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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
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 333-96619
----------------------
BLOCK COMMUNICATIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-4374555
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
541 N. SUPERIOR STREET, TOLEDO, OHIO 43660
------------------
(Address of principal executive offices)
(Zip code)
(419) 724-6257
--------------------------
(Registrant's telephone number, including area code)
541 N. SUPERIOR STREET, P.O. BOX 921, TOLEDO, OHIO 43697-0921
------------------
(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 Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
VOTING COMMON STOCK , (PAR VALUE $.10) NON-VOTING COMMON STOCK, (PAR VALUE $.10)
-------------------------- --------------------------
29,400 SHARES AS OF SEPTEMBER 18, 2002 427,786 SHARES AS OF SEPTEMBER 18, 2002
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Exhibits and reports on Form 8-K
SIGNATURES
Certification of the Managing Director
Certification of the Chief Financial Officer
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
2002 2001
--------------------------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents $ 30,898,988 $ 5,882,732
Receivables, less allowances for doubtful accounts
and discounts of $5,081,970 and $4,861,094,
respectively 39,681,701 44,225,634
Recoverable income taxes 6,598,520 4,483,300
Inventories 4,397,360 5,548,784
Prepaid expenses 2,783,579 3,703,756
Broadcast rights 5,891,948 6,083,782
Deferred income taxes 6,657,350 9,803,800
--------------------------------
Total current assets 96,909,446 79,731,788
Property, plant and equipment:
Land and land improvements 12,221,476 12,194,446
Buildings and leasehold improvements 41,492,228 41,186,933
Machinery and equipment 211,086,997 209,196,143
Cable television distribution systems and equipment 186,662,257 187,804,505
Security alarm and video systems installation costs 6,261,796 5,923,280
Construction in progress 14,298,479 11,495,916
--------------------------------
472,023,233 467,801,223
Less allowances for depreciation and amortization 216,568,020 204,605,517
--------------------------------
255,455,213 263,195,706
Other assets:
Goodwill 53,748,696 52,461,687
Other intangibles, net of accumulated amortization 37,574,340 31,451,414
Deferred income taxes 9,732,067 12,946,900
Prepaid pension costs 11,952,049 11,145,446
Cash value of life insurance, net of policy loans
of $12,735,560 11,150,307 10,691,105
Pension intangibles 7,230,030 7,230,030
Broadcast rights, less current portion 3,422,892 6,217,880
Deferred financing costs 12,332,848 5,676,725
Other 3,064,764 3,138,246
--------------------------------
150,207,993 140,959,433
--------------------------------
$502,572,652 $483,886,927
================================
1
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
JUNE 30 DECEMBER 31
2002 2001
------------------------------
(UNAUDITED) (NOTE 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,036,595 $ 12,355,122
Salaries, wages and payroll taxes 14,132,895 16,321,468
Workers' compensation and medical reserves 9,403,124 9,184,074
Other accrued liabilities 30,828,872 32,279,367
Current maturities of long-term debt 1,261,760 9,908,334
------------------------------
Total current liabilities 66,663,246 80,048,365
Long-term debt, less current maturities 252,503,855 227,355,513
Other long-term obligations 127,542,241 126,635,551
Minority interest 12,351,519 12,264,398
Stockholders' equity:
5% Non-cumulative, non-voting Class A Stock,
par value $100 a share (entitled in
liquidation to $100 per share in priority
over Common Stock)-- 15,680 shares
authorized; 12,620 shares issued
and outstanding 1,262,000 1,262,000
Common Stock, par value $.10 a share:
Voting Common Stock--29,400 shares
authorized, issued and outstanding 2,940 2,940
Non-voting Common Stock--588,000 shares
authorized; 427,786 shares issued
and outstanding 42,779 42,779
Accumulated other comprehensive loss (4,499,520) (4,725,589)
Additional paid-in capital 771,274 771,274
Retained earnings 45,932,318 40,229,696
------------------------------
43,511,791 37,583,100
------------------------------
$ 502,572,652 $ 483,886,927
==============================
See accompanying notes.
