Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2002
OR
For the transition period from ________________ to ________________
Commission File Number 0-16914
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (513) 977-3000
Not Applicable (Former name, former address and former fiscal year, if changed since last report.)
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 and 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2002 there were 61,319,717 of the Registrant’s Class A Common Shares outstanding and 18,616,913 of the Registrant’s Common Voting Shares outstanding.
INDEX TO THE E. W. SCRIPPS COMPANY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
PART I
ITEM 1. FINANCIAL STATEMENTS
The information required by this item is filed as part of this Form 10-Q. See Index to Financial Information at page F-1 of this Form 10-Q.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of business, such as defamation actions and various governmental and administrative proceedings relating to renewal of broadcast licenses, none of which is expected to result in material loss.
ITEM 2. CHANGES IN SECURITIES
There were no changes in the rights of security holders during the quarter for which this report is filed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the quarter for which this report is filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following table presents information on matters submitted to a vote of security holders at the 2002 Annual Meeting of Shareholders.
ITEM 5. OTHER INFORMATION
None.
4
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The information required by this item is filed as part of this Form 10-Q. See Index to Exhibits at page E-1 of this Form 10-Q.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
THE E. W. SCRIPPS COMPANY
Index to Financial Information
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ( UNAUDITED )
CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND STOCKHOLDERS’ EQUITY ( UNAUDITED )
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information disclosed in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, has not changed materially unless otherwise disclosed herein. Financial information as of December 31, 2001, included in these financial statements has been derived from the audited consolidated financial statements included in that report. In management’s opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made.
Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.
Use of Estimates - Preparation of the financial statements requires the use of estimates. The Company’s financial statements include estimates for such items as self-insured risks and income taxes payable. The Company self-insures for employees’ medical and disability income benefits, workers’ compensation and general liability. The recorded liability for self-insured risks is calculated using actuarial methods and is not discounted. The recorded liability for self-insured risks totaled $20.9 million at June 30, 2002. Management does not believe it is likely that its estimates for self-insured risks will change materially in the near term.
The Company reached agreement with the Internal Revenue Service (“IRS”) to settle the audit of its 1992 through 1995 consolidated federal income tax returns in the second quarter of 2002. As a result, the Company reduced its estimated liability for prior year income taxes by $8.0 million. The Company’s 1996 through 2000 consolidated federal income tax returns are currently under examination by the IRS. Management believes that adequate provision has been made for all open years.
Joint Operating Agencies - The joint operating agency (“JOA”) between the Company’s Denver Rocky Mountain News (“RMN”) and MediaNews Group Inc.’s Denver Post was approved by the U.S. Attorney General in January 2001. The 50-year agreement created a new entity called the Denver Newspaper Agency L.L.P., which is 50% owned by each partner. Both partners contributed certain assets used in the operations of their newspapers to the new entity. In addition, the Company paid $60 million to MediaNews Group Inc. The JOA commenced operations on January 22, 2001.
Net Income Per Share - The following table presents additional information about basic and diluted weighted-average shares outstanding:
F-7
Goodwill and Other Intangible Assets - The Company adopted Financial Accounting Standard (“FAS”) No. 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 No. 144. The Company has determined that there was no impairment of goodwill or other intangible assets on the date of adoption of FAS No. 142.
If the non-amortization provisions of FAS No. 142 had been effective in 2001, reported results of operations would have been as follows:
Reclassifications - For comparative purposes, certain 2001 amounts have been reclassified to conform to 2002 classifications.
F-8
2. ACQUISITIONS AND DIVESTITURES
Acquisitions
The acquisitions have been accounted for as purchases.
3. UNUSUAL CREDITS AND CHARGES
F-9
4. LONG-TERM DEBT
Long-term debt consisted of the following:
The Company has two Competitive Advance and Revolving Credit Facilities (the “Revolver”) and a commercial paper program that collectively permit aggregate borrowings up to $675 million (the “Variable Rate Credit Facilities”). The Revolver expires in September 2002. Borrowings under the Revolver are available on a committed revolving credit basis at the Company’s choice of three short-term rates or through an auction procedure at the time of each borrowing. The Revolver is primarily used as credit support for the commercial paper program in lieu of direct borrowings under the Revolver. The weighted-average interest rates on the Variable Rate Credit Facilities were 1.8% at June 30, 2002, 2.0% at December 31, 2001, and 4.1 % at June 30, 2001.
