UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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 March 31, 1999
OR
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 (I.R.S. Employer
incorporation or organization) 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 X 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 April 30, 1999
there were 59,126,172 of the Registrant's Class A Common Shares
outstanding and 19,218,913 of the Registrant's Common Voting Shares
outstanding.
INDEX TO THE E. W. SCRIPPS COMPANY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
Item No. Page
PART I - FINANCIAL INFORMATION
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
PART II - OTHER INFORMATION
1 Legal Proceedings 3
2 Changes in Securities 3
3 Defaults Upon Senior Securities 3
4 Submission of Matters to a Vote of Security Holders 3
5 Other Information 3
6 Exhibits and Reports on Form 8-K 4
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
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.
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
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
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
Dated: May 14, 1999 BY: D. J. Castellini
D. J. Castellini
Senior Vice President,
Finance & Administration
THE E. W. SCRIPPS COMPANY
Index to Financial Information
Item Page
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
Notes to Consolidated Financial Statements F-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations F-12
CONSOLIDATED BALANCE SHEETS
( in thousands ) As of
March 31, December 31, March 31,
1999 1998 1998
(Unaudited) (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,441 $ 14,400 $ 17,496
Short-term investments 26 20,551 3,135
Accounts and notes receivable (less
allowances -$9,439, $7,322, $6,707) 208,319 217,810 188,228
Program rights and production costs 57,755 68,870 58,733
Network distribution fees 12,900 18,729 14,700
Inventories 16,566 15,009 19,295
Deferred income taxes 24,310 24,140 22,356
Miscellaneous 30,144 27,824 24,115
Total current assets 363,461 407,333 348,058
Investments 156,610 140,788 92,865
Property, Plant and Equipment 469,685 478,703 474,283
Goodwill and Other Intangible Assets 1,187,634 1,193,257 1,234,917
Other Assets:
Program rights and production costs (less current portion) 62,550 50,763 42,359
Network distribution fees (less current portion) 57,031 43,204 43,779
Miscellaneous 34,270 31,064 21,578
Total other assets 153,851 125,031 107,716
TOTAL ASSETS $ 2,331,241 $ 2,345,112 $ 2,257,839
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
( in thousands, except share data ) As of
March 31, December 31, March 31,
1999 1998 1998
(Unaudited) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 230,785 $ 267,601 $ 108,298
Accounts payable 95,072 101,433 86,269
Customer deposits and unearned revenue 34,679 36,234 39,654
Accrued liabilities:
Employee compensation and benefits 39,555 40,807 41,138
Network distribution fees 38,793 35,520 31,478
Miscellaneous 55,306 50,896 63,337
Total current liabilities 494,190 532,491 370,174
Deferred Income Taxes 123,789 115,634 92,949
Long-Term Debt (less current portion) 501,831 501,834 601,849
Other Long-Term Obligations and Minority Interests (less current portion) 128,273 126,421 121,006
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: 59,102,871; 59,324,967; and 61,553,530 shares 591 593 616
Voting - authorized: 30,000,000 shares; issued and
outstanding: 19,218,913; 19,218,913; and 19,218,913 shares 192 192 192
Total 783 785 808
Additional paid-in capital 147,703 161,878 263,889
Retained earnings 891,346 870,315 796,909
Unrealized gains on securities available for sale 46,744 38,904 15,064
Foreign currency translation adjustment 320 581 199
Unvested restricted stock awards (3,738) (3,731) (5,008)
Total stockholders' equity 1,083,158 1,068,732 1,071,861
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,331,241 $ 2,345,112 $ 2,257,839
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ( UNAUDITED )
( in thousands, except per share data )
Three months ended
March 31,
1999 1998
Operating Revenues:
Advertising $ 282,950 $ 257,557
Circulation 37,588 40,541
Licensing 15,766 14,584
Joint operating agency distributions 10,917 10,816
Affiliate fees 11,937 8,677
Other 14,265 14,634
Total operating revenues 373,423 346,809
Operating Expenses:
Employee compensation and benefits 116,379 114,194
Newsprint and ink 37,303 36,348
Program, production and copyright costs 29,610 23,429
Other operating expenses 98,405 89,628
Depreciation 16,353 15,831
Amortization of intangible assets 9,636 9,924
Total operating expenses 307,686 289,354
Operating Income 65,737 57,455
Other Credits (Charges):
Interest expense (11,073) (12,012)
Miscellaneous, net 1,302 (1,438)
Net other credits (charges) (9,771) (13,450)
Income Before Taxes and Minority Interests 55,966 44,005
Provision for Income Taxes 22,932 17,959
Income Before Minority Interests 33,034 26,046
Minority Interests 1,033 968
Net Income $ 32,001 $ 25,078
Net Income per Share of Common Stock:
Basic $.41 $.31
Diluted .40 .31
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )
( in thousands )
Three months ended
March 31,
1999 1998
Cash Flows from Operating Activities:
Net income $ 32,001 $ 25,078
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 25,989 25,755
Deferred income taxes 3,824 2,198
Minority interests in income of subsidiary companies 1,033 968