2
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2002 2001 2002 2001
------------------------------ ------------------------------
Revenue:
Publishing $ 64,646,626 $ 67,859,634 $ 126,209,428 $ 129,714,071
Cable 25,240,422 22,237,089 50,337,257 43,384,995
Broadcasting 9,686,810 8,865,495 18,687,463 17,592,705
Other Communications 6,652,448 6,381,326 13,005,192 11,530,016
------------------------------ ------------------------------
106,226,306 105,343,544 208,239,340 202,221,787
Expense:
Publishing 61,227,791 65,295,840 122,747,104 130,783,321
Cable 22,392,149 18,641,371 45,206,105 37,085,564
Broadcasting 8,954,146 9,421,843 18,009,185 18,601,069
Other Communications 6,635,577 7,181,472 12,879,314 13,537,085
Corporate general and administrative 505,795 600,224 1,457,075 950,259
------------------------------ ------------------------------
99,715,458 101,140,750 200,298,783 200,957,298
------------------------------ ------------------------------
Operating income 6,510,848 4,202,794 7,940,557 1,264,489
Nonoperating income (expense):
Interest expense (5,894,078) (4,746,827) (10,642,227) (9,422,453)
Gain on disposition of Monroe
Cablevision -- -- 21,600,189 --
Loss on early extinguishment of debt (8,989,786) -- (8,989,786) --
Change in fair value of interest rate swaps (1,183,769) 674,797 278,057 (905,023)
Interest income 22,116 22,462 30,947 28,582
------------------------------ ------------------------------
(16,045,517) (4,049,568) 2,277,180 (10,298,894)
------------------------------ ------------------------------
Income (loss) before income taxes
and minority interest (9,534,669) 153,226 10,217,737 (9,034,405)
Provision (credit) for income taxes:
Federal:
Current (3,369,542) (242,001) (176,926) (1,423,916)
Deferred 239,699 (157,967) 3,500,000 (1,452,682)
------------------------------ ------------------------------
(3,129,843) (399,968) 3,323,074 (2,876,598)
State and local 413,724 405,498 753,339 280,299
------------------------------ ------------------------------
(2,716,119) 5,530 4,076,413 (2,596,299)
------------------------------ ------------------------------
Income (loss) before minority interest (6,818,550) 147,696 6,141,324 (6,438,106)
Minority interest (79,947) (13,220) (87,121) 40,438
------------------------------ ------------------------------
Net income (loss) $ (6,898,497) $ 134,476 $ 6,054,203 $ (6,397,668)
============================== ==============================
See accompanying notes.
3
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock
-------------------------------------
Class A Stock Voting Non-Voting
---------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------
Balance at January 1, 2002 12,620 $1,262,000 29,400 $2,940 427,786 $ 42,779
Net income
Amortization of fair value of
interest rate swaps at
January 1, 2001 (net of deferred
taxes of $127,250)
Total comprehensive income
Cash dividends declared:
Class A stock - $2.50 per share
Common Stock:
Voting - $0.70 per share
Non-voting - $0.70 per share
---------------------------------------------------------
Balances at June 30, 2002 12,620 $1,262,000 29,400 $2,940 427,786 $ 42,779
=========================================================
Balance at January 1, 2001 12,620 $1,262,000 29,400 $2,940 430,123 $ 43,012
Net loss
Fair value of interest rate
swaps at January 1, 2001,
less accumulated amortization
of $353,319 (net of deferred
taxes of $630,750)
Total comprehensive loss
Cash dividends declared:
Class A stock - $2.50 per share
Common Stock:
Voting - $0.70 per share
Non-voting - $0.70 per share
---------------------------------------------------------
Balances at June 30, 2001 12,620 $1,262,000 29,400 $2,940 430,123 $ 43,012
=========================================================
Accumulated
Other Additional
Comprehensive Paid-in Retained
Loss Capital Earnings Total
------------------------------------------------------------------
Balance at January 1, 2002 $(4,725,589) $771,274 $40,229,696 $37,583,100