In July 2002 the Company issued $200 million of 5.75% notes due in 2012. The proceeds from the note issuance will be used to repay the $100 million in notes due in October 2002 and to reduce the Company’s commercial paper borrowings.
The Revolver is expected to be replaced with a similar facility prior to expiration.
F-10
5. INVESTMENTS
Investments consisted of the following:
Investments available for sale represent securities in publicly traded companies. Investments available for sale are recorded at fair value. Fair value is based upon the closing price of the security on the reporting date.
Other equity investments include securities that do not trade in public markets, so they do not have readily determinable fair values. Management estimates the fair value of these securities approximates their carrying value at June 30, 2002. However, many of the investees have not issued new equity in the past two years and there can be no assurance that the Company would realize the carrying value of these securities upon their sale.
During the second quarter of 2002, the Company ceased active management of Scripps Ventures Funds I and II (“Scripps Ventures”). Scripps Ventures invested approximately $100 million in new businesses focusing primarily on new media technology.
F-11
Financial information for the Company’s business segments is as follows:
F-12
Other additions to long-lived assets include investments and launch incentives capitalized. Corporate assets are primarily cash, cash equivalent and other short-term investments, and refundable and deferred income taxes.
7. STOCK COMPENSATION PLANS
The Company’s Long-Term Incentive Plans (the “Plans”) provide for the award of incentive and nonqualified stock options with 10-year terms, stock appreciation rights, performance units and restricted and unresticted Class A Common Shares to key employees and directors. The Plans expire in 2007, except for awards then outstanding.
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 vest over an incentive period, conditioned upon the individual’s employment throughout that period. The following table presents information about stock options:
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:
The Company has adopted the “disclosure-only” provisions of FAS No. 123. Compensation expense is determined by the intrinsic value of the stock option or restricted stock award at the grant date, or on the vesting date for certain restricted stock awards which vest based upon the Company’s stock price. Therefore, no compensation expense is recognized for stock options unless the terms of the options are modified subsequent to the grant date.
Compensation expense recognized in the Company’s financial statements and pro forma net income assuming compensation expense had been determined based upon the fair value provisions of FAS No. 123 (determined using the Black-Scholes option pricing model) are as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates in three reportable segments: newspapers, cable television networks (referred to as “Scripps Networks”), and broadcast television.
FORWARD-LOOKING STATEMENTS
This discussion and the information contained in the notes to the consolidated financial statements contain certain forward-looking statements that are based on management’s current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond the Company’s control, include changes in advertising demand and other economic conditions; consumers’ taste; newsprint prices; program costs; labor relations; technological developments; competitive pressures; interest rates; regulatory rulings; and reliance on third-party vendors for various products and services. The words “believe,” “expect,” “anticipate,” “estimate,” “intend” and similar expressions identify forward-looking statements. All forward-looking statements, which are as of the date of this filing, should be evaluated with the understanding of their inherent uncertainty.
RESULTS OF OPERATIONS
Income from core operations represents net income as defined under generally accepted accounting principles (“GAAP”) excluding certain unusual items. These items are excluded because management believes the items are unlikely to recur or they otherwise impede analysis of the Company’s on-going operations.
Management uses earnings before interest, income taxes, depreciation and amortization (“EBITDA”), along with operating income and other GAAP measures to evaluate the performance of the Company’s operating segments. Management uses EBITDA to evaluate the performance of the Company’s operating segments because:
EBITDA, combined with information on historical and planned capital spending, is a useful and reliable measure of year-over-year operating performance. Banks and other lenders use EBITDA and other cash flow measures to evaluate the Company’s ability to meet its debt service requirements and its other obligations. Financial analysts and investors use EBITDA, combined with capital spending requirements, to estimate the value of communications media companies.
EBITDA, combined with information on historical and planned capital spending, is a useful and reliable measure of year-over-year operating performance.
Banks and other lenders use EBITDA and other cash flow measures to evaluate the Company’s ability to meet its debt service requirements and its other obligations.
Financial analysts and investors use EBITDA, combined with capital spending requirements, to estimate the value of communications media companies.
Income from core operations and EBITDA should not be construed as alternative measures of, but as supplemental information to, the Company’s net income and cash flows from operating activities as defined under GAAP.
Acquisitions and divestitures can affect the comparability of year-over-year reported results. The accompanying tables include the results of operations for acquired operations from the dates of acquisition. Divested operating units are removed from segment operating results and reported separately because management believes they impede analysis of the Company’s on-going operations.
See Note 2 to the Consolidated Financial Statements on page F-9 regarding acquisitions and divestitures.