Network distribution fee amortization greater (less) than payments (6,598) 784
Program cost amortization greater (less) than payments (13,060) (8,451)
Other changes in certain working capital accounts, net 15,097 40,203
Miscellaneous, net 3,485 3,368
Net operating activities 61,771 89,903
Cash Flows from Investing Activities:
Additions to property, plant and equipment (14,006) (12,090)
Purchase of subsidiary company and long-term investments (9,015) (4,285)
Change in short-term investments, net 20,525
Miscellaneous, net 4,220 1,254
Net investing activities 1,724 (15,121)
Cash Flows from Financing Activities:
Payments on long-term debt (36,827) (62,991)
Repurchase Class A Common shares (16,709)
Dividends paid (10,970) (10,498)
Dividends paid to minority interests (392) (396)
Miscellaneous, net (primarily exercise of stock options) 444 2,283
Net financing activities (64,454) (71,602)
Increase (Decrease) in Cash and Cash Equivalents (959) 3,180
Cash and Cash Equivalents:
Beginning of year 14,400 14,316
End of period $ 13,441 $ 17,496
Supplemental Cash Flow Disclosures:
Interest paid, excluding amounts capitalized $ 7,709 $ 8,164
Income taxes paid 11,457 5,740
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
AND STOCKHOLDERS' EQUITY ( UNAUDITED )
( in thousands, except share data )
Accumulated Unvested
Additional Other Restricted Total
Common Paid-in Retained Comprehensive Stock Stockholders'
Stock Capital Earnings Income Awards Equity
Balances at December 31, 1997 $ 806 $ 259,739 $ 782,329 $ 11,690 $ (5,602) $ 1,048,962
Comprehensive income:
Net income 25,078 25,078
Unrealized gains, net of deferred tax
of $2,291 4,301 4,301
Less: reclassification adjustment for gains
in income, net of deferred tax of $317 (634) (634)
Increase in unrealized gains on securities 3,667 3,667
Foreign currency translation adjustments (94) (94)
Total 25,078 3,573 28,651
Dividends: declared and paid - $.13 per share (10,498) (10,498)
Convert 114,798 Voting Shares to Class A Shares
Compensation plans, net: 142,575 shares issued 2 2,538 594 3,134
Tax benefits of compensation plans 1,612 1,612
Balances at March 31, 1998 $ 808 $ 263,889 $ 796,909 $ 15,263 $ (5,008) $ 1,071,861
Balances at December 31, 1998 $ 785 $ 161,878 $ 870,315 $ 39,485 $ (3,731) $ 1,068,732
Comprehensive income:
Net income 32,001 32,001
Unrealized gains, net of deferred tax
of $4,253 7,898 7,898
Less: reclassification adjustment for gains
in income, net of deferred tax of $31 (58) (58)
Increase in unrealized gains on securities 7,840 7,840
Foreign currency translation adjustments (261) (261)
Total 32,001 7,579 39,580
Dividends: declared and paid - $.14 per share (10,970) (10,970)
Repurchase 391,100 Class A Common Shares (4) (16,705) (16,709)
Compensation plans, net: 169,825 shares issued;
821 shares repurchased 2 1,199 (7) 1,194
Tax benefits of compensation plans 1,331 1,331
Balances at March 31, 1999 $ 783 $ 147,703 $ 891,346 $ 47,064 $ (3,738) $ 1,083,158
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
______________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements have been prepared in
accordance with generally accepted accounting principles 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, 1998, has not
changed materially unless otherwise disclosed herein. Financial
information as of December 31, 1998, 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.
Net Income Per Share - The following table presents additional
information about basic and diluted weighted-average shares
outstanding:
( in thousands )
Three months ended
March 31,
1999 1998
Basic weighted-average shares outstanding 78,096 80,358
Effect of dilutive securities:
Unvested restricted stock held by employees 192 198
Stock options held by employees 838 1,060
Diluted weighted-average shares outstanding 79,126 81,616
Recently Issued Accounting Standards - The Financial Accounting
Standards Board issued FAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. As market conditions warrant, the
Company uses foreign currency forward and option contracts to reduce
the risk of changes in the exchange rate for the Japanese yen on the
Company's anticipated net licensing receipts and forward contracts to
reduce the risk of changes in the price of newsprint on anticipated
purchases. The new standard, which must be adopted by January 1,
2000, will not have a material effect on the Company's financial
position or its results of operations. Foreign currency forward and
option contracts are currently recognized at fair value, however
changes in the fair value of such contracts, which under current
accounting rules are recognized immediately, will be initially
reported as a separate component of comprehensive income and
reclassified into earnings when the related licensing revenue is
earned. Newsprint forward contracts, when used, are not recorded in
the Company's balance sheet and gains and losses are deferred and
recognized in income as the newsprint is consumed. Under the new
standard newsprint forward contracts will be recorded at fair value
and changes in the value of the contracts will be initially reported
as a separate component of comprehensive income and reclassified into
earnings when the newsprint is consumed.
Use of Estimates - In the first quarter of 1999 the Company increased
the estimated useful lives of network distribution fees to the greater
of five years or the remaining terms of the distribution contracts.
