UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-16914
THE E. W. SCRIPPS COMPANY
(Exact name of registrant as specified in its charter)
Ohio
31-1223339
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
312 Walnut Street Cincinnati, Ohio
45202
(Address of principal executive offices)
(Zip Code)
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
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 31, 2002 there were 61,384,683 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 SEPTEMBER 30, 2002
Item No.
Page
PART I - FINANCIAL INFORMATION
1
Financial Statements
3
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
4
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
Changes in Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
5
Other Information
6
Exhibits and Reports on Form 8-K
Signatures
Certifications
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
ITEM 4. CONTROLS AND PROCEDURES
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 AND USE OF PROCEEDS
There were no changes in the rights of security holders during the quarter for which this report is filed.
There were no sales of unregistered equity securities 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
There were no matters submitted to a vote of security holders during the quarter for which this report is filed.
ITEM 5. OTHER INFORMATION
None.
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
A Current Report on Form 8-K reporting the Company’s Principal Executive Officer and Principal Financial Officer had signed sworn statements pursuant to Securities and Exchange Commission Order No. 4-460 was filed on August 12, 2002.
A Current Report on Form 8-K reporting the Company’s agreement to acquire controlling interest in the Shop At Home television retailing network was filed on August 16, 2002.
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.
Dated:
November 6, 2002
BY:
/s/ JOSEPH G. NECASTRO
Joseph G. NeCastro Senior Vice President and Chief Financial Officer
CERTIFICATIONS
I, Kenneth W. Lowe, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of The E.W. Scripps Company;
2.
Based on my knowledge, this quarterly 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 quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
c)
presented in this quarterly 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):
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
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 quarterly report whether or not 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:
/s/ KENNETH W. LOWE
Kenneth W. Lowe President and Chief Executive Officer
I, Joseph G. NeCastro, certify that:
Index to Financial Information
Item
Consolidated Balance Sheets
F-2
Consolidated Statements of Income
F-4
Consolidated Statements of Cash Flows
F-5
Consolidated Statements of Comprehensive Income and Stockholders’ Equity
F-6
Condensed Notes to Consolidated Financial Statements
F-7
Critical Accounting Policies and Estimates
F-16
Forward-Looking Statements
F-18
Results of Operations
Newspapers
F-21
Scripps Networks
F-22
Broadcast Television
F-24
Liquidity and Capital Resources
F-25
F-26
F-27
F-1
CONSOLIDATED BALANCE SHEETS
September 30, 2002
As of December 31, 2001
September 30, 2001
(in thousands)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$
34,361
17,419
15,332
Accounts and notes receivable (less allowances -$18,323, $13,964, $14,304)
218,241
236,311
228,734
Program rights and production costs
155,311
120,715
145,432
Inventories
7,393
7,345
7,521
Deferred income taxes
36,204
30,850
30,747
Miscellaneous
38,272
38,018
36,217
Total current assets
489,782
450,658
463,983
Investments
245,694
331,542
355,261
Property, Plant and Equipment
406,312
394,677
387,438
Goodwill
1,143,560
1,138,232
1,142,292
Other Assets:
Program rights and production costs (less current portion)
121,191
122,620
91,770
Network distribution incentives
178,725
124,639
79,326
Other intangible assets
62,391
64,959
66,167
14,539
16,433
16,711
Total other assets
376,846
328,651
253,974
TOTAL ASSETS
2,662,194
2,643,760
2,602,948
See notes to consolidated financial statements.