The application for a 50-year Joint Operating Agency (“JOA”) between the Company’s Denver Rocky Mountain News (“RMN”) and MediaNews Group Inc.’s (“MediaNews”) Denver Post was approved in January 2001 by the U.S. Department of Justice. The JOA commenced operations on January 22, 2001. The RMN received a 50% interest in the JOA in exchange for the contribution of most of its assets to the JOA and the payment of $60 million to MediaNews.
The RMN’s 50% share of the operating profit (loss) of the Denver JOA is reported as “Share of Joint Operating Agency Profits” in the financial statements. Editorial costs associated with the RMN are included in operating expenses. The financial statements do not include advertising and other revenue of the JOA, nor the costs to produce, distribute and market the newspapers, nor related depreciation. The RMN is reported separately in Management’s Discussion and Analysis.
Consolidated results of operations were as follows:
See Note 1 – Goodwill and Other Intangible Assets on page F-8 and Note 3 on page F-9 regarding items excluded from core operations.
All per share disclosures are on a diluted basis.
Other financial and statistical data, excluding unusual items, are as follows:
Certain restricted stock awards issued in 2001 are earned based upon the market price of the Company’s Class A Common Shares. The Company records expense related to these awards 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.
Corporate expenses in the second quarter of 2002 also include the accrual of performance bonuses, which were not earned in 2001.
Lower borrowing rates under short-term credit facilities led to lower period-over-period interest expense. Average daily borrowings under short-term credit facilities in the second quarter were $459 million in 2002 and $534 million in 2001. The weighted-average interest rate on such borrowings in the second quarter was 1.8% in 2002 and 4.5% in 2001. For the year-to-date period the weighted-average interest rate was 1.8% in 2002 and 5.2% in 2001.
The Company is currently rolling over short-term debt at an effective 90-day yield of 1.7%. The average balance of all interest bearing obligations for the first six months of the year was $724 million in 2002 and $770 million in 2001.
Interest capitalized in the year-to-date period was $0.3 million in 2002 and $0.4 million in 2001.
The Company adopted Financial Accounting Standard (“FAS”) No. 142 - Goodwill and Other Intangible Assets effective January 1, 2002. See Note 1 to the Consolidated Financial Statements. If FAS No. 142’s provisions regarding not amortizing goodwill and intangible assets with indefinite lives had been effective in 2001, amortization of goodwill and other intangible assets would have been $9.6 million less, increasing earnings per share by $.09 in the second quarter. Year-to-date amortization would have been $19.0 million less, increasing earnings per share by $.17.
Operating results for each of the Company’s reportable segments, excluding divested operating units and unusual items, are presented on the following pages.
F-18
NEWSPAPERS – RMN operating results are presented separately as a single line item to enhance comparability of year-over-year Newspaper operating results. Excluding unusual items, operating results were as follows:
The demand for advertising improved in many of the Company’s markets in the second quarter of 2002, although help wanted advertising volume remains below that of prior periods. Newspaper advertising revenues are expected to be flat year-over-year in the third quarter.
Newsprint and ink decreased in the quarter primarily due to a 30% decrease in year-over-year newsprint prices.
Second quarter and year-to-date results at the Denver newspaper were substantially improved over 2001 due to advertising and circulation rate increases and cost cutting measures implemented by the JOA, including the publication of combined weekend editions and a single classified advertising section distributed daily in both newspapers. The Company expects continued improvement in operating results in the Denver market, but expects the rate of improvement in year-over-year results will be lower than that of the first and second quarters.
F-19
SCRIPPS NETWORKS – Operating results, excluding unusual items, were as follows:
According to the Nielsen Homevideo Index, HGTV was distributed to 78.6 million homes in June 2002, up 8.1 million from June 2001 and 0.9 million in the quarter. Food Network was distributed to 75.3 million homes in June 2002, up 14.9 million from June 2001 and 1.5 million in the quarter.
Affiliate fee revenue increased 36% for HGTV and 7% for Food Network in the year-to-date period. The Company changed its estimate of the lives of certain network distribution contracts in the second quarter of 2002, increasing affiliate fee revenue by $1.7 million.
Programming and production expenses have increased as the Company improves the quality and variety of programming and expands the hours of original programming presented on its networks. Programming expense increased 16% for HGTV and 31% for Food Network in the year-to-date period.
Reduced marketing, advertising and promotional expenses led to the decrease in operations and distribution expense and sales and marketing expense. In the second quarter the Company increased its allowance for uncollectible accounts receivable due to the bankruptcy of Adelphia Communications, reducing EBITDA by $2.5 million.