Because of the previous uncertainty regarding the conditions under which
the distribution contracts would be renewed, such fees had been
amortized over the terms of the contracts. The Company has committed to
pay certain cable television system operators additional distribution
fees to carry the networks on systems not included in the original
distribution contracts. Management believes the expanded distribution
of the networks will increase affiliate fee and advertising revenue
beyond the remaining terms of the original distribution contracts. The
change in estimate was made to better match revenue and expense. Also
in the first quarter of 1999 the Company increased the estimated useful
lives of certain newspaper presses from 20 years to 30 years. The
changes in estimated useful lives were made prospectively. The effect
of these changes on first-quarter 1999 results was to increase operating
income $2,900,000 and net income $1,800,000, $.02 per share. The
changes in estimated lives will have similar effects on quarterly
results for the remainder of 1999.
Reclassifications - For comparative purposes, certain 1998 amounts have
been reclassified to conform to 1999 classifications.
2. ACQUISITIONS AND DIVESTITURES
Acquisitions
1999 - In the first quarter the Company acquired the 70% of Colorado
Real Estate On-Line, a provider of real estate listings on the
Internet, that it did not already own for $1,100,000 in cash and
acquired a 1.86% minority interest in The Television Food Network
for $2,400,000.
Divestitures
1998 - The Company sold Scripps Howard Productions, its program
television production operation based in Los Angeles, in the
second quarter and the Dallas, Texas, community newspapers,
including the Plano daily in the fourth quarter. No material gain
or loss was realized on either divestiture as proceeds
approximated the book value of the net assets sold.
Included in the consolidated financial statements are the following
results of divested operations (excluding gains on sales):
( in thousands ) Three months
ended
March 31,
1998
Operating revenues $ 3,800
Operating income (loss) (800)
3. LONG-TERM DEBT
Long-term debt consisted of the following:
( in thousands ) As of
March 31, December 31, March 31,
1999 1998 1998
Variable rate credit facilities $ 530,745 $ 567,561 $ 478,480
$100 million, 6.625% note, due in 2007 99,876 99,872 99,862
$100 million, 6.375% note, due in 2002 99,930 99,925 99,911
$30 million, 7.375% notes, due in 1998 29,778
Other notes 2,065 2,077 2,116
Total long-term debt 732,616 769,435 710,147
Current portion of long-term debt 230,785 267,601 108,298
Long-term debt (less current portion) $ 501,831 $ 501,834 $ 601,849
The Company has a Competitive Advance and Revolving Credit Facility
Agreement, which permits aggregate borrowings up to $700,000,000 (the
"Variable Rate Credit Facilities"). The Variable Rate Credit
Facilities are comprised of two unsecured lines, one limited to
$400,000,000 principal amount maturing in 1999, and the other limited
to $300,000,000 principal amount maturing in 2002. Borrowings under
the Variable Rate Credit Facilities are available on a committed
revolving credit basis at the Company's choice of three short-term
rates or through an auction procedure at the time of each borrowing.
The Variable Rate Credit Facilities are also used by the Company in
whole or in part, in lieu of direct borrowings, as credit support for
its commercial paper. The weighted average interest rates on the
Variable Rate Credit Facilities was 4.97% at March 31, 1999, 5.25% at
December 31, 1998, and 5.60% at March 31, 1998.
4. INVESTMENTS
Investments consisted of the following:
( in thousands ) As of
March 31, December 31, March 31,
1999 1998 1998
Securities available for sale:
Time Warner common stock (1,344,000 shares) $ 95,211 $ 83,446 $ 48,404
Other 5,360 5,286 3,723
Total securities available for sale 100,571 88,732 52,127
Investments accounted for using the equity method 17,428 15,157 7,574
Other (primarily venture capital) 38,611 36,899 33,164
Total investments $ 156,610 $ 140,788 $ 92,865
Unrealized gains on securities available for sale $ 71,928 $ 59,866 $ 23,188
5. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer
different products and services. They are managed separately because
each business requires different technology and marketing strategies.
The Company primarily evaluates the operating performance of its
segments based on earnings before interest, income taxes, depreciation
and amortization ("EBITDA"). EBITDA also excludes all credits and
charges classified as non-operating in the Consolidated Statements of
Income.
No single customer provides more than 10% of the Company's revenue.
The Company derives less than 10% of its revenues from markets outside
of the U.S.