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt
132,471
613,878
460,630
Accounts payable
90,729
81,690
84,762
Customer deposits and unearned revenue
29,584
29,381
32,686
Accrued liabilities:
Employee compensation and benefits
50,228
44,792
44,762
40,916
64,624
67,407
57,292
71,146
85,056
Total current liabilities
401,220
905,511
775,303
Deferred Income Taxes
142,471
146,989
155,941
Long-Term Debt (less current portion)
512,967
109,966
209,814
Other Long-Term Obligations and Minority Interests (less current portion)
137,255
129,394
127,953
Stockholders’ 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: 61,367,470; 60,103,746; and 60,020,711 shares
614
601
600
Voting - authorized: 30,000,000 shares; issued and outstanding: 18,616,913; 19,096,913; and 19,096,913 shares
186
191
Total
800
792
791
Additional paid-in capital
216,434
174,485
170,844
Retained earnings
1,260,239
1,183,595
1,185,918
Unrealized gains (losses) on securities available for sale
(2,793
)
5,067
(12,546
Foreign currency translation adjustment
20
(554
(203
Unvested restricted stock awards
(6,419
(11,485
(10,867
Total stockholders’ equity
1,468,281
1,351,900
1,333,937
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
F-3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended September 30,
Nine months ended September 30,
(in thousands, except per share data)
2002
2001
Operating Revenues:
Advertising
273,160
247,617
833,342
804,841
Circulation
33,566
34,850
103,385
105,090
Network affiliate fees, net
20,902
14,509
59,410
43,257
Licensing
16,082
14,269
50,348
49,520
Share of joint operating agency profits
17,238
14,280
51,833
31,064
Other
10,557
10,527
32,902
32,768
Total operating revenues
371,505
336,052
1,131,220
1,066,540
Operating Expenses:
123,766
114,588
368,749
351,430
Newsprint and ink
15,838
20,035
49,957
68,659
Amortization of program rights and production costs
38,004
33,971
113,836
99,760
Other operating expenses
84,452
82,721
267,569
274,892
Depreciation
14,053
13,189
41,370
41,141
Amortization of goodwill and other intangible assets
973
10,793
2,967
32,323
Total operating expenses
277,086
275,297
844,448
868,205
Operating Income
94,419
60,755
286,772
198,335
Other Credits (Charges):
Interest expense
(7,843
(8,417
(21,064
(31,737
Investment results, net of expenses
(10,052
(10,917
(83,991
50,825
Miscellaneous, net
675
240
57
1,073
Net other credits (charges)
(17,220
(19,094
(104,998
20,161
Income Before Taxes and Minority Interests
77,199
41,661
181,774
218,496
Provision for Income Taxes
30,622
18,023
66,575
87,249
Income Before Minority Interests
46,577
23,638
115,199
131,247
Minority Interests
901
1,005
2,687
2,826
Net Income
45,676
22,633
112,512
128,421
Net Income per Share of Common Stock:
Basic
.57
.29
1.42
1.63
Diluted
.28
1.40
1.61
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization
44,337
72,990
Net investment results and other nonrecurring items
44,938
(37,099
22,852
18,823
Tax benefits of stock compensation plans
13,453
8,903
Dividends received greater than share of profits of JOAs and equity method investments
7,896
19,572
Stock and deferred compensation plans
6,755
1,641
Minority interests in income of subsidiary companies
Affiliate fees billed greater than amounts recognized as revenue
9,686
16,578
Network launch incentive payments
(89,017
(13,668
Payments for programming less (greater) than program cost amortization
(13,257
(23,516
Other changes in certain working capital accounts, net
9,987
15,445
3,337
4,593
Net operating activities
176,166
215,509
Cash Flows from Investing Activities:
Additions to property, plant and equipment
(53,300
(46,054
Purchase of subsidiary companies and long-term investments
(19,581
(33,595
Investments in Denver JOA
(62,117
Sale of investments
280
14,694
3,974
1,508
Net investing activities
(68,627
(125,564
Cash Flows from Financing Activities:
Increase in long-term debt
202,446
8,059
Payments on long-term debt
(280,909
(52,249
Dividends paid
(35,868
(35,641
Dividends paid to minority interests
(1,175
(1,176
Repurchase Class A Common shares
(20,671
Miscellaneous, net (primarily employee stock options)
24,909
12,953
Net financing activities
(90,597
(88,725
Increase in Cash and Cash Equivalents
16,942
1,220
Cash and Cash Equivalents:
Beginning of year
14,112
End of period
Supplemental Cash Flow Disclosures:
Interest paid, excluding amounts capitalized
16,778
27,946
Income taxes paid
80,012
26,964
Denver newspaper assets contributed to JOA
160,064
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND STOCKHOLDERS’ EQUITY (UNAUDITED)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Unvested Restricted Stock Awards
Total Stockholders’ Equity
Comprehensive Income for the Three Months Ended Sept. 30
As of December 31, 2000
787
157,394
1,093,138
32,238
(5,747
1,277,810
Comprehensive income:
Unrealized gains (losses), net of tax of $3,065 and ($16,590)
6,116
(30,407
Adjustment for losses (gains) in income, net of tax of ($27,213) and ($48)
(50,539
(89
Increase (decrease) in unrealized gains (losses)
(44,423
(30,496
Currency translation
(564
(145
(44,987
83,434
(8,008
Dividends: declared and paid - $.45 per share
Repurchase 352,200 Class A Common Shares
(4
(20,667
Compensation plans, net: 843,008 shares issued; 109,425 shares repurchased; 2,500 shares forfeited
8
25,214
(5,120
20,102
Tax benefits of compensation plans
As of September 30, 2001
(12,749
4,513
Unrealized gains (losses), net of tax of ($4,170) and ($2,381)
(7,768
(4,480
Adjustment for losses (gains) in income, net of tax of ($50) and ($15)
(92
(28
(7,860
(4,508
Currency translation, net of tax of $112 and $67
574
15
(7,286
105,226
41,183
Convert 480,000 Voting Shares to Class A Common Shares
Compensation plans, net: 821,631 shares issued; 37,307 shares repurchased; 600 shares forfeited
28,496
5,066
33,570
As of September 30, 2002
(2,773
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 $20.6 million at September 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 2001 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:
Basic weighted-average shares outstanding
79,661
78,977
79,408
78,847
Effect of dilutive securities:
Unvested restricted stock held by employees
160
180
161
162
Stock options held by employees and directors
847
1,010
985
1,002
Diluted weighted-average shares outstanding
80,668
80,167
80,554
80,011
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:
Three months ended September 30, 2001
Nine months ended September 30, 2001
Basic EPS
Diluted EPS
As reported
0.29
0.28
Add back amortization of:
6,882
.09
20,481
.26
FCC licenses
117
352
Network affiliation and other
58
174
As adjusted
29,690
0.38
0.37
149,428
1.90
1.87
Reclassifications - For comparative purposes, certain 2001 amounts have been reclassified to conform to 2002 classifications.
