10-Q 1 d10q.htm QUARTERLY REPORT Quarterly Report
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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 EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of June 30, 2008 there were 42,307,064 of the Registrant’s Class A Common shares outstanding and 12,189,409 of the Registrant’s Common Voting shares outstanding.

 

 

 


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INDEX TO THE E. W. SCRIPPS COMPANY

REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008

 

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
    3    Quantitative and Qualitative Disclosures About Market Risk    3
    4    Controls and Procedures    3
   PART II - OTHER INFORMATION   
    1    Legal Proceedings    3
    1A    Risk Factors    3
    2    Unregistered Sales of Equity and Use of Proceeds    4
    3    Defaults Upon Senior Securities    4
    4    Submission of Matters to a Vote of Security Holders    4
    5    Other Information    5
    6    Exhibits    5
   Signatures    6

 

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PART I

As used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” “us” or “Scripps” may, depending on the context, refer to The E. W. Scripps Company, to one or more of its consolidated subsidiary companies or to all of them taken as a whole.

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 4. CONTROLS AND PROCEDURES

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

We are involved in litigation arising in the ordinary course of business, such as defamation actions, employment and employee relations and various governmental and administrative proceedings, none of which is expected to result in material loss.

 

ITEM 1A. RISK FACTORS

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

There were no sales of unregistered equity securities during the quarter for which this report is filed.

Under a share repurchase program authorized by the Board of Directors on October 28, 2004, we were authorized to repurchase up to 5.0 million Class A Common shares. As of June 30, 2008, we are authorized to repurchase 1.3 million additional shares. Due to the separation of Scripps Networks Interactive, Inc. from the Company, the repurchase of shares was suspended in the first quarter of 2008. There is no expiration date for the program and we are under no commitment or obligation to repurchase any particular amount of Class A Common shares under the program.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the quarter for which this report is filed.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following table presents information on matters submitted to a vote of security holders at the June 13, 2008 Annual Meeting of Shareholders:

 

Description of Matters Submitted

   In Favor    Authority
Witheld

1. Election of Directors:

     

Class A Common Shares:

     

William R. Burleigh

   86,395,418    32,536,887

David A. Galloway

   100,274,626    18,657,679

David M. Moffett

   101,980,971    16,951,334

Jarl Mohn

   99,992,299    18,940,006

Common Voting Shares:

     

John H. Burlingame

   36,363,746   

Kenneth W. Lowe

   36,363,746   

Nicholas B. Paumgarten

   36,363,746   

Jeffrey Sagansky

   36,363,746   

Nackey E. Scagliotti

   36,363,746   

Paul K. Scripps

   36,363,746   

Ronald W. Tysoe

   36,363,746   

1. Approve spin-off:

     

Common Voting Shares:

   36,363,746   

2. Amend the LTIP:

     

Common Voting Shares:

   36,363,746   

3. Amend the AIP:

     

Common Voting Shares:

   36,363,746   

4. Amend the ESPP:

     

Common Voting Shares:

   36,363,746   

 

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ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. 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.

 

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SIGNATURES

Pursuant to the requirements of the Securities 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: August 11, 2008

  BY:  

/s/ Douglas F. Lyons

    Douglas. F. Lyons
    Vice President and Controller

 

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THE E. W. SCRIPPS COMPANY

Index to Financial Information

 

Item

   Page

Condensed Consolidated Balance Sheets

   F-2

Condensed Consolidated Statements of Operations

   F-4

Condensed Consolidated Statements of Cash Flows

   F-5

Condensed Consolidated Statements of Comprehensive Income (Loss) and Shareholders’ Equity

   F-6

Condensed Notes to Consolidated Financial Statements

   F-7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Forward-Looking Statements

   F-29

Executive Overview

   F-29

Critical Accounting Policies and Estimates

   F-31

Results of Operations

   F-31

Consolidated Results of Operations

   F-32

Discontinued Operations

   F-32

Continuing Operations

   F-33

Business Segment Results

   F-35

Scripps Networks

   F-38

Newspapers

   F-40

Broadcast Television

   F-43

Interactive Media

   F-44

Liquidity and Capital Resources

   F-45

Quantitative and Qualitative Disclosures About Market Risk

   F-47

Controls and Procedures

   F-48

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007
     ( Unaudited )         ( Unaudited )

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 49,309    $ 31,632    $ 18,778

Short-term investments

     49,935      44,831      2,064

Accounts and notes receivable (less allowances - $8,611, $8,414, $14,586)

     557,785      561,929      538,211

Programs and program licenses

     225,809      215,127      201,736

Deferred income taxes

     19,297      17,124      19,117

Assets of discontinued operations

     152      1,825      967

Miscellaneous

     59,512      54,325      34,674
                    

Total current assets

     961,799      926,793      815,547
                    

Investments

     94,209      226,660      220,639
                    

Property, plant and equipment

     584,534      559,673      528,324
                    

Goodwill and other intangible assets:

        

Goodwill

     880,619      1,666,206      1,955,285

Other intangible assets

     175,679      188,227      309,441
                    

Total goodwill and other intangible assets

     1,056,298      1,854,433      2,264,726
                    

Other assets:

        

Programs and program licenses (less current portion)

     262,013      265,938      272,820

Unamortized network distribution incentives

     120,093      135,367      146,004

Prepaid pension

     9,128      8,975      9,133

Miscellaneous

     25,960      27,453      45,841
                    

Total other assets

     417,194      437,733      473,798
                    

TOTAL ASSETS

   $ 3,114,034    $ 4,005,292    $ 4,303,034
                    

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

 

( in thousands, except share data )    June 30,
2008
    As of
December 31,
2007
    June 30,
2007
 
     ( Unaudited )           ( Unaudited )  

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 65,693     $ 78,923     $ 73,917  

Customer deposits and unearned revenue

     49,807       57,174       64,497  

Accrued liabilities:

      

Employee compensation and benefits

     64,324       76,776       57,662  

Network distribution incentives

     5,182       4,616       4,388  

Accrued income taxes

     2,378       11,347       31,311  

Accrued marketing and advertising costs

     21,020       18,537       14,714  

Accrued interest

     24       5,757       10,459  

Miscellaneous

     71,955       70,005       61,508  

Liabilities of discontinued operations

     138       3,017       3,213  

Other current liabilities

     21,417       20,650       32,932  
                        

Total current liabilities

     301,938       346,802       354,601  
                        

Deferred income taxes

     105,368       362,234       340,610  
                        

Long-term debt

     386,236       504,663       623,881  
                        

Other liabilities (less current portion)

     212,148       199,302       181,257  
                        

Minority interests

     132,465       141,930       114,311  
                        

Shareholders’ equity:

      

Preferred stock, $.01 par - authorized: 25,000,000 shares; none outstanding

      

Common stock, $.01 par:

      

Class A - authorized: 80,000,000 shares; issued and outstanding: 42,307,064, 42,140,428 and 42,293,870 shares

     423       421       423  

Voting - authorized: 20,000,000 shares; issued and outstanding: 12,189,409, 12,189,409 and 12,189,409 shares

     122       122       122  
                        

Total

     545       543       545  

Additional paid-in capital

     508,176       476,142       462,653  

Retained earnings

     1,468,466       1,971,848       2,210,303  

Accumulated other comprehensive income (loss), net of income taxes:

      

Unrealized gains on securities available for sale

       4,338       9,775  

Pension liability adjustments

     (56,428 )     (57,673 )     (53,657 )

Foreign currency translation adjustment

     55,120       55,163       58,755  
                        

Total shareholders’ equity

     1,975,879       2,450,361       2,688,374  
                        

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 3,114,034     $ 4,005,292     $ 4,303,034  
                        

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ( UNAUDITED )

 

( in thousands, except per share data )    Three months ended
June 30,
    Six months ended
June 30,
 
     2008     2007     2008     2007  

Operating Revenues:

        

Advertising

   $ 462,554     $ 459,245     $ 893,113     $ 874,434  

Referral fees

     66,372       59,176       142,902       121,261  

Network affiliate fees, net

     69,684       58,672       137,114       116,524  

Circulation

     27,989       29,579       58,503       60,457  

Licensing

     19,499       17,421       38,105       35,694  

Other

     18,043       15,981       36,878       33,128  
                                

Total operating revenues

     664,141       640,074       1,306,615       1,241,498  
                                

Costs and Expenses:

        

Employee compensation and benefits

     175,614       179,585       361,292       362,292  

Production and distribution

     70,983       70,350       141,841       142,650  

Programs and program licenses

     82,982       70,209       159,537       133,054  

Marketing and advertising

     55,946       49,662       115,207       111,323  

Other costs and expenses

     87,683       72,100       158,293       140,988  
                                

Total costs and expenses

     473,208       441,906       936,170       890,307  
                                

Depreciation, Amortization, and (Gains) Losses:

        

Depreciation

     23,417       20,864       45,880       39,411  

Amortization of intangible assets

     6,286       11,343       12,585       27,234  

Write-down of newspaper goodwill

     778,900         778,900    

Losses (gains) on disposal of property, plant and equipment

     (2,364 )     243       (1,497 )     332  
                                

Net depreciation, amortization, write-down and (gains) losses

     806,239       32,450       835,868       66,977  
                                

Operating income (loss)

     (615,306 )     165,718       (465,423 )     284,214  

Interest expense

     (4,874 )     (10,729 )     (10,706 )     (20,930 )

Equity in earnings of JOAs and other joint ventures

     7,543       13,628       19,732       17,249  

Write-down of investments in newspaper partnerships

     (95,000 )       (95,000 )  

Gains (losses) on repurchases of debt

     (26,380 )     317       (26,380 )     317  

Miscellaneous, net

     7,431       2,601       8,192       3,449  
                                

Income (loss) from continuing operations before income taxes and minority interests

     (726,586 )     171,535       (569,585 )     284,299  

Provision (benefit) for income taxes

     (219,786 )     54,781       (168,912 )     86,316  
                                

Income (loss) from continuing operations before minority interests

     (506,800 )     116,754       (400,673 )     197,983  

Minority interests

     24,441       20,988       46,734       38,968  
                                

Income (loss) from continuing operations

     (531,241 )     95,766       (447,407 )     159,015  

Income from discontinued operations, net of tax

       1,695       234       6,930  
                                

Net income (loss)

   $ (531,241 )   $ 97,461     $ (447,173 )   $ 165,945  
                                

Net income (loss) per basic share of common stock:

        

Income (loss) from continuing operations

   $ (9.78 )   $ 1.76     $ (8.25 )   $ 2.92  

Income from discontinued operations

     .00       .03       .00       .13  
                                

Net income (loss) per basic share of common stock

   $ (9.78 )   $ 1.79     $ (8.24 )   $ 3.05  
                                

Net income (loss) per diluted share of common stock:

        

Income (loss) from continuing operations

   $ (9.78 )   $ 1.75     $ (8.25 )   $ 2.90  

Income from discontinued operations

     .00       .03       .00       .13  
                                

Net income (loss) per diluted share of common stock

   $ (9.78 )   $ 1.78     $ (8.24 )   $ 3.02  
                                

Net income (loss) per share amounts may not foot since each is calculated independently.