Net income 6,054,203 6,054,203
Amortization of fair value of
interest rate swaps at
January 1, 2001 (net of deferred
taxes of $127,250) 226,069 226,069
-----------
Total comprehensive income 6,280,272
Cash dividends declared:
Class A stock - $2.50 per share (31,550) (31,550)
Common Stock:
Voting - $0.70 per share 20,550 20,580
Non-voting - $0.70 per share (299,451) (299,451)
--------------------------
(351,581) (351,581)
-------------------------------------------------------------
Balances at June 30, 2002 $(4,499,520) $771,274 $45,932,318 $43,511,791
=============================================================
Balance at January 1, 2001 $ (521,942) $771,274 $59,832,216 $61,389,500
Net loss (6,397,668) (6,397,668)
Fair value of interest rate
swaps at January 1, 2001
less accumulated amortization
of $353,319 (net of deferred
taxes of $630,750) (1,122,054) (1,122,054)
-----------
Total comprehensive loss (7,519,722)
Cash dividends declared:
Class A stock - $2.50 per share (31,550) (31,550)
Common Stock:
Voting - $0.70 per share 20,580 (20,580)
Non-voting - $0.70 per share (301,086) (301,086)
--------------------------
(353,216) (353,216)
-------------------------------------------------------------
Balances at June 30, 2001 $(1,643,996) $771,274 $53,081,332 $53,516,562
=============================================================
See accompanying notes.
4
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30
2002 2001
------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 6,054,203 $ (6,397,668)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 22,277,829 19,792,377
Amortization of intangibles and deferred charges 1,293,452 1,895,479
Amortization of broadcast rights 3,322,689 3,052,523
Payments for broadcast rights (2,531,544) (2,792,012)
Gain on sale of Monroe Cablevision (21,600,189) -
Deferred income taxes (credit) 3,500,000 (1,452,682)
Provision for bad debts 986,654 1,352,286
Minority interest 87,121 (40,438)
Change in fair value of interest rate swaps (278,057) 905,023
Loss on disposal of property and equipment 402,814 36,610
Write off of deferred charges related to extinguished debt 2,697,784 -
Changes in operating assets and liabilities:
Receivables 3,525,876 7,526,859
Inventories 1,108,986 3,108,591
Prepaid expenses 783,574 148,896
Accounts payable (1,325,934) (6,787,474)
Salaries, wages, payroll taxes and other accrued
liabilities (2,365,385) (5,270,441)
Other assets 60,592 (3,109,636)
Postretirement benefits and other long-term
obligations 3,577,513 2,565,383
------------------------------
Net cash provided by operating activities 21,577,978 14,533,676
INVESTING ACTIVITIES
Additions to property, plant and equipment (12,647,899) (37,602,454)
Change in cash value of life insurance (459,201) 6,882,307
Payments for acquisitions - (990,000)
Proceeds from sale of Monroe Cablevision 12,059,115 -
Proceeds from disposal of property and equipment 40,617 13,218
------------------------------
Net cash used in investing activities (1,007,368) (31,696,929)
FINANCING ACTIVITIES
Issuance of subordinated notes 175,000,000 -
Borrowings under new term loan agreement 75,000,000 -
Payments on senior notes (67,499,000) (6,500,000)
Payments on previous term loan (75,000,000) -
Borrowings (payments) on long term revolver (92,500,000) 30,000,000
Net payments on short term revolver - (2,620,229)
Financing costs deferred (10,000,968) -
Cash dividends paid (351,581) (353,216)
Payments on notes payable and capital leases (202,805) (159,925)
------------------------------
Net cash provided by financing activities 4,445,646 20,366,630
------------------------------
Increase in cash and cash equivalents 25,016,256 3,203,377
Cash and cash equivalents at beginning of period 5,882,732 4,212,970
------------------------------
Cash and cash equivalents at end of period $ 30,898,988 $ 7,416,347
==============================
Non-cash borrowings under capital lease $ 903,798 $ -
==============================
See accompanying notes.