F-8
2. ACQUISITIONS AND DIVESTITURES
Acquisitions
-
In the first quarter the Company acquired an additional 1% interest in The Television Food Network (“Food Network”) for $5.2 million in cash, increasing the Company’s residual interest in Food Network to 69%.
In the third quarter the Company reached an agreement to acquire a 70% controlling interest in the Shop At Home television-retailing network for $49.5 million. The transaction was completed on October 31, 2002.
In the first quarter the Company acquired an additional 3% interest in Food Network for $14.4 million. In the fourth quarter the Company acquired an additional 1% interest in Food Network for $5.0 million.
The acquisitions have been accounted for as purchases.
3. UNUSUAL CREDITS AND CHARGES
Net investment results decreased net income $6.5 million ($.08 per share) in the quarter and $54.6 million ($.68 per share) year-to-date. Included in net investment results for the quarter were $9.6 million in write-downs of investments. Year-to-date investment results include $3.6 million of costs associated with winding down the Scripps Ventures I and II investment funds and $78.6 million of investment write-downs. Investment write-downs include $35.1 million due to the decline in value of the Company’s investment in AOL Time Warner (“AOL”) and $22.2 million due to the decline in value of the Scripps Ventures investment portfolios.
The reduction in the estimated liability for prior year income taxes increased net income by $8.0 million ($.10 per share) in the year-to-date period.
The combined effect of the above items was to decrease third quarter 2002 net income by $6.5 million ($.08 per share) and to decrease year-to-date 2002 net income by $46.6 million ($.58 per share).
Net investment results decreased net income $6.9 million ($.09 per share) in the quarter and increased net income $33.5 million ($.42 per share) year-to-date. Third quarter net investment results include $12.4 million in write-downs for several investments, and a $3.1 million decrease in accrued incentive compensation. Year-to-date realized gains totaled $77.8 million, including $65.9 million on the exchange of the Company’s investment in Time Warner for America Online, which acquired Time Warner, in January 2001 and an $11.7 million gain on the sale of a portion of the Company’s investment in Centra Software. Write-downs totaled $35.0 million in the year-to-date period, while accrued incentive compensation decreased $11.5 million, to zero.
Costs associated with workforce reductions, including the Company’s share of such costs at the Denver JOA, reduced operating income $1.5 million in the third quarter and $12.7 million year-to-date. Net income was reduced $0.9 million ($.01 per share) in the third quarter and $8.0 million ($.10 per share) year-to-date.
The combined effect of the above items was to reduce third quarter 2001 net income $7.9 million ($.10 per share) and to increase 2001 year-to-date net income $25.5 million ($.32 per share).
F-9
4. LONG-TERM DEBT
Long-term debt consisted of the following:
Variable rate credit facilities
232,391
513,855
460,590
$200 million, 5.750% notes, due in 2012
198,777
$100 million, 6.375% notes, due in 2002
99,998
99,983
99,978
$100 million, 6.625% notes, due in 2007
99,926
99,916
99,912
Other notes
14,346
10,090
9,964
Total long-term debt
645,438
723,844
670,444
Long-term debt (less current portion)
The Company has 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 August 2007. 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 September 30, 2002, 2.0% at December 31, 2001, and 3.2 % at September 30, 2001.
In July 2002 the Company issued $200 million of 5.75% notes due in 2012. The proceeds from the note issuance were used to reduce the Company’s commercial paper borrowings. In October 2002 the Company repaid the $100 million, 6.375% notes due in 2002.
