UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, 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, 2002
Commission File Number 0-16914
THE E. W. SCRIPPS COMPANY
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (513) 977-3000
Title of each class
Name of each exchange on which registered
Securities registered pursuant to Section 12(b) of the Act:
New York Stock Exchange
Class A Common Shares, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
Not applicable
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 o
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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).Yes x No o
The aggregate market value of Class A Common Shares of the Registrant held by nonaffiliates of the Registrant, based on the $80.10 per share closing price for such stock on February 28, 2003, was approximately $2,616,000,000. As of February 28, 2003, nonaffiliates held approximately 713,000 Common Voting Shares. There is no active market for such stock.
As of February 28, 2003, there were 61,761,513 of the Registrant’s Class A Common Shares, $.01 par value per share, outstanding and 18,369,163 of the Registrant’s Common Voting Shares, $.01 par value per share, outstanding.
Certain information required for Part III of this report is incorporated herein by reference to the proxy statement for the 2003 annual meeting of shareholders.
INDEX TO THE E. W. SCRIPPS COMPANY
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
Item No.
Page
Additional Information
3
Forward-Looking Statements
PART I
1. Business
Newspapers
4
Scripps Networks
8
Broadcast Television
10
Shop At Home
13
Licensing and Other Media
15
Employees
2. Properties
16
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for Registrant’s Common Equity and Related Stockholder Matters
17
6. Selected Financial Data
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
18
11. Executive Compensation
19
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
14. Controls and Procedures
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
2
As used in this Annual Report on Form 10-K, the terms “Scripps,” “we,” “our” or “us” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies, or to all of them taken as a whole.
ADDITIONAL INFORMATION
You can inspect and copy, at prescribed rates, our annual, quarterly and current reports, proxy statements and other information filed with the Securities and Exchange Commission (“SEC”) at the public reference facilities of the SEC at Room 1024, 450 Fifth Street N.W., Washington D.C. 20549. The SEC also maintains an Internet site (www.sec.gov) containing reports, proxy statements and other information. You can also inspect and copy the reports we file at the offices of the New York Stock Exchange, on which our Class A Common Shares are listed, at 20 Broad Street, New York, New York, 10005.
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our Internet site (www.scripps.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.
FORWARD-LOOKING STATEMENTS
Our Annual Report on Form 10-K contains certain forward-looking statements that are based on our 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 our 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.
ITEM 1. BUSINESS
We are a diversified media company operating in four reportable business segments: newspaper publishing, cable and satellite television programming services (“Scripps Networks”), broadcast television and television retailing (“Shop At Home”). Licensing and other media aggregates our operating segments that are too small to warrant separate reporting, primarily syndication and licensing of news features and comics.
Newspapers include 21 daily newspapers in the U.S.
Scripps Networks includes four national television networks that are distributed by cable and satellite television systems: Home & Garden Television (“HGTV”), Food Network, Fine Living and DIY - Do It Yourself Network (“DIY”). Scripps Networks also includes our 12% interest in FOX Sports Net South, a regional television network. We have announced plans to develop a subscription-based video-on-demand service featuring the programming of our four national television networks and to develop a programming service focusing on Hispanic lifestyle and interests.
Broadcast television includes ten television stations, nine of which are affiliated with national broadcast television networks.
Newspapers, Scripps Networks, and broadcast television rely upon advertising as a primary source of revenue. Advertising comprises 70% to 75% of our total revenues.
We acquired a 70% controlling interest in Shop At Home on October 31, 2002. Shop At Home markets a range of consumer goods to television viewers and through its Internet site. Shop At Home programming is distributed under the terms of affiliation agreements with broadcast television stations and cable and satellite television systems. Substantially all of Shop At Home’s revenues are derived from the sale of merchandise.
A summary of segment information for the three years ended December 31, 2002, is set forth on page F-46 of this Form 10-K.
Operations - We publish 21 daily newspapers. From our Washington bureau we operate the Scripps Howard News Service, a supplemental wire service covering stories in the capital, other parts of the United States and abroad.
A joint operating agency (“JOA”) between our Denver Rocky Mountain News (“RMN”) and MediaNews Group, Inc.’s (“MediaNews”) Denver Post (the ”Denver JOA”) was approved by the U.S. Attorney General in January 2001. The Denver Publishing Company, our wholly-owned subsidiary, received a 50% interest in the Denver JOA in exchange for the contribution of most of its assets to the Denver JOA and the payment of $60 million to MediaNews.
In addition to forming the Denver JOA, we acquired or divested the following newspaper operations in the five years ended December 31, 2002:
2000 -
Acquired the Ft. Pierce, Florida, daily newspaper in exchange for our Destin, Florida, newspaper and cash. Acquired the Henderson, Kentucky, daily newspaper and the Marco Island, Florida, weekly newspaper.
1998 -
Divested the Dallas Community newspapers, including the Plano daily newspaper. The Dallas Community newspapers were acquired in 1997 along with the daily newspapers in Abilene, Corpus Christi, San Angelo and Wichita Falls, Texas, and a daily newspaper in Anderson, South Carolina.
Excluding divested operating units and RMN revenues prior to the formation of the Denver JOA, our newspapers produced approximately 44% of our total operating revenues in 2002, down from 53% in 1998.
Our 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 our newspapers have introduced additional advertising services such as total-market-coverage products and direct-mail advertising. We expect continued growth in advertising revenues from such products. Certain of our daily newspapers also provide commercial printing services.
Revenues - Operating revenues for our newspapers and our share of profits of JOAs for the five years ended December 31, 2002, are presented below. Our financial statements do not include the advertising and other revenue of the Denver JOA. To enhance comparability of year-over-year results, RMN revenue prior to the formation of the Denver JOA is reported separately.
( in thousands )
2002
2001
2000
1999
1998
Advertising:
Local ROP
$
181,330
184,019
193,537
191,359
188,442
Classified ROP
213,955
215,430
227,096
209,728
193,165
National ROP
34,266
33,645
31,216
28,146
20,663
Preprint and other
102,454
92,509
91,174
80,182
71,566
Total advertising
532,005
525,603
543,023
509,415
473,836
Circulation
138,138
139,358
133,948
135,029
138,615
Other
12,306
11,764
10,176
9,735
10,402
Total
682,449
676,725
687,147
654,179
622,853
Rocky Mountain News - pre Denver JOA
11,650
220,998
209,713
200,442
Total segment operating revenues
Divested newspapers
886
3,806
17,498
Total operating revenues
688,375
909,031
867,698
840,793
Share of JOA operating profits
73,636
45,175
47,412
50,511
48,278
Run-of-paper (“ROP”) advertisements are included with news stories in the body of the newspaper. 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.
Preprinted advertisements are generally produced by advertisers and inserted into the newspaper.
Preprint and other advertising revenues also include advertising appearing on our newspaper Internet sites, total-market-coverage advertising and direct-mail advertising. Internet advertising ranges from simple static banners that appear at the top and bottom of a page to more complex advertisements that use animation and allow users to interact with the advertisements. Internet advertising revenues were $8.3 million in 2002, $6.5 million in 2001, $7.2 million in 2000, $4.7 million in 1999 and $1.7 million in 1998. Revenue from direct-mail, total-market-coverage and other advertising products was $19.5 million in 2002, $16.4 million in 2001, $16.4 million in 2000, $8.6 million in 1999 and $6.7 million in 1998.
A given volume of ROP advertisements is generally more profitable to us than the same volume of preprinted advertisements.
Contracts with advertisers, which are typically for one-year terms, may provide for discounted rates based upon advertising volume.
Advertising rates and revenues vary among our newspapers depending on circulation, type of advertising, local market conditions and competition. Declines in advertising spending, particularly in recessionary periods, adversely affect our business.
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.
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 our daily newspapers is as follows:
( in thousands ) (1)
Morning (M)
Newspaper
Evening (E)
Abilene (TX) Reporter-News
M
34
35
36
38
40
Albuquerque (NM) Tribune (2)
E
21
23
Anderson (SC) Independent-Mail
39
Birmingham (AL) Post-Herald (2)
12
Boulder (CO) Daily Camera
33
Bremerton (WA) Sun
31
37
Cincinnati (OH) Post (2)
49
53
60
65
71
Corpus Christi (TX) Caller-Times
63
66
Denver (CO) Rocky Mountain News (2)
305
323
427
396
332
Evansville (IN) Courier & Press
69
70
72
61
Henderson (KY) Gleaner
11
Knoxville (TN) News-Sentinel
118
121
123
122
Memphis (TN) Commercial Appeal
172
170
175
173
174
Naples (FL) Daily News
56
55
52
50
Redding (CA) Record-Searchlight
San Angelo (TX) Standard-Times
28
29
30
Treasure Coast (FL) News/Press-Tribune (3)
98
97
96
95
Ventura County (CA) Star
94
92
93
Wichita Falls (TX) Times Record News
32
Total Daily Circulation
1,292
1,320
1,451
1,431
1,373
(1) Based on Audit Bureau of Circulation Publisher’s Statements (“Statements”) for the six-month periods ended September 30, except figures for the Naples Daily News and the Treasure Coast News/Press-Tribune which are from the Statements for the twelve-month periods ended September 30.
(2) This newspaper is a party to a JOA. See “Joint Operating Agencies.” The Denver JOA publishes the Rocky Mountain News and the Denver Post Monday through Friday, and a joint newspaper on Saturday and Sunday. Reported daily circulation in 2002 and 2001 represents the Monday through Friday circulation of the Rocky Mountain News. Reported circulation prior to 2001 represents the Monday through Saturday circulation of the Rocky Mountain News.
(3) Represents the combined daily circulation of the Stuart News, the Vero Beach Press Journal and the Ft. Pierce Tribune.
5
Circulation information for the Sunday edition of our newspapers is as follows:
44
45
47
46
41
42
80
81
85
87
789
801
530
505
433
101
105
106
154
156
158
159
163
234
232
237
238
243
68
67
64
111
110
107
108
43
Total Sunday Circulation
1,926
1,943
1,687
1,675
1,619
(1) Based on Audit Bureau of Circulation Publisher’s Statements (“Statements”) for the six-month periods ended September 30, except figures for the Naples Daily News, and the Treasure Coast News/Press-Tribune which are from the Statements for the twelve-month periods ended September 30.
(2) The Denver JOA publishes a joint newspaper on Saturday and Sunday. Reported circulation in 2002 and 2001 represents the Sunday circulation of the joint newspaper. Reported circulation prior to 2001 represents the Sunday circulation of the Rocky Mountain News. See “Joint Operating Agencies.”
(3) Represents the combined Sunday circulation of the Stuart News, the Vero Beach Press Journal and the Ft. Pierce Tribune.
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.
We are a partner in JOAs in four markets. The Denver JOA is jointly managed by each of the partners. We do not share management responsibilities for each of our three other JOAs.
JOA revenues less JOA expenses, as defined in each JOA, equals JOA operating profits. In each case JOA expenses exclude editorial costs and expenses. JOA operating profits are split between the partners according to the terms of the JOA agreement. We receive 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. We have a residual interest in the net assets of the Albuquerque and Denver JOAs, but do not have a residual interest in the net assets of the Birmingham and Cincinnati JOAs.
Our share of JOA operating profits is reported as “Equity in earnings of JOAs and other joint ventures” in our consolidated financial statements. The related editorial costs and expenses are included in “Costs and expenses.”
The table below provides certain information about our JOAs.
Publisher of Other Newspaper
Year JOA Entered Into
Year of JOA Expiration
The Albuquerque Tribune
Journal Publishing Company
1933
2022
Birmingham Post-Herald
Newhouse Newspapers
1950
2015
The Cincinnati Post
Gannett Newspapers
1977
2007
Denver Rocky Mountain News
MediaNews Group, Inc.
2051
6
Newspaper Production - Our daily newspapers are printed using offset presses and use computer systems for writing, editing, composing and producing our newspapers. We completed construction of a new production facility for our Knoxville, Tennessee, daily newspaper in 2002 and began constructing a new production facility for our Treasure Coast newspapers in 2002.
Raw Materials and Labor Costs - We consumed approximately 141,000 metric tons of newsprint in 2002 and 140,000 metric tons in 2001. Over the past several years our newspapers have converted to a 50-inch web format. Implementation of a 50-inch web format reduced newsprint consumption by approximately 5% compared to consumption under previous web formats.
We purchase newsprint from various suppliers, many of which are Canadian. We believe our sources of supply of newsprint are adequate for our 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 its price. Newsprint prices fluctuated between $420 and $590 per metric ton from 1998 through 2002. The average newsprint price was in the lower portion of that range during the fourth quarter of 2002. Certain of our newsprint suppliers announced $50 per metric ton price increases effective March 1, 2003.
During 2002 we established Media Procurement Services (“MPS”), a wholly-owned subsidiary company. MPS provides newsprint procurement services for our newspapers and other non-affiliated newspapers. MPS provides us the ability to negotiate favorable pricing with newsprint suppliers due to increased purchasing power and by providing suppliers with improved production scheduling and more efficient newsprint delivery. We expect this to continue as the volume increases from additional clients. We receive a fee for the procurement services we provide non-affiliated newspapers.
Labor costs accounted for approximately 56% of our newspaper segment costs and expenses in 2002. Excluding RMN pre Denver JOA costs and expenses, labor costs accounted for approximately 53% of our newspaper segment costs and expenses in 2001 and 51% in 2000. A substantial number of our newspaper employees are represented by labor unions. See “Employees.”
Competition - Our newspapers compete for advertising revenues primarily with other local media, including other local newspapers, broadcast television and radio stations, cable television systems, telephone directories, other Internet sites and direct mail. Competition from electronic communications services, such as the Internet, is increasing, particularly in help-wanted, real estate and automotive classified advertising. Our newspapers offer advertisers the opportunity to distribute their message through the Internet and we continue to develop Internet initiatives designed to maintain our competitive position. Competition for advertising revenues is based upon audience size and demographics, price and effectiveness.
Our newspapers and Internet sites compete with all other information and entertainment media for consumers’ discretionary time.
7
Operations - Scripps Networks includes our four national television networks, and our 12% equity interest in FOX Sports Net South, a regional sports network.
Excluding divested operating units and RMN revenues prior to the formation of the Denver JOA from total operating revenues, Scripps Networks produced approximately 27% of our total operating revenues in 2002, up from 11% in 1998.
HGTV features programming focusing on home repair and remodeling, gardening, decorating and other activities associated with the home. HGTV began telecasting in December 1994. Food Network features programming focusing on food and entertaining. Food Network began telecasting in December 1993 and we acquired a controlling interest in 1997. Fine Living, which began telecasting in March 2002, targets an upper demographic audience and advertisers in the luxury consumer goods and services markets. DIY features step-by-step instructions, in-depth demonstrations and tips on various topics associated with home improvement, gardening and crafts. DIY began telecasting in the fourth quarter of 1999.
Each of our networks operates an Internet site featuring content from its programs and additional information and products of interest to its 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.
We own an approximate 70% residual interest in Food Network and an approximate 90% residual interest in Fine Living. Certain minority owners in Fine Living have the right to require us to repurchase their ownership interest beginning in 2006 at the then fair market value. We have a corresponding right to purchase the minority interest.
Approximately 87 million homes in the United States are reached by cable and satellite television systems, according to the Nielsen Homevideo Index (“Nielsen”). Certain homes may receive cable and satellite television networks from more than one source, so the number of cable and satellite television households may not represent unique homes. Information concerning the national reach of our networks is as follows:
( in millions )
Homes reached in the month of December (1)
National Television Network
HGTV
80.4
76.4
67.1
59.0
48.4
Food Network
78.2
71.5
54.4
44.2
37.1
Fine Living
12.7
DIY
12.9
9.2
1.9
(1) The number of homes that receive cable television networks according to Nielsen. Fine Living and DIY are not rated by Nielsen. Homes reached for those networks represent comparable amounts as calculated by us.
As HGTV and Food Network reach full distribution our focus has turned from gaining distribution to increasing viewership. Prime time (Monday through Sunday from 8:00 pm to 11:00 pm) viewership of HGTV and Food Network has increased more than five-fold in the past five years. We believe our commitment to provide quality original programming is a key to the continued increased viewership of our networks.
We expect to increase distribution of Fine Living and DIY to approximately 20 million homes in 2003.
We joined with Time Warner Cable to launch a joint video-on-demand (“VOD”) trial in November 2001 on Time Warner digital cable homes in Cincinnati, Ohio. The initial VOD package included a total of 60 hours of programming from HGTV, Food Network and DIY. In October 2002, we announced plans to expand our VOD agreement to cover 30 Time Warner cable television systems across the United States and to Comcast’s Philadelphia cable television system. The on-demand packages in these new markets are currently offered free-of-charge. We expect to continue our efforts to develop a subscription-based VOD model.
We are also developing plans for a programming service focusing on Hispanic lifestyle and interests.
Revenues - Operating revenues for the five years ended December 31, 2002, were as follows:
Advertising
330,806
272,299
249,619
169,959
96,271
Network affiliate fees, net
78,662
59,175
40,312
34,149
22,366
5,934
5,721
5,750
8,814
14,307
415,402
337,195
295,681
212,922
132,944
Advertising purchased on our networks primarily seeks to promote nationally recognized consumer products and brands. Advertising time on the networks is sold in both the up-front and scatter markets. The mix between the up-front and scatter markets is based upon a number of factors, including the demand for advertising time, economic conditions and pricing.