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ( UNAUDITED )

 

( in thousands )    Six months ended
June 30,
 
     2008     2007  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ (447,173 )   $ 165,945  

Income from discontinued operations

     (234 )     (6,930 )
                

Income (loss) from continuing operations

     (447,407 )     159,015  

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

    

Programs and program licenses costs

     159,537       133,054  

Depreciation and intangible assets amortization

     58,465       66,645  

Asset impairments, net of deferred income tax

     582,786    

Losses (gains) on repurchases of debt

     26,380       (317 )

Network distribution incentive amortization

     16,547       13,715  

Equity in earnings of JOAs and other joint ventures

     (19,732 )     (17,249 )

Deferred income taxes

     42,671       (592 )

Excess tax benefits of stock compensation plans

     (1,228 )     (2,070 )

Stock and deferred compensation plans

     14,025       19,971  

Minority interests in income of subsidiary companies

     46,734       38,968  

Program payments

     (169,290 )     (176,178 )

Dividends received from JOAs and other joint ventures

     20,562       22,779  

Capitalized network distribution incentives and payments

     (3,513 )     (5,476 )

Prepaid and accrued pension expense

     10,323       7,325  

Other changes in certain working capital accounts, net

     (41,925 )     (15,182 )

Miscellaneous, net

     1,457       (185 )
                

Net cash provided by continuing operating activities

     296,392       244,223  

Net cash provided by (used in) discontinued operating activities

     (972 )     (11,599 )
                

Net operating activities

     295,420       232,624  
                

Cash Flows from Investing Activities:

    

Purchase of subsidiary companies, minority interest, and long-term investments

     (816 )     (2,821 )

Additions to property, plant and equipment

     (68,231 )     (52,429 )

Increase (decrease) in short-term investments

     (5,104 )     808  

Sale of long-term investments

     37,074       1,339  

Miscellaneous, net

     2,656       69  
                

Net cash used in continuing investing activities

     (34,421 )     (53,034 )

Net cash used in discontinued investing activities

       60,927  
                

Net investing activities

     (34,421 )     7,893  
                

Cash Flows from Financing Activities:

    

Increase in long-term debt

     387,105    

Payments on long-term debt

     (506,355 )     (142,616 )

Bond redemption premium payment

     (22,517 )  

Dividends paid

     (45,724 )     (42,581 )

Dividends paid to minority interests

     (56,199 )     (47,086 )

Repurchase Class A Common shares

     (11,442 )     (30,103 )

Proceeds from employee stock options

     15,492       11,776  

Excess tax benefits of stock compensation plans

     1,228       2,070  

Miscellaneous, net

     (4,835 )     (3,749 )
                

Net cash used in continuing financing activities

     (243,247 )     (252,289 )

Net cash used in discontinued financing activities

       (43 )
                

Net financing activities

     (243,247 )     (252,332 )
                

Effect of exchange rate changes on cash and cash equivalents

     (75 )     143  
                

Increase (decrease) in cash and cash equivalents

     17,677       (11,672 )

Cash and cash equivalents:

    

Beginning of year

     31,632       30,450  
                

End of period

   $ 49,309     $ 18,778  
                

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

AND SHAREHOLDERS’ EQUITY ( UNAUDITED )

 

( in thousands, except share data )    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
    Comprehensive
Income (Loss) for
the
Three Months Ended
June 30
 

As of December 31, 2006

   $ 545     $ 432,523     $ 2,145,875     $ 2,492     $ 2,581,435    

Comprehensive income:

            

Net income

         165,945         165,945     $ 97,461  
                                                

Unrealized gains (losses) on investments, net of tax of $465 and $(1,004)

           (816 )     (816 )     1,765  

Amortization of prior service costs, actuarial losses, and transition obligations, net of tax of $(653) and $(323)

           1,147       1,147       568  

Equity in investee’s adjustments for FAS 158, net of tax of $(39) and $(20)

           59       59       29  

Currency translation, net of tax of $(590) and $(518)

           11,991       11,991       9,470  
                                                

Total comprehensive income

             178,326     $ 109,293  
                                                

FIN 48 transition adjustment

         (30,869 )       (30,869 )  

Dividends: declared and paid - $.78 per share

         (42,581 )       (42,581 )  

Repurchase 217,667 Class A Common shares

     (2 )     (2,034 )     (28,067 )       (30,103 )  

Compensation plans, net: 200,961 shares issued; 14,898 shares repurchased; 433 shares forfeited

     2       28,992           28,994    

Tax benefits of compensation plans

       3,172           3,172    
                                          

As of June 30, 2007

   $ 545     $ 462,653     $ 2,210,303     $ 14,873     $ 2,688,374    
                                          

As of December 31, 2007

   $ 543     $ 476,142     $ 1,971,848     $ 1,828     $ 2,450,361    

Comprehensive loss:

            

Net loss

         (447,173 )       (447,173 )   $ (531,241 )
                                                

Unrealized gains (losses) on investments, net of tax of $79 and $(1,786)

           (682 )     (682 )     2,609  

Adjustment for losses (gains) in income on investments, net of tax of $1,968 and $1,968

           (3,655 )     (3,655 )     (3,655 )
                                                

Change in unrealized gains (losses) on investments

           (4,337 )     (4,337 )     (1,046 )

Amortization of prior service costs, actuarial losses, and transition obligations, net of tax of $(757) and $(378)

           1,339       1,339       670  

Equity in investee’s adjustments for FAS 158, net of tax of $60 and $30

           (95 )     (95 )     (48 )

Currency translation adjustment, net of tax of $307 and $(79)

           (43 )     (43 )     (2 )
                                                

Total comprehensive loss

             (450,309 )   $ (531,667 )
                                                

Dividends: declared and paid - $.84 per share

         (45,724 )       (45,724 )  

Repurchase 93,333 Class A Common shares

     (1 )     (956 )     (10,485 )       (11,442 )  

Compensation plans, net: 278,130 shares issued;

            

15,897 shares repurchased; 2,264 shares forfeited

     3       30,900           30,903    

Tax benefits of compensation plans

       2,090           2,090    
                                          

As of June 30, 2008

   $ 545     $ 508,176     $ 1,468,466     $ (1,308 )   $ 1,975,879    
                                          

See notes to condensed consolidated financial statements.

 

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The condensed consolidated 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 interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto included in our 2007 Annual Report on Form 10-K. In management’s opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation.

Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.

Nature of Operations - We are a diverse media concern with interests in national television networks, newspaper publishing, broadcast television, interactive media, and licensing and syndication. All of our media businesses provide content and advertising services via the Internet. Our media businesses are organized into the following reportable business segments: Scripps Networks, Newspapers, Broadcast television, and Interactive media. Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics. Additional information for our business segments is presented in Note 19. Information on the spin-off of the national television networks and interactive media is in Note 20.

Use of Estimates - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make a variety of decisions that affect the reported amounts and the related disclosures. Such decisions include the selection of accounting principles that reflect the economic substance of the underlying transactions and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions.

Our financial statements include estimates and assumptions used in accounting for our defined benefit pension plans; the recognition of certain revenues; rebates due to customers; the periods over which long-lived assets are depreciated or amortized; the fair value of long-lived assets and goodwill; income taxes payable; estimates for uncollectible accounts receivable; and self-insured risks.

While we re-evaluate our estimates and assumptions on an ongoing basis, actual results could differ from those estimated at the time of preparation of the financial statements.

Newspaper Joint Operating Agreements (“JOA”) - We include our share of JOA earnings in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Operations. The related editorial costs and expenses are included within costs and expenses in our Condensed Consolidated Statements of Operations. Our residual interest in the net assets of the Denver JOA is classified as an investment in the Condensed Consolidated Balance Sheets.

Revenue Recognition - Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery occurs or services are rendered, the sales price is fixed or determinable and collectibility is reasonably assured. When a sales arrangement contains multiple elements, such as the sale of advertising and other services, revenue is allocated to each element based upon its relative fair value. Revenue recognition may be ceased on delinquent accounts depending upon a number of factors, including the customer’s credit history, number of days past due, and the terms of any agreements with the customer. Revenue recognition on such accounts resumes when the customer has taken actions to remove their accounts from delinquent status, at which time any associated deferred revenues would also be recognized. Revenue is reported net of our remittance of sales taxes, value added taxes and other taxes collected from our customers.

 

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Our primary sources of revenue are from:

 

   

The sale of print, broadcast, and Internet advertising.

 

   

Referral fees and commissions from retailers and service providers.

 

   

Fees for programming services (“network affiliate fees”).

 

   

The sale of newspapers.

 

   

Licensing royalties.

The revenue recognition policies for each source of revenue are described in our annual report on Form 10-K for the year ended December 31, 2007.

Share-Based Compensation - We have a Long-Term Incentive Plan (the “Plan”) which is described more fully in our Annual Report on Form 10-K for the year ended December 31, 2007. The Plan provides for the award of incentive and nonqualified share options, share appreciation rights, restricted and unrestricted Class A Common shares and performance units to key employees and non-employee directors.

In accordance with Financial Accounting Standard No. 123(R) - Share Based Payment (“FAS 123(R)”), compensation cost is based on the grant-date fair value of the award. The fair value of awards that grant the employee the right to the appreciation of the underlying shares, such as share options, is measured using a lattice-based binomial model. The fair value of awards that grant the employee the underlying shares is measured by the fair value of a Class A Common share.

Certain awards of Class A Common shares have performance conditions under which the number of shares granted is determined by the extent to which such performance conditions are met. Compensation costs for such awards are measured by the grant-date fair value of a Class A Common share and the number of shares earned. In periods prior to completion of the performance period, compensation costs are based upon estimates of the number of shares that will be earned.

Compensation costs, net of estimated forfeitures due to termination of employment or failure to meet performance targets, are recognized on a straight-line basis over the requisite service period of the award. The requisite service period is generally the vesting period stated in the award. However, because share compensation grants vest upon the retirement of the employee, grants to retirement-eligible employees are expensed immediately and grants to employees who will become retirement eligible prior to the end of the stated vesting period are expensed over such shorter period. The vesting of certain awards is also accelerated if performance measures are met. If it is expected those performance measures will be met, compensation costs are expensed over the accelerated vesting period.

Compensation costs of share options are estimated on the date of grant using a lattice-based binomial model. The weighted-average assumptions used in the model are as follows:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2008     2007     2008     2007  

Weighted-average fair value of options granted

   $ 27.54     $ 37.74     $ 27.54     $ 37.74  

Assumptions used to determine fair value:

        

Dividend yield

     1.3 %     1.0 %     1.3 %     1.0 %

Risk-free rate of return

     3.1 %     4.7 %     3.1 %     4.7 %

Expected life of options (years)

     6.0       5.35       6.0       5.35  

Expected volatility

     19.3 %     20.6 %     19.3 %     20.6 %

Share based compensation costs totaled $6.2 million for the second quarter of 2008 and $6.0 million for the second quarter of 2007. Year-to-date share based compensation costs totaled $15.8 million in 2008 and $17.2 million in 2007.

Share Split – On July 15, 2008, the holders of our Common Voting Shares and Class A Common Shares approved a 1-for-3 reverse split by means of an amendment to the Company’s Articles of Incorporation pursuant to which: (i) each issued and outstanding Common Voting Share will be reclassified and changed into one-third ( 1/3) of a Common Voting Share, (ii) each issued and outstanding Class A Common Share will be reclassified and changed into one-third ( 1/3) of a Class A Common Share, and (iii) the Company’s stated capital account shall be reduced proportionately. Any fractional interest in a Common Voting Share or Class A Common Share that exists after giving effect to the amendment will be paid in cash. All share and per share

 

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amounts in our condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the reverse share split for all periods presented.

Earnings Per Share - Basic EPS is calculated by dividing earnings available to common shareholders by the weighted-average number of common share outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential issuance of common shares. The following table presents information about basic and diluted weighted-average shares outstanding:

 

( in thousands )    Three months ended
June 30,
   Six months ended
June 30,
     2008    2007    2008    2007

Basic weighted-average shares outstanding

   54,305    54,395    54,261    54,430

Effect of dilutive securities:

           

Unvested restricted stock and share units held by employees

      69       71

Stock options held by employees and directors

      333       385
                   

Diluted weighted-average shares outstanding

   54,305    54,797    54,261    54,886
                   

Anti-dilutive stock securities

   4,890    3,957    2,413    2,114
                   

Due to the net loss in 2008, the diluted EPS calculation for the three and six months ended June 30 excludes unvested stock, share units and stock options held by employees and directors, as they were anti-dilutive.

For 2007, we had stock options that were anti-dilutive and accordingly were not included in the computation of diluted weighted-average shares outstanding.

 

2. ACCOUNTING CHANGES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Accounting Changes - In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, Fair Value Measurements (“FAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued Staff Position 157-2 (“FSP”), Effective Date of FASB Statement No. 157, which delays the effective date of FAS 157 for non-financial assets and liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. Under the provisions of the FSP, we will delay application of FAS 157 for fair value measurements used in the impairment testing of goodwill and indefinite-lived intangible assets and eligible non-financial assets and liabilities included within a business combination. The adoption of FAS 157 did not have a material impact on our financial statements. See note 16, Fair Value Measurement, for additional information.

In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115 (“FAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. We adopted FAS 159 as of January 1, 2008. The adoption of FAS 159 had no impact on our financial statements.

Recently Issued Accounting Standards - In December 2007, the FASB issued FAS No. 141(R), Business Combinations (“FAS 141(R)”). FAS 141(R) provides guidance relating to recognition of assets acquired and liabilities assumed in a business combination. FAS 141(R) also establishes expanded disclosure requirements for business combinations. FAS 141(R) is effective for us on January 1, 2009, and we will apply FAS 141(R) prospectively to all business combinations subsequent to the effective date.