F-10
5. INVESTMENTS
Investments consisted of the following:
Securities available for sale (at market value):
AOL Time Warner (2,017,000 common shares)
23,597
64,740
66,757
Centra Software (700,500 common shares)
869
5,604
5,996
3,354
4,213
3,483
Total available-for-sale securities
27,820
74,557
76,236
Denver newspaper JOA
189,183
198,527
202,944
FOX SportSouth and other joint ventures
6,969
6,744
8,706
Other equity investments
21,722
51,714
67,375
Total investments
(4,188
7,793
(19,529
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 of start-up enterprises 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 September 30, 2002, however, many of the investees have not issued new equity in the past two years. 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. The carrying value of the portfolio was $4.5 million as of September 30, 2002.
F-11
6. SEGMENT INFORMATION
Financial information for the Company’s business segments is as follows:
OPERATING REVENUES
180,239
177,975
554,044
549,425
97,069
77,056
296,737
252,911
Broadcast television
72,745
61,121
213,987
201,241
Licensing and other media
21,452
19,900
66,452
67,012
1,070,589
Unusual item
(4,049
Per consolidated financial statements
EBITDA
60,706
58,200
195,039
172,482
29,872
17,647
82,722
60,061
20,621
12,478
61,398
53,820
4,493
2,513
13,237
11,154
Corporate
(6,247
(4,561
(21,287
(13,465
109,445
86,277
331,109
284,052
Unusual items
(1,540
(12,253
84,737
271,799
DEPRECIATION
6,337
6,316
19,056
19,546
2,239
1,582
6,527
5,425
4,938
4,794
14,355
14,786
199
232
583
616
340
265
849
705
41,078
63
AMORTIZATION OF INTANGIBLE ASSETS
170
212
507
469
771
944
2,365
2,824
32
48
95
75
1,204
3,368
Amortization of goodwill and intangible assets with indefinite lives
9,589
28,544
411
OPERATING INCOME
54,199
51,672
175,476
152,467
26,862
15,121
73,830
51,812
15,651
7,636
46,948
38,959
4,294
2,281
12,654
10,538
(6,587
(4,826
(22,136
(14,170
71,884
239,606
(9,589
(28,544
(12,727
F-12
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
7,044
8,334
27,304
24,097
3,917
5,523
9,835
10,812
4,912
2,951
12,920
10,295
146
21
228
301
518
130
3,013
549
16,537
16,959
53,300
46,054
BUSINESS ACQUISITIONS AND OTHER ADDITIONS TO LONG-LIVED ASSETS
390
80
454
63,796
20,334
18,070
70,566
45,920
27
Venture capital and other investments
7,801
8,623
13,872
15,995
28,525
26,773
84,912
125,738
1,263,725
1,282,028
726,637
576,627
502,800
499,407
24,787
29,595
50,089
143,687
94,156
71,604
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.
F-13
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:
Nine months ended September 30, 2002
Number of Shares
Weighted Average Exercise Price
Range of Exercise Prices
Options granted during the period
1,087,300
75.26
73 - 78
1,088,750
64.24
58 - 70
Options exercised during the period
760,562
29.96
15 - 67
649,276
27.32
11 - 56
Options forfeited during the period
47,898
48.72
35 - 64
Options outstanding at end of period
4,858,276
54.08
15 - 78
4,642,013
44.59
12 - 70
Options exercisable at end of period
2,867,119
43.64
15 - 68
2,728,468
35.64
Weighted-average fair value of options granted
22.18
18.93
Assumptions used to determine fair value:
Dividend yield
0.8
%
1.5
Expected volatility
22.1
23.1
Risk-free rate of return
4.5
5.5
Expected life of options
7 years
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:
Price at Award Dates
Weighted Average
Range of Prices
Shares awarded during the period
32,305
72.43
72 - 77
165,120
63.41
57 - 71
Shares vested during the period
114,515
62.03
42 - 84
120,497
49.26
45 - 56
Shares forfeited during the period
47.39
47 - 48
2,500
52.54
45 - 63
Unvested shares at end of period
340,071
55.65
43 - 77
436,054
50.24
26 - 71
F-14
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:
COMPENSATION EXPENSE RECOGNIZED
Restricted stock awards
848
1,299
3,700
Stock options
303
1,356
PRO FORMA RESULTS UNDER FAS NO. 123
Net income as reported
Additional stock option expense, net of income tax effects
(3,689
(3,047
(10,145
(8,740
Pro forma net income
41,987
19,586
102,367
119,681
Pro forma net income per share of common stock:
Basic earnings per share:
0.57
(0.05
(0.04
(0.13
(0.11
Pro forma basic earnings per share
0.53
0.25
1.29
1.52
Diluted earnings per share:
Pro forma diluted earnings per share
0.52
0.24
1.27
1.50
The sum of the net income per share amounts may not equal the pro forma amounts because each is computed independently.