Financial information for the Company's business segments is as
follows:
( in thousands )
Three months ended
March 31,
1999 1998
OPERATING REVENUES
Newspapers $ 219,740 $ 215,126
Broadcast television 75,367 74,815
Category television 48,200 30,470
Licensing and other media 30,116 26,398
Total $ 373,423 $ 346,809
EBITDA
Newspapers $ 65,408 $ 62,726
Broadcast television 21,448 22,553
Category television 4,994 (740)
Licensing and other media 4,251 2,799
Corporate (4,375) (4,128)
Total $ 91,726 $ 83,210
DEPRECIATION
Newspapers $ 9,377 $ 10,211
Broadcast television 4,695 3,926
Category television 1,815 1,230
Licensing and other media 226 217
Corporate 240 247
Total $ 16,353 $ 15,831
AMORTIZATION OF INTANGIBLE ASSETS
Newspapers $ 5,646 $ 5,743
Broadcast television 2,366 2,405
Category television 1,574 1,774
Licensing and other media 50 2
Total $ 9,636 $ 9,924
OPERATING INCOME
Newspapers $ 50,385 $ 46,772
Broadcast television 14,387 16,222
Category television 1,605 (3,744)
Licensing and other media 3,975 2,580
Corporate (4,615) (4,375)
Total $ 65,737 $ 57,455
OTHER NONCASH ITEMS
Broadcast television $ 290 $ (764)
Category television (19,948) (6,872)
Licensing and other media (31)
Total $ (19,658) $ (7,667)
Other noncash items include programming and program production
expenses in excess of (less than) the amounts paid, and, for category
television, amortization of network distribution fees in excess of
(less than) distribution fee payments.
( in thousands ) Three months ended
March 31,
1999 1998
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Newspapers $ 8,700 $ 6,312
Broadcast television 3,073 5,093
Category television 1,228 307
Licensing and other media 295 63
Corporate 710 315
Total $ 14,006 $ 12,090
BUSINESS ACQUISITIONS AND OTHER ADDITIONS TO LONG-LIVED ASSETS
Newspapers $ 1,129 $ 331
Broadcast television 55 70
Category television 14,739 2,745
Licensing and other media 5,431 3,825
Total $ 21,354 $ 6,971
ASSETS
Newspapers $1,233,032 $1,297,009
Broadcast television 483,494 478,658
Category television 370,465 305,412
Licensing and other media 194,018 129,275
Corporate 50,232 47,485
Total $2,331,241 $2,257,839
Other additions to long-lived assets include investments and network
distribution fees. Corporate assets are primarily cash, investments,
and refundable and deferred income taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The E. W. Scripps Company ("Company") operates in three reportable
segments: Newspapers, Broadcast Television and Category Television.
The newspaper segment includes 19 daily newspapers in the U.S. The
broadcast television segment includes nine network-affiliated
stations. Category Television includes Home & Garden Television
("HGTV"), The Television Food Network ("Food Network"), and the
Company's 12% equity interest in FOX Sports South, a regional cable
television network. Licensing and Other Media aggregates the
Company's operating segments that are too small to report separately,
including syndication and licensing of news features and comics and
publication of independent telephone directories.
All per share disclosures included in management's discussion and
analysis of financial condition and results of operations are on a
diluted basis.
Consolidated results of operations were as follows:
( in thousands, except per share data ) Year-to-Date
1999 Change 1998
Operating revenues:
Newspapers $ 219,740 4.0 % $ 211,338
Broadcast television 75,367 0.7 % 74,815
Category television 48,200 58.2 % 30,470
Licensing and other media 30,116 14.1 % 26,398
Total 373,423 8.9 % 343,021
Divested operating units 3,788
Total operating revenues $ 373,423 7.7 % $ 346,809
Operating income:
Newspapers $ 50,385 8.0 % $ 46,668
Broadcast television 14,387 (11.3)% 16,222
Category television 1,605 142.9 % (3,744)
Licensing and other media 3,975 13.6 % 3,498
Corporate (4,615) (4,375)
Total 65,737 12.8 % 58,269
Divested operating units (814)
Total operating income 65,737 14.4 % 57,455
Interest expense (11,073) (12,012)
Miscellaneous, net 1,302 (1,438)
Income taxes (22,932) (17,959)
Minority interest (1,033) (968)
Net income $ 32,001 27.6 % $ 25,078
Per share of common stock:
Net income $.40 29.0 % $.31
( in thousands ) Year-to-Date
1999 Change 1998
Other Financial and Statistical Data - excluding divested operations:
Total advertising revenues $ 282,950 11.1 % $ 254,633
Advertising revenues as a
percentage of total revenues 75.8 % 74.2 %
EBITDA:
Newspapers $ 65,408 4.9 % $ 62,361
Broadcast television 21,448 (4.9)% 22,553
Category television 4,994 (740)
Licensing and other media 4,251 15.4 % 3,685
Corporate (4,375) (4,128)
Total $ 91,726 9.5 % $ 83,731
Effective income tax rate 41.0 % 40.8 %
Weighted-average shares outstanding 79,126 (3.1)% 81,616
Cash provided by operating activities $ 61,771 $ 89,903
Capital expenditures (14,006) (11,994)
Business acquisitions and other
additions to long-lived assets (21,354) (6,971)
Increase (decrease) in long-term debt (36,827) (62,991)
Repurchase Class A Common shares (16,709)
Dividends paid, including minority interests (11,362) (10,894)
Earnings before interest, income taxes, depreciation and amortization
("EBITDA") is included in the discussion of segment results because:
Management believes the year-over-year change in EBITDA is a more
useful measure of year-over-year economic performance than the
change in operating income because, combined with information on
capital spending plans, it is more reliable. Changes in
amortization and depreciation have no impact on economic
performance. Depreciation is a function of capital spending,
which is important and is separately disclosed.