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 provides guidance related to accounting for noncontrolling (minority) interests as equity in the consolidated financial statements at fair value. FAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact that the adoption of FAS 160 will have on our financial statements.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“FAS 161”). FAS 161 amends and expands the disclosure requirements of Statement 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items

 

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are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently evaluating the impact that the adoption of FAS 161 will have on our financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in FAS No. 128, “Earnings per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for us on January 1, 2009, and prior-period earnings per share data would be adjusted retrospectively. We are currently evaluating the impact that the adoption of FSP EITF 03-6-1 will have on our financial statements.

 

3. ACQUISITIONS

 

2007 -   In July 2007, we reached an agreement to acquire Fum Machineworks, Inc. d/b/a Recipezaar.com, a user-generated recipe and community site featuring more than 230,000 recipes, for cash consideration of approximately $25 million. We also acquired Incando Corporation d/b/a Pickle.com, a Web site that enables users to easily organize and share photos and videos from any camera or mobile phone device, for cash consideration of approximately $4.7 million. These acquisitions are part of our broader strategy at Scripps Networks to move our online businesses beyond extensions of our networks to become multi-branded, user-centric applications that create communities of online consumers in the home, food and lifestyle categories.
  In the second quarter of 2007, we acquired newspaper publications in areas contiguous to our existing newspaper markets for total consideration of $2.0 million.

The following table summarizes the fair values of the assets acquired and the liabilities assumed for certain of our acquisitions. The allocation of these purchase prices reflects final values assigned which may differ from preliminary values reported in the financial statements for prior periods.

 

( in thousands )    2007
Recipezaar/
Pickle
 

Accounts receivable

   $ 135  

Other current assets

     95  

Property, plant and equipment

     4,787  

Goodwill

     24,968  
        

Total assets acquired

     29,985  

Current liabilities

     (71 )
        

Net purchase price

   $ 29,914  
        

Pro forma results are not presented for these 2007 acquisitions because the combined results of operations would not be significantly different from reported amounts.

 

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4. DISCONTINUED OPERATIONS

Our Cincinnati JOA with Gannett Co. Inc., was not renewed when the agreement terminated on December 31, 2007. In connection with the termination of the JOA, we ceased publication of our Cincinnati Post and Kentucky Post newspapers that participated in the Cincinnati JOA.

In 2006, we sold our Shop At Home television network to Jewelry Television. We also reached agreement in the third quarter of 2006 to sell the five Shop At Home-affiliated broadcast television stations. On December 22, 2006, we closed the sale of the three stations located in San Francisco, CA, Canton, OH and Wilson, NC. The sale of the two remaining stations located in Lawrence, MA, and Bridgeport, CT closed on April 24, 2007.

In accordance with the provisions of FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the results of businesses held for sale or that have ceased operations are presented as discontinued operations within our results of operations. Accordingly, these businesses have been excluded from segment results for all periods presented.

Operating results of our discontinued operations were as follows:

 

( in thousands )    Three months ended
June 30,
   Six months ended
June 30,
 
     2008    2007    2008    2007  

Operating revenues

   $ —      $ 213    $ 5    $ 1,320  
                             

Equity in earnings of JOA

   $ —      $ 4,511    $ 331    $ 8,439  
                             

Income from discontinued operations:

           

Income from discontinued operations, before tax

   $ —      $ 2,664    $ 371    $ 5,597  

Income taxes (benefit)

     —        969      137      (1,333 )
                             

Income from discontinued operations

   $ —      $ 1,695    $ 234    $ 6,930  
                             

A tax benefit of $3.4 million was recognized in 2007 related to differences that were identified between our prior year provision and tax returns for our Shop At Home businesses.

Assets and liabilities of our discontinued operations for applicable periods consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

Assets:

        

Deferred income taxes

   $ 49    $ 842    $ 888

Other assets

     103      983      79
                    

Assets of discontinued operations

   $ 152    $ 1,825    $ 967
                    

Liabilities:

        

Other liabilities

   $ 138    $ 3,017    $ 3,213
                    

Liabilities of discontinued operations

   $ 138    $ 3,017    $ 3,213
                    

 

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5. OTHER CHARGES AND CREDITS

2008 – In the second quarter of 2008, we redeemed the remaining balances of our outstanding notes and recorded a $26.4 million loss on the extinguishment of debt.

Transaction costs and other activities related to the spin-off of our national lifestyle media brands (HGTV, Food Network, DIY, Fine Living and GAC and their Internet businesses) and online comparison shopping services (Shopzilla and uSwitch and their associated Web sites) increased our costs and expenses by $23.4 million in 2008. The costs associated with these transactions, some of which are not expected to be deductible for income tax purposes, increased year-to-date net loss by $48.8 million.

Investment results, reported in the caption “Miscellaneous, net” in our Condensed Consolidated Statements of Operations, include realized gains of $6.8 million from the sale of certain investments in the second quarter of 2008.

2007 – A majority of our newspapers offered voluntary separation plans to eligible employees during 2007. In connection with the acceptance of the offer by 137 employees, we accrued severance related costs of $8.9 million in the second quarter of 2007.

Due to changes in a distribution agreement at our Shopzilla business, we wrote down intangible assets during the first quarter of 2007 to reflect that certain components of the contract were not continued. This resulted in a charge to amortization of $5.2 million.

In connection with the adoption of FASB Interpretation No. 48 and the corresponding detailed review that was completed for our deferred tax balances, we identified adjustments necessary to properly record certain tax balances. These adjustments reduced the tax provision in the first quarter of 2007 increasing year-to-date net income $4.0 million.

 

6. INCOME TAXES

We file a consolidated federal income tax return, consolidated unitary return in certain states, and other separate state income tax returns for certain of our subsidiary companies. Included in our federal and state income tax returns is our proportionate share of the taxable income or loss of partnerships and incorporated limited liability companies that have been elected to be treated as partnerships for tax purposes (“pass-through entities”). Our financial statements do not include any provision (benefit) for income taxes on the income (loss) of pass-through entities attributed to the non-controlling interests.

Food Network is operated under the terms of a general partnership agreement. Fine Living is a limited liability company and is treated as a partnership for tax purposes. As a result, federal and state income taxes for these pass-through entities accrue to the individual partners.

Consolidated income (loss) before income tax consisted of the following:

 

( in thousands )    Three months ended
June 30,
   Six months ended
June 30,
     2008     2007    2008     2007

Income (loss) allocated to Scripps

   $ (751,056 )   $ 150,596    $ (616,370 )   $ 245,376

Income of pass-through entities allocated to non-controlling interests

     24,470       20,939      46,785       38,923
                             

Income (loss) from continuing operations before income taxes and minority interest

   $ (726,586 )   $ 171,535    $ (569,585 )   $ 284,299
                             

The income tax provision for interim periods is determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period. To determine the annual effective income tax rate, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax. The actual effective income tax rate for the full year may differ from these estimates if income before income tax is greater or less than what was estimated or if the allocation of income to jurisdictions in which it is taxed is different from the estimated allocations. We review and adjust our estimated effective income tax rate for the full year each quarter based upon our most recent estimates of income before income tax for the full year and the jurisdictions in which we expect that income will be taxed.

 

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Information regarding our expected effective income tax rate from continuing operations for the full year of 2008 and the actual effective income tax rate from continuing operations for the full year of 2007 is as follows:

 

     2008     2007  

Statutory rate

   (35.0 )%   35.0 %

Effect of:

    

State and local income taxes, net of federal income tax benefit

   (2.2 )   6.0  

Income of pass-through entities allocated to non-controlling interests

   (2.8 )   (11.4 )

Non-deductible goodwill

   6.6     42.9  

Non-deductible spin transaction costs

   4.3    

Section 199 - Production Activities Deduction

   (0.5 )   (4.9 )

FIN 48

   1.7     2.4  

Miscellaneous

   (0.3 )   (0.4 )
            

Effective income tax rate

   (28.2 )%   69.6 %
            

 

7. JOINT OPERATING AGREEMENT AND NEWSPAPER PARTNERSHIPS

Our Denver newspaper (Denver Rocky Mountain News) is operated pursuant to the terms of a joint operating agreement (“JOA”) which expires in 2051. The other publisher in the JOA is MediaNews Group, Inc. The Newspaper Preservation Act of 1970 provides a limited exemption from anti-trust laws, permitting competing newspapers in a market to combine their sales, production and business operations in order to reduce aggregate expenses and take advantage of economies of scale, thereby allowing the continuing operation of both newspapers in that market. Each newspaper in a JOA maintains a separate and independent editorial operation.

The sales, production and business operations of the Denver newspapers are operated by the Denver Newspaper Agency, a limited liability partnership (the “Denver JOA”). Each newspaper owns 50% of the Denver JOA and shares management of the combined newspaper operations. We receive a 50% share of the Denver JOA profits.

In the first quarter of 2008, we ceased publication of our Albuquerque Tribune newspaper. At the same time we also reached an agreement with the Journal Publishing Company (“JPC”), the publisher of the Albuquerque Journal (“Journal”), to terminate the Albuquerque joint operating agreement between the Journal and our Albuquerque Tribune newspaper. Under an amended agreement with the JPC, we will own an approximate 40% residual interest in the Albuquerque Publishing Company, G.P. (the “Partnership”) and we will pay JPC an annual amount equal to a portion of the editorial savings realized from ceasing publication of our newspaper. The Partnership will direct and manage the operations of the continuing Journal newspaper.

We participate in a newspaper partnership with MediaNews Group, Inc. that operates certain of both companies’ newspapers in Colorado, including their editorial operations. We have a 50% interest in the partnership.

Our share of the operating profit (loss) of our JOA and our newspaper partnerships is reported as “Equity in earnings of JOAs and other joint ventures” in our financial statements.

 

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8. INVESTMENTS

Investments consisted of the following:

 

( in thousands, except share data )    June 30,
2008
    As of
December 31,
2007
   June 30,
2007

Securities available for sale (at market value):

       

Time Warner (2,008,000 common shares)

     $ 33,152    $ 42,248

Other available-for-sale securities

   $ 17       2,832      2,195
                     

Total available-for-sale securities

     17       35,984      44,443

Newspaper partnerships

     40,399       143,694      138,368

Joint ventures

     45,182       38,918      30,218

Other equity securities

     8,611       8,064      7,610
                     

Total investments

   $ 94,209     $ 226,660    $ 220,639
                     

Unrealized gains (loss) on securities available for sale

   $ (1 )   $ 6,391    $ 14,893
                     

Investments available for sale represent securities of publicly-traded companies. Investments available for sale are recorded at fair value based upon the closing price of the security on the reporting date.

Our preliminary impairment analysis as of June 30, 2008, resulted in a $95 million non-cash charge to reduce the carrying value of our investment in our Denver JOA and Colorado newspaper partnership. See Note 10.