F-15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s discussion of and analysis of its financial condition and results of operations is based upon the Company’s consolidated financial statements. Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K describes the significant accounting policies adopted by the Company. The most critical accounting policies and estimates relate to revenue recognition, receivable allowances, programming, investments, long-lived assets, employee benefits and income taxes.
Revenue Recognition - The Company’s primary sources of revenue are from the sales of:
•
advertising space, time and on the Company’s Internet sites
newspapers to distributors and individual subscribers; and
programming services to cable and satellite television systems (“network affiliate fees”).
Advertising. Advertising revenue is recorded, net of agency commissions, when advertisements are published in newspapers, are broadcast on television stations or cable television networks, and over the terms of the contracts for advertising appearing on the Company’s Internet sites. 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 management 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 cable television network advertising contracts may guarantee the advertiser a minimum audience, requiring management to make estimates of audience size. If management determines the Company 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.
Newspaper Subscriptions. Prepaid newspaper subscriptions are deferred and are included in circulation revenue on a pro-rata basis over the term of the subscriptions. Circulation revenue includes sales to retail outlets and newsstands, which are subject to returns. The Company records these retail sales 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 services generally pay a per subscriber fee for the right to distribute the Company’s networks on their systems. The Company 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 are waived in exchange for such long-term distribution contracts. Network affiliate fee revenues are reported net of incentives in the Consolidated Statements of Income and are recognized over the terms of the contracts.
Customer Billed Revenue - Amounts due to the Company for network affiliate fees are determined by cable and satellite television systems based upon subscribers receiving the Company’s programming. Licensees determine royalties due to the Company based upon their sales of licensed products. This requires management to make estimates of the number of subscribers receiving the Company’s networks and licensed merchandise sales. Estimated network affiliate fee and licensing revenues are adjusted based upon actual amounts realized.
Receivable Allowances - The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Allowances are based on historical experience and other assumptions, and are adjusted based on write-offs realized. Actual write-offs of bad debts have historically been insignificant, less than 1.0% of revenues.
Programming - Programming assets include licensed programs and programs produced by or for the Company. 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 rates, subscriber fees and program usage. Accordingly, revenue estimates and planned usage are reviewed periodically and are revised if necessary. 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 of day are evaluated on an aggregate basis.
Investments - The Company holds investments in several companies, including publicly traded securities and others 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. The Company’s investments are regularly reviewed to determine if there has been an other-than-temporary decline in market value. In making that determination, management considers the extent to which cost exceeds market value, the duration of the market decline and the investees’ earnings and cash forecasts, and current cash position, among other factors.
Long-lived Assets - Management also exercises judgment in determining the estimated useful life of long lived assets, specifically plant and property and certain intangible assets with a finite life. Management bases its judgment on estimated lives of these assets based on actual experienced length of service of similar assets and expert opinions.
Certain events or changes in circumstances may indicate that the carrying value of the Company’s property, plant and equipment, intangible assets, and goodwill may not be recoverable and require an impairment review. In assessing impairment, the Company 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 to not be recoverable, an impairment loss representing the amount of excess over its fair value would be recognized in income.
In accordance with FAS No. 142 the Company reviews for goodwill impairment based upon its reporting units. Reporting units are operating segments or businesses one level below the operating segment. Scripps Networks comprises one reporting unit. The Company’s newspaper and broadcast television reporting units are based on size of newspaper market and broadcast television affiliation.
Employee Benefits - The Company is self-insured for employee-related health and disability benefits and workers compensation claims. A third-party administrator is used to process all claims. Liabilities for unpaid claims are based on the Company’s historical claims experience rate and are developed from actuarial valuations. However, actual amounts could vary significantly from such estimates, which would require the Company to record adjustments to expense in that period.
Management relies on actuarial valuations to determine pension costs. Inherent in these valuations are assumptions of discount rates and expected return on plan assets. Management considers current market conditions, including changes in interest rates, in selecting these assumptions. Changes in market conditions and changes in assumptions regarding plan participants may cause volatility in year-over-year pension expense.
Income Taxes - The Company’s accounting for income taxes is sensitive to interpretation of various laws and regulations. The Internal Revenue Service is currently examining the Company’s 1996 to 2001 consolidated federal income tax returns. Management reviews its provision for open tax years on an ongoing basis.
The company records a tax valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company’s deferred tax assets subject to a valuation allowance primarily relate to state net operating loss carryforwards and capital loss carryforwards. The Company considers ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event the Company determined the deferred tax asset it would realize was greater or less than the net amount recorded, an adjustment would be made to the tax provision in that period.
F-17
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
The Company operates in three reportable segments: newspapers, cable television networks (referred to as “Scripps Networks”), and broadcast television.
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.