Banks and other lenders use EBITDA to determine the Company's
borrowing capacity.
Financial analysts and acquirors use EBITDA, combined with capital
spending requirements, to value communications media companies.
EBITDA should not, however, be construed as an alternative measure of
the amount of the Company's income or cash flows from operating
activities.
In the first quarter of 1999 the Company acquired the 70% of Colorado
Real Estate On-Line, a provider of real estate listings on the
Internet, that it did not already own for $1.1 million in cash and
acquired a 1.86% minority interest in The Television Food Network for
$2.4 million. The Company sold Scripps Howard Productions ("SHP"),
the Company's television program production operation based in Los
Angeles in the second quarter of 1998 and the Dallas, Texas, community
newspapers, including the Plano daily, in the fourth quarter of 1998.
No material gain or loss was realized on either as proceeds
approximated the book value of the net assets sold.
In the first quarter of 1999 the Company increased the estimated useful
lives of network distribution fees to the greater of five years or the
remaining terms of the distribution contracts. Also in the first
quarter of 1999 the Company increased the estimated useful lives of
certain newspaper presses from 20 years to 30 years. The changes in
estimated useful lives were made prospectively. The effect of these
changes on first-quarter 1999 results was to increase EBITDA $1.8
million and operating income $2.9 million. The changes in estimated
lives will have similar effects on quarterly results for the remainder
of 1999.
Excluding acquired and divested operations and the changes in
estimated useful lives, EBITDA increased 7.4% and operating income
increased 7.8%. Operating results for the Company's reportable
segments, excluding Divested Operations, are presented on the
following pages.
Interest expense decreased $0.9 million year-over-year as lower average
interest rates more than offset increased average borrowings. The
average monthly balance of outstanding debt increased $7.3 million to
$750 million, however the weighted average interest rate on the
Company's variable rate borrowings decreased from 5.60% to 4.97%.
Miscellaneous non-operating items include investment income and gains,
gains and losses on the sale of real estate, and credits or charges
associated with divested operations. The 1999 period includes a $0.7
million gain on the sale of real estate. The 1998 period includes run-
off expenses of divested businesses and an investment write-down
totaling $2.0 million.
Of the $.09 increase in net income per share of common stock,
approximately $.04 was due to the changes in accounting estimates and
the year-over-year change in miscellaneous non-operating items.
NEWSPAPERS - Operating results, excluding Divested Operations, were as
follows:
( in thousands ) Year-to-Date
1999 Change 1998
Operating revenues:
Local $ 68,324 6.4 % $ 64,188
Classified 67,440 6.8 % 63,157
National 7,932 24.7 % 6,361
Preprint and other 23,903 9.6 % 21,813
Newspaper advertising 167,599 7.8 % 155,519
Circulation 37,588 (6.7)% 40,295
Joint operating agency distributions 10,917 0.9 % 10,816
Other 3,636 (22.8)% 4,708
Total operating revenues 219,740 4.0 % 211,338
Operating expenses:
Employee compensation and benefits 71,245 2.4 % 69,544
Newsprint and ink 37,303 3.9 % 35,910
Other 45,784 5.2 % 43,523
Depreciation and amortization 15,023 (4.3)% 15,693
Total operating expenses 169,355 2.8 % 164,670
Operating income $ 50,385 8.0 % $ 46,668
Other Financial and Statistical Data:
EBITDA $ 65,408 4.9 % $ 62,361
Percent of operating revenues:
Operating income 22.9 % 22.1 %
EBITDA 29.8 % 29.5 %
Capital expenditures $ 8,700 $ 6,217
Business acquisitions and other
additions to long-lived assets 1,129 331
Newspaper results continue to reflect the effort to gain market share
in Denver. Circulation revenue decreased primarily due to promotions
and discounts offered in the Denver market. Newsprint consumption
increased approximately 10%, offsetting an approximate 6% decrease in
newsprint prices. Denver accounted for substantially all of the
increase in newsprint consumption. Excluding Denver, EBITDA increased
9.1%.
Year-over-year newsprint costs are expected to decrease slightly in
the second quarter of 1999. A similar increase in newsprint
consumption is expected, but lower prices will more than offset the
increase in consumption.
The change in the estimated lives of newspaper presses from a maximum of
20 years to 30 years reduced depreciation expense by approximately $0.9
million. The change will have similar effects on quarterly depreciation
for the remainder of 1999.