 

9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

Land and improvements

   $ 80,293    $ 79,555    $ 77,176

Buildings and improvements

     281,694      273,328      268,439

Equipment

     674,338      650,526      630,696

Computer software

     165,822      143,084      109,487
                    

Total

     1,202,147      1,146,493      1,085,798

Accumulated depreciation

     617,613      586,820      557,474
                    

Net property, plant and equipment

   $ 584,534    $ 559,673    $ 528,324
                    

 

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10. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following:

 

( in thousands )    June 30,
2008
    As of
December 31,
2007
    June 30,
2007
 

Goodwill

   $ 880,619     $ 1,666,206     $ 1,955,285  
                        

Other intangible assets:

      

Amortizable intangible assets:

      

Carrying amount:

      

Acquired network distribution

     43,415       43,415       43,415  

Broadcast television network affiliation relationships

     26,748       26,748       26,748  

Customer lists

     227,464       227,064       228,253  

Copyrights and other trade names

     53,088       52,966       53,188  

Other

     32,705       32,657       32,797  
                        

Total carrying amount

     383,420       382,850       384,401  
                        

Accumulated amortization:

      

Acquired network distribution

     (11,962 )     (10,563 )     (9,149 )

Broadcast television network affiliation relationships

     (4,131 )     (3,582 )     (3,027 )

Customer lists

     (158,687 )     (151,194 )     (61,762 )

Copyrights and other trade names

     (36,232 )     (34,793 )     (9,003 )

Other

     (22,351 )     (20,113 )     (17,641 )
                        

Total accumulated amortization

     (233,363 )     (220,245 )     (100,582 )
                        

Net amortizable intangible assets

     150,057       162,605       283,819  
                        

Other indefinite-lived intangible assets:

      

FCC licenses

     25,622       25,622       25,622  
                        

Total other intangible assets

     175,679       188,227       309,441  
                        

Total goodwill and other intangible assets

   $ 1,056,298     $ 1,854,433     $ 2,264,726  
                        

 

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Activity related to goodwill, amortizable intangible assets and indefinite-lived intangible assets by business segment was as follows:

 

( in thousands )    Scripps
Networks
    Newspapers     Broadcast
Television
    Interactive
Media
    Licensing
and Other
   Total  

Goodwill:

             

Balance as of December 31, 2006

   $ 240,502     $ 777,902     $ 219,367     $ 723,262     $ 18    $ 1,961,051  

Business acquisitions

       998              998  

Adjustment of purchase price allocations

           (14,703 )        (14,703 )

Foreign currency translation adjustment, inclusive of impact of purchase price adjustments

           7,939          7,939  
                                               

Balance as of June 30, 2007

   $ 240,502     $ 778,900     $ 219,367     $ 716,498     $ 18    $ 1,955,285  
                                               

Balance as of December 31, 2007

   $ 265,436     $ 785,621     $ 215,414     $ 399,717     $ 18    $ 1,666,206  

Write-down of newspaper goodwill

       (778,900 )            (778,900 )

Other adjustments

       (6,721 )            (6,721 )

Adjustment of purchase price allocations

     34                34  
                                               

Balance as of June 30, 2008

   $ 265,470     $ —       $ 215,414     $ 399,717     $ 18    $ 880,619  
                                               

Amortizable intangible assets:

             

Balance as of December 31, 2006

   $ 38,707     $ 10,075     $ 25,137     $ 209,702        $ 283,621  

Business acquisitions

       997              997  

Adjustment of purchase price allocations

           21,004          21,004  

Foreign currency translation adjustment, inclusive of impact of purchase price adjustments

           5,431          5,431  

Amortization

     (1,621 )     (916 )     (560 )     (24,137 )        (27,234 )
                                               

Balance as of June 30, 2007

   $ 37,086     $ 10,156     $ 24,577     $ 212,000        $ 283,819  
                                               

Balance as of December 31, 2007

   $ 35,438     $ 9,210     $ 24,008     $ 93,949        $ 162,605  

Foreign currency translation adjustment

           37          37  

Amortization

     (1,630 )     (1,038 )     (563 )     (9,354 )        (12,585 )
                                               

Balance as of June 30, 2008

   $ 33,808     $ 8,172     $ 23,445     $ 84,632        $ 150,057  
                                               

Other indefinite-lived intangible assets:

             

Balance for all respective periods presented

       $ 25,622          $ 25,622  
                                               

Estimated amortization expense of intangible assets for each of the next five years is expected to be $12.6 million for the remainder of 2008, $24.2 million in 2009, $21.2 million in 2010, $20.8 million in 2011, $17.3 million in 2012, $9.9 million in 2013 and $44.1 million in later years.

FAS 142, Goodwill and Other Intangible Assets (“FAS 142”), requires goodwill and other indefinite-lived assets to be tested for impairment annually and if an event or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets. The testing for impairment is a two step process. The first step is the estimation of the fair value of each of the reporting units, which is then compared to their carrying value. If the fair value is less than the carrying value of the reporting unit then an impairment of goodwill possibly exists. Step two is then performed to determine the amount of impairment.

Due primarily to the continuing negative effects of the economy on our advertising revenues and those of other publishing companies, and the difference between our stock price following the spin-off of Scripps Networks Interactive to shareholders and the per share carrying value of our remaining net assets, we determined that indications of impairment existed as of June 30, 2008.

Under the two-step process required by FAS 142, we made a determination of the fair value of our businesses. Fair values were determined using a combination of an income approach, which estimated fair value based upon future revenues, expenses and cash flows discounted to their present value, and a market approach, which estimated fair value using market multiples of various financial measures compared to a set of comparable public companies.

The valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the use of alternative assumptions could produce significantly different results.

We concluded the fair value of our newspaper reporting unit did not exceed the carrying value of our newspaper net assets as of June 30, 2008, while the fair value of our broadcast television reporting unit was in excess of the carrying value. Because of the timing and complexity of the calculations required under step two of the process, we have not yet completed that process. However, based upon our preliminary valuations, we recorded a $779 million, non-cash charge in the three months ended June 30, 2008 to reduce the carrying value of goodwill. We also recorded a preliminary non-cash charge of $95 million to reduce the carrying value of our investment in the Denver JOA and Colorado newspaper partnership to our share of the estimated fair value of their net assets. We will complete our test in the third quarter but do not expect our preliminary estimate to change significantly. Such changes would not impact our cash flows.

 

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11. PROGRAMS AND PROGRAM LICENSES

Programs and program licenses consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

Cost of programs available for broadcast

   $ 1,108,344    $ 985,570    $ 910,506

Accumulated amortization

     770,257      661,529      596,736
                    

Total

     338,087      324,041      313,770

Progress payments on programs not yet available for broadcast

     149,735      157,024      160,786
                    

Total programs and program licenses

   $ 487,822    $ 481,065    $ 474,556
                    

In addition to the programs owned or licensed by us included in the table above, we have commitments to license certain programming that is not yet available for broadcast, including first-run syndicated programming. Such program licenses are recorded as assets when the programming is delivered to us and is available for broadcast. First-run syndicated programming is generally produced and delivered at or near its broadcast date. Such contracts may require progress payments or deposits prior to the program becoming available for broadcast. Remaining obligations under contracts to purchase or license programs not yet available for broadcast totaled approximately $271 million at June 30, 2008. If the programs are not produced, our commitment to license the programs would generally expire without obligation.

Progress payments on programs not yet available for broadcast and the cost of programs and program licenses capitalized totaled $68.5 million in the second quarter of 2008 and $78.7 million in the second quarter of 2007. Year-to-date progress payments and capitalized programs totaled $141 million in 2008 and $154 million in 2007.

Estimated amortization of recorded program assets and program commitments for each of the next five years is as follows:

 

( in thousands )    Programs
Available for
Broadcast
   Programs Not
Yet Available
for Broadcast
   Total

Remainder of 2008

   $ 108,251    $ 51,276    $ 159,527

2009

     132,765      140,058      272,823

2010

     67,158      108,939      176,097

2011

     27,668      72,189      99,857

2012

     2,245      40,685      42,930

2013

        7,593      7,593

Later years

        767      767
                    

Total

   $ 338,087    $ 421,507    $ 759,594
                    

Actual amortization in each of the next five years will exceed the amounts presented above as our broadcast television stations and our national television networks will continue to produce and license additional programs.

 

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12. UNAMORTIZED NETWORK DISTRIBUTION INCENTIVES

Unamortized network distribution incentives consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

Network launch incentives

   $ 78,573    $ 90,542    $ 100,949

Unbilled affiliate fees

     41,520      44,825      45,055
                    

Total unamortized network distribution incentives

   $ 120,093    $ 135,367    $ 146,004
                    

Amortization recorded as a reduction to affiliate fee revenue in the consolidated financial statements, and estimated amortization of recorded network distribution incentives for each of the next five years, is presented below.

 

( in thousands )    Three months ended
June 30,
   Six months ended
June 30,
     2008    2007    2008    2007

Amortization of network distribution incentives

   $ 8,290    $ 6,899    $ 16,547    $ 13,715
                           

Estimated amortization for the next five years is as follows:

 

Remainder of 2008

   $ 16,685

2009

     36,717

2010

     26,740

2011

     23,552

2012

     12,580

2013

     1,226

Later years

     2,593
      

Total

   $ 120,093
      

Actual amortization could be greater than the above amounts as additional incentive payments may be capitalized as we expand distribution of Scripps Networks.

 

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13. LONG-TERM DEBT

Long-term debt consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

E. W. Scripps variable-rate credit facilities

   $ 60,000    $ 79,559    $ 56,859

6.625% notes due in 2007

           99,996

3.75% notes due in 2008

        39,950      39,653

4.25% notes due in 2009

        86,091      86,049

4.30% notes due in 2010

        112,840      140,586

5.75% notes due in 2012

        184,922      199,373

Scripps Networks Interactive, credit facility

     325,000      

Other notes

     1,236      1,301      1,365
                    

Total long-term debt

   $ 386,236    $ 504,663    $ 623,881
                    

We had Competitive Advance and Revolving Credit Facilities expiring in June 2011 (the “Revolver”) and a commercial paper program that collectively permitted aggregate borrowings up to $750 million (the “Variable-Rate Credit Facilities”). On June 30, 2008, the existing credit agreement was cancelled and we entered into a new Revolving Credit Agreement (“Revolving Credit Agreement”) expiring on June 30, 2013 with a total availability of $200 million. Borrowings under the Revolver are available on a committed revolving credit basis at our choice of an adjusted rate based on LIBOR plus 0.625% to 1.5% or the higher of the prime or the Federal Funds rate plus 0.5 %. The Revolving Credit Agreement includes certain affirmative and negative covenants including compliance with specified financial ratios, including maintenance of minimum interest coverage ratio and leverage ratio as defined in the agreement. The weighted-average interest rate on borrowings under the E.W. Scripps Variable-Rate Credit Facilities was 3.3% at June 30, 2008, 4.9% at December 31, 2007, and 5.4% at June 30, 2007.

On June 30, 2008, Scripps Networks Interactive Inc. (“SNI”), a wholly-owned subsidiary of Scripps, also entered into a Competitive Advance and Revolving Credit Facility (“SNI Revolving Credit Agreement”) that permits $550 million in aggregate borrowings and expires in June 2013. SNI borrowed $325 million under the SNI Revolving Credit Agreement on June 30, 2008 at a weighted-average interest rate of 2.9%. On July 1, 2008, SNI began operations as a separate publicly traded company upon the completion of its separation from Scripps (See Note 20). The outstanding borrowings under the SNI Revolving Credit Agreement remained with SNI upon the completion of the separation.

The scheduled $40 million principal payment on our 3.75% notes was paid in the first quarter of 2008. In the second and third quarters of 2007, we repurchased $37.1 million principal amount of our 4.30% notes due in 2010 for $35.8 million and repurchased $14.6 million principal amount of our 5.75% note due in 2012 for $14.5 million.

In June 2008, we redeemed the outstanding balance of the 4.25% notes, the 4.3% notes and the 5.75% notes prior to maturity resulting in a loss on extinguishment of $26 million.

As of June 30, 2008, we had outstanding letters of credit totaling $8.3 million.

 

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14. OTHER LIABILITIES

Other liabilities consisted of the following:

 

( in thousands )    June 30,
2008
   As of
December 31,
2007
   June 30,
2007

Program rights payable

   $ 2,142    $ 3,070    $ 2,655

Employee compensation and benefits

     39,155      41,418      43,027

Liability for pension benefits

     84,592      75,935      59,660

Network distribution incentives

     3,951      6,738      8,763

FIN 48 tax liability

     62,625      53,830      49,003

Other

     19,683      18,311      18,149
                    

Other liabilities (less current portion)

   $ 212,148    $ 199,302    $ 181,257
                    

 

15. MINORITY INTERESTS

Non-controlling interests hold an approximate 10% residual interest in Fine Living. The minority owners of Fine Living have the right (put option) to require us to repurchase their interests. We have a call option to acquire their interests. The minority owners will receive the fair market value for their interests at the time their option is exercised. In 2006, we notified a minority owner that we were exercising our call option on their 3.75% interest in Fine Living. In July 2008, we reached agreement with the minority owner on the exercise price of the call option and completed the transaction for cash consideration of $9.0 million. The put options on the remaining non-controlling interest in Fine Living are currently exercisable. The call options become exercisable in 2016. No amounts have been recorded in our Condensed Consolidated Balance Sheets related to these options.

Non-controlling interests hold an approximate 30% residual interest in Food Network. The Food Network general partnership agreement is due to expire on December 31, 2012, unless amended or extended prior to that date. In the event of such termination, the assets of the partnership are to be liquidated and distributed to the partners in proportion to their partnership interests.

