-term obligations and minority interests consisted of the following:
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents additional information about the change in certain working capital accounts:
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12. EMPLOYEE BENEFIT PLANS
Retirement plans expense consisted of the following:
The following table presents information about the Company's employee benefit plan assets and obligations:
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Assumptions used in the accounting for the defined benefit plans were as follows:
Management believes the discount rate plus two percentage points is the best estimate of the long-term return on plan assets, and the discount rate minus two and one-half percentage points is the best estimate of the long-term increase in compensation levels. Therefore, when the discount rate changes, management's expectation for the future long-term rate of return on plan assets and increase in compensation levels changes in tandem. For 2002 the assumed return on plan assets is 9.5% and the assumed rate of increase in compensation levels is 5.0%.
Plan assets consist of marketable equity and fixed-income securities.
13. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer different products and services. The Company evaluates the operating performance of its segments based primarily on earnings before interest, income taxes, depreciation and amortization ("EBITDA"), excluding divested operating units (see Note 3), unusual items (see Note 4) and all amounts classified as other credits (charges) in the Consolidated Statements of Income. No single customer provides more than 10% of the Company's revenue. International revenues are primarily derived from licensing comic characters and HGTV and Food Network programming in international markets. Licensing of comic characters in Japan provides more than 60% of the Company's international revenues, which are less than $50,000,000 annually.
Information regarding the Company's business segments is presented on the following page.
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Other additions to long-lived assets include investments and launch incentives capitalized. Corporate assets are primarily cash, cash equivalent and other short-term investments, and refundable and deferred income taxes.
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14. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising in the ordinary course of business, none of which is expected to result in material loss.
The Company's cable television systems were acquired by Comcast Corporation ("Comcast") in 1996. Pursuant to the terms of its agreement with Comcast, the Company remains liable for any losses resulting from certain lawsuits, certain other expenses and tax liabilities of its cable television systems attributable to periods prior to the transactions.
The Company purchased program rights totaling $167,000,000 in 2001, $189,000,000 in 2000 and $131,000,000 in 1999, the payments for which are generally made over the lives of the contracts. At December 31, 2001, the Company was committed to purchase approximately $158,000,000 of program rights that are not currently available for broadcast, substantially all of which is for programs not yet produced. If such programs are not produced, the Company's commitments would expire without obligation.
The Company capitalized launch incentive payments totaling $82,000,000 in 2001, $13,000,000 in 2000 and $22,000,000 in 1999. At December 31, 2001, the Company was committed to make additional launch incentive payments totaling approximately $45,000,000 associated with the launch of the Company's networks on cable and satellite television systems.
Minimum payments on noncancelable leases at December 31, 2001, were: 2002, $13,800,000; 2003, $10,400,000; 2004, $9,700,000; 2005, $9,300,000; 2006, $6,700,000 and later years, $16,800,000. Rental expense for cancelable and noncancelable leases was $16,800,000 in 2001, $19,300,000 in 2000 and $16,300,000 in 1999.
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15. CAPITAL STOCK AND INCENTIVE PLANS
Capital Stock - The capital structure of the Company includes Common Voting Shares and Class A Common Shares. The articles provide that the holders of Class A Common Shares, who are not entitled to vote on any other matters except as required by Ohio law, are entitled to elect the greater of three or one-third of the directors. In 1997 and 1998 the Board of Directors authorized the purchase of a total of 6,000,000 of the Company's Class A Common Shares. The Company repurchased 4,270,600 shares through December 31, 2001.
Incentive Plans - The Company's Long-Term Incentive Plans (the "Plans") provide for the award of incentive and nonqualified stock options with 10-year terms, stock appreciation rights, performance units and restricted and unrestricted Class A Common Shares to key employees and non-employee directors. The Plans expire in 2007, except for options then outstanding. The number of shares authorized for issuance under the plans at December 31, 2001, was 10,913,000, of which approximately 2,065,000 had not been issued.
Stock Options - Stock options may be awarded to purchase Class A Common Shares at not less than 100% of the fair market value on the date the option is granted. Stock options will vest over an incentive period, conditioned upon the individual's employment through that period. The following table presents information about stock options:
Substantially all options granted prior to 1999 are exercisable. Options issued in 1999 through 2001 generally become exercisable over a three-year period.
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The Company has adopted the "disclosure-only" provisions of FAS No. 123; therefore no compensation expense has been recognized for stock option grants. Had compensation expense been determined based upon the fair value (determined using the Black-Scholes option pricing model) at the grant date consistent with the provisions of FAS No. 123, the Company's income from continuing operations would have been reduced to the pro forma amounts as follows:
Restricted Stock - Awards of Class A Common Shares vest over an incentive period conditioned upon the individual's employment throughout that period. During the vesting period shares issued are nontransferable, but the shares are entitled to all the rights of an outstanding share. Compensation expense is determined based upon the fair value of the shares at the grant date. Information related to awards of Class A Common Shares is presented below:
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16. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summarized financial information is as follows:
The sum of the quarterly net income per share amounts may not equal the reported annual amount because each is computed independently based upon the weighted-average number of shares outstanding for the period.
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To the Board of Directors and Stockholders,The E. W. Scripps Company:
We have audited the accompanying consolidated balance sheets of The E. W. Scripps Company and subsidiary companies ("Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and comprehensive income and stockholders' equity for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item S-1. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2001 and 2000, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLPCincinnati, OhioJanuary 23, 2002
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Index to Consolidated Financial Statement Schedules
S - 1
S - 2
Index to Exhibits
E - 1
E - 2