5
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Block
Communications, Inc. (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. For further
information, refer to the annual consolidated financial statements and footnotes
thereto.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
New Accounting Standards
Effective January 1, 2001, the Company adopted Statement of the Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement Nos. 137 and 138, (collectively,
SFAS No. 133), which requires the Company to record all derivatives on the
balance sheet at fair value. At June 30, 2002, the Company participates in six
interest-rate swap contracts. One of these contracts is accounted for as a fair
value hedge and therefore changes in the fair value of the derivative have no
impact on the Company's results of operations. The remaining contracts either do
not qualify for hedge accounting or the Company has not elected to implement
hedge accounting. Accordingly, a non-cash derivative valuation gain (loss) of
$278,057 and $(905,023) has been recognized during the six-month periods ended
June 30, 2002 and 2001, respectively.
Effective January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased
goodwill and indefinite lived intangible assets are no longer amortized but
reviewed annually for impairment, or more frequently if impairment indicators
arise. Intangible assets with lives restricted by contractual, legal or other
means will continue to be amortized over their useful lives. During the six
month period ended June 30, 2001, the Company recognized $1,674,070 of
amortization expense related to goodwill and indefinite-lived intangibles,
resulting in a net loss of $4,723,598 when adjusted for the non-amortization
provisions of SFAS No. 142. The Company has completed the initial impairment
testing required by SFAS No. 142. No impairment charges have been recognized
based on the results of this testing.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of. The adoption of this standard has had no effect on the Company's
consolidated results of operations or financial position for the six months
ended June 30, 2002.
In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, was issued and
requires a gain or loss related to the extinguishment of debt to no longer be
recorded as extraordinary item. The Company has elected early adoption as
encouraged by SFAS No. 145, which would not otherwise require adoption until
fiscal year 2003. As a result, losses on extinguishment of debt totaling $9.0
million are included in income from continuing operations at June 30, 2002.
In July 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, was issued and applies to fiscal years beginning after
December 31, 2002. The pronouncement requires certain costs associated with a
restructuring, discontinued operation or plant closing to be recognized as
incurred rather than at the date of commitment to an exit or disposal plan. The
Company does not expect the adoption of this standard to significantly impact
its financial position or results of operations.
6
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 2--ACQUISITION
Effective March 29, 2002, the Company consummated an asset exchange agreement
with Comcast Corporation which resulted in an exchange of 100% of the assets of
Monroe Cablevision for 100% of the assets of Comcast's Bedford, Michigan
operations and $12.1 million cash. The Company recorded a $21.6 million gain on
the disposition of Monroe Cablevision resulting from the difference in fair
value versus the net book value of assets exchanged. For tax reporting, the
transaction has been treated as a like kind exchange and the amount of the gain
in excess of the cash received has been deferred. The operations of Monroe
Cablevision are included in the Company's financial statements through March 28,
2002.
The net assets of the acquired Bedford system have been recorded at their fair
value and relate primarily to the cable distribution system and intangibles. The
operations of the Bedford system have been included in the Company's financial
statements since March 29, 2002.
NOTE 3--LONG-TERM DEBT
In April 2002, the Company issued $175 million of 9 1/4% senior subordinated
notes, the proceeds of which where used to pay off the existing senior term loan
and senior notes and a portion of the balance outstanding under the revolving
credit agreement. The subordinated notes mature April 15, 2009. On May 15, 2002
the company refinanced the remainder of its senior credit facilities. The new
senior credit facilities include a $40 million delayed draw term loan A, a $75
million term loan B, and an $85 million revolver. Term loan A matures May 2009,
however the availability is reduced if required withdrawals are not made ($20
million by June 2003 and $20 million by December 2003). Term loan B matures
November 2009. The term loan A and revolving credit agreements provide for
scheduled reductions beginning September 2004, with a final maturity date of May
2009. Only the availability under term loan B was drawn at the date of the
refinance.