Minority interests include non-controlling interests of approximately 4% in the capital stock of the subsidiary company that publishes our Memphis newspaper and approximately 6% in the capital stock of the subsidiary company that publishes our Evansville newspaper. The capital stock of these companies does not provide for or require the redemption of the non-controlling interests by us.

 

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16. FAIR VALUE MEASUREMENT

We adopted FAS 157 as of January 1, 2008, with the exception of the application of the standard to non-recurring, nonfinancial assets and liabilities. The adoption of FAS 157 did not have a material impact on our fair value measurements. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

   

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Inputs, other than quoted market prices in active markets, that are observable either directly or indirectly.

 

   

Level 3 – Unobservable inputs based on our own assumptions.

The following table sets forth our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2008:

 

( in thousands )    June 30, 2008
   Total    Level 1    Level 2    Level 3

Assets:

           

Short-term investments

   $ 49,935    $ 49,935    $      $  

Available-for-sale securities

     17      17      
                           

Total assets measured at fair value

   $ 49,952    $ 49,952    $      $  
                           

Liabilities:

           

Deferred compensation plan liabilities

   $ 22,955    $ 22,955    $      $  
                           

Total liabilities measured at fair value

   $ 22,955    $ 22,955    $      $  
                           

 

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17. SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents additional information about the change in certain working capital accounts:

 

( in thousands )    Six months ended
June 30,
 
     2008     2007  

Other changes in certain working capital accounts, net:

    

Accounts receivable

   $ 4,294     $ (3,620 )

Inventories

     (3,913 )     (1,052 )

Accounts payable

     (11,107 )     (4,788 )

Accrued income taxes

     (6,273 )     6,223  

Accrued employee compensation and benefits

     (12,164 )     (14,586 )

Accrued interest

     (5,733 )     (391 )

Other accrued liabilities

     (2,966 )     1,707  

Other, net

     (4,063 )     1,325  
                

Total

   $ (41,925 )   $ (15,182 )
                

Information regarding supplemental cash flow disclosures is as follows:

 

( in thousands )    Six months ended
June 30,
     2008     2007

Interest paid, excluding amounts capitalized

   $ 15,959     $ 20,790
              

Income taxes paid continuing operations

   $ 85,956     $ 80,495

Income taxes paid (refunds received) discontinued operations

     (657 )     18,017
              

Total income taxes paid

   $ 85,299     $ 98,512
              

 

18. EMPLOYEE BENEFIT PLANS

We sponsor defined benefit pension plans that cover substantially all non-union and certain union-represented employees. Benefits are generally based upon the employee’s compensation and years of service.

We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”). The SERP, which is unfunded, provides defined pension benefits in addition to the defined benefit pension plan to eligible participants based on average earnings, years of service and age at retirement.

Substantially all non-union and certain union employees are also covered by a company-sponsored defined contribution plan. We match a portion of employees’ voluntary contributions to this plan.

Other union-represented employees are covered by union-sponsored multi-employer plans.

 

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We use a December 31 measurement date for our retirement plans. Retirement plans expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:

 

( in thousands)    Three months ended
June 30,
    Six months ended
June 30,
 
     2008     2007     2008     2007  

Service cost

   $ 5,020     $ 4,566     $ 9,954     $ 9,212  

Interest cost

     7,064       6,469       14,587       13,217  

Expected return on plan assets, net of expenses

     (8,815 )     (8,499 )     (17,998 )     (17,348 )

Amortization of prior service cost

     161       146       322       292  

Amortization of actuarial (gain)/loss

     282       124       574       312  
                                

Total for defined benefit plans

     3,712       2,806       7,439       5,685  

Multi-employer plans

     43       296       361       626  

SERP

     2,079       1,801       4,158       3,601  

Defined contribution plans

     2,442       2,040       4,781       4,308  
                                

Total

   $ 8,276     $ 6,943     $ 16,739     $ 14,220  
                                

We contributed $1.1 million to fund current benefit payments for our non-qualified SERP plan during the first half of 2008. We anticipate contributing an additional $1.5 million to fund the SERP’s benefit payments during the remainder of fiscal 2008. We have met the minimum funding requirements of our defined benefit pension plans. Accordingly, we do not anticipate making any contributions to these plans in 2008.

 

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19. SEGMENT INFORMATION

We determine our business segments based upon our management and internal reporting structure. Our reportable segments are strategic businesses that offer different products and services.

Scripps Networks includes five national television networks and their affiliated Web sites, Home & Garden Television (“HGTV”), Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities. We own approximately 70% of Food Network and approximately 90% of Fine Living. Each of our networks is distributed by cable and satellite television systems. Scripps Networks earns revenue primarily from the sale of advertising time and from affiliate fees from cable and satellite television systems.

Our newspaper business segment includes daily and community newspapers in 15 markets in the U.S. Newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers. We also have a newspaper that is operated pursuant to the terms of joint operating agreement. See Note 7. Each newspaper in a JOA maintains an independent editorial operation and receives a share of the operating profits of the combined newspaper operations.

Broadcast television includes six ABC-affiliated stations, three NBC-affiliated stations and one independent station. Our television stations reach approximately 10% of the nation’s television households. Broadcast television stations earn revenue primarily from the sale of advertising time to local and national advertisers.

Interactive media includes our online comparison shopping services, Shopzilla and uSwitch. Shopzilla operates a product comparison shopping service that helps consumers find products offered for sale on the Web by online retailers. uSwitch operates an online comparison service that helps consumers compare prices and arrange for the purchase of a range of essential home services including gas, electricity, home phone, broadband providers and personal finance products, primarily in the United Kingdom. Our interactive media businesses earn revenue primarily from referral fees and commissions paid by participating online retailers and service providers.

Licensing and other media aggregates our operating segments that are too small to report separately, and primarily includes syndication and licensing of news features and comics.

The accounting policies of each of our business segments are those described in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2007.

Each of our segments may provide advertising, programming or other services to our other business segments. In addition, certain corporate costs and expenses, including information technology, pensions and other employee benefits, and other shared services, are allocated to our business segments. The allocations are generally amounts agreed upon by management, which may differ from amounts that would be incurred if such services were purchased separately by the business segment. Corporate assets are primarily cash, cash equivalents and other short-term investments, property and equipment primarily used for corporate purposes, and deferred income taxes.

Our chief operating decision maker (as defined by FAS 131 – Segment Reporting) evaluates the operating performance of our business segments and makes decisions about the allocation of resources to our business segments using a measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities (including our proportionate share of JOA restructuring activities), investment results and certain other items that are included in net income (loss) determined in accordance with accounting principles generally accepted in the United States of America.

As discussed in Note 1, we account for our share of the earnings of our JOA and newspaper partnerships using the equity method of accounting. Our equity in earnings of our JOA and newspaper partnerships is included in “Equity in earnings of JOAs and other joint ventures” in our Condensed Consolidated Statements of Operations. Newspaper segment profits include equity in earnings of JOAs and newspaper partnerships but exclude write-downs in the carrying value. Scripps Networks segment profits include equity in earnings of joint ventures.

 

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Information regarding our business segments is as follows:

 

( in thousands )    Three months ended
June 30,
    Six months ended
June 30,
 
     2008     2007     2008     2007  

Segment operating revenues:

        

Scripps Networks

   $ 349,223     $ 308,148     $ 660,059     $ 577,627  
                                

Newspapers:

        

Newspapers managed solely by us

     144,433       165,723       300,032       335,474  

JOAs and newspaper partnerships

     53       48       114       106  
                                

Total newspapers

     144,486       165,771       300,146       335,580  

Broadcast television

     80,520       84,539       156,539       161,047  

Interactive media

     66,851       59,022       144,347       121,956  

Licensing and other media

     23,375       22,381       45,818       45,581  

Corporate

     200       799       909       1,226  

Intersegment eliminations

     (514 )     (586 )     (1,203 )     (1,519 )
                                

Total operating revenues

   $ 664,141     $ 640,074     $ 1,306,615     $ 1,241,498  
                                

Segment profit (loss):

        

Scripps Networks

   $ 180,236     $ 164,136     $ 326,856     $ 291,636  
                                

Newspapers:

        

Newspapers managed solely by us

     19,074       29,256       44,624       65,947  

JOAs and newspaper partnerships

     (2,732 )     886       (717 )     (6,488 )
                                

Total newspapers

     16,342       30,142       43,907       59,459  

Broadcast television

     18,305       23,496       32,475       39,875  

Interactive media

     15,064       6,757       36,031       6,376  

Licensing and other media

     1,850       2,578       4,022       5,556  

Corporate

     (33,341 )     (15,319 )     (53,151 )     (34,273 )

Intersegment eliminations

     20       6       37       (189 )

Depreciation and amortization of intangibles

     (29,703 )     (32,207 )     (58,465 )     (66,645 )

Write-down of newspaper goodwill

     (778,900 )       (778,900 )  

Gains (losses) on disposal of PP&E

     2,364       (243 )     1,497       (332 )

Interest expense

     (4,874 )     (10,729 )     (10,706 )     (20,930 )

Write-down of investments in newspaper partnerships

     (95,000 )       (95,000 )  

Gains (losses) on repurchases of debt

     (26,380 )     317       (26,380 )     317  

Miscellaneous, net

     7,431       2,601       8,192       3,449  
                                

Income (loss) from continuing operations before income taxes and minority interests

   $ (726,586 )   $ 171,535     $ (569,585 )   $ 284,299  
                                

Depreciation:

        

Scripps Networks

   $ 6,038     $ 4,876     $ 12,014     $ 9,480  
                                

Newspapers:

        

Newspapers managed solely by us

     5,437       5,623       10,810       10,960  

JOAs and newspaper partnerships

     321       330       646       659  
                                

Total newspapers

     5,758       5,953       11,456       11,619  

Broadcast television

     4,724       4,119       9,137       8,442  

Interactive media

     6,662       5,359       12,862       8,820  

Licensing and other media

     119       121       236       235  

Corporate

     116       436       175       815  
                                

Total depreciation

   $ 23,417     $ 20,864     $ 45,880     $ 39,411  
                                

 

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( in thousands )    Three months ended
June 30,
   Six months ended
June 30,
     2008    2007    2008    2007

Amortization of intangibles:

           

Scripps Networks

   $ 815    $ 815    $ 1,630    $ 1,621
                           

Newspapers:

           

Newspapers managed solely by us

     519      461      1,038      916

JOAs and newspaper partnerships

           
                           

Total newspapers

     519      461      1,038      916

Broadcast television

     282      282      563      560

Interactive media

     4,670      9,785      9,354      24,137
                           

Total amortization of intangibles

   $ 6,286    $ 11,343    $ 12,585    $ 27,234
                           

Additions to property, plant and equipment:

           

Scripps Networks

   $ 9,097    $ 5,092    $ 17,906    $ 10,137
                           

Newspapers:

           

Newspapers managed solely by us

     12,211      5,598      25,977      11,211

JOAs and newspaper partnerships

     21      113      38      202
                           

Total newspapers

     12,232      5,711      26,015      11,413

Broadcast television

     8,444      6,218      13,158      8,594

Interactive media

     4,695      13,073      10,333      19,491

Licensing and other media

     603      1,052      1,268      2,132

Corporate

     1,909      647      2,696      1,881
                           

Total additions to property, plant and equipment

   $ 36,980    $ 31,793    $ 71,376    $ 53,648
                           

Business acquisitions and other additions to long-lived assets:

           

Scripps Networks

   $ 68,621    $ 78,725    $ 141,582    $ 153,953

Newspapers:

           

Newspapers managed solely by us

        1,995         1,995

JOAs and newspaper partnerships

     84      92      96      104
                           

Total newspapers

     84      2,087      96      2,099

Corporate

           550      632
                           

Total

   $ 68,705    $ 80,812    $ 142,228    $ 156,684
                           

Assets:

           

Scripps Networks

         $ 1,477,182    $ 1,350,469
                   

Newspapers:

           

Newspapers managed solely by us

           330,004      1,100,704

JOAs and newspaper partnerships

           51,271      150,084
                   

Total newspapers

           381,275      1,250,788

Broadcast television

           476,105      483,081

Interactive media

           594,757      1,030,876

Licensing and other media

           30,366      27,408

Investments

           8,807      51,983

Corporate

           145,390      107,462
                   

Total assets of continuing operations

           3,113,882      4,302,067

Discontinued operations

           152      967
                   

Total assets

         $ 3,114,034    $ 4,303,034
                   

No single customer provides more than 10% of our revenue. We earn international revenues from our Shopzilla and uSwitch businesses. We also earn international revenues from the licensing of comic characters and programming from our national television networks in international markets.