Advertising contracts generally have terms of one year or less and may guarantee the advertisements will reach a minimum audience level over the term of the contract. If the minimum audience level is not met, the advertiser will receive additional advertising time. The ability to sell advertising and the rates received are dependent primarily on the size and demographics of the audience, as well as overall demand for advertising time. Declines in advertising spending, particularly in recessionary periods, adversely affect our business.
Internet 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 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. Internet advertising revenues were $6.4 million in 2002, $3.9 million in 2001, $5.1 million in 2000, $3.4 million in 1999 and $0.7 million in 1998.
The first and third quarters generally have lower advertising revenues than the second and fourth quarters.
Cable and satellite television systems generally pay a per-subscriber fee for the right to distribute our programming. Food Network’s initial distribution contracts generally provide the network to cable television systems without charge through 2003. Network affiliate fee revenues are reported net of incentives granted in exchange for long-term distribution contracts. See “Distribution.”
Programming - The cost of programming is a significant portion of our operating expenses. We both own and license the programming that airs on our networks. We have continually improved the quality and variety of programming and expanded the hours of original programming presented on our networks. The expense recognized for owned and licensed programs totaled $111.9 million in 2002, $92.4 million in 2001, $71.6 million in 2000, $46.2 million in 1999 and $30.7 million in 1998.
We transmit our programming to cable and satellite television systems via satellite. Transponder rights are acquired under the terms of long-term contracts with satellite owners.
Distribution - Our networks are distributed by cable and satellite television systems under the terms of long-term distribution contracts. We may make cash payments to cable and satellite television systems and may provide an initial period in which payment of affiliate fees by the systems is waived in exchange for such long-term distribution contracts. In markets where we have broadcast television stations, distribution of the networks may also be obtained in exchange for granting cable or satellite television systems the right to carry the local television stations’ signals.
The four largest cable and satellite television systems provide service to more than 60% of homes receiving HGTV and Food Network, while the eight largest provide service to more than 90% of such homes. The loss of distribution by any of these cable and satellite television systems would adversely affect our business. While no assurance can be given regarding renewal of our distribution contracts, we have historically successfully renewed expiring distribution agreements for HGTV and Food Network.
Competition - In addition to competing with other networks for distribution on cable and satellite television systems, we compete 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. We compete for consumers’ discretionary time with all other information and entertainment media.
9
Operations - Broadcast television includes ten television stations, nine of which are affiliated with national broadcast television networks.
We acquired television station KMCI in Lawrence, Kansas, in 2000. We had operated the station under a Local Marketing Agreement (“LMA”) since 1996. Revenues from KMCI were included in our results of operations while the station was operated under the LMA.
Excluding divested operating units and RMN revenues prior to the formation of the Denver JOA from total operating revenues, our broadcast television stations produced approximately 20% of our total operating revenues in 2002, down from 28% in 1998.
Local advertising
171,301
162,761
173,878
171,353
166,115
National advertising
95,497
96,866
119,428
120,638
125,432
Political advertising
23,703
2,400
34,762
2,478
20,084
Network compensation
8,044
9,279
9,951
13,121
16,040
6,609
6,295
5,106
4,772
3,043
305,154
277,601
343,125
312,362
330,714
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 our 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. Declines in advertising spending, particularly in recessionary periods, adversely affect our business.
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.
Our Detroit television station recently began producing a newscast and selling the advertising within the newscast for another station in the Detroit market. Certain of our stations may also manage operations for other television stations in their markets. We share the profits from these initiatives with the other stations.
Network Affiliation and Programming - Nine of our ten television stations are affiliated with national television networks. The networks offer a variety of programs to affiliated stations, which have a limited 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 may compensate affiliated stations for carrying network programming. Affiliated television stations may share in the cost of certain network programming, which is deducted from such compensation.
In 2001, we renegotiated and extended our network affiliation agreements with NBC, which were originally scheduled to expire in 2004. Network compensation is sharply reduced under the new agreements, which expire in 2010. Our three NBC affiliates recognized $0.3 million in network compensation revenue in 2002, $1.4 million in 2001 and $2.4 million in 2000. Our ABC affiliation agreements expire in 2004 through 2006.
In addition to network programs, our 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 our locally produced programming. Advertising during local news programs accounts for approximately 30% of total operating revenues.
Information concerning our stations, their network affiliations and the markets in which they operate is as follows:
Station and Market
Network Affiliation/ DTV Channel
Affiliation Expires in/ DTV Service Commenced
FCC License Expires in
Rank of Mkt (1)
Stations in Mkt (3)
WXYZ-TV, Detroit, Ch. 7
ABC
2004
2005
Digital Service Status
Average Audience Share (2)
Station Rank in Market (4)
1
WFTS-TV, Tampa, Ch. 28
WEWS-TV, Cleveland, Ch. 5
14
KNXV-TV, Phoenix, Ch. 15
2006
WMAR-TV, Baltimore, Ch. 2
24
WCPO-TV, Cincinnati, Ch. 9
KSHB-TV, Kansas City, Ch. 41
NBC
2010
(5)
KMCI-TV, Lawrence, Ch. 38
Ind.
WPTV-TV, W. Palm Beach, Ch. 5
KJRH-TV, Tulsa, Ch. 2
All market and audience data is based on the November Nielsen survey.
Competition - Our television stations compete for advertising revenues primarily with other local media, including other television stations, radio stations, cable television systems, 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.
Our 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. We intend to undertake upgrades in our services, including development of digital television broadcasting, to maintain our competitive posture as well as to comply with government requirements. Technological advances in interactive media services will further increase these competitive pressures.
Our 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 – Broadcast television 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 broadcast television stations except in accordance with a license issued by the FCC and empowers the FCC to revoke, modify and renew broadcast television licenses, approve the transfer of control of any entity holding such licenses, determine the location of stations, regulate the equipment used by stations and adopt and enforce necessary regulations. The FCC also enforces regulations concerning programming, including children’s and political programming, and it recently adopted new rules affecting stations’ employment practices.
The Telecommunications Act of 1996 (the “1996 Act”) significantly relaxed the regulatory environment applicable to broadcasters. Under the 1996 Act, broadcast television 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 our broadcast television licenses, we have never had a license revoked, have never been denied a renewal and all previous renewals have been for the maximum term.
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 television station, or in some markets under certain conditions, more than 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 a daily newspaper in the same community. Our television station and daily newspaper in Cincinnati were owned by us at the time the cross-ownership rule was enacted and enjoy “grandfathered” status. These properties would become subject to the cross-ownership rule upon their sale. The 1996 Act directed the FCC to review all its media ownership rules biennially, and a major review of these rules, including the newspaper/broadcast television cross-ownership rule is now underway. At the direction of the D.C. Circuit Court of Appeals the FCC is also reconsidering its decision in 2000 not to rescind or relax 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 granted each television station a second channel on which to begin offering digital service and it set out a timetable for completing the transition by 2006, when it is expected that one of these channels would be returned. Most observers now believe that this deadline will be extended.
A substantial number of technical, regulatory and market-related issues remain unresolved regarding the transition to digital television. These issues include uncertainty as to the timing of the transition, what rules the FCC may adopt affecting broadcasters’ use of their spectrum, cable operators’ obligation to carry broadcasters’ digital offerings, equipment manufacturers’ obligation to offer digital tuners on new television receivers, and the level of consumer demand for the new services. We cannot predict the effect of these uncertainties on our offering of digital service or our business.
Under the Cable Television Consumer Protection and Competition Act of 1992, broadcast television stations gained “must-carry” rights on any cable television system defined as “local” with respect to the station. Stations may waive their must-carry rights and instead negotiate retransmission consent agreements with local cable companies. Our stations have generally elected to negotiate retransmission consent agreements with cable companies. While the FCC has 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.
Operations - On October 31, 2002, we completed a transaction with Summit America Television, Inc. (“Summit America,” formerly Shop At Home, Inc.) that resulted in our acquiring a 70% controlling interest in the Shop At Home television-retailing network. Shop At Home markets a range of consumer goods to television viewers and through its Internet site.
Our programming is distributed by broadcast television stations and by cable and satellite television systems on a full-time or part-time basis. Shop At Home can be viewed in more than 170 television markets, including 97 of the 100 largest television markets.
Distribution during the past five years was as follows:
Average full-time equivalent homes reached
42.1
29.7
24.5
19.2
14.1
Certain broadcast stations and cable television systems carry Shop At Home programming on a part-time basis. We use a cable and satellite television household full-time equivalent method to measure the reach of our programming, accounting for both the quantity and quality of time available.
Acquiring Shop At Home provides us with the means to quickly gain scale in a growing market. We expect to leverage our expertise as a diverse media company to expand distribution and to offer a wider range of products. Acquiring Shop At Home also enables us to provide a video commerce platform to our advertisers.
Revenues - Operating revenues in November and December 2002 totaled $42.3 million.
Operating revenues in the five years ended December 31, 2002, which includes periods in which Shop At Home was owned by Summit America, were as follows:
Merchandise sales
210,199
180,426
187,216
174,250
128,994
2,467
2,518
1,458
2,209
1,669
212,666
182,944
188,674
176,459
130,663
Merchandise Sales. We market jewelry, electronics, beauty and fitness, collectibles and other products to consumers. We expect to expand product offerings, particularly in cookware and other products for the home.
Viewers can order any product offered by us, subject to availability. Orders can be placed 24 hours a day, seven days a week, over the Internet, with telephone representatives or through an automated touch tone system via our toll-free number. A majority of customers pay for their purchases by credit card; however, we also accept money orders, checks, debit cards or electronic funds transfers.
Shipping. Customer orders are shipped as promptly as possible after taking the order, using either ground or priority delivery services. Products are shipped from our warehouse facility or are drop-shipped by selected vendors from their facilities.
Customer Relations. We maintain a customer service department to address customer inquiries regarding products, shipping dates and billing information. We strive to continually improve our customer service and make regular price and service comparisons with our competitors.
We offer our customers a full refund for merchandise returned within 30 days of purchase.
Cyclicality. Retail sales typically decline in recessionary periods, adversely affecting our business.
Seasonality. Our business is somewhat seasonal, with sales made in the fourth quarter typically being the highest for the year.
Programming and Presentation of Merchandise - Programming is segmented based upon product or theme categories, and is produced in a digital format from our studio and technical facilities in Nashville, Tennessee. Our facilities permit the production of simultaneous live shows. Selected programming is replayed on Shop At Home’s Internet site.
A show-host approach is used with the host conveying information about the products and demonstrating use of the products. We seek to differentiate our programming from other television-retail programming by using an informal, personal style of presentation and by offering unique products.
Products and Merchandise - We purchase merchandise from numerous vendors. Certain products are available through multiple suppliers. We also acquire specialty products from a select group of vendors and believe we will be able to continue to identify sources of specialty products.
The mix of products and source of merchandise depend on a variety of factors including price and availability. We monitor product sales and revise our product offerings to maintain an attractive product mix. We continually evaluate new products and vendors to broaden our merchandise selection.
We generally do not have long-term commitments with our vendors, and a variety of sources are available for each category of merchandise sold. In 2002, products purchased from three vendors in two different product categories accounted for 23%, 15% and 12% of net sales. We believe we could find alternative sources for these products if the vendors ceased supplying merchandise.
Network Distribution - Our programming is telecast nationally under the terms of affiliation agreements with broadcast television stations and cable and satellite television systems, some of which carry our programming on a part-time basis. Agreements with broadcast television stations and cable television systems typically are for one-year terms with automatic renewal unless either party gives a 30-day notice prior to the end of the term.
We have a three-year affiliation agreement with Summit America to carry Shop At Home programming on Summit America’s broadcast television stations located in San Francisco, Boston, Cleveland, Raleigh and Bridgeport, Connecticut. Summit America has the right to terminate these agreements after January 31, 2004.
Affiliation agreements with satellite television systems are multi-year agreements that may be terminated prior to their expiration under limited circumstances. Affiliates are paid a fee based upon the number of cable and direct broadcast satellite households reached by the affiliate.
While there can be no assurances as to renewal of our affiliation agreements or that such agreements will not be terminated prior to their expiration, our experience has been that our affiliation agreements are continued for long periods.
Competition - Television retailing is a rapidly expanding industry. We compete with three other large public companies and many smaller television retailers. We compete with QVC, HSN and ShopNBC in nearly all of the television markets in which our programming is available. QVC and HSN are the revenue leaders in the industry and each reaches a larger percentage of U.S. television households than Shop At Home.
We also compete with store, catalogue and Internet retailers.
Operations - Licensing and other media aggregates our 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.
We acquired or divested the following operations in the five years ended December 31, 2002:
Divested independent telephone directories in Memphis, Tennessee; Kansas City, Missouri; North Palm Beach, Florida; and New Orleans, Louisiana.
Acquired the independent telephone directories. Divested Scripps Howard Productions, our television program production operation based in Los Angeles.
Licensing
68,402
65,877
68,549
63,755
62,260
Newspaper feature distribution
21,078
21,517
23,590
23,382
22,650
834
1,391
4,756
5,433
3,913
90,314
88,785
96,895
92,570
88,823
Divested other media
9,614
19,236
7,379
106,509
111,806
96,202
Under the trade name United Media, we are a leading distributor of news columns, comics and other features for the newspaper industry. Newspapers typically pay a weekly fee for their use of the features. 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. We continue syndication of previously published “Peanuts” strips, and retain the rights to license the characters. “Peanuts” provides approximately 88% of our licensing revenues. Approximately 64% 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. We generally negotiate a fixed fee for the use of our copyrighted characters for promotional and advertising purposes. We generally pay a percentage of gross syndication and licensing royalties to the creators of these properties.
We also represent the owners of other copyrights and trademarks, including Raggedy Ann and Precious Moments, in the U.S. and international markets. Services offered include negotiation of licensing agreements, enforcement of licensing agreements and collection of royalties. We typically retain a percentage of the licensing royalties.
Competition - Our 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.
As of December 31, 2002, we had approximately 7,700 full-time employees, of whom approximately 5,000 were with newspapers, 800 with Scripps Networks, 1,300 with broadcast television, 500 with Shop At Home and 100 with licensing and other media. Various labor unions represent approximately 1,300 employees, primarily in newspapers. We have not experienced any work stoppages at our current operations since 1985. We consider our relationships with our employees to be generally satisfactory.
ITEM 2. PROPERTIES
Newspapers require business and editorial offices and printing plants. We own substantially all of the facilities and equipment used in our newspaper publishing operations. In 2002 we completed construction of a new production facility for our Knoxville newspaper. We are currently constructing a new production facility for our Treasure Coast newspapers.
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 and California. We obtain satellite transmission rights under long-term contracts with satellite owners. Substantially all other facilities and equipment are owned by Scripps Networks.
Broadcast television requires offices and studios and other real property for towers upon which broadcasting transmitters and antenna equipment are located. We own substantially all of the facilities and equipment used in our broadcast television operations. We own, or co-own with other broadcast television stations in the market, the towers used to transmit our television signal. We completed construction of a new facility for our West Palm Beach station in 2001. We will begin construction of a new facility for our Cincinnati station in 2003.
Shop At Home operates from facilities in Nashville, Tennessee. Shop At Home requires technical and television production facilities, offices, studios and leases warehouse facilities to store consumer products. We expect to expand Shop At Home’s warehouse facilities as product offerings are expanded. We obtain satellite transmission rights under long-term contracts with satellite owners. Substantially all other facilities and equipment used are owned by Shop At Home.
We believe our facilities are generally well maintained and are sufficient to serve our present needs.
ITEM 3. LEGAL PROCEEDINGS
We are 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 2002.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “SSP.” There are approximately 21,000 owners of our Class A Common shares, based on security position listings, and 18 owners of our Common Voting shares (which do not have a public market). We have declared cash dividends in every year since our incorporation in 1922. Future dividends are, however, subject to our earnings, financial condition and capital requirements.
The range of market prices of our Class A Common shares, which represents the high and low sales prices for each full quarterly period, and quarterly cash dividends are as follows:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Market price of common stock:
High
82.50
87.50
78.30
80.10
Low
66.20
73.80
68.06
65.13
Cash dividends per share of common stock
.15
.60
66.60
69.00
71.70
68.05
54.70
56.40
56.10
58.00
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk information 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers - Executive officers serve at the pleasure of the Board of Directors.
Name
Age
Position
Kenneth W. Lowe
President, Chief Executive Officer and Director (since October 2000); President and Chief Operating Officer (January 2000 to October 2000); Chairman and Chief Executive Officer, Scripps Networks (1994 to 2000)
Richard A. Boehne
Executive Vice President (since 1999); Vice President/Communications and Investor Relations (1995 to 1999)
Joseph G. NeCastro
Senior Vice President and Chief Financial Officer (since May 2002); Chief Financial Officer, Penton Media Inc. (1998 to 2002); Vice President of Finance, Reader’s Digest USA (1993 to 1998)
Frank Gardner
Senior Vice President and Chairman, Scripps Networks (since 2001); Senior Vice President/Interactive Media (2000 to 2001); Senior Vice President/Television (1993 to 2000)
Alan M. Horton
59
Senior Vice President/Newspapers (since 1994)
John F. Lansing
Senior Vice President/Television (since May 2002); Vice President/Television (2001 to 2002); Vice President/General Manager, WEWS-TV (1997 to 2001)
B. Jeff Craig
Vice President and Chief Technology Officer (since 2001); Senior Vice President, Interactive Technology and New Media Development, Discovery Communications (1998 to 2000)
Gregory L. Ebel
Vice President/Human Resources (since 1994)
M. Denise Kuprionis
Vice President, Corporate Secretary and Director of Legal Affairs (since 2001), Corporate Secretary and Director of Legal Affairs (2000 to 2001); Corporate Secretary (1987 to 2000)
Tim A. Peterman
Vice President/Corporate Development (since March 2002); Chief Financial Officer/ Broadcast Division/Chief Financial Officer/Cable Television Network Division, USA Networks (1999 to 2002); Director of Finance for the Television Station Group, Sinclair Communications (1998 to 1999)
Lori A. Hickok
Vice President and Controller (since June 2002); Corporate Development Analyst (2001 to 2002); Controller - New Media, (1999 to 2001); Vice President of Finance, Paramount Kings Island (1996 to 1998)
Timothy E. Stautberg
Vice President/Communications and Investor Relations (since 1999); General Manager, Redding Record Searchlight (1997 to 1999)
Stephen W. Sullivan
Vice President/Newspaper Operations (since August 2000); Vice President/Newspapers (1997 to 2000)
E. John Wolfzorn
57
Vice President and Treasurer (since July 2002); Treasurer (1979 to 2002)
Directors - The information required by Item 10 of Form 10-K relating to directors of Scripps is incorporated by reference to the material captioned “Election of Directors” in our 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 March 28, 2003.