BROADCAST TELEVISION - Operating results were as follows:
( in thousands ) Year-to-Date
1999 Change 1998
Operating revenues:
Local $ 41,303 4.2 % $ 39,656
National 28,939 (3.8)% 30,082
Political 364 10.3 % 330
Other 4,761 0.3 % 4,747
Total operating revenues 75,367 0.7 % 74,815
Operating expenses:
Employee compensation and benefits 26,552 0.2 % 26,499
Program and copyright costs 14,275 6.7 % 13,373
Other 13,092 5.7 % 12,390
Depreciation and amortization 7,061 11.5 % 6,331
Total operating expenses 60,980 4.1 % 58,593
Operating income $ 14,387 (11.3)% $ 16,222
Other Financial and Statistical Data:
EBITDA $ 21,448 (4.9)% $ 22,553
Percent of operating revenues:
Operating income 19.1 % 21.7 %
EBITDA 28.5 % 30.1 %
Capital expenditures $ 3,073 $ 5,093
Business acquisitions and other
additions to long-lived assets 55 70
The demand for television advertising remained soft in most of the
Company's television markets during the first quarter. Advance
advertising sales indicate that year-over-year revenues will decrease
about 5% in the second quarter. Year-over-year comparisons are difficult
because of political advertising revenue during the 1998 election year.
Network compensation revenues decreased $0.2 million in the first quarter.
Program costs for the full year are expected to increase approximately
3% and other operating expenses are expected to increase approximately
2%.
CATEGORY TELEVISION - Operating results were as follows:
( in thousands ) Year-to-Date
1999 Change 1998
Operating revenues:
Advertising $ 33,505 72.7 % $ 19,404
Affiliate fees 11,937 37.6 % 8,677
Other 2,758 15.4 % 2,389
Total operating revenues 48,200 58.2 % 30,470
Operating expenses:
Employee compensation and benefits 10,579 34.9 % 7,844
Programming and production costs 15,335 55.4 % 9,866
Network distribution fees 4,091 29.5 % 3,158
Other 13,201 27.6 % 10,342
Depreciation and amortization 3,389 12.8 % 3,004
Total operating expenses 46,595 36.2 % 34,214
Operating income (loss) $ 1,605 $ (3,744)
Other Financial and Statistical Data:
EBITDA $ 4,994 $ (740)
Payments for programming and network
distribution fees less than (greater than)
amounts recognized as expense (19,948) (6,872)
Capital expenditures $ 1,228 $ 307
Business acquisitions and other
additions to long-lived assets 14,739 2,745
Increases in advertising and affiliate fee revenue are primarily due to
the increase in the cable television systems that carry HGTV and Food
Network and, therefore, the increase in potential audience. According
to the Nielsen Homevideo Index, HGTV was telecast to 51.9 million homes
in March 1999, up 11.7 million from March 1998 and up 3.5 million in the
quarter. Food Network was telecast to 39.1 million homes in March 1999,
up 7.4 million from March 1998 and up 2.0 million in the quarter.
The Company expects to continue to expand the distribution of HGTV and
Food Network. Such expansion may require the payment of distribution
fees to obtain carriage on additional cable television systems. In the
first quarter of 1999 the Company agreed to pay $12.3 million to obtain
distribution on cable television systems not included in the original
distribution contracts with certain multiple system operators ("MSO").
Management believes the distribution of the networks on additional
systems will increase affiliate fee and advertising revenue beyond the
remaining terms of the original distribution contract with the MSO.
Therefore the Company increased the estimated useful lives of category
television network distribution fees to the greater of five years or the
remaining terms of the distribution contracts. The change in estimated
lives reduced first quarter network distribution fees $1.8 million. The
change will have similar effects on quarterly network distribution fees
for the remainder of 1999.
EBITDA for HGTV was $4.3 million in 1999 and $1.8 million in 1998.
EBITDA for Food Network was $0.5 million in 1999 compared to a loss of
$2.4 million in 1998. Food Network is not expected to produce
positive EBITDA for the full year of 1999 because programming costs
are expected to increase in an effort to improve quality and increase
variety.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash flow from operating activities,
primarily from its newspaper and broadcast television operating
segments. There are no significant legal or other restrictions on the
transfer of funds among the Company's business segments. Cash flow
provided by the operating activities of the newspaper and broadcast
television segments in excess of the capital expenditures of those
segments is used primarily to invest in the category television
segment, to fund corporate expenditures, or to invest in new
businesses. Management expects total cash flow from operating
activities in 1999 will be sufficient to meet the Company's expected
total capital expenditures, required interest payments and dividend
payments.
Cash flow from operating activities was $61.8 million in 1999 compared
to $89.9 million in 1998. Increases in working capital employed by
the Category Television segment combined with increased spending to
improve programming and to expand distribution of HGTV and Food
Network were the primary causes of the decrease.
Cash flow from operating activities in 1999 was used for capital
expenditures of $14.0 million, dividend payments of $11.4 million,
reduction of net debt (borrowings less cash equivalent and other short-
term investments) of $16.3 million, and the repurchase of 0.4 million
Class A Common Shares at a cost of $16.7 million. The Board of
Directors has authorized the repurchase of an additional 2.6 million
shares.
Net debt totaled $733,000,000 at March 31, 1999, and was 40% of total
capitalization. The Company currently intends to repay debt only when
there are not more productive uses for excess cash. Management
believes the Company's cash flow from operations and substantial
borrowing capacity, taken together, provide adequate resources to fund
expansion of existing businesses and the development or acquisition of
new businesses.