Other additions to long-lived assets include investments, capitalized intangible assets, and Scripps Networks capitalized programs and network launch incentives.

 

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20. SUBSEQUENT EVENTS

Spin-Off of Scripps Networks Interactive

On October 16, 2007, the Company announced that its Board of Directors had authorized its management to pursue a plan to separate E. W. Scripps (“Scripps”) into two independent, publicly-traded companies (the “Separation”) through the spin-off of Scripps Networks Interactive, Inc. (“SNI”) to the Scripps shareholders. To effect the Separation, SNI was formed on October 23, 2007, as a wholly-owned subsidiary of Scripps. The assets and liabilities of the Scripps Networks and Interactive Media businesses of Scripps were transferred to SNI. SNI will be the parent company which will own the national television networks and the online comparison shopping services businesses as of the separation date and 100% of the shares will be owned by the existing E. W. Scripps shareholders. On May 8, 2008, the Board of Directors of Scripps approved the distribution of all of the common shares of SNI.

The distribution of all of the shares of SNI was made on July 1, 2008 to the shareholders of record as of the close of business on June 16, 2008 (the “Record Date”). The shareholders of record received one SNI Class A Common Share for every Scripps Class A Common Share held as the Record Date and one SNI Common Voting Share for every Scripps Common Voting Share held as of the Record Date.

As a result of the spin-off SNI will be presented as discontinued operations in our future financial statements. We have previously filed on July 8, 2008 on Form 8-K unaudited pro forma condensed consolidated financial information giving effect to the spin-off of SNI.

In connection with the Separation, the following agreements between Scripps and SNI became effective:

 

   

Separation and Distribution Agreement

 

   

Transition Services Agreement

 

   

Employee Matters Agreement

 

   

Tax Allocation Agreement

Separation and Distribution Agreement

The Separation and Distribution Agreement contains the key provisions relating to the separation of SNI from EWS and the distribution of SNI common shares to EWS shareholders. The agreement also identifies the assets to be transferred to and the liabilities and contracts to be assumed by SNI or retained by EWS in the distribution and when and how the transfers will occur. The agreement also provides that liability for, and control of, future litigation claims against either company for events that took place prior to the separation will be assumed by the company operating the business to which the claim relates. In the case of businesses which were sold or discontinued prior to the date of the separation, the agreement identifies which company has assumed those liabilities.

The agreement provides for indemnification of the other company and the other company’s officers, directors and employees for losses arising out of:

 

   

Its failure to perform or discharge any of the liabilities it assumes pursuant to the Separation and Distribution Agreement.

 

   

Its businesses as conducted as of the date of the separation and distribution.

 

   

Its breaches of the Separation and Distribution agreement, any of the ancillary agreements pursuant to which EWS or SNI are co-parties or share benefits and burdens.

 

   

Its untrue statement or alleged untrue statement of a material fact, or omission or alleged omission to state a material fact, required to be stated or necessary to make statements therein not misleading in the portions of the following documents for which it has assumed responsibility for: Form 10 Registration Statement of SNI, the definitive proxy statement sent to the EWS shareholders soliciting their vote on the separation transaction and its other public filings made by EWS after the distribution date.

Transition Services Agreement

The Transition Services Agreement provides for EWS and SNI to provide services to each other on a compensated basis for a period of up to two years. Compensation will be on an arms-length basis. EWS will provide services or support to SNI, including

 

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information technology, human resources, accounting and finance, and facilities. SNI will provide information technology support and services.

Employee Matters Agreement

The Employee Matters Agreement provides for the allocation of the liabilities and responsibilities relating to employee compensation and benefit plans and programs, including the treatment of outstanding incentive awards, deferred compensation obligations and retirement and welfare benefit obligations between EWS and SNI. The agreement provides that EWS and SNI will each be responsible for all employment and benefit related obligations and liabilities for employees that work for the respective companies. The agreement also provides that SNI employees will continue to participate in certain of the EWS benefit plans during a transition period through December 31, 2008. After the transition period, the account balances or actuarialy determined values of assets and liabilities of SNI employees will be transferred to the benefit plans of SNI. The agreement also governs the treatment of outstanding EWS share-based equity awards. See “Share-Based Equity Awards” below.

Tax Allocation Agreement

The Tax Allocation Agreement sets forth the allocations and responsibilities of EWS and SNI with respect to liabilities for federal, state, local and foreign income taxes for periods before and after the spin-off, tax deductions related to compensation arrangements, preparation of income tax returns, disputes with taxing authorities and indemnification of income taxes that would become due if the spin-off were taxable. Generally EWS and SNI will be responsible for income taxes for periods before the spin-off for their respective businesses.

Other Agreements

EWS and SNI have also entered into various other agreements that have been negotiated on an arm’s length basis and that individually or in the aggregate do not constitute material agreements.

Share-Based Equity Awards

As a result of the distribution of SNI to the shareholders of EWS, employees holding share-based equity awards, including share options and restricted shares, have received modified awards in either EWS, SNI or both companies based on whether the awards were vested or unvested at the time of the spin-off of SNI and whether the employee is an EWS or SNI employee. Under FAS 123R the adjustments to the outstanding share based equity awards is considered a modification and accordingly we compared the fair value of the awards immediately prior to the modification to the fair value of the awards immediately after the modification to measure the incremental share-based compensation.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This discussion and analysis of financial condition and results of operations is based upon the condensed consolidated financial statements and the condensed notes to the consolidated financial statements. You should read this discussion in conjunction with those financial statements.

FORWARD-LOOKING STATEMENTS

This discussion and the information contained in the condensed notes to the consolidated financial statements contains certain forward-looking statements related to our businesses, including the separation plan, that are based on our current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from the expectations expressed in the forward-looking statements. Such risks, trends and uncertainties, which in most instances are beyond our control, include changes in advertising demand and other economic conditions; consumers’ tastes; 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. We undertake no obligation to publicly update any forward-looking statements to reflect events or circumstances after the date the statement is made.

EXECUTIVE OVERVIEW

The E. W. Scripps Company (“Scripps”) is a diverse media company with interests in newspaper publishing, broadcast television stations and licensing and syndication. The company’s portfolio of media properties includes: daily and community newspapers in 15 markets and the Washington-based Scripps Media Center, home to the Scripps Howard News Service; 10 broadcast television stations, including six ABC-affiliated stations, three NBC affiliates and one independent; and United Media, a leading worldwide licensing and syndication company that is the home of PEANUTS, DILBERT and approximately 150 other features and comics. Prior to the spin-off of SNI, effective July 1, 2008, We also had interests in national television networks and online comparison shopping services, including Scripps Networks, with such brands as HGTV, Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and Interactive media, comprising our Shopzilla and uSwitch businesses.

On October 16, 2007, the Company announced that its Board of Directors had authorized management to pursue a plan to separate Scripps into two independent, publicly-traded companies (the “Separation”) through the spin-off of Scripps Networks Interactive, Inc. (“Scripps Networks Interactive”) to the Scripps shareholders. To effect the Separation, Scripps Networks Interactive was formed on October 23, 2007, as a wholly-owned subsidiary of Scripps. The assets and liabilities of the Scripps Networks and Interactive Media businesses of Scripps were transferred to Scripps Networks Interactive, Inc. Scripps Networks Interactive will be the parent company which will own the national television networks and the online comparison shopping services businesses as of the Separation date and whose shares will be owned by the existing Scripps shareholders. On May 8, 2008, the Board of Directors of Scripps approved the distribution of all of the common shares of Scripps Networks Interactive. Following the distribution, Scripps shareholders will own 100 percent of the common shares of Scripps Networks Interactive.

The distribution of all of the shares of SNI was made on July 1, 2008 to the shareholders of record as of the close of business on June 16, 2008 (the “Record Date”). The shareholders of record received one SNI Class A Common Share for every Scripps Class A Common Share held as of the Record Date and one SNI Common Voting Share for every Scripps Common Voting Share held as of the Record Date.

As a result of the distribution of SNI to the shareholders of EWS, employees holding share-based equity awards, including share options and restricted shares, have received modified awards in either EWS, SNI or both companies based on whether the awards were vested or unvested at the time of the spin-off of SNI and whether the employee is an EWS or SNI employee. Under FAS 123R the adjustments to the outstanding share-based equity awards is considered a modification and accordingly we compared the fair value of the awards immediately prior to the modification to the fair value of the awards immediately after the modification to measure the incremental share-based compensation. The incremental compensation is estimated to be $20 to $21 million which will be expensed in the third quarter.

 

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Our newspaper businesses are still operating in an extremely challenging environment as industry-wide weakness in local advertising persisted during the second quarter of 2008. Revenues declined 12.8% compared to the same quarter a year ago and were largely affected by weakness in classified advertising, particularly in the employment, automotive and real estate areas. Our newspaper division’s exposure to the Florida and California markets has compounded the situation. We continue to focus on operating the business as efficiently as possible. Newspaper expenses were down 9.7% compared to the same quarter a year ago, which helped offset the decline in revenue. Segment profit declined to $16.3 million compared to $30.1 million in the 2007 comparable quarter.

In the three months ended June 30, 2008, we concluded that we had indicators of impairment with respect to the carrying value of our newspaper goodwill and investments in our Denver JOA and Colorado newspaper partnership. As a result, we took a preliminary $779 million non-cash charge in the three months ended June 30, 2008 to write-down our newspapers goodwill and a preliminary $95 million non-cash charge to reduce the carrying value of our Denver JOA and Colorado newspaper partnership.

At our broadcast television stations, revenues declined to $80.5 million compared to $84.5 million during the same period a year ago. The decline was attributable to weaker local and national advertising revenues during the quarter, which were not offset by increased political advertising during the period. Segment profit was $18.3 million in the second quarter of 2008 versus $23.5 million in the 2007 comparable quarter.

Scripps Networks generated strong operating results during the second quarter of 2008. Revenue grew 13% and segment profit grew 10% compared with the same period a year ago to $349 million and $180 million, respectively. Positive viewership trends at HGTV and Food Network, combined with strong pricing in the scatter advertising market, helped drive the growth.

Our interactive media businesses delivered improved results compared with the same period in 2007. Revenue for the quarter grew 13% to $66.9 million, while segment profit was $15.1 million compared to $6.8 million in the second quarter of 2007. The growth for the quarter was driven by improvements at Shopzilla that allowed the business to more efficiently increase and monetize user traffic. Increased energy switching activity and lower operating expenses at uSwitch drove improved results within that business.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make a variety of decisions which affect reported amounts and related disclosures, including the selection of appropriate accounting principles and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, including our historical experience, actuarial studies and other assumptions. We are committed to incorporating accounting principles, assumptions and estimates that promote the representational faithfulness, verifiability, neutrality and transparency of the accounting information included in the financial statements.

Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K describes the significant accounting policies we have selected for use in the preparation of our financial statements and related disclosures. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in estimates that are likely to occur could materially change the financial statements. We believe the accounting for Network Affiliate Fees, Acquisitions, Goodwill and Other Indefinite-Lived Intangible Assets, Income Taxes and Pension Plans to be our most critical accounting policies and estimates. A detailed description of these accounting policies is included in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007.

There have been no significant changes in those accounting policies or other significant accounting policies.

RESULTS OF OPERATIONS

The trends and underlying economic conditions affecting the operating performance and future prospects differ for each of our business segments. Accordingly, we believe the following discussion of our consolidated results of operations should be read in conjunction with the discussion of the operating performance of our business segments that follows on pages F-35 through F-44.