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.
ITEM 14. CONTROLS AND PROCEDURES
The Controls and Procedures 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 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Supplemental Schedules
(a) The consolidated financial statements of Scripps are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1.
The report of Deloitte & Touche LLP, Independent Auditors, dated January 22, 2003 (except for Notes 1 and 12, as to which the date is February 6, 2003), is filed as part of this Form 10-K. See Index to Consolidated Financial Statement Information at page F-1.
(b) The consolidated supplemental schedules of Scripps are filed as part of this Form 10-K. See Index to Consolidated Financial Statement Schedules at page S-1.
Exhibits
The information required by this item appears at page E-1 of this Form 10-K.
Reports on Form 8-K
A Current Report on Form 8-K reporting that we had completed the acquisition of a 70% controlling interest in the Shop At Home television-retailing network from Summit America was filed on November 6, 2002.
A Current Report on Form 8-K reporting the sale of $100 million in 4.25% notes was filed on December 16, 2002.
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 25, 2003.
By:
/s/ KENNETH W. LOWE
Kenneth W. Lowe President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on March 25, 2003.
Signature
Title
President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ JOSEPH G. NECASTRO
Senior Vice President and Chief Financial Officer
/s/ WILLIAM R. BURLEIGH
Chairman of the Board of Directors
William R. Burleigh
/s/ CHARLES E. SCRIPPS
Director
Charles E. Scripps
/s/ PAUL K. SCRIPPS
Paul K. Scripps
/s/ EDWARD W. SCRIPPS
Edward W. Scripps
/s/ JOHN H. BURLINGAME
John H. Burlingame
/s/ JARL MOHN
Jarl Mohn
/s/ NICHOLAS B. PAUMGARTEN
Nicholas B. Paumgarten
/s/ RONALD W. TYSOE
Ronald W. Tysoe
/s/ JULIE A. WRIGLEY
Julie A. Wrigley
/s/ NACKEY E. SCAGLIOTTI
Nackey E. Scagliotti
/s/ DAVID A. GALLOWAY
David A. Galloway
20
CERTIFICATIONS
I, Kenneth W. Lowe, certify that:
1. I have reviewed this annual report on Form 10-K of The E. W. Scripps Company;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
BY:
I, Joseph G. NeCastro, certify that:
Joseph G. NeCastro Senior Vice President and Chief Financial Officer
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENT INFORMATION
1. Selected Financial Data
F-2
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
F-5
Critical Accounting Policies and Estimates
Results of Operations
F-7
F-10
F-12
F-14
Liquidity and Capital Resources
F-15
3. Quantitative and Qualitative Disclosures About Market Risk
F-17
4. Controls and Procedures
F-18
5. Consolidated Balance Sheets
F-19
6. Consolidated Statements of Income
F-21
7. Consolidated Statements of Cash Flows
F-22
8. Consolidated Statements of Comprehensive Income and Shareholders’ Equity
F-23
9. Notes to Consolidated Financial Statements
F-24
10. Independent Auditors’ Report
F-51
F-1
ELEVEN-YEAR FINANCIAL HIGHLIGHTS
( in millions, except per share data )
2002 (1)
2001 (1)
2000 (1)
1999 (1)
1998 (1)
1997 (1)
1996 (1)
1995 (1)
1994 (1)
1993 (1)
1992 (1)
Summary of Operations
Operating Revenues:
682
677
687
654
623
483
415
387
363
335
317
337
296
213
133
Broadcast television
278
343
312
331
295
288
255
247
Licensing and other media
90
89
75
1,536
1,380
1,423
1,272
1,175
952
843
769
724
675
652
Divested operating units (2)
25
88
190
RMN pre-JOA operating revenues (3)
221
210
200
197
183
184
146
1,392
1,654
1,505
1,401
1,193
1,086
997
931
917
988
Segment profit (loss):
270
269
276
260
217
166
150
109
125
76
(9
)
(14
(17
(8
(1
129
128
126
113
116
82
(2
Corporate
(28
(19
(20
(18
(16
(15
(13
Total segment profit
481
389
464
400
379
249
196
Depreciation
(58
(56
(69
(65
(64
(54
(50
(46
(40
(42
Amortization of other intangible assets
(4
(5
(3
(6
Amortization of goodwill and other intangible assets with indefinite lives (4)
(38
(36
(35
(22
Restructuring charges (5)
(10
(11
Disputed music license royalties (6)
Pittsburgh strike costs (7)
(33
Interest expense
(39
(52
(45
(47
(26
(34
Investment results, net of expenses (8)
(86
(25
Gains (losses) on divested operations (1)
48
78
Gain on sale of Garfield copyrights (9)
Other gains (losses) (10)
Miscellaneous, net
Income taxes (11)
(116
(100
(108
(104
(93
(118
(84
(76
(81
Minority interests
Income from continuing operations
188
138
131
127
91
Per Share Data
2.34
1.73
2.06
1.85
1.62
1.94
1.58
1.19
1.22
1.40
Cash dividends
.56
.54
.52
.50
.44
.40
Market value of proceeds from Cable Transaction (12)
19.83
Market Value of Common Shares at December 31
Per share
76.95
66.00
62.88
44.81
49.75
48.44
35.00
39.38
30.25
27.50
24.75
6,159
5,227
4,951
3,502
3,908
3,906
2,827
3,153
2,415
2,056
1,847
Scripps Cable Financial Data (12)
Segment operating revenues
280
252
Segment profit
119
102
Depreciation and amortization
54
58
Net income
Net income per share of common stock
.49
.39
.32
.20
Capital expenditures
(48
(67
Note: Certain amounts may not foot since each is rounded independently.
Cash Flow Statement Data
Net cash provided by continuing operations
206
256
194
239
193
176
114
142
Investing activity:
(88
(68
(75
(80
(57
(53
(37
(87
Business acquisitions and investments
(102
(139
(70
(29
(745
(128
(12
(32
Other (investing)/divesting activity, net
62
51
147
Financing activity:
Increase (decrease) in long-term debt
651
(30
(138
(194
Dividends paid
(51
(43
Common stock issued (retired)
Other financing activity
27
Balance Sheet Data
Total assets
2,870
2,642
2,588
2,535
2,376
2,304
1,479
1,362
1,302
1,260
1,291
Long-term debt (including current portion) (13)
725
715
771
773
248
442
Stockholders’ equity (13)
1,515
1,352
1,278
1,164
1,070
1,050
945
1,194
1,084
860
733
Notes to Selected Financial Data
As used herein and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “Scripps,” “we,” “our,” or “us” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies, or to all of them taken as a whole.
The income statement and cash flow data for the eleven years ended December 31, 2002, and the balance sheet data as of the same dates have been derived from the audited consolidated financial statements of Scripps. 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.
(1) In the periods presented we acquired and divested the following:
Acquisitions
2002 -
2001 -
1999 -
1997 -
1996 -
1994 -
1993 -
1992 -
Divestitures
1995 -
(2) Operating units other than cable television systems sold prior to December 31, 2002.
(3) The Denver JOA commenced operations on January 22, 2001. Our 50% share of the operating profit (loss) of the Denver JOA is reported as “Equity in earnings of JOAs and other joint ventures” in our financial statements. The editorial costs associated with the RMN are included in “Costs and expenses.” Our financial statements do not include the advertising and other operating revenues of the Denver JOA, the costs to produce, distribute and market the newspapers or related depreciation. To enhance comparability of year-over-year operating results, we have removed the operating revenues of the RMN prior to the formation of the Denver JOA from our newspaper operating revenues and separately reported those revenues.
F-3
(4) We adopted Financial Accounting Standard No. (“FAS”) 142 - Goodwill and Other Intangible Assets 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 144. We have determined that there was no impairment of goodwill or other intangible assets on the date of adoption of FAS 142. Amortization of goodwill and other intangible assets with indefinite lives, primarily FCC licenses and broadcast television station network affiliation agreements, was as follows:
(5) Restructuring charges consist of the following:
(6) A $4.3 million change in estimate of disputed music license fees increased income from continuing operations in 1993 by $2.3 million, $.03 per share.
(7) Operating losses of $32.7 million during the Pittsburgh Press strike reduced income from continuing operations in 1992 by $20.2 million, $.27 per share.
(8) Investment results include i) gains and losses from the sale or write-down of investments and ii) accrued incentive compensation and other expenses associated with the management of the Scripps Ventures investment portfolios. Investment results include the following:
(9) In 1994 we sold our worldwide GARFIELD and U.S. ACRES copyrights. The sale resulted in a pre-tax gain of $31.6 million, which increased income from continuing operations by $17.4 million, $.23 per share.
(10) Other gains (losses) included the following:
(11) The provision for income taxes was affected by the following unusual items:
A change in the estimated tax liability for prior years reduced the tax provision, increasing income from continuing operations by $9.8 million, $.12 per share.
A change in the estimated tax liability for prior years reduced the tax provision, increasing income from continuing operations by $7.2 million, $.09 per share.
A change in the estimated tax liability for prior years increased the tax provision, reducing income from continuing operations by $5.3 million, $.07 per share.
A change in the estimated tax liability for prior years decreased the tax provision, increasing income from continuing operations by $5.4 million, $.07 per share; the effect of the increase in the federal income tax rate to 35% from 34% on the beginning of the year deferred tax liabilities increased the tax provision, reducing income from continuing operations by $2.3 million, $.03 per share.
A change in the estimated tax liability for prior years decreased the tax provision, increasing income from continuing operations by $8.4 million, $.11 per share.
(12) Our cable television systems (“Scripps Cable”) were acquired by Comcast Corporation (“Comcast”) on November 13, 1996, (the “Cable Transaction”) through a merger whereby our shareholders received, tax-free, a total of 93 million shares of Comcast’s Class A Special Common Stock. The aggregate market value of the Comcast shares was $1.593 billion and the net book value of Scripps Cable was $356 million, yielding an economic gain of $1.237 billion to our shareholders. This gain is not reflected in our financial statements as accounting rules required us to record the transaction at book value. Unless otherwise noted, the data excludes the cable television segment, which is reported as a discontinued business operation.
(13) Includes effect of discontinued cable television operations prior to completion of the Cable Transaction.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements and the notes thereto. You should read this discussion in conjunction with those financial statements.
This discussion and the information contained in the notes to the consolidated financial statements contain certain forward-looking statements that are based on our 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 our 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are 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.
Note 1 to the Consolidated Financial Statements describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. We believe the following to be the most critical accounting policies, estimates and assumptions affecting our reported amounts and related disclosures.
Revenue Recognition
Advertising. Advertising revenue is recorded, net of agency commissions, when advertisements are published in newspapers or are broadcast on television stations or national television networks. Advertising on our Internet sites is recognized over the period in which the advertising will appear.
Advertising contracts, which generally have a term of one year or less, may provide discounts based upon the volume of advertising purchased during the terms of the contracts. This requires us to make certain estimates regarding future advertising volumes. We base our estimates on various factors including our historical experience and advertising sales trends. Estimated rebates are recorded as a reduction of revenue in the period the advertisement is displayed and are revised as necessary based on actual volume realized.
Broadcast and national television network advertising contracts may guarantee the advertiser a minimum audience, requiring us to make estimates of audience size that will be delivered throughout the terms of the contracts. We base our estimate of audience size on information provided by ratings services and our historical experience. If we determine we will not deliver the guaranteed audience, an accrual for “make-good” advertisements is recorded as a reduction of revenue. The estimated make-good accrual is adjusted throughout the terms of the advertising contracts.
Newspaper Subscriptions. Circulation revenue for newspapers sold directly to subscribers is based upon the retail rate. Prepaid newspaper subscriptions are deferred and are included in circulation revenue on a pro-rata basis over the term of the subscriptions. Circulation revenue for newspapers sold to independent newspaper distributors, which are subject to returns, is based upon the wholesale rate. Newspaper circulation revenue is recognized upon publication of the newspaper, net of estimated returns. Estimated returns are based on historical return rates and are adjusted based on actual returns realized.
Network Affiliate Fees. Cable and satellite television systems generally pay a per-subscriber fee for the right to distribute our programming under the terms of long-term distribution contracts. We may make cash payments to cable and satellite television systems and may provide an initial period in which payment of affiliate fees by the systems is waived in exchange for such long-term distribution contracts. Network affiliate fee revenues are reported net of such incentives. Incentive payments are recorded as assets upon launch of our programming on the cable or satellite television system. The costs of incentives are recognized over the terms of the contracts based upon the ratio of each period’s revenue to expected total revenue over the terms of the contracts.
Merchandise Sales. Revenue from the sale of merchandise is recognized when the products are delivered to the customer. We allow customers to return merchandise for full credit or refund within 30 days from the date of receipt. Revenue is reported net of estimated returns, which are based upon our historical experience. Actual levels of merchandise returned may vary from these estimates.
Programs and Program Licenses - Programming assets include licensed programs and programs produced by us or on a contract basis for us. These costs are expensed over the estimated useful life of the programming based upon expected future cash flows. Estimated future cash flows can change based upon market acceptance, advertising and network affiliate fee rates, the number of cable and satellite television subscribers receiving our networks and program usage. Accordingly, revenue estimates and planned usage are reviewed periodically and are revised if necessary. Such revisions may affect the amount of amortization recorded in a given year, the life over which the programs are amortized, or both. If actual demand or market conditions are less favorable than projected, programming cost write-downs may be required. Programming asset write-downs are determined using a day-part methodology, whereby programs broadcast during a particular time period (such as prime time) are evaluated on an aggregate basis.
Long-lived Assets - Judgment is applied in determining the estimated useful life of long-lived assets, specifically plant and property and certain intangible assets with a finite life. We base our judgment of estimated lives on the length of time we have employed similar assets and upon expert opinions.
Certain events or changes in circumstances may indicate that the carrying value of our property, plant and equipment, intangible assets, and goodwill may not be recoverable and may require an impairment review. In assessing impairment, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. Based on that review, if the carrying value of these assets exceeds fair value and is determined not to be recoverable, an impairment loss representing the amount of excess over its fair value would be recognized in income.
In accordance with FAS 142 we review goodwill for impairment based upon groupings of businesses, referred to as reporting units. Reporting units are operating segments or groupings of businesses one level below the operating segment level. Scripps Networks and Shop At Home comprise separate reporting units. Our newspaper and broadcast television reporting units are based on size of newspaper market and broadcast television affiliation.
F-6
Investments - We hold investments in several companies, including publicly traded securities and other securities that have no active market. Future adverse changes in market conditions, poor operating results, or the inability of certain development stage companies to find additional financing could result in losses that may not be reflected in an investment’s current carrying value, thereby requiring an impairment charge in the future. We regularly review our investments to determine if there has been an other-than-temporary decline in market value. In making that determination, we consider the extent to which cost exceeds market value, the duration of the market decline, earnings and cash forecasts, and current cash position, among other factors.
Employee Benefits - We are self-insured for employee-related health and disability benefits and workers’ compensation claims. A third-party administrator is used to process all claims. Estimated liabilities for unpaid claims are based on our historical claims experience and are developed from actuarial valuations. However, actual amounts could vary significantly from such estimates, which would require adjustments to expense in that period.
We rely upon actuarial valuations to determine pension costs. Inherent in these valuations are assumptions of discount rates and the expected return on plan assets. The discount rate used to determine our future pension obligations is based upon market rates for long-term bonds. Our return on plan assets assumption is based upon expected returns for broad equity and bond indices, our asset allocation and the historical returns we have earned on those asset classes. A change of 0.5% in our discount rate of 6.5%, or in our assumed rate of return on plan assets of 8.25%, would not materially affect 2003 pension expense. Future pension expense will depend on future investment performance, changes in discount rates and other factors related to the employee population participating in our pension plans.
Income Taxes - Accounting for income taxes is sensitive to interpretation of various laws and regulations. The Internal Revenue Service is currently examining our 1996 to 2001 consolidated federal income tax returns. We review our provision for open tax years on an ongoing basis.
We record a tax valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Deferred tax assets subject to a valuation allowance primarily relate to state net operating loss carryforwards and capital loss carryforwards. We consider ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we determine the deferred tax asset we would realize would be greater or less than the net amount recorded, an adjustment would be made to the tax provision in that period.