YEAR 2000 READINESS
Items disclosed herein constitute "Y2000 Readiness Disclosures" under
the Year 2000 Information and Readiness Disclosure Act.
Description and Company Plans
The Year 2000 ("Y2K") issue results from computer programs, computer
equipment and certain embedded chips using two digits rather than four
to define the year. Computer applications and equipment that use date-
sensitive software or date-sensitive embedded chips may recognize a
date of "00" as the year 1900 instead of the year 2000. As a result,
those computer applications may fail or improperly process financial
transactions.
The term "Y2K compliant" as used throughout this document means that the
relevant hardware, software, embedded chips or interfaces specifically
referenced herein will correctly process, provide and receive date data
within and between the 20th and 21st centuries.
The Company's Y2K remediation project includes the following phases:
- - identifying and assessing the Y2K issue,
- - determining required revisions to or replacements of affected
computer applications and equipment,
- - testing of those revisions and replacements,
- - developing contingency plans in the event that revisions and
replacements are not completed timely or do not fully remediate the Y2K
issues.
Identification and Assessment of Y2K Issues
The identification and assessment phase was completed in 1998. This
phase included a comprehensive inventory of internally developed
computer applications, computer applications and computer hardware
purchased or licensed from third parties (which includes the majority
of the Company's computer software applications), and other equipment
with embedded chips. The inventoried applications and equipment were
evaluated to identify Y2K issues. Y2K issues were identified based
upon review of applications and equipment by the Company and/or
communication with the vendor. This phase also included an assessment
of the impact of failing to remediate identified Y2K issues on the
Company's business operations, results of operations, and financial
condition. Based upon the identification of Y2K issues and assessment
of the effect of those issues, each of the computer applications and
items of equipment with embedded chips were assigned to one of the
following categories:
1) applications and equipment with Y2K issues that, if they were to
fail, would seriously impair the Company's ability to operate its
business,
2) applications and equipment with Y2K issues for which the Company
has feasible alternatives,
3) applications and equipment found to be Y2K compliant or certified
Y2K compliant by the vendor,
4) noncompliant applications and equipment that will have little or no
effect on business operations.
The Company created a central data base identifying all inventoried
applications and equipment, Y2K issues identified, the priority of
remediation based upon the perceived business risk, the method of
remediation (upgrade or replace), and targeted remediation completion
date. Approximately 20% of the Company's applications were classified
in the highest priority and 15% in the second priority.
The identification and assessment phase also included communications
with significant vendors, suppliers and customers to determine the
extent to which the Company's systems and business operations are
vulnerable if those third parties fail to remediate their own Y2K
issues.
Y2K Remediation Efforts
The Company's plan of remediation includes a mix of installing new
applications and equipment, upgrading existing applications and
equipment, retiring obsolete systems and equipment, and confirming
significant third party compliance. A discussion of the identified
Y2K issues that could materially affect each of the Company's business
segments and the Company's plan of remediation follows.
Newspapers
The Company uses a variety of newspaper circulation, advertising and
editorial computer systems in the production of its newspapers. The
Company began replacing most of its internally developed software with
applications developed by third-party software vendors and upgrading
other applications several years ago. Many of these systems have been
installed and implemented. Vendors have either certified their
applications to be Y2K compliant or have Y2K-compliant upgrades
currently available. Most system upgrades and replacements have been
completed. Remediation of the remaining noncompliant systems is
expected to be completed through early third quarter of 1999.
Equipment and applications used in producing, printing, sorting and
distributing newspapers use software or embedded chips that are not
Y2K compliant. Management has determined that in many instances this
equipment is not date dependent and the internal calendars can be set
back to an earlier year without affecting the operation of the
equipment. Other equipment and software will have to be upgraded or
replaced.
Management anticipates increasing its newspaper inventories in the
latter part of 1999 to mitigate the effect of any temporary disruption
in the delivery of newsprint or any disruption in the operation of
newsprint mills.
The Company's Cincinnati, Birmingham and Albuquerque newspapers
operate under joint operating agreements ("JOAs") whereby the Company
receives a portion of the JOA profits from the managing party. The
Company has discussed Y2K issues with the managing parties to ensure
the managing parties are addressing their Y2K issues. The Company's
share of JOA profits could be adversely affected if those managing
parties experience a significant disruption in business operations;
however management believes the possibility of a significant
disruption is unlikely.
Broadcast Television
The Company receives network and syndicated programming via satellite.
The Company's receipt of that programming is dependent upon the
broadcast networks and program syndicators resolving their Y2K issues.
The Company has completed tests of the affiliate network with NBC.
Based upon such tests the Company expects it will be able to receive
programming from NBC after 1999. The Company expects to perform
similar testing with ABC. Management does not anticipate any
disruption in receiving programming from the broadcast networks or
syndicators, but in the event of such a disruption the Company has
alternative programming available.
The Company uses advertising inventory management software to manage,
schedule and bill advertising in each of the Company's broadcast
television markets. This software is licensed from two different
vendors. One system, which is used in three of the Company's markets,
has been certified by the vendor to be Y2K compliant. The Company
expects to complete testing of this system during the second quarter.