The Company launched DIY in the fourth quarter of 1999 and launched Fine Living, its fourth network, in March 2002. Start-up losses associated with DIY and Fine Living reduced EBITDA in the second quarter by $9.3 million in 2002 compared to $4.9 million in the second quarter of 2001. For the year-to-date period, start-up losses reduced EBITDA by $21.4 million in 2002 and $10.3 million in 2001. Full year start-up losses are currently projected to reduce EBITDA by approximately $30 million to $35 million in 2002.
Excluding the start-up expenses of the new networks, EBITDA increased 34% in the quarter and 41% year-to-date.
F-21
BROADCAST TELEVISION – Operating results, excluding unusual items, were as follows:
Improved demand for advertising and additional advertising in the Company’s Detroit market tied to the Stanley Cup playoffs led to the increase in advertising revenues in the second quarter.
The Company continues to be affected by its relatively high exposure to the ABC television network, for which audience levels have generally declined in recent years. Six of the Company’s 10 television stations are ABC affiliates. Excluding the effects of the Stanley Cup playoffs, revenues at the ABC affiliates decreased approximately 1% year-over-year in the second quarter.
Revenue for the Company’s three NBC affiliates increased 5.7% year-over-year in the second quarter.
In 2001 the Company renegotiated and extended its affiliation agreements with NBC, which were originally scheduled to expire in 2004. Network compensation is sharply reduced under the new agreements, which expire in 2009. The Company’s ABC affiliation agreements expire on various dates during the period 2004 through 2006.
F-22
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary source of liquidity is cash flow from operating activities. Advertising provides 70% to 80% of the Company’s total revenues, so the Company’s cash flow from operating activities is adversely affected during recessionary periods. The Company’s cash flow from operating activities in the first half of the year was $101 million in 2002 and $123 million in 2001. Increased launch incentive payments to expand distribution of Scripps Networks was the primary cause of the decrease. The Company expects to continue to increase the distribution of Scripps Networks.
Cash flow from operating activities exceeded capital expenditures and cash dividends by $39 million in the first six months and is expected to substantially exceed the total of its capital expenditure requirements and cash dividends in 2002, as it has each year since 1992.
The excess cash flow from existing businesses and the Company’s substantial borrowing capacity have been used primarily to fund acquisitions, investments, and to develop new businesses. There are essentially no legal or other restrictions on the transfer of funds among the Company’s business segments.
Repurchase of a total of six million Class A Common shares was authorized by the Board of Directors in 1998. The balance remaining on this authorization is 1.7 million shares.
Net debt (borrowings less cash equivalents and other short-term investments) decreased $53 million in the first six months of 2002, to $669 million at June 30, 2002. Net debt includes commercial paper borrowings totaling $455 million, with average maturities of 90 days or less. Commercial paper borrowings are supported by bank credit facilities which permit maximum borrowings of $675 million and expire in September 2002. The facility is expected to be replaced with a similar facility prior to expiration. The Company’s access to commercial paper markets can be affected by macroeconomic factors outside of its control. In addition to macroeconomic factors, the Company’s access to commercial paper markets and its borrowing costs are affected by short and long-term debt ratings assigned by independent rating agencies.
The Company issued $200 million of 5.75% notes due in 2012 in July. The proceeds from the notes will be used to repay the Company’s 6.375% notes due in October 2002 and to reduce the Company’s commercial paper borrowings.
F-23
MARKET RISK
The Company’s earnings and cash flow can be affected by, among other things, economic conditions, interest rate changes, foreign currency fluctuations (primarily in the exchange rate for the Japanese yen) and changes in the price of newsprint. The Company is also exposed to changes in the market value of its investments. The information disclosed in Market Risk in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, has not changed materially unless otherwise disclosed herein.
The Company held no foreign currency or newsprint derivative financial instruments at June 30, 2002, or at December 31, 2001.
The following table presents additional information about the Company’s market-risk-sensitive financial instruments:
______________
The Company manages interest rate risk primarily by maintaining a mix of fixed-rate and variable-rate debt. The Company may use interest rate swaps, forwards or other derivative financial instruments to manage its interest rate risk. The Company did not hold such instruments at June 30, 2002. The weighted-average interest rate on borrowings under the Variable Rate Credit Facilities was 1.8% at June 30, 2002, and 2.0% at December 31, 2001.
Index to Exhibits