RESULTS OF OPERATIONS
Nature of Operations and Basis of Presentation - We are a diversified media company operating in four reportable business segments. Newspaper publishing includes 21 daily newspapers in the U.S. Scripps Networks includes four national television networks distributed by cable and satellite television systems: Home & Garden Television (“HGTV”), Food Network, Fine Living and DIY - Do It Yourself Network (“DIY”). Scripps Networks also includes our 12% interest in FOX Sports Net South, a regional television network. We own approximately 70% of Food Network and 90% of Fine Living. Broadcast television includes ten stations, nine of which are affiliated with national broadcast networks. Shop At Home markets a range of consumer goods to television viewers and through its Internet site. Shop At Home programming is distributed by broadcast television stations and by cable and satellite television systems. Licensing and other media aggregates operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.
Acquisition and Divestitures - A joint operating agency (the “Denver JOA”) between our Denver Rocky Mountain News (“RMN”) and MediaNews Group, Inc.’s Denver Post (“Post”) commenced operations on January 22, 2001. In addition to forming the Denver JOA, we acquired and divested the following operations in the three year period ended December 31, 2002:
See Note 3 to the Consolidated Financial Statements for additional information regarding acquisitions and divestitures.
Consolidated Results of Operations - Net income was $188 million, $2.34 per share, in 2002, compared to $138 million, $1.73 per share, in 2001 and $163 million, $2.06 per share in 2000. Net income increased 36% in 2002 and decreased 16% in 2001. All per share amounts are presented on a diluted basis.
Net income was affected by the following items:
• Results for 2002 reflect the cessation of the amortization of goodwill and intangible assets with indefinite lives, due to the adoption of FAS 142 effective January 1, 2002. Amortization of goodwill and intangible assets with indefinite lives was $38.1 million, $28.1 million after tax, $.35 per share, in 2001 and $35.8 million, $26.5 million after tax, $.33 per share, in 2000.
• Restructuring charges in 2001 of $10.2 million primarily consist of costs associated with workforce reductions at newspapers solely managed by us. Such workforce reductions were initiated as a result of the advertising recession that began in 2001. Restructuring charges of $9.5 million in 2000 are costs related to the formation of the Denver JOA. Substantially all restructuring charges were paid in cash at or near the time the costs were incurred.
Equity in earnings of JOAs and other joint ventures includes our share of restructuring costs at the Denver JOA. In 2002, a gain on the sale of excess real estate increased equity in earnings of the Denver JOA by $3.9 million in 2002. Our share of costs associated with workforce reductions at the Denver JOA reduced equity in earnings of the Denver JOA by $5.9 million in 2001.
Restructuring charges, including Denver JOA restructuring charges, increased net income by $2.4 million, $.03 per share, in 2002, decreased net income by $10.1 million, $.13 per share, in 2001 and decreased net income by $6.2 million, $.08 per share, in 2000.
• Net investment results include (i) net realized gains and losses and (ii) accrued performance-based compensation and other expenses associated with the management of the Scripps Ventures investment funds. Net investment results were a pre-tax charge of $85.7 million in 2002, a pre-tax credit of $5.1 million in 2001 and a $24.8 million pre-tax charge in 2000.
Between 1997 and 2002 we invested in new businesses focusing on new media technology, primarily through Scripps Ventures. Write-downs of such investments, net of realized gains upon sales of securities, were $45.0 million in 2002, $39.5 million in 2001 and $17.5 million in 2000. Accrued performance-based compensation was increased $4.5 million in 2000, to $11.5 million. The $11.5 million accrual was reversed in 2001 due to the decline in value of the investments. In 2002, we incurred $3.6 million in costs associated with winding down active management of Scripps Ventures.
In 2001, we recognized a gain of $65.9 million upon the exchange of our investment in Time Warner for America Online (“AOL”), which acquired Time Warner in the first quarter of 2001. Due to subsequent declines in the value of AOL, we wrote down our investment in AOL by $29.0 million in the fourth quarter of 2001 and by $35.1 million in the second quarter of 2002.
Net investment results reduced net income by $55.6 million, $.69 per share, in 2002, increased net income by $3.8 million, $.05 per share, in 2001 and decreased net income by $15.8 million, $.20 per share, in 2000.
• In 2000, we sold our telephone directories and traded our Destin, Florida, newspaper and cash for the daily newspaper in Ft. Pierce, Florida. The $6.2 million net gain on the sale and trade increased net income by $4.0 million, $.05 per share.
• We settled the audit of our 1992 through 1995 consolidated federal income tax returns with the Internal Revenue Service (“IRS”) in 2002. Our 1996 through 2001 consolidated federal income tax returns are currently under examination by the IRS. As a result of the settlement and proposed adjustments in the current examination, in 2002 we reduced our estimate of the tax liability for prior year income taxes and increased our estimate of the amount we would realize from foreign tax credit carryforwards. In 2000, we reduced our estimate of the tax liability for prior year income taxes and changed our estimate of the amount we would realize from state net operating loss carryforwards. These changes in estimates increased net income by $9.8 million, $.12 per share, in 2002 and by $7.2 million, $.09 per share, in 2000.
The effective income tax rate was 37.4% in 2002, 41.3% in 2001 and 39.2% in 2000. The changes in estimates of the tax liability for prior year income taxes and the other items described above affected the effective income tax rate in each year. Excluding these items, the effective income tax rate was 39.4% in 2002, 39.4% in 2001 and 39.6% in 2000. The effective income tax rate in 2003 is expected to be approximately 40% due to higher effective state income tax rates.
Excluding the affects of these items, net income increased 34% in 2002 and decreased 14% in 2001. Operating results were driven by changes in pension expense, segment profit (which includes pension expense), a reduction in depreciation expense resulting from the formation of the Denver JOA, and changes in interest rates.
F-8
Pre-JOA depreciation at the RMN was $0.8 million in 2001 and $14.4 million in 2000. Depreciation and amortization for Shop At Home was $1.9 million in 2002. Depreciation and amortization is expected to be approximately $70 million in 2003.
Interest expense decreased in 2002 and 2001 primarily due to lower rates on variable rate credit facilities. The weighted-average interest rate on such facilities was 1.8% in 2002, 4.2% in 2001, and 6.4% in 2000. We are currently rolling over short-term debt at an effective 90-day yield of 1.3%. Average daily borrowings under short-term credit facilities were $373 million in 2002, $504 million in 2001, and $527 million in 2000. The average balance of all interest bearing obligations was $706 million in 2002, $741 million in 2001, and $767 million in 2000. Interest expense in 2003 is expected to increase approximately 20%, to $34 million, primarily as a result of our decision to replace $200 million of borrowings under the variable rate credit facilities with fixed rate notes.
Minority interest increased in 2002 primarily due to improved operating performance of Food Network, in which we own an approximate 70% residual interest. Food Network profits are allocated entirely to Class A partners until such partners' capital contributions are returned. Approximately $57 million of profits remain to be allocated to Class A partnership interests before amounts are allocated to other partnership interests. We own approximately 87% of the Class A partnership interests.
Segment Operating Revenues and Segment Profit - Segment operating revenues and segment profit (loss) are presented below.
For the years ended December 31,
Change
Operating revenues:
(0.9
)%
(24.2
908,145
23.2
%
14.0
9.9
(19.1
42,345
1.7
(8.4
1,535,664
10.3
1,391,956
(15.3
1,643,846
Divested operating units
10,500
(15.9
1,654,346
270,268
13.7
237,686
(11.8
269,409
124,596
64.9
75,547
68,770
98,109
79,651
(38.3
129,018
(1,682
17,284
16.1
14,881
(7.8
16,144
(27,810
(49.5
(18,596
6.2
(19,825
480,765
23.5
389,169
(16.0
463,516
Segment profit was affected by changes in pension expense. Pension expense was $13.4 million in 2002, $6.6 million in 2001 and $4.2 million in 2000. Pension expense increased primarily due to lower returns on plan assets. Pension expense is expected to be approximately $25 million in 2003 due to lower discount rates and lower expected returns on plan assets.
Corporate expense increased in 2002 primarily due to the vesting of certain performance based restricted stock awards and the accrual of performance bonuses, which were not earned in 2001. Certain restricted stock awards issued in 2001 are earned based upon the market price of our Class A Common Shares. The expense related to these awards is recorded when the shares are earned. Corporate expense increased year-over-year in the first quarter when 20,000 shares were earned. An additional 20,000 shares were earned in April 2002. The remaining 20,000 shares under the award can be earned in 2003 if certain targets are met in 2003.
The following is a discussion of the performance or our reportable business segments.
SHOP AT HOME - Operating results for Shop At Home are included in our results of operations from the October 31, 2002, acquisition of the television-retailing network. Operating revenues for the last two months of 2002 were $42.3 million and segment losses were $1.7 million. Shop At Home revenues increased 16% in 2002 on a pro forma basis, assuming we had owned the business for the full year in 2002 and 2001. Shop At Home is expected to reduce total segment profit by approximately $10 million in 2003 and is expected to dilute 2003 earnings per share by $.10 to $.15.
F-9
NEWSPAPERS - Operating results for our newspaper segment were as follows:
Newspapers managed solely by us
Segment operating revenues:
Local
(1.5
(4.9
Classified
(0.7
(5.1
National
1.8
7.8
10.8
1.5
Newspaper advertising
1.2
(3.2
4.0
4.6
15.6
Total excluding RMN pre-JOA operating revenues
0.8
RMN pre-JOA operating revenues
Segment costs and expenses (excludes depreciation and amortization):
Editorial and newspaper content
75,552
74,244
4.4
71,111
Newsprint and ink
65,736
(20.1
82,272
80,830
Other press and production
72,178
69,131
3.6
66,723
Circulation and distribution
66,026
1.4
65,121
5.5
61,738
Total market coverage, direct mail, printing and other
32,162
8.3
29,700
17.9
25,181
Advertising sales and marketing
68,785
7.1
64,246
2.1
62,914
General and administrative
69,632
6.0
65,687
(4.0
68,435
Total excluding RMN pre-JOA costs and expenses
450,071
(0.1
450,401
3.1
436,932
RMN pre-JOA costs and expenses
12,544
230,639
Total segment costs and expenses
462,945
667,571
Contribution to segment profit excluding RMN pre-JOA
232,378
2.7
226,324
(9.5
250,215
RMN pre-JOA contribution to segment profit
(894
(9,641
Total contribution to segment profit
225,430
(6.3
240,574
JOAs and other joint ventures
51,056
7.7
JOA editorial costs and expenses
35,312
0.4
35,161
120.3
15,960
JOA contribution to segment profit
38,324
141.1
15,895
31,452
Equity in income (loss) of other joint ventures
(434
88.1
(3,639
(39.1
(2,617
37,890
12,256
28,835
Contribution to segment profit of newspapers solely managed by us as a percent of segment operating revenues
34.1
32.7
26.5
Supplemental Information:
38,616
34,363
29,834
Business acquisitions and other additions to long-lived assets
534
63,199
74,878
The Denver JOA began operations in January 2001. Our financial statements do not include the advertising and other operating revenues of the Denver JOA or the costs to produce, distribute and market the newspapers. To enhance comparability of year-over-year segment results, we have removed the operating revenues and costs and expenses of the RMN for periods prior to the formation of the Denver JOA and reported such amounts separately.
Our newspapers are concentrated in mid-sized markets and as such we have less of a reliance on national advertising than certain other newspaper groups. We believe our concentration in mid-sized markets limits our exposure to sharp declines in national help-wanted advertising. We expect newspaper advertising revenue to increase between 3% and 5% in 2003.
We continue to expand our offerings of direct mail, total market coverage and other new advertising revenue streams.
The average price of newsprint decreased 22% in 2002, after increasing 6% in 2001 and 7% in 2000. Newsprint prices have fluctuated between $420 and $590 per metric ton from 1998 through 2002. The average newsprint price was in the lower portion of that range during the fourth quarter of 2002. Certain newsprint suppliers announced $50 per metric ton price increases effective March 1, 2003.
Circulation and distribution costs increased primarily due to efforts to gain circulation at our larger newspapers.
The increase in general and administrative expenses is primarily due to an increase in performance bonuses earned in 2002.
Employee compensation and benefit costs are expected to increase 4% to 6%, or $10 million to $15 million, in 2003 due to rising health care and pension costs.
The RMN contributed $9.4 million to segment profit in 2002. In 2001, the RMN reduced segment profit by $13.1 million, including a $12.2 million reduction in segment profit after the formation of the Denver JOA. The RMN reduced segment profit by $9.6 million in 2000. Operating results in Denver have improved due to advertising and circulation rate increases and cost-cutting measures implemented by the Denver JOA, including publication of combined weekend editions and a single classified advertising section distributed in both newspapers. We expect the year-over-year increase in the RMN contribution to segment profit in 2003 to be in the $6 million range due to the sluggish economy.
Capital expenditures in 2002 and 2001 include construction of a new production facility for our Knoxville daily newspaper. Capital expenditures in 2003 are expected to be $41 million, including construction of a new production facility for our Treasure Coast, Florida, daily newspapers.
F-11
SCRIPPS NETWORKS - Operating results for Scripps Networks were as follows:
21.5
9.1
32.9
46.8
3.7
(0.5
Programming and production
122,212
17.6
103,892
16.4
89,274
Operations and distribution
31,338
(7.7
33,952
9.0
31,146
Sales and marketing
79,550
72,391
4.2
69,442
63,893
56,067
33.6
41,973
296,993
11.5
266,302
14.9
231,835
Segment profit before joint ventures
118,409
67.0
70,893
11.0
63,846
Equity in income of joint ventures
6,187
4,654
(5.5
4,924
Segment profit before joint ventures, as a percent of segment operating revenues
28.5
21.0
21.6
Billed network affiliate fees
92,278
16.7
79,061
61,543
Network launch incentive payments
92,394
66,202
8,226
Payments for programming less (greater) than program cost amortization
(23,024
(42,290
(45,509
14,545
14,114
12,236
5,235
20,934
1,587
Amounts recorded on the year-end balance sheet:
Program assets
252,805
214,419
176,596
Unamortized network distribution incentives
199,013
124,639
63,996
Launch incentive payments due to cable and satellite television systems for launches through the end of the period
66,222
69,543
55,235
According to the Nielsen Homevideo Index (“Nielsen”) approximately 87 million homes in the United States receive cable or satellite television. According to Nielsen, HGTV was telecast to 80.4 million homes in December 2002, 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 78.2 million homes in December 2002, 71.5 million homes in December 2001, 54.4 million homes in December 2000, and 44.2 million homes in December 1999.
Wider distribution of HGTV and Food Network and increased viewership of the networks led to increased demand and higher advertising rates. Advertising revenues in 2001 were reduced by lost sales in the days following the September 11 terrorist attacks and weakened demand due to the advertising recession. Advertising revenues are expected to increase approximately 20% for the full year of 2003.
The increase in network affiliate fees reflects wider distribution of HGTV and Food Network, as well as both scheduled rate increases and rate increases resulting from the renewal of distribution agreements. Network affiliate fees are expected to increase approximately 15% in 2003.
As HGTV and Food Network become fully distributed, marketing and advertising expenditures designed to gain distribution have been decreased. The reduction in marketing and advertising expenditures led to the decrease in operations and distribution expense. Marketing and advertising expenditures to support distribution of the networks were $2.1 million in 2002 and $5.7 million in 2001.
Programming and production expense has increased due to the improved quality and variety of programming and expanded hours of original programming. We own the rights to substantially all of the programming we produce and expect to telecast the programs over several years. HGTV and Food Network programming and production expense is expected to increase approximately 15% in 2003.
In addition to continuing our investments in programming, we expect to continue to undertake additional marketing and promotion efforts to continue to increase the viewership of HGTV and Food Network. Sales and marketing expenses for the networks are expected to increase approximately 8% in 2003.
The increase in general and administrative expenses is primarily due to an increase in performance bonuses earned in 2002 and to start-up costs associated with DIY and Fine Living.
We launched DIY in the fourth quarter of 1999 and Fine Living in the first quarter of 2002. Start-up costs associated with DIY and Fine Living reduced segment profit by $38.0 million in 2002, $22.1 million in 2001 and $10.9 million in 2000.
Excluding losses associated with the launch of new networks, segment profit increased 67% in 2002 and 23% in 2001.
Fine Living and DIY could each be seen in approximately 13 million homes in December 2002. We expect to increase distribution of Fine Living and DIY to approximately 20 million homes in 2003.
We launched a joint video-on-demand (“VOD”) trial with Time Warner Cable in November 2001 on Time Warner digital cable homes in Cincinnati, Ohio. The initial VOD package included a total of 60 hours of programming from HGTV, Food Network and DIY. We have announced plans to expand our VOD agreement to cover 30 Time Warner cable television systems across the United States and to Comcast’s Philadelphia cable television system. The on-demand packages in these new markets are currently offered free-of-charge. We expect to continue our efforts to develop a subscription-based VOD model.
We expect losses related to developing programming services will decrease segment profit by $50 million in 2003, including costs related to the development of a programming service focusing on Hispanic lifestyle and interests. The cash investment in developing programming services will substantially exceed the reported losses because of investments in programming and launch incentive payments to cable television systems.
Capital expenditures in 2003 are expected to be approximately $16 million.