The other system must be upgraded. The vendor has informed the Company
that a Y2K-compliant version of its software will be made available.
If the software upgrade is not completed, or is not installed prior
to the end of 1999, the Company can perform these functions manually.
The insertion of advertising into program breaks is automated by
computer-controlled equipment. This equipment has been found to be
noncompliant and must be upgraded or replaced. Failure of this
software or equipment would not materially disrupt the Company's
business operations as this process can be performed manually.
The Company uses various broadcast and studio equipment to produce and
transmit its broadcast signals. Although much of this equipment
includes embedded chips, the Company's tests of this equipment
indicate it will continue to operate after 1999.
Category Television
The Company uses advertising inventory management software to manage,
schedule and bill advertising. Some of these systems are currently
Y2K compliant and others must be upgraded. The Company expects to
complete installation of the upgrades prior to the end of 1999.
If the software upgrade is not completed, or is not installed prior
to the end of 1999, the Company can perform these functions manually.
The insertion of advertising into program breaks is automated by
computer-controlled equipment. Failure of this software or equipment
would not materially disrupt the Company's business operations as this
process can be performed manually.
The Company transmits its network programming to cable television and
direct broadcast satellite systems via satellite. Management has
determined that certain equipment, while noncompliant, will continue
to function after 1999 and therefore does not need to be upgraded or
replaced. Noncompliant equipment that could affect the production and
transmission of a signal will be upgraded or replaced by the end of
the second quarter of 1999.
Management believes the satellites used in transmitting the Company's
networks are Y2K compliant and has received written assurances to
that effect. However, the Company understands that headend equipment
controlling set-top boxes for virtually all cable television subscribers
is presently not Y2K compliant. Management believes that failure of
this equipment could potentially prevent cable television systems from
delivering the Company's programming to viewers. Management understands
that equipment and set-top box manufacturers have developed solutions
that cable television systems have begun to install in their headend
equipment. Management anticipates that this issue will be remediated,
but that process is not within the Company's control.
Testing of Upgrades and Replacements
The Company's Y2K remediation program includes testing of applications
and equipment identified by the Company as compliant or certified as
compliant by the vendor. The Company's Y2K remediation program also
includes testing of upgrades and replacements of noncompliant systems
and equipment as those upgrades and replacements are installed and
upon completion of the installations. Most of the Company's Y2K
remediation efforts in 1999 will focus on testing. Testing includes
the use of dates that simulate transactions and environments, both
before and after the year 2000, including leap year. While that
testing provides assurance that the upgrades and replacements
installed by the Company perform as designed, it is not possible for
the Company to completely simulate the effect of the year 2000 when
testing the Company's systems, and certain embedded chips cannot be
tested. As of April 30, 1999, the Company had completed remediation
efforts, including testing, of approximately 40% of all category 1 and
category 2 systems.
Costs of Y2K Remediation Program
The Company does not routinely accumulate costs of the Company's Y2K
remediation program. The total costs of the program, including
capital spending on equipment and computer software, are estimated at
less than $10 million. This estimate does not include the costs of
labor and other internal resources. The majority of these costs would
have been incurred regardless of the Y2K issue, although the Y2K issue
has slightly accelerated the Company's plans to replace certain
equipment and computer software. Management believes the redeployment
of internal resources and the acceleration of these projects will not
have a material adverse effect on other business operations.
Risks of Y2K Issues and Contingency Plans
Like all large companies, the Company is dependent on the continued
functioning of basic, heavily computerized services such as banking,
telephony and electric power. Management has attempted to ensure that
the third parties upon which the Company relies address their Y2K
issues, but management has no direct knowledge of those issues and
cannot estimate the costs to the Company if such issues are not
remedied. Management believes the possibility of failure of these
critical third party systems is unlikely.
As part of normal business practices, the company maintains site-
specific emergency plans to be followed during emergency circumstances,
such as failure of editorial systems, printing presses, or broadcast
equipment. These emergency plans will be updated with a variety of
internal and external scenarios that might occur as a result of the Y2K
issue, and will specify alternatives if any Y2K-related business
disruption occurs. The Company expects to complete such contingency
plans by mid-1999, and will update those plans throughout the remainder
of 1999 based upon the progress of the Y2K remediation program.
Management believes it has an effective program to resolve the Y2K
issue in a timely manner and that its Y2K issues will be remediated.
Based upon assessment of its internal systems and the status of its
Y2K remediation efforts, management does not expect the Y2K issue to
pose significant problems for the Company's operations or to have a
material effect on the Company's results of operations or financial
condition. However, if the Company is unable to complete its Y2K
remediation program, or if its Y2K remediation program does not fully
remediate the effects of the Y2K issue, or if third parties fail to
remediate their own Y2K issues, the Company could experience a
material disruption in its business operations. In addition,
disruptions in the general economy as a result of the Y2K issue could
lead to a reduction of advertising spending which could adversely
affect the Company.
THE E. W. SCRIPPS COMPANY
Index to Exhibits
Exhibit
No. Item Page
12 Ratio of Earnings to Fixed Charges E-2