 

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Consolidated Results of Operations - Consolidated results of operations were as follows:

 

( in thousands, except per share data )    Quarter Period     Year-to-date  
     2008     Change     2007     2008     Change     2007  

Operating revenues

   $ 664,141     3.8 %   $ 640,074     $ 1,306,615     5.2 %   $ 1,241,498  

Costs and expenses

     (473,208 )   7.1 %     (441,906 )     (936,170 )   5.2 %     (890,307 )

Depreciation and amortization of intangibles

     (29,703 )   (7.8 )%     (32,207 )     (58,465 )   (12.3 )%     (66,645 )

Write-down of newspaper goodwill

     (778,900 )         (778,900 )    

Gains (losses) on disposal of PP&E

     2,364         (243 )     1,497         (332 )
                                            

Operating income (loss)

     (615,306 )       165,718       (465,423 )       284,214  

Interest expense

     (4,874 )   (54.6 )%     (10,729 )     (10,706 )   (48.8 )%     (20,930 )

Equity in earnings of JOAs and other joint ventures

     7,543         13,628       19,732         17,249  

Write-down of investments in newspaper partnerships

     (95,000 )         (95,000 )    

Gains (losses) on repurchases of debt

     (26,380 )       317       (26,380 )       317  

Miscellaneous, net

     7,431         2,601       8,192         3,449  
                                            

Income (loss) from continuing operations before income taxes and minority interests

     (726,586 )       171,535       (569,585 )       284,299  

Benefit (provision) for income taxes

     219,786         (54,781 )     168,912         (86,316 )
                                            

Income (loss) from continuing operations before minority interests

     (506,800 )       116,754       (400,673 )       197,983  

Minority interests

     (24,441 )   16.5 %     (20,988 )     (46,734 )   19.9 %     (38,968 )
                                            

Income (loss) from continuing operations

     (531,241 )       95,766       (447,407 )       159,015  

Income from discontinued operations, net of tax

         1,695       234     (96.6 )%     6,930  
                                            

Net income (loss)

   $ (531,241 )     $ 97,461     $ (447,173 )     $ 165,945  
                                            

Net income (loss) per diluted share of common stock:

            

Income (loss) from continuing operations

   $ (9.78 )     $ 1.75     $ (8.25 )     $ 2.90  

Income from discontinued operations

     .00         .03       .00         .13  
                                            

Net income (loss) per diluted share of common stock

   $ (9.78 )     $ 1.78     $ (8.24 )     $ 3.02  
                                            

Net income (loss) per share amounts may not foot since each is calculated independently.

Discontinued Operations - Discontinued operations include the Cincinnati Post and Kentucky Post newspapers that participated in the Cincinnati JOA, the Shop At Home television network and the five Shop At Home-affiliated broadcast television stations (See Note 4 to the Condensed Consolidated Financial Statements). In accordance with the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of businesses held for sale or that have ceased operations are presented as discontinued operations.

Operating results for our discontinued operations were as follows:

 

( in thousands )    Quarter Period    Year-to-date  
     2008    2007    2008    2007  

Operating revenues

   $ —      $ 213    $ 5    $ 1,320  
                             

Equity in earnings of JOA

   $ —      $ 4,511    $ 331    $ 8,439  
                             

Income from discontinued operations:

           

Income from discontinued operations, before tax

   $ —      $ 2,664    $ 371    $ 5,597  

Income taxes (benefit)

     —        969      137      (1,333 )
                             

Income from discontinued operations

   $ —      $ 1,695    $ 234    $ 6,930  
                             

We ceased publication of our Cincinnati Post and Kentucky Post newspapers effective with the termination of the Cincinnati JOA agreement on December 31, 2007. The Shop At Home television network was sold to Jewelry Television on June 21, 2006. The three Shop At Home-affiliated broadcast television stations located in San Francisco, CA, Canton, OH and Wilson, NC were sold on December 22, 2006 and the stations located in Lawrence, MA, and Bridgeport, CT were sold on April 24, 2007. The transactions impact the year-over-year comparability of our discontinued operations results.

 

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A tax benefit of $3.4 million was recognized in 2007 related to differences that were identified between our prior year provision and tax returns for our Shop At Home businesses.

Continuing Operations The increase in operating revenues for the year-to-date period of 2008 compared with the prior-year period was due to double-digit growth in advertising sales and affiliate fee revenue at our national television networks and increases in referral fee revenues at our interactive media division. The increase in advertising sales at Scripps Networks was primarily the result of improved audience viewership at HGTV and Food Network and strong pricing in the scatter advertising market. The increase in operating revenues at interactive media was attributed to Shopzilla effectively increasing and monetizing user traffic and increasing energy switching activity at uSwitch. Increases in revenues at Scripps Networks and interactive media were partially offset by lower advertising revenues at our newspaper division. The decline in revenues at our newspapers was attributed to lower local and classified advertising, including particularly weak real estate, employment and automotive classified advertising.

The increase in costs and expenses for the 2008 year-to-date period was primarily attributed to the expanded hours of original programming at our national networks. Lower costs and expenses at our interactive media and newspapers divisions partially offset the increase at Scripps Networks. Interactive media’s costs and expenses in 2007 include approximately $15 million of costs related to a leadership transition at Shopzilla and increased marketing expenses at uSwitch. The decrease in newspapers’ costs and expenses reflects lower newsprint and ink costs due primarily to lower paper usage. In addition, our newspaper division’s costs and expenses in 2007 include employee severance costs of $8.9 million.

The decrease in depreciation and amortization was primarily attributed to the write-down of uSwitch’s intangible assets during the fourth quarter of 2007, which resulted in lower amortization expense during 2008.

FAS 142, Goodwill and Other Intangible Assets (“FAS 142”), requires goodwill and other indefinite-lived assets to be tested for impairment annually and if an event or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets. The testing for impairment is a two step process. The first step is the estimation of the fair value of each of the reporting units, which is then compared to their carrying value. If the fair value is less than the carrying value of the reporting unit then an impairment of goodwill possibly exists. Step two is then performed to determine the amount of impairment.

Due primarily to the continuing negative effects of the economy on our advertising revenues and those of other publishing companies, and the difference between our stock price following the spin-off of Scripps Networks Interactive to shareholders and the per share carrying value of our remaining net assets, we determined that indications of impairment existed as of June 30, 2008.

Under the two-step process required by FAS 142, we made a determination of the fair value of our businesses. Fair values were determined using a combination of an income approach, which estimated fair value based upon future revenues, expenses and cash flows discounted to their present value, and a market approach, which estimated fair value using market multiples of various financial measures compared to a set of comparable public companies.

The valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the use of alternative assumptions could produce significantly different results.

We concluded the fair value of our newspaper reporting unit did not exceed the carrying value of our newspaper net assets as of June 30, 2008 while the fair value of our broadcast television reporting unit was in excess of the carrying value. Because of the timing and complexity of the calculations required under step two of the process, we have not yet completed that process. However, based upon our preliminary valuations, we recorded a $779 million, non-cash charge in the three months ended June 30, 2008 to reduce the carrying value of goodwill. We also recorded a preliminary non-cash charge of $95 million to reduce the carrying value of our investment in the Denver JOA and Colorado partnership to our share of the estimated fair value of their net assets. We will complete our test in the third quarter but do not expect our preliminary estimate to change significantly. Such changes would not impact our cash flows.

Interest expense includes interest incurred on our outstanding borrowings and deferred compensation and other employment agreements. Interest incurred on our outstanding borrowings decreased in 2008 due to lower average debt levels. The average balance of outstanding borrowings for the six month period of 2008 was $484 million at an average rate of 4.2% and $711 million at an average rate of 5.2% in 2007. The average balance of outstanding obligations for the second quarter of 2008 was $481 million at an average rate of 3.7% compared with $690 million at an average rate of 5.2% for the second quarter of 2007.

In the third quarter of 2005, the management committee of the Denver Newspaper Agency (“DNA”) approved plans to consolidate DNA’s newspaper production facilities resulting in certain assets of the existing facilities being retired earlier than previously estimated. The reduction in these assets’ estimated useful lives increased DNA’s depreciation expense through April 2007. The increased depreciation resulted in a $4.0 million decrease in our equity in earnings of JOAs in the year-to-date period of 2007.

The consolidation of DNA’s newspaper production facilities was completed in 2007. In the first quarter of 2008, DNA sold the production facility that was no longer being utilized in DNA’s operations. The gain from this transaction increased our 2008 equity in earnings from JOAs $4.4 million.

We concluded that at June 30, 2008 we had indicators of impairment with respect to our investment in newspaper partnerships and as a result recorded a $95 million non-cash charge to write-down the carrying value of these investments.

In the second quarter of 2008, we redeemed the remaining balances of our outstanding notes and recorded a $26.4 million loss on the extinguishment of debt.

 

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Investment results, reported in the caption “Miscellaneous, net”, include realized gains from the sale of certain investments in the second quarter of 2008 that totaled $6.8 million.

The income tax provision for interim periods is determined by applying the expected effective income tax rate for the full year to year-to-date income before income tax. Tax provisions are separately provided for certain discrete transactions in interim periods. To determine the annual effective income tax rate for the full-year period, we must estimate both the total income before income tax for the full year and the jurisdictions in which that income is subject to tax.

Our effective income tax rate is affected by the growing profitability of Food Network. Food Network is operated pursuant to the terms of a general partnership, in which we own an approximate 70% residual interest. Income taxes on partnership income accrue to the individual partners. While the income before income tax reported in our financial statements includes all of the income before tax of the partnership, our income tax provision does not include income taxes on the portion of Food Network income that is attributable to the non-controlling interest.

 

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Information regarding our effective tax rate, and the impact of the Food Network partnership on our effective income tax rate, is as follows:

 

( in thousands )    Quarter Period     Year-to-date  
     2008     2007     2008     2007  

Income (loss) from continuing operations before income taxes and minority interests as reported

   $ (726,586 )   $ 171,535     $ (569,585 )   $ 284,299  

Income of pass-through entities allocated to non-controlling interests

     24,470       20,939       46,785       38,923  
                                

Income (loss) allocated to Scripps

   $ (751,056 )   $ 150,596     $ (616,370 )   $ 245,376  
                                

Provision (benefit) for income taxes

   $ (219,786 )   $ 54,781     $ (168,912 )   $ 86,316  
                                

Effective income tax rate as reported

     30.2 %     31.9 %     29.7 %     30.4 %

Effective income tax rate on income allocated to Scripps

     29.3 %     36.4 %     27.4 %     35.2 %

The write-down to the carrying value of Newspaper goodwill included $103 million of goodwill that is not deductible for income taxes. During 2008, we also recorded a loss on the extinguishment of debt of $26.4 million and incurred transaction costs related to the spin-off of our national lifestyle television networks and global interactive services businesses totaling $23.4 million. A portion of the costs associated with these transactions are also not expected to be deductible for income tax purposes.

Minority interest increased in the second quarter and year-to-date periods of 2008 due to the increased profitability of the Food Network. Food Network’s profits are allocated in proportion to each partner’s residual interests in the partnership, of which we own approximately 70%.

Business Segment Results - As discussed in Note 19 to the Condensed Consolidated Financial Statements, our chief operating decision maker (as defined by FAS 131—Segment Reporting) evaluates the operating performance of our business segments using a performance measure we call segment profit. Segment profit excludes interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items that are included in net income determined in accordance with accounting principles generally accepted in the United States of America.

Items excluded from segment profit generally result from decisions made in prior periods or from decisions made by corporate executives rather than the managers of the business segments. Depreciation and amortization charges are the result of decisions made in prior periods regarding the allocation of resources and are therefore excluded from the measure. Financing, tax structure and divestiture decisions are generally made by corporate executives. Excluding these items from our business segment performance measure enables us to evaluate business segment operating performance based upon current economic conditions and decisions made by the managers of those business segments in the current period.