F-13
BROADCAST TELEVISION - Operating results for broadcast television were as follows:
5.2
(6.4
(1.4
(18.9
Political
(13.3
(6.8
5.0
23.3
Programming and station operations
142,294
3.0
138,132
(5.8
146,630
37,138
6.4
34,918
(14.4
40,807
27,613
10.9
24,900
(6.6
26,670
207,045
197,950
(7.5
214,107
Segment profit as a percent of segment operating revenues
32.2
28.7
37.6
(276
2,464
1,460
23,655
18,785
31,280
14,710
Our television stations benefited from political advertising and the return of the Olympics in 2002. Revenues in 2001 were impacted by approximately $4 million in lost sales in the days immediately following the September 11 terrorist attacks. Our television stations broadcast 32 hours of continuous, commercial free network and local news coverage, and for the next several days there was little demand for television advertising. We expect local and national advertising to increase approximately 8% in 2003.
Expenses decreased year-over-year in 2001 and in 2000, primarily due to employee workforce reductions. The 2002 increase in sales and marketing and general and administrative expenses is primarily due to an increase in performance bonuses and commissions.
Employee compensation and benefit costs are expected to increase 4% to 6%, or $4 million to $7 million, in 2003 due to rising health care and pension costs. Expenses related to licensed programming are expected to increase between 2% and 3%, or approximately $2 million, in 2003.
Capital expenditures in 2000 include construction of a new production facility for our West Palm Beach television station. Capital expenditures are expected to be approximately $32 million in 2003, including construction of a new production facility for our Cincinnati television station.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is our cash flow from operating activities. Advertising has historically provided 70% to 75% of total operating revenues, so cash flow from operating activities is adversely affected during recessionary periods.
Information about our use of cash flow from operating activities is presented in the following table:
STATEMENT OF CASH FLOWS INFORMATION:
Net cash provided by operating activities
212,945
3.3
206,067
(19.4
255,743
(88,400
(68,223
(74,577
Dividends paid, including to minority interests
(51,143
(50,784
(47,202
Cash flow available for acquisitions and debt repayment
73,402
87,060
133,964
(118,261
(102,299
(139,056
Other investing activity
15,416
16,125
61,729
1,026
9,202
(53,958
Purchase and retirement of common stock
(22,449
(4,571
Other financing activities - primarily stock option proceeds
26,506
15,668
5,548
Cash flow from operating activities exceeded capital expenditures and cash dividends in 2002, as it has in each year since 1992. Cash flow from operating activities in excess of capital expenditures and dividends, combined with our substantial borrowing capacity have been used primarily to fund acquisitions and investments, and to develop new businesses. There are essentially no legal or other restrictions on the transfer of funds among our business segments.
Net cash provided by operating activities was reduced by contributions to Scripps’ defined benefit pension plans of $40 million in 2002. Pension contributions were $1.5 million in 2001 and $0.8 million in 2000. We expect to make additional pension contributions of approximately $40 million in 2003.
Net cash provided by operating activities was also reduced in 2002 and in 2001 by increased investments in Scripps Networks’ programming, incentives paid to cable and satellite television systems and by investments in our developing networks. Costs associated with developing Fine Living and DIY reduced cash flow from operating activities by approximately $110 million in 2002, by approximately $20 million in 2001 and by approximately $10 million in 2000.
Capital expenditures increased in 2002 primarily due to the construction of a new production facility for our Knoxville daily newspaper. Capital expenditures in 2003 are estimated to increase to approximately $100 million because of our decision to begin construction of a newspaper plant on the Treasure Coast of Florida and a new production facility for our Cincinnati television station.
We expect cash flow available for acquisitions and debt repayment to decrease in 2003 due to costs associated with our developing networks and Shop At Home.
In 2002, we acquired a 70% controlling interest in the Shop At Home television-retailing network for $49.5 million in cash. Related to the acquisition of the controlling interest, we agreed to loan Summit America Television, Inc. (“Summit America”), the former parent of Shop At Home, $47.5 million to be repaid in three years and to purchase $3.0 million of Summit America redeemable preferred stock. We also acquired an additional 1% interest in Food Network for $5.2 million.
In 2001, we paid MediaNews $60.0 million in connection with the formation of the Denver JOA. We also acquired an additional 4% interest in Food Network for $19.4 million.
In 2000, we acquired daily newspapers in Henderson, Kentucky, Ft. Pierce, Florida, and a weekly newspaper in Marco Island, Florida, for $67.1 million and acquired television station KMCI in Kansas City for $14.6 million.
In 2002, 2001 and 2000 we invested $11.6 million, $21.4 million and $57.0 million in Scripps Ventures and other investments.
Net debt (borrowings less cash equivalent and other short-term investments) increased $3.0 million in 2002, to $725 million at December 31, 2002. Net debt includes commercial paper borrowings totaling $312 million, with average maturities of 90 days or less. Commercial paper borrowings are supported by two bank credit facilities, one which permits maximum borrowings of $400 million and expires in August 2003 and one which permits maximum borrowings of $200 million and expires in 2007. Borrowings of $288 million are available under the facilities. The $400 million facility is expected to be replaced with a similar facility prior to its expiration.
Our access to commercial paper markets can be affected by macroeconomic factors outside of our control. In addition to macroeconomic factors, our access to commercial paper markets and our borrowing costs are affected by short and long-term debt ratings assigned by independent rating agencies.
We have a U.S. shelf registration statement which allows us to borrow up to $500 million, of which $400 million was available at December 31, 2002. In February 2003, we borrowed $50 million under the shelf registration statement, reducing the available amount to $350 million. The proceeds from the notes were used to reduce commercial paper borrowings.
A summary of our contractual cash commitments for each of the next five years, as of December 31, 2002, is as follows:
Less than 1 Year
1 to 3 Years
4 to 5 Years
Over 5 Years
On balance sheet amounts:
Long-term debt
75,171
300,165
349,442
724,972
Other noncurrent liabilities:
Network distribution contracts
62,846
3,315
Programming
45,020
16,877
62,114
Employee compensation and benefits
27,437
15,263
10,232
47,452
100,384
Other long-term obligations
9,711
2,791
1,852
16,280
Commitments:
Programming not yet available for broadcast
58,800
82,400
34,500
6,400
182,100
Operating leases
14,300
21,700
13,600
17,800
67,400
Satellite and other purchase commitments
40,800
68,200
2,800
111,800
Total contractual cash obligations
326,300
217,660
364,366
422,946
1,331,272
In the ordinary course of business we enter into long-term contracts to license or produce programming, to lease office space, to obtain satellite transmission rights, and to obtain distribution of Shop At Home. A liability for licensed programming is not recorded until the program is available for telecast. Liabilities for our other commitments are recorded when the related services are rendered.
We expect our operating leases will be replaced with leases for similar facilities upon their expiration. We expect our broadcast television stations and our national television networks to continue to enter into programming commitments and for our national television networks and Shop At Home to continue to obtain satellite transmission rights.
F-16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.” We are also exposed to changes in the market value of our investments.
We may use foreign currency forward and option contracts to hedge our 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. We held no foreign currency or newsprint derivative financial instruments at December 31, 2002, or during the year then ended.
The following table presents additional information about market-risk-sensitive financial instruments:
As of December 31, 2002
As of December 31, 2001
( in thousands, except share data )
Cost Basis
Fair Value
Financial instruments subject to interest rate risk:
Variable rate credit facilities
312,371
513,855
$200 million, 5.750% notes, due in 2012
198,809
217,368
$100 million, 4.250% notes, due in 2009
99,334
102,468
$100 million, 6.625% notes, due in 2007
99,930
113,737
99,916
104,376
$100 million, 6.375% notes, due in 2002
99,983
102,685
Other notes
14,528
13,956
10,090
9,084
Total long-term debt including current portion
759,900
723,844
730,000
Note from Summit America, including accreted discount
43,250
46,250
Financial instruments subject to market value risk:
AOL Time Warner (2,017,000 shares)
29,667
26,420
64,740
Centra Software (700,500 shares)
1,427
701
5,604
Other available-for-sale securities
891
3,407
947
4,563
Total investments in publicly-traded companies
31,985
30,528
67,114
74,907
Summit America preferred stock
3,000
(a
Other equity investments
17,970
51,364
(a) Included in other equity investments are securities that do not trade in public markets, so they do not have readily determinable fair values. Many of the investees have had no rounds of equity financing in the past two years. There can be no assurance as to the amounts we would receive if these securities were sold.
Our objectives in managing interest rate risk are to limit the impact of interest rate changes on our earnings and cash flows and to reduce our overall borrowing costs. We manage interest rate risk primarily by maintaining a mix of fixed-rate and variable-rate debt, and through the use of interest rate swaps. In February 2003, we issued $50 million of 3.75% notes due in 2008. The proceeds were used to reduce borrowings under the variable rate credit facilities. Concurrently, we entered into a pay-floating interest rate swap, effectively converting the notes to a variable rate obligation indexed to LIBOR. We held no interest rate swaps, forwards or other derivative financial instruments at December 31, 2002 or December 31, 2001.
The weighted-average interest rate on borrowings under the Variable Rate Credit Facilities at December 31 was 1.4% in 2002, 2.0% in 2001 and 6.6% in 2000.
In connection with the acquisition of our 70% controlling interest in Shop At Home, we agreed to lend Summit America, the former parent of Shop At Home, $47.5 million and to purchase $3.0 million of its 6% preferred stock. The note is secured by Summit America’s broadcast television stations in San Francisco, Boston and Cleveland and bears interest at 6%, payable quarterly. The note and the preferred stock mature in 2005. The carrying amount of the note is based on the estimated fair value of the note at the date of acquisition of the controlling interest in Shop At Home plus accreted discount.
CONTROLS AND PROCEDURES
Scripps’ management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other information presented in this report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect certain estimates and adjustments by management. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, we must make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We re-evaluate our estimates and assumptions on an ongoing basis. While actual results could, in fact, differ from those estimated at the time of preparation of the financial statements, we are 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.
We maintain a system of internal accounting controls and procedures, which management believes provide reasonable assurance that transactions are properly recorded and that assets are protected from loss or unauthorized use.
We maintain a system of disclosure controls and procedures to ensure timely collection and evaluation of information subject to disclosure, to ensure the selection of appropriate accounting polices, and to ensure compliance with our accounting policies and procedures. Our disclosure control systems and procedures include the certification of financial information provided by each of our businesses by the management of those businesses.
The integrity of the internal accounting and disclosure control systems are based on written policies and procedures, the careful selection and training of qualified financial personnel, a program of internal audits and direct management review. Our disclosure control committee meets periodically to review our systems and procedures and to review our financial statements and related disclosures.
Both the internal and independent auditors have direct and private access to the Audit Committee.
In December 2002 and January 2003, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) was carried out under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation.
CONSOLIDATED BALANCE SHEETS
As of December 31,
ASSETS
Current Assets:
Cash and cash equivalents
15,508
17,419
Accounts and notes receivable (less allowances - 2002, $18,092; 2001, $13,964)
280,352
236,311
Programs and program licenses
124,196
120,715
Inventories
24,234
7,345
Deferred income taxes
30,364
30,850
Miscellaneous
25,357
38,018
Total current assets
500,011
450,658
Investments
254,351
331,542
Property, Plant and Equipment
456,789
394,677
Goodwill
1,171,109
1,136,083
Other Assets:
Programs and program licenses (less current portion)
162,022
122,620
Other intangible assets
67,795
64,959
Note receivable from Summit America
15,997
16,433
Total other assets
488,077
328,651
TOTAL ASSETS
2,870,337
2,641,611
See notes to consolidated financial statements.
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt
613,878
Accounts payable
113,579
81,690
Customer deposits and unearned revenue
40,582
29,381
Accrued liabilities:
80,167
44,792
Network distribution incentives
64,624
53,728
71,146
Total current liabilities
426,073
905,511
Deferred Income Taxes
142,630
144,840
Long-Term Debt (less current portion)
649,801
109,966
Other Noncurrent Liabilities and Minority Interests (less current portion)
136,368
129,394
Commitments and Contingencies (Note 17)
Shareholders’ Equity:
Preferred stock, $.01 par - authorized: 25,000,000 shares; none outstanding
Common stock, $.01 par:
Class A - authorized: 120,000,000 shares; issued and outstanding: 2002 - 61,668,221 shares; 2001 - 60,103,746 shares
617
601
Voting - authorized: 30,000,000 shares; issued and outstanding: 2002 - 18,369,113 shares; 2001 - 19,096,913 shares
191
792
Additional paid-in capital
218,623
174,485
Retained earnings
1,324,027
1,183,595
Other comprehensive income:
Unrealized gains (losses) on securities available for sale
(945
5,067
Pension liability adjustments
(22,650
Foreign currency translation adjustment
199
(554
Unvested restricted stock awards
(4,590
(11,485
Total shareholders’ equity
1,515,465
1,351,900
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements
F-20
CONSOLIDATED STATEMENTS OF INCOME
( in thousands, except per share data )
Operating revenues
Equity in earnings of JOAs and other joint ventures
83,245
46,190
49,719
Costs and expenses
(1,134,288
(1,054,858
(1,240,288
(58,319
(55,658
(69,057
Amortization of goodwill and other intangible assets
(4,449
(42,995
(40,108
Restructuring charges
(10,198
(9,523
Investment results, net of expenses
(85,667
5,063
(24,834
Net gains on divested operations
6,196
(28,301
(39,197
(51,934
1,037
1,079
1,485
Income before taxes and minority interests
308,922
241,382
276,002
Provision for income taxes
115,619
99,622
108,090
.
Income before minority interests
193,303
141,760
167,912
5,006
3,797
4,459
188,297
137,963
163,453
Net income per share of common stock:
Basic
2.37
1.75
2.09
Diluted
Weighted average shares outstanding:
79,485
78,825
78,170
80,619
79,970
79,161
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash flows from operating activities:
62,768
98,653
109,165
44,932
8,519
9,454
Investment results and nonrecurring items, net of deferred income tax
43,926
5,159
Tax benefits of stock compensation plans
13,293
10,478
4,959
Affiliate fees billed greater than amounts recognized as revenue
13,616
19,886
21,231
Stock and deferred compensation plans
11,634
8,584
11,116
Dividends received greater than share of profits of JOAs and equity-method investments
6,872
22,413
1,214
Minority interests in income of subsidiary companies
(92,394
(66,202
(8,226
(23,300
(39,826
(44,049
Other changes in certain working capital accounts, net
(66,881
1,069
(18,773
5,176
486
(3,419
Net operating activities
Cash Flows from Investing Activities:
Additions to property, plant and equipment
Purchase of subsidiary companies and long-term investments
(40,879
Investments in Denver JOA
(61,420
Sale of subsidiary companies and long-term investments
507
14,550
50,940
14,909
1,575
10,789
Net investing activities
(191,245
(154,397
(151,904
Cash Flows from Financing Activities:
Increase in long-term debt
301,772
9,271
737
Payments on long-term debt
(300,746
(54,695
(47,865
(47,506
(43,924
Dividends paid to minority interests
(3,278
Repurchase Class A Common shares
Miscellaneous, net (primarily employee stock options)
Net financing activities
(23,611
(48,363
(100,183
Increase (Decrease) in Cash and Cash Equivalents
(1,911
3,307
3,656
Cash and Cash Equivalents:
Beginning of year
14,112
10,456
End of year
Supplemental Cash Flow Disclosures:
Interest paid, excluding amounts capitalized
25,939
38,538
51,434
Income taxes paid
111,979
63,008
110,065
Denver newspaper assets contributed to JOA
156,830
Destin newspaper traded for Fort Pierce newspaper (see Note 3)
3,857
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND SHAREHOLDERS’ EQUITY
( in thousands, except share data)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Unvested Restricted Stock Awards
Total Shareholders’ Equity
As of December 31, 1999
781
136,731
973,609
58,271
(4,940
1,164,452
Comprehensive income
Unrealized gains (losses), net of tax of $17,972
(32,819
Reclassification adjustment for losses (gains) in income, net of tax of ($4,233)
7,398
Increase (decrease) in unrealized gains
(25,421
Currency translation
(612
(26,033
137,420
Dividends: declared and paid - $.56 per share
Convert 120,000 Voting Shares to Class A shares
Repurchase 80,500 Class A Common shares
(4,570
Compensation plans, net: 742,915 shares issued;
15,445 shares forfeited; 50,591 shares repurchased
20,274
(807
19,474
Tax benefits of compensation plans
As of December 31, 2000
787
157,394
1,093,138
32,238
(5,747
1,277,810
Comprehensive income:
Unrealized gains, net of tax of ($2,690)
4,990
Reclassification adjustment for losses (gains) in income, net of tax of $17,124
(31,800
(26,810
Currency translation, net of tax of $180
(915
(27,725
110,238
Dividends: declared and paid - $.60 per share
Repurchase 382,200 Class A Common shares
(22,445
Compensation plans, net: 966,084 shares issued; 2,500 shares forfeited; 119,466 shares repurchased
29,058
(5,738
23,329
4,513
Unrealized gains (losses), net of tax of $3,134
(5,820
Reclassification adjustment for losses (gains) in income, net of tax of $104
(192
Increase (decrease) in unrealized gains (losses)
(6,012
Minimum pension liability, net of tax of $14,606
Currency translation, net of tax of ($120)
753
(27,909
160,388
Convert 727,800 Voting Shares to Class A shares
Compensation plans, net: 878,678 shares issued;
1,800 shares forfeited; 40,203 shares repurchased
30,845
6,895
37,749
(23,396
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the accounts of The E. W. Scripps Company and its majority-owned subsidiary companies. As used in the Notes to Consolidated Financial Statements, the terms “we,” “our,” “us” or “Scripps” may, depending on the context, refer to The E. W. Scripps Company and its consolidated subsidiaries.