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” revenue 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.
In August 2002 the Company reached an agreement to acquire a 70% controlling interest in the Shop At Home television-retailing network. The acquisition was completed on October 31, 2002.
Consolidated results of operations were as follows:
Quarterly Period
Year-to-Date
Change
Operating revenues:
Newspapers excluding RMN
174,102
(0.1
)%
174,315
534,426
0.0
534,189
Rocky Mountain News
6,137
3,660
19,618
15,236
Total newspapers
1.3
26.0
17.3
19.0
6.3
7.8
(0.8
Revenues from core operations
10.5
5.7
Operating income:
53,410
0.7
53,056
171,954
3.8
165,630
789
(1,384
3,522
(13,163
4.9
15.1
77.6
42.5
20.5
88.3
20.1
Operating income from core operations
31.3
19.7
Income taxes
(34,146
(25,160
(104,007
(82,212
Minority interest
(901
(1,005
(2,687
(2,826
Income from core operations
52,204
39.1
37,542
159,071
28.4
123,904
Unusual credits (charges):
Employee work force reduction
Tax effect of unusual credits (charges)
3,524
7,137
29,432
(5,037
Prior year tax liability adjustments
8,000
(12.4
Per share of common stock:
.65
38.3
.47
1.97
27.1
1.55
(.01
(.10
(.09
(.26
Net investment results
(.08
(.68
.42
.10
(13.0
Weighted-average shares outstanding
The sum of per share from core operations and unusual credits (charges) may not equal the reported net income per share amount because each is computed independently.
All per share disclosures are on a diluted basis.
F-19
Other financial and statistical data, excluding unusual items, are as follows:
Total advertising revenues, excluding RMN
10.3
794,062
Advertising revenues as a percentage of total revenues
74.8
74.5
75.0
75.2
EBITDA:
59,783
0.5
59,470
191,138
3.6
184,424
923
(1,270
3,901
(11,942
4.3
13.1
69.3
37.7
65.3
14.1
78.8
18.7
EBITDA from core operations
26.9
16.6
Effective income tax rate for core operations
39.5
39.3
Net cash provided by operating activities
75,398
92,102
Capital expenditures
(16,537
(16,959
Business acquisitions and investments
(8,186
(9,269
(95,712
Increase (decrease) in long-term debt
(23,499
(40,877
(78,463
(44,190
Dividends paid, including to minority interests
(12,378
(12,298
(37,043
(36,817
Purchase and retirement of common stock
(18,683
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 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 third quarter were $233 million in 2002 and $457 million in 2001. The weighted-average interest rate on such borrowings in the third quarter was 1.8% in 2002 and 3.6% in 2001. For the year-to-date period the weighted-average interest rate was 1.8% in 2002 and 4.8% in 2001. The Company is currently rolling over short-term debt at an effective 90-day yield of 1.6%.
In July 2002 the Company issued $200 million of 5.75% notes due in 2012. The proceeds from the note issuance were used to reduce the Company’s commercial paper borrowings. The average balance of all interest bearing obligations year-to-date was $704 million in 2002 and $747 million in 2001. In October 2002 the Company repaid its $100 million, 6.375% notes.
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. Amortization of goodwill and other intangible assets with indefinite lives, primarily FCC licenses and broadcast television station network affiliation agreements, was $9.6 million, $7.1 million after-tax, $.09 per share in the third quarter and $28.5 million, $21.0 million after tax, $.26 per share.
Third quarter 2001 operating results were affected by a downturn in business immediately following the September 11 terrorist attacks, which exacerbated an already weak market. The Company’s nine network-affiliated television stations broadcast 36 hours of continuous, commercial free network and local news coverage following the attacks, and for the next several days there was little demand for television advertising.
Operating results for each of the Company’s reportable segments, excluding divested operating units and unusual items, are presented on the following pages.