 

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Information regarding the operating performance of our business segments determined in accordance with FAS 131 and a reconciliation of such information to the consolidated financial statements is as follows:

 

( in thousands )    Quarter Period     Year-to-date  
     2008     Change     2007     2008     Change     2007  

Segment operating revenues:

            

Scripps Networks

   $ 349,223     13.3 %   $ 308,148     $ 660,059     14.3 %   $ 577,627  
                                            

Newspapers:

            

Newspapers managed solely by us

     144,433     (12.8 )%     165,723       300,032     (10.6 )%     335,474  

JOAs and newspaper partnerships

     53     10.4 %     48       114     7.5 %     106  
                                            

Total newspapers

     144,486     (12.8 )%     165,771       300,146     (10.6 )%     335,580  

Broadcast television

     80,520     (4.8 )%     84,539       156,539     (2.8 )%     161,047  

Interactive media

     66,851     13.3 %     59,022       144,347     18.4 %     121,956  

Licensing and other media

     23,375     4.4 %     22,381       45,818     0.5 %     45,581  

Corporate

     200     (75.0 )%     799       909     (25.9 )%     1,226  

Intersegment eliminations

     (514 )   (12.3 )%     (586 )     (1,203 )   (20.8 )%     (1,519 )
                                            

Total operating revenues

   $ 664,141     3.8 %   $ 640,074     $ 1,306,615     5.2 %   $ 1,241,498  
                                            

Segment profit (loss):

            

Scripps Networks

   $ 180,236     9.8 %   $ 164,136     $ 326,856     12.1 %   $ 291,636  
                                            

Newspapers:

            

Newspapers managed solely by us

     19,074     (34.8 )%     29,256       44,624     (32.3 )%     65,947  

JOAs and newspaper partnerships

     (2,732 )       886       (717 )       (6,488 )
                                            

Total newspapers

     16,342         30,142       43,907         59,459  

Broadcast television

     18,305     (22.1 )%     23,496       32,475     (18.6 )%     39,875  

Interactive media

     15,064         6,757       36,031         6,376  

Licensing and other media

     1,850     (28.2 )%     2,578       4,022     (27.6 )%     5,556  

Corporate

     (33,341 )       (15,319 )     (53,151 )   55.1 %     (34,273 )

Intersegment eliminations

     20         6       37         (189 )

Depreciation and amortization of intangibles

     (29,703 )   (7.8 )%     (32,207 )     (58,465 )   (12.3 )%     (66,645 )

Write-down of newspaper goodwill

     (778,900 )         (778,900 )    

Gains (losses) on disposal of PP&E

     2,364         (243 )     1,497         (332 )

Interest expense

     (4,874 )   (54.6 )%     (10,729 )     (10,706 )   (48.8 )%     (20,930 )

Write-down of investments in newspaper partnerships

     (95,000 )         (95,000 )    

Gains (losses) on repurchases of debt

     (26,380 )       317       (26,380 )       317  

Miscellaneous, net

     7,431         2,601       8,192         3,449  
                                            

Income (loss) from continuing operations before income taxes and minority interests

   $ (726,586 )     $ 171,535     $ (569,585 )     $ 284,299  
                                            

Corporate expenses, excluding costs that will be incurred as a result of the Scripps Networks Interactive spin-off, are expected to be about $11 million in the third quarter.

Discussions of the operating performance of each of our reportable business segments begin on page F-37.

 

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Segment profit includes our share of the earnings of JOAs and certain other investments included in our consolidated operating results using the equity method of accounting. A reconciliation of our equity in earnings of JOAs and other joint ventures included in segment profit to the amounts reported in our Condensed Consolidated Statements of Operations is as follows:

 

( in thousands )    Quarter Period    Year-to-date
     2008    2007    2008    2007

Scripps Networks:

           

Equity in earnings of joint ventures

   $ 5,083    $ 4,552    $ 8,759    $ 8,522

Newspapers:

           

Equity in earnings of JOAs and newspaper partnerships

     2,460      9,076      10,973      8,727
                           

Total equity in earnings of JOAs and other joint ventures

   $ 7,543    $ 13,628    $ 19,732    $ 17,249
                           

Certain items required to reconcile segment profitability to consolidated results of operations determined in accordance with accounting principles generally accepted in the United States of America are attributed to particular business segments.

Significant reconciling items attributable to each business segment are as follows:

 

( in thousands )    Quarter Period     Year-to-date  
     2008     2007     2008     2007  

Depreciation and amortization:

        

Scripps Networks

   $ 6,853     $ 5,691     $ 13,644     $ 11,101  
                                

Newspapers:

        

Newspapers managed solely by us

     5,956       6,084       11,848       11,876  

JOAs and newspaper partnerships

     321       330       646       659  
                                

Total newspapers

     6,277       6,414       12,494       12,535  

Broadcast television

     5,006       4,401       9,700       9,002  

Interactive media

     11,332       15,144       22,216       32,957  

Licensing and other media

     119       121       236       235  

Corporate

     116       436       175       815  
                                

Total

   $ 29,703     $ 32,207     $ 58,465     $ 66,645  
                                

Gains (losses) on disposal of PP&E:

        

Scripps Networks

   $ —       $ —       $ (764 )   $ (68 )
                                

Newspapers:

        

Newspapers managed solely by us

     (6 )     (33 )     (6 )     (41 )

JOAs and newspaper partnerships

     (53 )     (2 )     (33 )     (1 )
                                

Total newspapers

     (59 )     (35 )     (39 )     (42 )

Broadcast television

     2,538       (12 )     2,415       (26 )

Interactive media

       (196 )       (196 )

Corporate

     (115 )       (115 )  
                                

Gains (losses) on disposal of PP&E

   $ 2,364     $ (243 )   $ 1,497     $ (332 )
                                

Write-down of newspaper goodwill

   $ 778,900       $ 778,900     $    
                    

Write-down of investments in newspaper partnerships

   $ 95,000       $ 95,000    
                    

 

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Scripps Networks - Scripps Networks includes five national television networks and their affiliated Web sites, HGTV, Food Network, DIY Network (“DIY”), Fine Living and Great American Country (“GAC”); and our 7.25% interest in Fox-BRV Southern Sports Holdings, LLC which comprises the Sports South and Fox Sports Net South regional television networks. Our networks also operate internationally through licensing agreements and joint ventures with foreign entities.

Advertising and network affiliate fees provide substantially all of each network’s operating revenues and employee costs and programming costs are the primary expenses. The demand for national television advertising is the primary economic factor that impacts the operating performance of our networks.

Operating results for Scripps Networks were as follows:

 

( in thousands )    Quarter Period    Year-to-date
     2008    Change     2007    2008    Change     2007

Segment operating revenues:

               

Advertising

   $ 271,254    10.9 %   $ 244,529    $ 506,747    12.5 %   $ 450,277

Network affiliate fees, net

     69,684    18.8 %     58,672      137,114    17.7 %     116,524

Other

     8,285    67.5 %     4,947      16,198    49.6 %     10,826
                                       

Total segment operating revenues

     349,223    13.3 %     308,148      660,059    14.3 %     577,627
                                       

Segment costs and expenses:

               

Employee compensation and benefits

     41,516    13.8 %     36,483      83,509    15.4 %     72,340

Programs and program licenses

     71,566    22.6 %     58,383      136,563    24.9 %     109,329

Production and distribution

     14,985    6.4 %     14,089      28,994    8.8 %     26,660

Other segment costs and expenses

     46,003    16.1 %     39,609      92,896    7.8 %     86,184
                                       

Total segment costs and expenses

     174,070    17.2 %     148,564      341,962    16.1 %     294,513
                                       

Segment profit before joint ventures

     175,153    9.8 %     159,584      318,097    12.4 %     283,114

Equity in income of joint ventures

     5,083    11.7 %     4,552      8,759    2.8 %     8,522
                                       

Segment profit

   $ 180,236    9.8 %   $ 164,136    $ 326,856    12.1 %   $ 291,636
                                       

Supplemental Information:

               

Billed network affiliate fees

   $ 77,332      $ 63,662    $ 152,388      $ 126,513

Program payments

     72,253        78,957      146,177        152,223

Depreciation and amortization

     6,853        5,691      13,644        11,101

Capital expenditures

     9,097        5,092      17,906        10,137

Business acquisitions and other additions to long-lived assets, primarily program assets

     68,621        78,725      141,582        153,953

Advertising revenues increased primarily due to an increased demand for advertising time and higher advertising rates at our networks. Improved ratings and viewership, particularly at HGTV and Food Network, and strong pricing in the scatter advertising market contributed to the increases in advertising revenues during 2008 compared with 2007.

Distribution agreements with cable and satellite television systems currently in force require the payment of affiliate fees over the terms of the agreements. The increase in network affiliate fees is primarily attributed to rate increases and our national television networks growth in distribution.

We continue to successfully develop our network brands on the Internet. Online advertising revenues were approximately $20.1 million in the second quarter of 2008 compared with $19.3 million in the second quarter of 2007. Year-to-date online advertising revenues were $36.4 million in 2008 compared with $34.7 million in 2007.

Employee compensation and benefits increased primarily due to the hiring of additional employees to support the growth of Scripps Networks.

Programs and program licenses increased due to the improved quality and variety of programming, expanded programming hours, and higher costs attributed to investing in high-definition programming.

 

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Supplemental financial information for Scripps Networks is as follows:

 

( in thousands )    Quarter Period    Year-to-date
     2008    Change     2007    2008    Change     2007

Operating revenues:

               

HGTV

   $ 171,818    12.9 %   $ 152,198    $ 320,295    12.0 %   $ 286,051

Food Network

     136,191    12.7 %     120,874      264,446    15.6 %     228,663

DIY

     19,319    27.8 %     15,117      34,667    30.0 %     26,665

Fine Living

     14,666    16.6 %     12,574      27,421    19.8 %     22,889

GAC

     6,768    (4.5 )%     7,089      12,683        12,678

Other

     461    55.7 %     296      547    (19.7 )%     681
                                       

Total segment operating revenues

   $ 349,223    13.3 %   $ 308,148    $ 660,059    14.3 %   $ 577,627
                                       

Homes reached in June (1):

               

HGTV

             95,300    2.1 %     93,300

Food Network

             95,600    2.6 %     93,200

DIY

             47,600    5.3 %     45,200

Fine Living

             50,000    5.9 %     47,200

GAC

             54,100    11.8 %     48,400

 

(1) Approximately 100 million homes in the United States receive cable or satellite television. Homes reached are according to the Nielsen Homevideo Index (“Nielsen”), with the exception of Fine Living which is not yet rated by Nielsen and represent comparable amounts calculated by us.

 

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Newspapers - We operate daily and community newspapers in 15 markets in the U.S. Our newspapers earn revenue primarily from the sale of advertising space to local and national advertisers and from the sale of newspapers to readers. Our Denver newspaper is operated pursuant to the terms of a joint operating agreement (“JOA”). Each newspaper in a JOA maintains an independent editorial operation and receives a share of the operating profits of the combined newspaper operations.

Newspapers managed solely by us: The newspapers managed solely by us operate in mid-size markets, focusing on news coverage within their local markets. Advertising and circulation revenues provide substantially all of each newspaper’s operating revenues, and employee and newsprint costs are the primary expenses at each newspaper. The operating performance of our newspapers is most affected by newsprint prices and economic conditions, particularly within the retail, labor, housing and auto markets.

Operating results for newspapers managed solely by us were as follows:

 

( in thousands )    Quarter Period    Year-to-date
     2008    Change     2007    2008    Change     2007

Segment operating revenues:

               

Local

   $ 30,842    (12.7 )%   $ 35,334    $ 64,703    (10.5 )%   $ 72,297

Classified

     38,535    (21.1 )%     48,840      80,344    (20.1 )%     100,539

National

     6,663    (19.9 )%     8,323      14,676    (14.9 )%     17,253

Preprint, online and other

     35,870    (7.9 )%     38,949      72,332    (4.2 )%     75,473
                                       

Newspaper advertising

     111,910    (14.9 )%     131,446      232,055    (12.6 )%     265,562

Circulation

     27,989    (5.4 )%     29,579      58,503    (3.2 )%     60,457

Other

     4,534    (3.5 )%     4,698      9,474    0.2 %     9,455
                                       

Total operating revenues

     144,433    (12.8 )%     165,723      300,032    (10.6 )%     335,474
                                       

Segment costs and expenses:

               

Employee compensation and benefits

     63,392    (12.4 )%     72,336      130,153    (7.1 )%     140,123

Production and distribution

     37,552    (3.4 )%     38,860      76,541    (4.1 )%     79,833

Other segment costs and expenses

     24,415    (3.4 )%     25,271      48,714    (1.7 )%     49,571
                                       

Total costs and expenses

     125,359    (8.1 )%     136,467      255,408    (5.2 )%     269,527
                                       

Contribution to segment profit

   $ 19,074    (34.8 )%   $ 29,256    $ 44,624    (32.3 )%   $ 65,947
                                       

Supplemental Information:

               

Depreciation and amortization

   $ 5,956      $ 6,084    $ 11,848      $ 11,876

Write-down of newspaper goodwill

     778,900           778,900     

Capital expenditures

     12,211        5,598      25,977        11,211

Business acquisitions, including acquisitions of minority interests, and other additions to long-lived assets

          1,995           1,995

 

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The decrease in advertising revenues was primarily due to continued weakness in classified and local advertising in our newspaper markets. Decreases in real estate, automotive and employment advertising particularly affected revenues at our Florida and California newspapers.