Nature of Operations - We are a diversified media company operating in four reportable business segments: newspaper publishing, cable and satellite television programming services (referred to as “Scripps Networks”), broadcast television and television-retailing (“Shop At Home”).
Newspaper publishing includes 21 daily newspapers in the U.S. Newspapers 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 four national television networks distributed by cable and satellite television systems: Home & Garden Television (“HGTV”), Food Network, Fine Living and DIY - Do It Yourself Network (“DIY”). Scripps Networks also includes our 12% interest in FOX Sports Net South, a regional television network. As of December 31, 2002, we owned approximately 70% of Food Network and approximately 90% of Fine Living. Scripps Networks derives revenue primarily from the sale of advertising time and from affiliate fees from cable and satellite television systems.
Broadcast television includes ten stations, nine of which are affiliated with national broadcast networks. Broadcast television derives revenue primarily from the sale of advertising time to local and national advertisers.
Shop At Home markets a range of consumer goods to television viewers and through its Internet site. Shop At Home programming is distributed under the terms of affiliation agreements with broadcast television stations and cable and satellite television systems. Substantially all of Shop At Home’s revenues are derived from the sale of merchandise.
The relative importance of each line of business is indicated in the segment information presented in Note 16. Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.
Our operations are geographically dispersed and we have a diverse customer base. We believe 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 our financial position. However, more than 70% of our operating revenues have historically been derived from advertising. Operating results can be affected by changes in the demand for advertising both nationally and in individual markets.
Use of Estimates - We must make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. While we re-evaluate our estimates and assumptions on an ongoing basis, actual results could, in fact, differ from those estimated at the time of preparation of the financial statements.
Our financial statements include estimates for uncollectible accounts receivable; product returns and rebates due to customers; revenue recognized under customer-billed arrangements (see “Revenue Recognition”); the periods over which long-lived assets are depreciated or amortized; assumptions used in accounting for our defined benefit pension plans; self-insured risks and income taxes payable.
We self-insure employees’ medical and disability income benefits, workers’ compensation benefits and general liability. The recorded liability, which totaled $20.1 million at December 31, 2002, is calculated using actuarial methods and is not discounted. Management does not believe it is likely that its estimates for such items will change materially in the near term.
Revenue Recognition - Our primary sources of revenue are from:
• The sale of advertising space, advertising time and Internet advertising.
• The sale of newspapers to distributors and to individual subscribers.
• Programming services provided to cable and satellite television systems (“network affiliate fees”).
• The sale of merchandise to consumers.
• Royalties from licensing copyrighted characters.
Revenue recognition policies for each source of revenue are described below.
Advertising contracts, which generally have a term of one year or less, may provide discounts based upon the volume of advertising purchased during the terms of the contracts. This requires us to make certain estimates regarding future advertising volumes. Estimated rebates are recorded as a reduction of revenue in the period the advertisement is displayed and are revised as necessary based on actual volume realized.
Broadcast and national television network advertising contracts may guarantee the advertiser a minimum audience, requiring us to make estimates of audience size. If we determine we will not deliver the guaranteed audience, an accrual for “make-good” advertisements is recorded as a reduction of revenue. The estimated make-good accrual is adjusted over the terms of the advertising contracts.
Broadcast television stations may receive compensation for airing network programming under the terms of the network affiliation agreements. Network affiliation agreements generally provide for the payment of pre-determined fees, but may provide compensation based upon other factors. Pre-determined fees are recognized as revenue on a straight-line basis over the terms of the network affiliation agreements. Compensation dependent upon other factors, which may vary over the terms of the affiliation agreements, is recognized when such amounts are earned.
Newspaper Subscriptions. Circulation revenue for newspapers sold directly to subscribers is based upon the retail rate. Prepaid newspaper subscriptions are deferred and are included in circulation revenue on a pro-rata basis over the term of the subscriptions. Circulation revenue for newspapers sold to independent newspaper distributors, which are subject to returns, is based upon the wholesale rate. Newspaper circulation revenue is recognized upon delivery, net of estimated returns. Estimated returns are based on historical return rates and are adjusted based on actual returns realized.
Network Affiliate Fees. Cable and satellite television systems generally pay a per-subscriber fee for the right to distribute our programming on their systems under the terms of long-term distribution contracts. We may make cash payments to cable and satellite television systems and may provide an initial period in which payment of affiliate fees by the systems is waived in exchange for such long-term distribution contracts. Network affiliate fee revenues are reported net of such incentives. Incentive payments are recorded as assets upon launch of our programming on the cable or satellite television system. The costs of incentives are recognized over the terms of the contracts based upon the ratio of each period’s revenue to expected total revenue over the terms of the contracts.
Licensing. Royalties from merchandise licensing are recognized as the licensee sells products. Royalties from promotional licensing are recognized on a straight-line basis over the terms of the licensing agreements.
Customer-billed Revenue. Certain of our revenues, primarily network affiliate fees and licensing revenues, are reported to us by customers in accordance with contractual terms. This requires us to estimate the amount of revenue earned in the current period. Network affiliate fees are determined by contracts with cable and satellite television systems and are based upon subscribers receiving our programming. Licensing revenues are determined by contracts with licensees and are based upon sales of licensed products. We record revenue based upon estimates of the number of subscribers receiving our programming services and licensed product sales. Estimated network affiliate fees and licensing revenues are subsequently adjusted based upon actual amounts realized.
F-25
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.
Inventories - Inventories are stated at the lower of cost or market. Merchandise inventories are computed using the average cost method, which approximates the first in, first out (“FIFO”) method. The cost of newsprint and other inventories is computed using the FIFO method.
We identify slow-moving or obsolete merchandise inventories and estimate appropriate loss provisions. Estimated loss provisions are calculated net of amounts that can be recovered under vendor return programs. While we have no reason to believe our inventory return privileges will be discontinued in the future, our risk of loss would increase if such a loss of return privileges were to occur.
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 (“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.
We are a partner in JOAs in four markets. The JOA between our Denver Rocky Mountain News and MediaNews Group, Inc.’s (“MediaNews”) Denver Post (the “Denver JOA”) was approved by the U.S. Attorney General in January 2001.
The Denver JOA is jointly managed by us and MediaNews. We do not share management responsibilities for our other three JOAs.
JOA revenues less JOA expenses, as defined in each JOA, equals JOA operating profits. In each case JOA expenses exclude editorial costs and expenses. JOA operating profits are split between the partners according to the terms of the JOA agreement. We receive 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. Our portion of JOA operating profits is reported in “Equity in earnings of JOAs and other joint ventures” in our Consolidated Statements of Income. We include the editorial costs and expenses of our newspapers in “Costs and expenses” in our Consolidated Statements of Income.
Our residual interest in the net assets of the Denver and Albuquerque JOAs is classified as an investment in the Consolidated Balance Sheets. We do not have a residual interest in the net assets of the other JOAs.
Investments - We have 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. Such changes could materially affect the amounts reported in our financial statements.
We record our investments at fair value, except for securities accounted for under the equity method or that do not trade in a public market. Investments in 20%- to 50%-controlled companies and in all joint ventures and partnerships are accounted for using the equity method. Investments in private companies are recorded at adjusted cost, net of impairment write-downs, because no readily determinable market price is available. All other securities are classified as available for sale. Fair value is determined using quoted market prices. The difference between adjusted cost basis and fair value, net of related tax effects, is recorded in the accumulated other comprehensive income component of shareholders’ equity.
We regularly review our investments to determine if there has been an other-than-temporary decline in value. In making that determination we consider the extent to which cost exceeds fair value, the duration of the market decline, earnings and cash forecasts, and current cash position among other factors. The cost basis is adjusted when a decline in market value is determined to be other than temporary, with the resulting adjustment charged against net income.
The cost of securities sold is determined by specific identification.
F-26
Property, Plant and Equipment - Depreciation is computed using the straight-line method over estimated useful lives as follows:
Buildings and improvements
35 years
Printing presses
30 years
Other newspaper production equipment
5 to 10 years
Television transmission towers and related equipment
15 years
Other television and program production equipment
3 to 15 years
Office and other equipment
3 to 10 years
Goodwill -Goodwill represents the cost of acquisitions in excess of the acquired businesses’ tangible assets and identifiable intangible assets. Prior to January 1, 2002, goodwill was accounted for in accordance with Accounting Principles Board Opinion (“APB”) 17 - Intangible Assets. Amortization of goodwill was calculated on a straight-line basis over 40 years.
Effective January 1, 2002, we adopted Financial Accounting Standard No. (“FAS”) 142 - Goodwill and Other Intangible Assets (see Note 2). Goodwill is no longer amortized, but is reviewed for impairment at least annually. In accordance with FAS 142 goodwill is reviewed for impairment based upon reporting units, which are defined as operating segments or groupings of businesses one level below the operating segment level. Scripps Networks and Shop At Home comprise separate reporting units. Our newspaper and broadcast television reporting units are based upon the size of the newspaper market and the broadcast television network affiliation.
Programs and Program Licenses - Programming aired by our broadcast television stations and by Scripps Networks is either produced by us or for us by independent production companies, or is licensed under agreements with independent producers. Costs to produce live programming that is not expected to be rebroadcast, such as newscasts and Shop At Home programs, are expensed as incurred. Production costs for other internally produced programs are capitalized.
Program licenses generally have fixed terms, limit the number of times we can air the programs, and require payments over the terms of the licenses. The licensor retains ownership of the program upon expiration of the license. Licensed program assets and liabilities are recorded when the programs become available for broadcast. The liability for program licenses is not discounted for imputed interest.
Programs and program licenses are amortized over estimated useful lives or over the terms of the license agreements based upon expected future cash flows. Estimated future cash flows can change based upon market acceptance, advertising and network affiliate fee rates, the number of cable and satellite television subscribers receiving our networks and program usage. Accordingly, we periodically review revenue estimates and planned usage and revise our assumptions if necessary. If actual demand or market conditions are less favorable than projected, a write-down to fair value may be required. Program asset write-downs are determined using a day-part methodology, whereby programs broadcast during a particular time period (such as prime time) are evaluated on an aggregate basis.
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 noncurrent liabilities.
Other Intangible Assets - FCC licenses represents the value assigned to the broadcast licenses of acquired broadcast television stations. Broadcast television stations are subject to the jurisdiction of the Federal Communications Commission (“FCC”) which prohibits the operation of stations except in accordance with an FCC license. FCC licenses stipulate each station’s operating parameters as defined by channels, effective radiated power and antenna height. FCC licenses are granted for a term of up to eight years, and are renewable upon request. We have never had a renewal request denied, and all previous renewals have been for the maximum term.
Broadcast television network affiliation represents the value assigned to an acquired broadcast television station’s relationship with a national television network. Broadcast television stations affiliated with national television networks typically have greater profit margins than independent television stations, primarily due to audience recognition of the television station as a network affiliate. National network affiliation agreements are generally renewable upon the mutual decision of the broadcast television station and the network. Our affiliated broadcast television stations have always maintained affiliation with one of the primary national broadcast television networks.
F-27
FCC licenses and network affiliation agreements are classified as indefinite-lived intangible assets. Accordingly, effective January 1, 2002, these assets are no longer amortized but are tested for impairment at least annually. Prior to the adoption of FAS 142 these assets were amortized on a straight-line basis over 40 years. Under FAS 142 we also assess, at least annually, whether the assets continue to have indefinite lives.
Network distribution intangible assets represent the value assigned to an acquired programming service’s relationships with the broadcast television stations and cable and satellite television systems that distribute its programs. These relationships and distribution provide the opportunity to deliver advertising and sell merchandise to viewers. While these contracts are renewable, most of our acquired contracts have been renewed a limited number of times. As a result, we amortize these contractual relationships over the terms of the distribution contracts.
Customer lists and other intangible assets are amortized on a straight-line basis over periods of up to 20 years.
Impairment of Long-Lived Assets - - In accordance with FAS 142 goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, and whenever events or changes in circumstances indicate the carrying amounts of the assets may be impaired. We have elected to perform our impairment review during the fourth quarter of each year, in conjunction with our annual planning cycle. At December 31, 2002, we found no impairment of goodwill or other indefinite-lived intangible assets.
In accordance with FAS 144 - Accounting for the Impairment and Disposal of Long-lived Assets, other long-lived assets are reviewed for impairment whenever events or 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 undiscounted cash flow is less than the carrying amount of the assets, then amortizable 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.
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. Our 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.
Risk Management Contracts - We do not hold derivative financial instruments for trading or speculative purposes, and we do not hold leveraged contracts. From time to time we may use interest rate swaps to limit the impact of interest rate changes on our earnings and cash flows and to reduce our overall borrowing costs. We held no derivative financial instruments in the three years ended December 31, 2002.
In February 2003, we entered into a pay-floating interest rate swap, effectively converting $50 million of newly issued 3.75% notes due in 2008 to variable rate obligations. See Note 12.
Net Income Per Share - The following table presents additional information about basic and diluted weighted-average shares outstanding:
Basic weighted-average shares outstanding
Effect of dilutive securities:
Unvested restricted stock held by employees
169
165
Stock options held by employees
965
976
826
Diluted weighted-average shares outstanding
F-28
Stock-Based Compensation - We have a stock-based compensation plan, which is described more fully in Note 18. 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. We measure compensation expense using the intrinsic-value-based method of APB 25 – Accounting for Stock Issued to Employees, and its related interpretations. No stock-based compensation expense is recorded upon the issuance of stock options as the exercise price of all options granted equals the market value of the underlying common stock on the date of grant. The values of awards of Class A Common shares, which require no payment by the employee, are amortized to expense over the vesting period.
Net income, as reported
Add stock-based compensation included in reported income, net of related income tax effects:
Stock options
881
Restricted share awards
6,427
2,748
4,591
Deduct stock-based compensation determined under fair value based method, net of related tax effects:
(13,801
(12,610
(8,273
(6,427
(2,748
(4,591
Pro forma net income
174,496
126,234
155,180
Basic earnings per share:
As reported
Additional stock option compensation, net of tax effects
(.17
(.15
(.11
Pro forma
2.20
1.60
1.99
Diluted earnings per share:
(.10
2.16
1.96
Net income per share amounts may not foot since each is calculated independently.
Fair value was calculated using the Black-Scholes option pricing model. Assumptions used to determine fair value are as follows:
Weighted-average fair value of options granted
22.20
18.92
15.87
Assumptions used to determine fair value:
Dividend yield
Expected volatility
22.1
23.0
24.0
Risk-free rate of return
4.5
6.5
Expected life of options
7 years
Reclassifications - For comparative purposes, certain prior year amounts have been reclassified to conform to current classifications.
F-29
2. ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting Changes - We adopted FAS 141 - Business Combinations and FAS 142 - Goodwill and Other Intangible Assets effective January 1, 2002. We determined there was no impairment of goodwill or other intangible assets as of the date of adoption. If the non-amortization provisions of FAS 142 had been effective for all periods presented, reported results of operations would have been as follows:
For the Years Ended
December 31, 2001
December 31, 2000
Net Income
Basic EPS
Diluted EPS
Add back amortization of:
27,356
.35
.34
25,798
.33
FCC licenses
470
.01
Network affiliation and other
233
.00
226
As adjusted
166,022
2.11
2.08
189,947
2.43
2.40
We adopted FAS 143 - Accounting for Asset Retirement Obligations effective January 1, 2002. The statement requires the fair value of an asset retirement obligation be recorded when incurred. The associated retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the estimated useful life. Adoption of this standard had no effect on our financial statements.
In 2001, we adopted FAS 144 - Accounting for the Impairment or Disposal of Long-Lived Assets, which replaced FAS 121 - Accounting for the Impairment of Long-lived Assets and Assets to be Disposed Of. This statement developed one accounting model for assets to be disposed, and requires that long-lived assets be recorded at the lower of carrying amount or fair value less costs to sell. Adoption of this standard had no effect on our financial statements.
In 2002, we adopted FAS 145 - Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, and Technical Corrections. Among the more important provisions of this statement are the requirements that gains and losses on the early retirement of debt are classified as extraordinary items only if such gains and losses meet the requirements of APB 30 - Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions and the requirement that certain lease modifications that have economic effects similar to a sales-leaseback transaction to be accounted for as a sale-leaseback transaction. Adoption of this standard had no effect on our financial statements.
Recently Issued Accounting Standards - FAS 146 - Accounting for Costs Associated with Exit or Disposal Activities was issued in June 2002. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002, and nullifies Emerging Issues Task Force Issue No. (“EITF”) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The primary difference between this statement and EITF 94-3 is that FAS 146 requires a liability for costs associated with exit or disposal activities to be recorded when incurred rather than when management commits to an exit plan.
FASB Interpretation No. (“Interpretation”) 45 - Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others was issued in November 2002 and is effective for guarantees issued or modified after December 31, 2002. Interpretation 45 requires a guarantor to disclose information regarding the amounts, terms, maximum future payments and the carrying amount of guarantees, and to recognize a liability for the obligations undertaken at the time a guarantee is issued.
Interpretation 46 - Consolidation of Variable Interest Entities was issued in January 2003 and is effective with respect to all variable interest entities created or acquired after January 31, 2003, and to all variable interest entities held prior to that date in the first fiscal year or interim period beginning after June 15, 2003. Interpretation 46 clarifies when such entities must be consolidated.
Adoptions of these standards are expected to have no effect on our financial statements.
F-30
3. ACQUISITIONS AND DIVESTITURES
In the first quarter, we acquired an additional 1% interest in Food Network for $5.2 million in cash. We acquired an additional fractional interest in our Evansville newspaper in the second quarter for $0.4 million in cash.