F-20
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:
Local
41,115
(3.0
42,376
131,033
(1.2
132,688
Classified
53,420
(0.7
53,783
163,220
(2.5
167,335
National
8,359
2.3
8,170
24,424
(0.6
24,572
Preprint and other
23,950
9.0
21,964
71,452
9.5
65,271
Newspaper advertising
126,844
0.4
126,293
390,129
0.1
389,866
(3.7
(0.9
104,310
11,141
10,620
32,334
2.5
31,547
2,551
(0.0
2,552
8,578
8,466
Expenses, excluding depreciation and amortization:
Editorial and newspaper content
21,746
21,910
65,748
65,682
15,345
(21.0
19,424
48,505
(23.5
63,396
Other press and production
17,103
2.4
16,708
52,490
2.7
51,097
Circulation and distribution
15,978
(1.7
16,257
48,751
48,041
Other advertising, internet and printing
7,895
8.9
7,251
23,360
6.9
21,849
Advertising sales and marketing
16,229
7.4
15,104
49,882
5.3
47,376
General and administrative
19,945
12.6
17,719
54,213
7.5
50,421
114,241
114,373
342,949
(1.4
347,862
EBITDA before equity-method investments
59,861
59,942
191,477
2.8
186,327
Share of pre-tax earnings (losses) of equity-method investments
(78
(472
(339
(1,903
6,373
6,414
19,184
2.1
18,794
Operating income before RMN
Operating income
Percent of operating revenues:
34.3
34.1
35.8
34.5
Operating income, excluding RMN
30.7
30.4
32.2
31.0
Supplemental Statement of Cash Flows Information:
Dividends received greater (less) than share of profits of JOAs and equity-method investments
3,325
(3,473
9,484
19,370
Business acquisitions and other additions to long-lived assets
The demand for advertising stabilized in many of the Company’s markets in the third quarter of 2002, although help wanted advertising volume remains below that of prior periods. Newspaper advertising revenues are expected to increase modestly year-over-year in the fourth quarter.
Newsprint and ink decreased in the quarter primarily due to a 24% decrease in year-over-year newsprint prices.
Third 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.
SCRIPPS NETWORKS – Operating results, excluding unusual items, were as follows:
74,803
22.2
61,234
233,345
13.4
205,753
44.1
37.3
1,364
3.9
1,313
3,982
Operating expenses, excluding depreciation and amortization:
Programming and production
30,389
18.0
25,747
90,615
21.1
74,833
Operations and distribution
7,090
(10.0
7,878
24,276
(9.4
26,795
Sales and marketing
17,416
10.9
15,701
54,157
(2.1
55,307
14,365
19.4
12,027
48,955
22.7
39,891
69,260
12.9
61,353
218,003
10.8
196,826
27,809
77.1
15,703
78,734
40.4
56,085
Share of pre-tax earnings of equity-method investments
2,063
1,944
3,988
3,976
3,010
19.2
2,526
8,892
8,249
30.8
22.9
27.9
23.7
27.7
19.6
24.9
Billed network affiliate fees
23,880
19,290
69,096
59,835
19,176
5,816
89,017
13,668
378
(7,315
(13,447
(25,703
Dividends received greater (less) than share of earnings of equity-method investments
(383
(745
(1,588
164
5,240
14,429
Supplemental balance sheet information:
Program assets
232,227
198,120
Launch incentive payments due to cable and satellite television systems for launches through the end of the period
44,684
72,809
According to the Nielsen Homevideo Index, HGTV was distributed to 79.8 million homes in September 2002, up 5.5 million from September 2001 and 1.2 million in the quarter. Food Network was distributed to 76.6 million homes in September 2002, up 8.9 million from September 2001 and 1.3 million in the quarter. Prime-time viewership was up 29% for Food and 35% for HGTV compared to the prior year.
Wider distribution of the networks and the increase in viewership led to increased demand for advertising and higher advertising rates at the Company’s networks. Advertising revenues in the prior year were reduced due to lost sales in the days immediately following the September 11 terrorist attacks. The networks were off the air for 24 hours and experienced weakened demand and canceled advertising. Advertising revenues are expected to increase between 40% and 45% year-over-year in the fourth quarter.
Network affiliate fee revenue increased 36% for HGTV and 20% 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 network affiliate fee revenue by $1.7 million in the quarter and $3.4 million in the year-to-date period. Network affiliate fee revenues are expected to increase approximately 35% year-over-year in the fourth quarter.
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 17% for HGTV and 23% for Food Network in the year-to-date period.
The Company launched DIY in the fourth quarter of 1999 and launched Fine Living, its fourth network, in March 2002. DIY was distributed to 12 million homes in September 2002. Fine Living signed a long-term distribution agreement with DIRECTV in September, increasing distribution of the network to 13 million homes on October 1, 2002.
Start-up losses associated with DIY and Fine Living reduced EBITDA in the third quarter by $7.3 million in 2002 compared to $5.7 million in the third quarter of 2001. For the year-to-date period, start-up losses reduced EBITDA by $29 million in 2002 and $16 million in 2001. Full year start-up losses are currently projected to reduce EBITDA by approximately $38 million in 2002.
Excluding the start-up expenses of the new networks, EBITDA at Scripps Networks increased 59% in the quarter and 46% year-to-date.
The year-over-year increase in network launch incentive payments is due to expanded distribution of the Company’s networks.