In conjunction with the refinancing, the Company has recognized a second quarter
loss of $9.0 million consisting of premiums paid to the existing noteholders and
unamortized deferred financing costs relating to the refinanced debt. As noted
above, this amount is included in income from continuing operations as the
Company has elected early adoption of SFAS No. 145.
During the second quarter, the company has entered into three additional swap
contracts related to the new debt and existing swaps. One of these is a
cancelable swap that effectively converts a portion of the Company's fixed rate
subordinated notes to a variable rate based on LIBOR. This contract has been
accounted for as a fair value hedge, resulting in the recognition of a swap
asset with an offsetting adjustment to the carrying value of the underlying
debt. The table below details the amounts recognized as long-term debt:
JUNE 30, DECEMBER 31,
2002 2001
--------------------------
Subordinated notes $175,000,000 $ -
Senior term loan 75,000,000 75,000,000
Long-term revolver - 92,500,000
Senior notes payable - 67,499,000
Capital leases 2,965,840 2,264,847
Fair value adjustment of subordinated notes 799,775 -
--------------------------
253,765,615 237,263,847
Current maturities 1,261,760 9,908,334
--------------------------
$252,503,855 $227,355,513
==========================
7
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 4--OTHER LONG-TERM OBLIGATIONS
Other long-term obligations consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
-------------------------------
Other postretirement benefits $ 81,996,601 $ 80,824,000
Pension liabilities 18,780,881 17,412,753
Deferred compensation obligations 14,633,445 13,594,736
Interest rate swap liability 5,308,380 6,739,531
Broadcast rights payable 4,623,696 6,446,520
Other 2,199,238 1,618,011
-------------------------------
$127,542,241 $126,635,551
===============================
NOTE 5--BUSINESS SEGMENT INFORMATION
The Company has three reportable segments--publishing, cable and broadcasting.
The publishing segment operates two daily newspapers located in Ohio and
Pennsylvania. The cable segment includes two cablevision companies located in
Ohio. The broadcasting segment has five television stations located in Idaho,
Illinois, Indiana, Kentucky, and Ohio. The "Other" category includes
non-reportable segments and corporate items. The non-reportable segments provide
services such as telephony, security systems and monitoring, cable plant
construction and distributed advertising services. The following table presents
certain financial information for the three reportable segments and the other
category.
8
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 5--BUSINESS SEGMENT INFORMATION (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Publishing $ 65,589,540 $ 69,079,425 $ 127,842,873 $ 132,611,102
Intersegment 942,914 1,219,791 1,633,445 2,897,031
------------- ------------- ------------- -------------
External Publishing 64,646,626 67,859,634 126,209,428 129,714,071
Cable 25,274,544 22,442,889 50,371,379 43,796,195
Intersegment 34,122 205,800 34,122 411,200
------------- ------------- ------------- -------------
External Cable 25,240,422 22,237,089 50,337,257 43,384,995
Broadcasting 9,686,810 8,865,495 18,687,463 17,592,705
Other 6,652,448 6,381,326 13,005,192 11,530,016
------------- ------------- ------------- -------------
106,226,306 105,343,544 208,239,340 202,221,787
Operating income (loss):
Publishing 4,288,526 3,294,326 4,978,881 850,122
Intersegment 869,691 730,532 1,516,557 1,919,372
------------- ------------- ------------- -------------
Net Publishing 3,418,835 2,563,794 3,462,324 (1,069,250)
Cable 1,935,356 2,772,341 3,536,846 4,340,524
Intersegment (912,917) (823,377) (1,594,306) (1,958,907)
------------- ------------- ------------- -------------
Net Cable 2,848,273 3,595,718 5,131,152 6,299,431
Broadcasting 732,664 (556,348) 678,278 (1,008,364)
Corporate expenses (505,795) (600,224) (1,457,075) (950,259)
Other 16,871 (800,146) 125,878 (2,007,069)
------------- ------------- ------------- -------------
6,510,848 4,202,794 7,940,557 1,264,489
Nonoperating income (expense) (16,045,517) (4,049,568) 2,277,180 (10,298,894)
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest $ (9,534,669) $ 153,226 $ 10,217,737 $ (9,034,405)
============= ============= ============= =============
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION
The new credit facilities referred to in Note 3 to these financial statements
are guaranteed jointly and severally by all of the Company's wholly owned
subsidiaries (collectively, the Guarantors). Such guarantees are full and
unconditional. WAND (TV) Partnership, a partially owned subsidiary of the
Company, is not a guarantor of the credit facilities.