In the fourth quarter, we acquired a 70% controlling interest in Shop At Home for $49.5 million. Related to the acquisition of the controlling interest, we loaned Summit America Television, Inc. (“Summit America”), the former parent of Shop At Home, $47.5 million to be repaid in three years. We also purchased $3.0 million of Summit America redeemable preferred stock. See Note 6.
Acquiring a controlling interest in Shop At Home provides us with an existing infrastructure and workforce with retailing expertise, enabling us to quickly gain scale in a growing market. We expect to leverage our expertise as a diverse media company to expand distribution and to offer a wider range of products. Acquiring Shop At Home also enables us to provide a video commerce platform to our advertisers.
Summit America has the right to require us to purchase the remaining 30% of Shop At Home at any time between November 1, 2004, and October 31, 2007, at the then fair value. We have an option to acquire the remaining 30% of Shop At Home at any time after October 31, 2007, at the then fair value.
We acquired an additional 4% interest in Food Network for $19.4 million and an additional fractional interest in our Evansville newspaper.
In the first quarter, we acquired the daily newspaper in Fort Pierce, Florida, in exchange for our newspaper in Destin, Florida, and $28.1 million in cash, strengthening our position in the Stuart and Vero Beach, Florida, markets. Also in the first quarter, we acquired television station KMCI in Lawrence, Kansas, for $14.6 million in cash. In the fourth quarter we acquired the daily newspaper in Henderson, Kentucky, which is adjacent to our Evansville, Indiana, daily newspaper, for $22.9 million in cash. We also acquired the weekly newspaper in Marco Island, Florida, which is adjacent to our Naples, Florida, daily newspaper, for $16.1 million in cash.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the dates of acquisition. The allocation of the purchase price to the Shop At Home assets and liabilities is based upon preliminary appraisals, and is therefore subject to change.
Current assets, primarily inventory
18,662
2,427
Property, plant and equipment
35,672
12,068
Intangible assets
5,222
13,113
35,026
19,563
60,192
Fair value of note from Summit America
43,000
Other assets
251
Total assets acquired
140,833
87,800
Current liabilities
(31,927
(1,876
Minority interest
(2,242
Total liabilities assumed
(34,169
Fair value of Destin newspaper
(3,857
Cash paid
106,664
82,067
F-31
Approximately $1.1 million of the $5.2 million of intangible assets acquired in the Shop At Home transaction was assigned to trade names and domain names, which have indefinite lives. Of the remaining amounts, $1.5 million was assigned to customer lists, which are amortized over three years, and $2.6 million to network distribution relationships, which are amortized over contract lives. Intangible assets acquired in 2000 primarily represent the value of the FCC license for KMCI, which are no longer subject to amortization under the provisions of FAS 142.
Goodwill of $29.7 million was acquired in the Shop At Home transaction. The entire amount was assigned to the Shop At Home business segment. Goodwill in the newspaper acquisitions in 2000 totaled $59.8 million and was allocated to the newspaper segment. Substantially all of the other goodwill acquired relates to the purchase of minority interests in Food Network, and was assigned to the Scripps Networks business segment. All acquired goodwill is expected to be deductible for tax purposes.
Operating results of acquired businesses are included in the Consolidated Statements of Income from the dates of acquisitions, with the exception of KMCI whose results were included while we operated the station under a contract with the previous owner.
The following table summarizes, on a pro forma basis, the estimated combined results of operations of Scripps and Shop At Home had the transaction taken place at the beginning of 2000. Pro forma results are not presented for the other acquisitions because the combined results of operations would not be significantly different from reported amounts.
The pro forma information includes adjustments for interest expense that would have been incurred to finance the acquisition and additional depreciation and amortization of the assets acquired. The 2001 and 2000 periods do not include amortization of goodwill and indefinite-lived intangible assets that are no longer amortizable under the provisions of FAS 142. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the acquisition been completed at the beginning of the period.
1,783,477
1,620,075
1,890,299
174,492
115,209
146,372
1.46
1.87
1.44
We sold our independent telephone directories and traded our Destin, Florida, newspaper and cash for the daily newspaper in Fort Pierce, Florida. The sales and trade resulted in net gains of $6.2 million, $4.0 million after-tax ($.05 per share). Operating revenue related to divested operating units was $10.5 million in 2000.
F-32
4. RESTRUCTURING CHARGES AND UNUSUAL ITEMS
Reported results of operations were affected by the following items:
• Net investment results were a pre-tax charge of $85.7 million, decreasing net income by $55.6 million, $.69 per share. Included in net investment results are i) $80.1 million in write-downs for several investments, including $35.1 million due to the decline in value of our investment in AOL Time Warner (“AOL”) and $23.0 million due to declines in the value of the Scripps Ventures Funds I and II (“Scripps Ventures”) investment portfolios, and ii) $3.6 million of costs associated with winding down the Scripps Ventures investment funds.
• A $3.9 million gain on the sale of real estate at the Denver JOA increased net income by $2.4 million, $.03 per share.
• We reduced our estimated tax liability for prior years and increased the estimated amount we expect to realize from foreign tax credit carryforwards (see Note 5). Net income was increased by $9.8 million, $.12 per share.
The combined effect of the above items was to decrease 2002 net income by $43.4 million, $.54 per share.
• Net investment results were a pre-tax credit of $5.1 million, increasing net income by $3.8 million, $.05 per share. Included in net investment results are i) realized net gains totaling $77.3 million, including $65.9 million on the exchange of our investment in Time Warner for AOL, which acquired Time Warner in the first quarter, and an $11.7 million gain on the sale of a portion of our investment in Centra Software, ii) $80.2 million in write-downs for several investments, including a $29.0 million write-down of the investment in AOL in the fourth quarter, and iii) an $11.5 million reduction in accrued performance-based compensation, to zero at December 31, 2001.
• Costs of $16.1 million associated with workforce reductions, including our $5.9 million share of such costs at the Denver JOA, decreased operating net income by $10.1 million, $.13 per share.
The combined effect of the above items was to decrease 2001 net income by $6.3 million, $.08 per share.
In addition to the gains on divested operations described in Note 3, reported results of operations were affected by the following items:
• Net investment results were a pre-tax charge of $24.8 million, decreasing net income by $15.8 million, $.20 per share. Included in net investment results are i) realized gains of $12.4 million, ii) $29.9 million in write-downs for several investments, and iii) a $4.5 million increase in accrued performance-based compensation, to $11.5 million at December 31, 2000.
• Expenses of $9.5 million associated with the formation of the Denver JOA reduced net income by $6.2 million, $.08 per share.
• We reduced our estimated tax liability for prior years and our estimate of unrealizable state net operating loss carryforwards (see Note 5). Net income was increased by $7.2 million, $.09 per share.
The combined effect of the above items was to decrease 2000 net income by $10.9 million, $.14 per share.
F-33
5. INCOME TAXES
In 2002, we settled the audit of our 1992 through 1995 consolidated federal income tax returns with the Internal Revenue Service (“IRS”). Our 1996 through 2001 consolidated federal income tax returns are currently under examination by the IRS. As a result of the settlement and proposed adjustments in the current examination, we reduced our estimated liability for prior year income taxes and increased the amount we expect to realize from foreign tax credit carryforwards. These changes in estimates reduced our 2002 tax provision by $9.8 million. In 2000, we reduced our liability for prior year income taxes by $4.2 million.
We believe adequate provision has been made for all open tax years.
The approximate effects of the temporary differences giving rise to deferred income tax liabilities (assets) were as follows:
Accelerated depreciation and amortization
181,682
148,780
Investments, primarily gains and losses not yet recognized for tax purposes
(262
22,795
Accrued expenses not deductible until paid
(12,537
(10,219
Deferred compensation and retiree benefits not deductible until paid
(36,759
(29,673
Other temporary differences, net
(15,518
(10,499
116,606
121,184
State net operating loss carryforwards
(13,055
(13,587
Valuation allowance for state deferred tax assets
8,715
6,393
Net deferred tax liability
112,266
113,990
Our state net operating loss carryforwards expire from 2003 through 2017. At each balance sheet date we estimate 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, we reduced our valuation allowance by $3.0 million in 2000.
F-34
The provision for income taxes consisted of the following:
Current:
Federal
60,779
55,758
82,514
State and local
20,530
15,531
18,361
Foreign
5,203
3,787
5,376
86,512
75,076
106,251
Tax benefits of compensation plans allocated to additional paid-in capital
Total current income tax provision
Deferred:
(3,271
435
(13,340
1,361
(981
(3,519
(1,910
(546
(16,859
Deferred tax allocated to other comprehensive income
Total deferred income tax provision
The difference between the statutory rate for federal income tax and the effective income tax rate was as follows:
Statutory rate
Effect of:
State and local income taxes
5.6
3.5
Adjustment of liability for prior year income taxes
Amortization of nondeductible goodwill
1.6
0.7
Effective income tax rate
F-35
6. INVESTMENTS
Investments consisted of the following:
Securities available for sale (at market value):
Total available-for-sale securities
Denver JOA
194,347
198,527
FOX Sports Net South and other joint ventures
8,506
6,744
Total investments
(1,457
7,793
Note receivable from Summit America, at initial fair value plus accreted discount
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.
Other equity investments include securities that do not trade in public markets, so they do not have readily determinable fair values. We estimate the fair value of these securities approximates their carrying value at December 31, 2002, however, many of the investees have had no rounds of equity financing in the past two years. There can be no assurance we would realize the carrying value of these securities upon their sale.
We ceased active management of Scripps Ventures in 2002. Scripps Ventures invested approximately $100 million in new businesses focusing primarily on new media technology and realized approximately $45 million from the sale of investments. The carrying value of the portfolio was $3.8 million as of December 31, 2002.
In connection with the acquisition of the controlling interest in Shop At Home, we purchased $3.0 million of Summit America 6.0% redeemable preferred stock. At Summit America’s option, dividends are deferred until the mandatory redemption of the preferred stock in 2005. We also loaned Summit America $47.5 million, to be repaid in 2005, at 6% interest. The note was recorded at fair value as of the date of acquisition of Shop At Home. The difference between the face value of the note and the fair value at the date of acquisition is accreted to income over the term of the note. Based upon market interest rates for fixed rate securities with similar terms and credit quality, we estimate the fair value of the note was approximately $46.3 million at December 31, 2002.
F-36
Summarized financial information for the Denver JOA and a summary of amounts recorded in our consolidated financial statements are presented below. The Denver JOA is organized as a limited liability company that has elected to be treated as a partnership for income tax purposes. Therefore the partners are responsible for income taxes applicable to their share of the taxable income of the Denver JOA. The net income of the Denver JOA presented below does not reflect income taxes that will be incurred by its partners.
Financial Position of Denver JOA:
Current assets
95,195
96,273
42,534
46,887
Working capital
52,661
49,386
174,546
198,786
8,741
11,950
Noncurrent liabilities
(17,943
(13,528
Stockholders’ equity
218,005
246,594
Amounts recorded by Scripps:
Investment in Denver JOA
For the year ended December 31, 2002 and for the period January 22, 2001, to December 31, 2001
Results of Operations of Denver JOA:
418,641
384,523
(353,935
(379,476
Other credits (charges)
2,918
(258
67,624
4,789
Share of JOA profits for the period
34,013
1,890
Share of DNA gains (restructuring charges)
3,856
(5,881
Share of JOA profits included in newspaper segment profit
30,157
7,771
RMN operating revenues
157
RMN editorial costs and expenses for the period
(20,896
(20,034
RMN contribution to segment profit (loss)
9,418
(12,243
RMN depreciation and amortization
(514
(437
RMN income (loss)
12,760
(18,561
Distributions received for the period
43,700
17,500
The RMN received a 50% interest in the Denver JOA in exchange for the contribution of most of its assets to the Denver JOA and the payment of $60 million to MediaNews. No gain or loss was recognized on the contribution of the assets to the Denver JOA. The Denver JOA recorded the net assets contributed by us and by MediaNews at their historical cost. The difference between the carrying amount of our investment in the Denver JOA and our 50% share of the stockholders’ equity of the Denver JOA relates to differences between the carrying value and the fair value of the contributed net assets.
F-37
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
Land and improvements
52,502
45,246
224,874
204,792
Equipment
622,860
549,660
900,236
799,698
Accumulated depreciation
443,447
405,021
Net property, plant and equipment
In 2002, we sold our Cincinnati television station production facility to the City of Cincinnati for $7.9 million in cash. Our television station will continue to use the facility until construction of a new production facility is completed in 2004. The gain on the sale of the facility of $7.6 million has been deferred until our station relocates to its new production facility. We will receive an additional $3.0 million in incentive payments if our station relocates prior to June 1, 2004.
8. GOODWILL
The carrying amount of goodwill by business segment and changes in the carrying amount of goodwill are as follows:
Licensing and Other
Balance as of December 31, 1999
770,527
124,302
234,541
11,349
1,140,719
Acquired during the year
59,767
425
Attributed to business sold
(558
(11,156
(11,714
Amortization of goodwill
(22,743
(3,546
(7,587
(174
(34,050
Balance as of December 31, 2000
806,993
121,181
226,954
1,155,147
19,435
Attributed to business sold and contribution to Denver JOA
(1,423
(425
(1,848
(24,966
(4,225
(36,779
Balance as of December 31, 2001
780,732
135,966
219,367
29,698
Balance as of December 31, 2002
780,825
141,201
F-38
9. PROGRAMS AND PROGRAM LICENSES
Programs and program licenses consisted of the following:
Carrying amount
572,917
55,964
628,881
477,541
62,231
539,772
Accumulated amortization
320,112
22,551
342,663
263,122
33,315
296,437
Net book value
33,413
286,218
28,916
243,335
Amortization included in the consolidated financial statements, and estimated amortization of recorded program assets for each of the next five years, is presented below.
Amortization expense for the year ended December 31:
111,903
42,286
154,189
92,386
43,103
135,489
71,638
49,406
121,044
Estimated amortization for the year ending December 31:
2003
94,761
29,435
78,184
3,884
82,068
50,998
51,035
24,065
24,089
4,797
4,814
Later years
Actual amortization in each of the next five years will exceed the amounts presented above as our broadcast television stations and our national television networks will continue to produce or license additional programs.
The cost of licensed or produced programs capitalized was $199 million in 2002, $167 million in 2001 and $189 million in 2000. At December 31, 2002, we were committed to license or produce approximately $182 million of additional programs. If such programs are not produced, our commitments would expire without obligation.
F-39
10. UNAMORTIZED NETWORK DISTRIBUTION INCENTIVES
Unamortized network distribution incentives consisted of the following:
Network launch incentives
295,926
205,726
107,991
84,897
187,935
120,829
Unbilled affiliate fees
11,078
3,810
Total unamortized network distribution incentives
Amortization included in the consolidated financial statements, and estimated amortization of recorded network launch incentives for each of the next five years, is presented below.
Amortization for the year ended December 31:
$ 20,884
21,406
18,058
$ 23,621
26,384
27,270
24,412
17,230
69,018
$ 187,935
Actual amortization will be greater than the above amounts as additional incentive payments may be capitalized as we expand distribution of Scripps Networks.
We capitalized launch incentive payments totaling $90.1 million in 2002, $82.3 million in 2001 and $13.4 million in 2000.
F-40
11. OTHER INTANGIBLE ASSETS
Other intangible assets consisted of the following:
Carrying Amount
Accumulated Amortization
Net Book Value
Acquired network distribution
23,308
4,750
5,456
Customer lists
5,753
(1,634
4,119
4,219
(1,216
3,003
6,607
(4,476
2,131
(4,062
2,545
Total amortized
35,668
11,000
31,495
11,004
Network affiliation
26,748
25,622
1,563
2,862
1,585
Total unamortized
56,795
53,955
Intangible assets by business segment were as follows:
4,925
5,336
3,996
6,904
52,593
52,719
4,718
Minimum pension liability adjustment
Total other intangible assets
Amortization of other intangible assets under the provisions of FAS 142, and estimated amortization expense of intangible assets for each of the next five years, is as follows:
3,135
510
4,449
679
4,063
4,867
423
3,764
4,314
409
2,229
1,481
4,246
590
1,237
2,284
946
1,495
360
482
327
449
1,892
152
2,044
3,776
3,337
223
3,664
F-41
12. LONG-TERM DEBT
Long-term debt consisted of the following:
Other notes, primarily due on demand
Total long-term debt
Long-term debt (less current portion)
Fair value of long-term debt *
* Fair value was estimated based on current rates available to the Company for debt of the same remaining maturity.
We have Competitive Advance and Revolving Credit Facilities (the “Revolver”), and a commercial paper program that collectively permit aggregate borrowings up to $600 million (the “Variable Rate Credit Facilities”). The Revolver consists of two facilities, one permitting $400 million in aggregate borrowings expiring in August 2003 and the second a $200 million facility expiring in 2007. The August 2003 facility is expected to be replaced with a similar facility prior to its expiration. Borrowings under the Revolver are available on a committed revolving credit basis at our choice of three short-term rates or through an auction procedure at the time of each borrowing. The Revolver is primarily used as credit support for our commercial paper program in lieu of direct borrowings under the Revolver. The weighted-average interest rate on the Variable Rate Credit Facilities at December 31 was 1.4% in 2002 and 2.0% in 2001.
We have a U.S. shelf registration statement which allows us to borrow up to $500 million, of which $400 million was available at December 31, 2002. In February 2003, we borrowed $50 million under the shelf registration statement, reducing the available amount to $350 million. The proceeds from the notes were used to reduce commercial paper borrowings. Concurrently, we entered into a pay-floating interest rate swap, effectively converting the notes to a variable rate obligation indexed to LIBOR.