F-23
BROADCAST TELEVISION – Operating results, excluding unusual items, were as follows:
41,138
16.2
35,389
126,238
7.0
117,927
22,789
7.7
21,151
70,491
70,220
Political
5,470
735
6,453
1,039
Network compensation
1,870
(20.4
2,348
5,779
(25.0
7,702
1,478
(1.3
1,498
5,026
15.5
4,353
Programming and station operations
35,142
35,002
104,798
1.0
103,733
8,998
16.3
7,740
27,205
5.6
25,767
7,984
35.3
5,901
20,586
14.9
17,921
52,124
7.2
48,643
152,589
3.5
147,421
4,970
2.6
4,842
14,450
(2.8
14,861
28.3
20.4
28.7
26.7
21.5
12.5
21.9
823
190
2,187
Improved demand for advertising led to the increase in advertising revenues. Local and national advertising revenue increased 13% year-over-year in the third quarter. Broadcast television advertising revenues in the prior year quarter were reduced by approximately $4 million due to sales lost in the days immediately following the September 11 terrorist attacks. The Company’s nine network-affiliated television stations broadcast 36 hours of continuous, commercial free network and local news coverage following the attacks, and for the next several days there was little demand for television advertising.
Including political revenue, broadcast television advertising revenues are expected to increase between 10% and 15% year-over-year in the fourth quarter. Political revenues are expected to be approximately $12 million in the fourth quarter compared to $1.4 million in the 2001 period.
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.
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 nine months of the year was $176 million in 2002 and $216 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 $86 million in the first nine 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.
In July the Company issued $200 million of 5.75% notes due in 2012. The proceeds from the notes were used to reduce the Company’s commercial paper borrowings. In October 2002 the Company repaid its $100 million, 6.375% notes and filed a shelf registration for up to $500 million in debt securities with the Securities and Exchange Commission. The Company would use the proceeds for the sale of debt securities for general corporate purposes including capital spending, debt reduction and acquisitions.
Net debt (borrowings less cash equivalents and other short-term investments) decreased $76 million in the first nine months of 2002, to $645 million at September 30, 2002. Net debt includes commercial paper borrowings totaling $232 million, with average maturities of 90 days or less. Commercial paper borrowings are supported by bank credit facilities permitting maximum borrowings of $600 million. 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.
Net debt is expected to increase in the fourth quarter as the Company closes the acquisition of Shop At Home and continues to expand distribution of Scripps Networks.
Repurchase of a total of six million Class A Common shares was authorized by the Board of Directors in 1998. The Company repurchased a total of 4.3 million Class A Common Shares between June 1997 and October 2001, at prices ranging from $39 to $60 per share. The balance remaining on this authorization is 1.7 million shares.
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 September 30, 2002 or at December 31, 2001.
The following table presents additional information about the Company’s market-risk-sensitive financial instruments:
Cost Basis
Fair Value
Financial instruments subject to interest rate risk:
Variable rate credit facilities, including commercial paper
$200 million, 5.75% notes, due in 2012
216,314
100,180
102,685
114,327
104,376
13,688
9,084
Total long-term debt including current portion
676,900
730,000
Financial instruments subject to market value risk:
29,667
1,427
Other available-for-sale securities
914
597
Total investments in publicly-traded companies
32,008
66,764
(a
(a)
Included in other equity investments are 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. However, many of the investees have not issued new equity in the past two years. There can be no assurance that the Company would realize the carrying value of these securities upon their sale.
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 September 30, 2002. The weighted-average interest rate on borrowings under the Variable Rate Credit Facilities was 1.8% at September 30, 2002, and 2.0% at December 31, 2001. In October 2002, the Company repaid its $100 million, 6.375% notes.
CONTROLS AND PROCEDURES
The Company’s management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other information presented in this report. The financial statements of the Company 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, management must make a variety of decisions which 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, management applies judgment based on its understanding and analysis of the relevant circumstances, including its historical experience, actuarial studies and other assumptions. Management re-evaluates its 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, management is committed to preparing financial statements incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.
The Company’s management maintains a system of internal accounting controls and disclosure controls and procedures which management believes provide reasonable assurance that transactions are properly recorded and the Company’s assets are protected from loss or unauthorized use.
The integrity of the accounting and disclosure 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. The Company’s disclosure control systems and procedures are designed to ensure timely collection and evaluation of information subject to disclosure, to ensure the selection of appropriate accounting polices, and to ensure compliance with the Company’s accounting policies and procedures. The Audit Committee is composed solely of independent directors and meets periodically with the independent auditors, management and the internal auditors to discuss accounting, financial reporting, auditing and internal auditing matters. Both the internal and independent auditors have direct and private access to the Audit Committee.
In September and October 2002 an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). 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. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies or material weaknesses.
Index to Exhibits
Exhibit No.
12
Ratio of Earnings to Fixed Charges
E-2
99(a)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
E-3
99(b)
E-4
E-1