Certain long-term debt agreements contain maintenance requirements for net worth and coverage of interest expense and restrictions on incurrence of additional indebtedness. We are 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.
Capitalized interest was $0.6 million in 2002, $0.7 million in 2001 and $0.2 million in 2000.
F-42
13. OTHER NONCURRENT LIABILITIES AND MINORITY INTERESTS
Other noncurrent liabilities and minority interests consisted of the following:
Program rights payable
42,234
101,205
20,948
13,825
Deferred gain on sale of WCPO building
7,649
15,490
Total other long-term obligations and minority interests
273,597
242,297
Current portion of other noncurrent liabilities
137,229
112,903
Other noncurrent liabilities and minority interests (less current portion)
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents additional information about the change in certain working capital accounts:
Other changes in certain working capital accounts, net:
Accounts receivable
(42,867
23,500
(24,238
Prepaid and accrued pension expense
(24,696
5,280
3,418
(24,464
(2,120
Accrued income taxes
(18,167
11,868
586
Other accrued liabilities
16,024
(17,927
8,024
Other, net
(2,402
2,812
(4,443
F-43
15. EMPLOYEE BENEFIT PLANS
Retirement plans expense consisted of the following:
Service cost
13,326
13,022
13,857
Interest cost
20,203
20,970
19,198
Expected return on plan assets, net of expenses
(20,729
(27,362
(27,596
Net amortization and deferral
620
(71
(1,259
Total for defined benefit plans
13,420
6,559
4,200
Multi-employer plans
399
747
1,248
Defined contribution plans
5,948
5,618
6,208
19,767
12,924
11,656
Assumptions used in the accounting for the defined benefit plans were as follows:
Used to determine annual expense:
Discount rate
7.50
8.00
Long-term rate of return on plan assets
9.50
10.00
Increase in compensation levels
5.00
5.50
Used in year-end valuation of pension obligations and funded status:
6.50
8.25
4.75
F-44
The following table presents information about our employee benefit plan assets and obligations:
Change in benefit obligation
Benefit obligation at beginning of year
273,207
274,971
268,810
Benefits paid
(17,498
(17,920
(16,606
Reductions associated with dispositions and formation of Denver JOA
(1,818
(15,940
Actuarial losses (gains)
49,872
(1,896
(10,288
Benefit obligation at end of year
337,292
Change in plan assets
Fair value at beginning of year
229,460
286,338
302,934
Actual return (loss) on plan assets
(17,662
(22,589
(799
Company contributions
40,361
1,477
809
Transfers associated with dispositions and formation of Denver JOA
(4,814
(17,846
Fair value at end of year
229,847
Plan assets greater than (less than) projected benefits
(107,445
(43,747
11,367
Unrecognized net loss (gain)
98,964
10,169
(38,904
Unrecognized prior service cost
875
1,880
2,629
Unrecognized net asset at the date FAS 87 was adopted, net of amortization
(603
(2,012
Prepaid (accrued) pension costs
(7,606
(32,301
(26,920
Amounts recognized in Consolidated Balance Sheets
Prepaid pension costs
9,668
20,564
16,364
Accrued pension benefit obligation
(51,693
(52,865
(43,284
Intangible asset
Minimum pension liability adjustment included in accumulated other comprehensive income
32,856
Plan assets consist of marketable equity and fixed-income securities.
F-45
16. SEGMENT INFORMATION
Our reportable segments are strategic businesses that offer different products and services. We evaluate the operating performance (“Segment Profit (Loss)”) of our business segments based primarily on earnings before interest, income taxes, depreciation and amortization, excluding divested operating units, restructuring charges, investment results and certain other unusual items.
Information regarding our business segments is as follows:
SEGMENT OPERATING REVENUES
SEGMENT PROFIT (LOSS)
261
Restructuring charges, including share of Denver JOA charges
(16,079
Income before income taxes and minority interest
DEPRECIATION
25,839
25,869
40,574
9,300
8,357
7,063
19,618
19,652
19,277
1,372
856
831
814
1,334
949
972
58,319
55,658
68,700
357
Per consolidated financial statements
69,057
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of goodwill and intangible assets with indefinite lives
38,128
35,794
42,995
40,108
F-46
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
576
373
338
10,635
548
88,400
68,223
74,484
74,577
BUSINESS ACQUISITIONS AND
OTHER ADDITIONS TO LONG-LIVED ASSETS
95,384
103,263
15,035
101,099
Venture capital and other investments
11,373
18,139
53,615
208,410
184,628
158,238
1,284,315
1,274,694
1,276,264
790,667
638,636
521,545
505,402
496,911
524,696
142,138
23,465
26,899
34,851
48,956
127,924
170,156
75,394
76,547
60,379
2,587,891
No single customer provides more than 10% of our 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 approximately 60% of our international revenues, which are less than $50 million annually.
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 deferred income taxes.
17. COMMITMENTS AND CONTINGENCIES
We are involved in litigation arising in the ordinary course of business, none of which is expected to result in material loss. Our cable television systems were acquired by Comcast Corporation (“Comcast”) in 1996. Pursuant to the terms of the agreement with Comcast, we remain liable for any losses resulting from certain lawsuits, certain other expenses and tax liabilities of the cable television systems attributable to periods prior to the transactions.
Minimum payments on noncancelable leases at December 31, 2002, were: 2003, $14.3 million; 2004, $12.2 million; 2005, $9.5 million; 2006, $7.0 million; 2007, $6.6 million; and later years, $17.8 million. We expect our operating leases will be replaced with leases for similar facilities upon their expiration. Rental expense for cancelable and noncancelable leases was $19.0 million in 2002, $16.8 million in 2001 and $19.3 million in 2000.
In the ordinary course of business we enter into long-term contracts to obtain satellite transmission rights, to obtain distribution of Shop At Home, or to obtain other services. Liabilities for such commitments are recorded when the related services are rendered. Minimum payments on such contractual commitments at December 31, 2002, were: 2003, $40.8 million; 2004, $38.5 million; 2005, $29.7 million; and 2006, $2.8 million. We expect these contracts will be replaced with similar contracts upon their expiration.
F-47
18. CAPITAL STOCK AND INCENTIVE PLANS
Capital Stock - Scripps’ capital structure includes Common Voting Shares and Class A Common Shares. The articles of incorporation 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.
Repurchase of a total of 6.0 million Class A Common Shares has been authorized by the Board of Directors. A total of 4.3 million shares were repurchased between June 1997 and October 2001, at prices ranging from $39 to $60 per share. The balance remaining on the authorization is 1.7 million shares.
Incentive Plans - Scripps’ Long-Term Incentive Plan (the “Plan”) provides for the award of restricted and unrestricted Class A Common Shares, incentive and nonqualified stock options with 10-year terms, stock appreciation rights, and performance units to key employees and non-employee directors. The Plan expires in 2007, except for options then outstanding. The number of shares authorized for issuance under the plan at December 31, 2002, was 13.9 million, of which approximately 3.9 million had not been issued.
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.
Information related to awards of Class A Common Shares is presented below:
Number of Shares
Weighted - Average Exercise Price
Range of Exercise Prices
Unvested shares at December 31, 1999
243,309
$ 40.00
$ 26 - 56
Shares awarded in 2000
296,903
49.31
44 - 60
Shares forfeited in 2000
(15,445
44.78
39 - 48
Shares vested in 2000
(130,836
37.79
26 - 52
Unvested shares at December 31, 2000
393,931
46.78
26 - 60
Shares awarded in 2001
184,947
63.51
57 - 71
Shares forfeited in 2001
(2,500
52.54
45 - 63
Shares vested in 2001
(153,497
45.42
Unvested shares at December 31, 2001
422,881
54.55
42 - 71
Shares awarded in 2002
32,305
72.43
72 - 77
Shares forfeited in 2002
(1,800
48.29
45 - 67
Shares vested in 2002
(125,010
61.26
42 - 84
Unvested shares at December 31, 2002
328,376
$ 55.77
$ 43 - 77
F-48
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:
Weighted - Average ExercisePrice
Outstanding at December 31, 1999
3,626,767
$ 31.75
$ 11 - 56
Granted in 2000
1,025,550
49.27
43 - 60
Exercised in 2000
(401,380
21.38
11 - 50
Forfeited in 2000
(1,500
49.00
Outstanding at December 31, 2000
4,249,437
36.98
11 - 60
Granted in 2001
1,102,200
64.17
58 - 70
Exercised in 2001
(743,227
27.38
11 - 56
Forfeited in 2001
(76,872
20 - 64
Outstanding at December 31, 2001
4,531,538
44.95
15 - 70
Granted in 2002
1,116,800
75.31
73 - 78
Exercised in 2002
(808,304
30.37
15 - 67
Outstanding at December 31, 2002
4,840,034
$ 54.39
$ 16 - 78
Substantially all options granted prior to 2000 are exercisable. Options granted in 2000 through 2002 generally become exercisable over a three-year period. Information about options outstanding and options exercisable by year of grant is as follows:
Year of Grant
Options on Shares Outstanding
Options on Shares Exercisable
Weighted Average Exercise Price
1993 - expire in 2003
71,450
$ 16
$ 16.35
1994 - expire in 2004
268,100
18 - 21
18.90
1995 - expire in 2005
9,800
20.01
1996 - expire in 2006
79,000
26 - 29
27.01
1997 - expire in 2007
367,350
35 - 42
35.12
1998 - expire in 2008
443,200
39 - 56
47.32
1999 - expire in 2009
580,679
42 - 52
47.17
2000 - expire in 2010
871,366
705,911
49.36
2001 - expire in 2011
1,032,289
466,637
64.22
2002 - expire in 2012
Total options on number of shares
2,992,127
F-49
19. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summarized financial information is as follows:
( in thousands, except per share data ) 2002
$ 344,685
$ 380,435
$ 354,267
$ 456,277
$ 1,535,664
15,756
20,503
19,223
27,763
(264,142
(275,573
(264,045
(330,528
(13,883
(15,428
(15,026
(18,431
(62,768
Investment results, net of expense
(8,388
(65,551
(10,052
(1,676
(6,592
(6,629
(7,843
(7,237
(764
980
Income taxes
(26,868
(9,085
(30,622
(49,044
(115,619
(834
(952
(901
(2,319
(5,006
$ 39,880
$ 26,956
$ 45,676
$ 75,785
$ 188,297
$ .50
$ .34
$ .57
$ .95
$ 2.37
$ .33
$ .94
$ 2.34
79,017
79,546
79,661
79,715
80,263
80,729
80,668
80,815
$ .15
$ .60
$ 353,023
$ 360,681
$ 321,772
$ 356,480
$ 1,391,956
8,927
8,458
15,752
13,053
(275,936
(261,427
(251,247
(266,248
(24,765
(24,243
(23,982
(25,663
(98,653
(7,138
(1,540
(1,520
58,785
2,957
(10,917
(45,762
(12,461
(10,859
(8,417
(7,460
353
480
240
(40,642
(28,584
(18,023
(12,373
(99,622
(846
(975
(1,005
(971
(3,797
$ 66,438
$ 39,350
$ 22,633
$ 9,542
$ 137,963
$ .84
$ .29
$ .12
$ 1.75
$ .83
$ .49
$ .28
$ 1.73
78,719
78,844
78,977
78,760
79,864
80,002
79,849
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.
F-50
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Shareholders, 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, 2002 and 2001, and the related consolidated statements of income, cash flows and comprehensive income and shareholders’ equity for each of the three years in the period ended December 31, 2002. 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 as 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, 2002 and 2001, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2002, 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.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets,” effective January 1, 2002.
DELOITTE & TOUCHE LLPCincinnati, OhioJanuary 22, 2003 (except for Notes 1 and 12, as to which the date is February 6, 2003)
Index to Consolidated Financial Statement Schedules
Valuation and Qualifying Account
S-2
S-1
VALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 SCHEDULE II
COLUMN A
COLUMN B
COLUMN C
COLUMN D
COLUMN E
COLUMN F
CLASSIFICATION
Balance Beginning of Period
Additions Charged to Costs andExpenses
Deductions Amounts ChargedOff-Net
Increase (Decrease) RecordedAcquisitions (Divestitures)
Balance End of Period
YEAR ENDED DECEMBER 31, 2002:
Allowance for doubtful accounts receivable
13,964
9,368
5,240
18,092
YEAR ENDED DECEMBER 31, 2001:
13,891
11,026
10,210
(743
YEAR ENDED DECEMBER 31, 2000:
11,266
14,648
11,345
(678
Index to Exhibits
Exhibit Number
Description of Item
Exhibit No. Incorporated
3.01
Articles of Incorporation
3.02
Code of Regulations
4.01
Class A Common Share Certificate
(2)
4.02A
Form of Indenture: 6.375% notes due in 2002
(3)
4.1
4.02B
Form of Indenture: 6.625% notes due in 2007
4.02C
Form of Indenture: 5.75% notes due in 2012
4.02D
Form of Indenture: 4.25% notes due in 2009
(10)
4.02E
Form of Indenture: 3.75% notes due in 2008
4.03A
Form of Debt Securities: 6.375% notes due in 2002
4.03B
Form of Debt Securities: 6.625% notes due in 2007
4.03C
Form of Debt Securities: 5.75% notes due in 2012
4.03D
Form of Debt Securities: 4.25% notes due in 2009
4.03E
Form of Debt Securities: 3.75% notes due in 2008
10.01
Amended and Restated Joint Operating Agreement, dated January 1, 1979, among Journal Publishing Company, New Mexico State Tribune Company and Albuquerque Publishing Company, as amended
(1)
10.02
Amended and Restated Joint Operating Agreement, dated February 29, 1988, among Birmingham News Company and Birmingham Post Company
10.03
Joint Operating Agreement, dated September 23, 1977, between the Cincinnati Enquirer, Inc. and the Company, as amended
10.04
Joint Operating Agreement Among The Denver Post Corporation, Eastern Colorado Production Facilities, Inc., Denver Post Production Facilities LLC and The Denver Publishing Company dated as May 11, 2000, as amended
(9)
10.06
Building Lease, dated April 25, 1984, among Albuquerque Publishing Company, Number Seven and Jefferson Building Partnership
10.08A
10.06A
Ground Lease, dated April 25, 1984, among Albuquerque Publishing Company, New Mexico State Tribune Company, Number Seven and Jefferson Building Partnership
10.08B
10.07
Agreement, dated August 17, 1989, between United Feature Syndicate, Inc. and Charles M. Schulz and the Trustees of the Schulz Family Renewal Copyright Trust, as amended
10.11
10.20
Share Purchase Agreement Between Shop At Home, Inc. and Scripps Networks, Inc.
10.40
5-Year Competitive Advance and Revolving Credit Agreement
10.1
10.41
364-Day Competitive Advance and Revolving Credit Agreement
10.2
10.53
1987 Long-Term Incentive Plan
10.36
10.54
Agreement, dated December 24, 1959, between the Company and Charles E. Scripps, as amended
10.39A
10.54A
Assignment, Assumption, and Release Agreement, dated December 31, 1987, between the Company, Scripps Howard, Inc. and Charles E. Scripps
10.39B
10.54B
Amendment, dated June 21, 1988, to December 24, 1959 Agreement between the Company and Charles E. Scripps
10.39C
10.55
Board Representation Agreement, dated March 14, 1986, between The Edward W. Scripps Trust and John P. Scripps
10.44
10.56
Shareholder Agreement, dated March 14, 1986, between the Company and the Shareholders of John P. Scripps Newspapers
10.45
10.57
Scripps Family Agreement dated October 15, 1992
(4)
E-1
10.58
1997 Long-Term Incentive Plan
(6)
4B
10.59
Non-Employee Directors’ Stock Option Plan
4A
10.60
1997 Deferred Compensation and Phantom Stock Plan for Senior Officers and Selected Executives
(7)
10.61
1997 Deferred Compensation and Stock Plan for Directors
(8)
10.62
Employment Agreement, dated July 20, 1999, between the Company and Kenneth W. Lowe
Computation of Ratio of Earnings to Fixed Charges for the Three Years Ended December 31, 2002
E-3
Subsidiaries of the Company
E-4
Independent Auditors’ Consent
E-5
99(a)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
E-6
99(b)
E-7
(1) Incorporated by reference to Registration Statement of The E. W. Scripps Company on Form S-1 (File No. 33-21714).
(2) Incorporated by reference to The E. W. Scripps Company Annual Report on Form 10-K for the year ended December 31, 1990.
(3) Incorporated by reference to Registration Statement on Form S-3 (File No. 33-36641).
(4) Incorporated by reference to The E. W. Scripps Company Current Report on Form 8-K dated October 15, 1992.
(5) Incorporated by reference to Scripps Howard, Inc. Registration Statement on Form 10 (File No. 1-11969).
(6) Incorporated by reference to Registration Statement of The E. W. Scripps Company on Form S-8 (File No. 333-27623).
(7) Incorporated by reference to Registration Statement of The E. W. Scripps Company on Form S-8 (File No. 333-27621).
(8) Incorporated by reference to The E.W. Scripps Company Annual Report on Form 10-K for the year ended December 31, 1998.
(9) Incorporated by reference to The E.W. Scripps Company Annual Report on Form 10-K for the year ended December 31, 2000.
(10) Incorporated by reference to Registration Statement S-3 (file No. 333-100390) of The E.W. Scripps Company.
E-2