Supplemental consolidating financial information of the Company, specifically
including such information for the Guarantors, is presented below. Financial
information for the Parent Company includes both the Holding Company and its one
division, The Toledo Blade Company. Investments in subsidiaries are presented
using the cost method of accounting and eliminated. Separate financial
statements of the Guarantors are not provided as the consolidating financial
information contained herein provides a more meaningful disclosure to allow
investors to determine the nature of assets held and the operations of the
combined groups.
9
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 2002
Unconsolidated
---------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
-------------------------------------------------------------------------------
ASSETS:
Current assets $ 52,182,457 $ 41,387,970 $ 3,294,743 $ 44,276 $ 96,909,446
Property, plant and equipment, net 28,139,463 220,829,273 6,003,841 482,636 255,455,213
Intangibles, net 4,562,448 58,493,141 28,068,958 198,489 91,323,036
Cash value of life insurance, net 10,940,929 209,378 - - 11,150,307
Prepaid pension costs 1,635,204 10,316,845 - - 11,952,049
Pension intangibles 645,495 6,584,535 - - 7,230,030
Investments in subsidiaries 191,066,136 - - (191,066,136) -
Other 8,429,018 20,123,553 - - 28,552,571
-------------------------------------------------------------------------------
$ 297,601,150 $ 357,944,695 $ 37,367,542 $(190,340,735) $ 502,572,652
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 15,158,335 $ 50,876,182 $ 668,788 $ (40,059) $ 66,663,246
Long-term debt 252,503,855 - - - 252,503,855
Other long-term obligations 17,315,182 226,744,186 35,467 (116,552,594) 127,542,241
Minority interest - - - 12,351,519 12,351,519
Stockholders' equity 12,623,778 80,324,327 36,663,287 (86,099,601) 43,511,791
-------------------------------------------------------------------------------
$ 297,601,150 $ 357,944,695 $ 37,367,542 $(190,340,735) $ 502,572,652
===============================================================================
10
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2001
Unconsolidated
------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
-------------------------------------------------------------------------------
ASSETS:
Current assets $ 15,717,915 $ 55,969,309 $ 4,138,933 $ 3,905,631 $ 79,731,788
Property, plant and equipment, net 28,992,144 228,208,431 5,962,544 32,587 263,195,706
Intangibles, net 4,784,698 50,860,955 28,068,959 198,489 83,913,101
Cash value of life insurance, net 10,486,057 205,048 - - 10,691,105
Prepaid pension costs 1,852,686 9,276,267 - 16,493 11,145,446
Pension intangibles 645,495 6,584,535 - - 7,230,030
Investments in subsidiaries 211,745,229 - - (211,745,229) -
Other 10,366,210 17,627,480 2,554 (16,493) 27,979,751
-------------------------------------------------------------------------------
$ 248,590,434 $ 368,732,025 $ 38,172,990 $(207,608,522) $ 483,886,927
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities $ 24,017,694 $ 50,444,551 $ 1,773,706 $ 3,812,414 $ 80,048,365
Long-term debt 227,355,513 - - - 227,355,513
Other long-term obligations 21,238,306 242,620,050 - (137,222,805) 126,635,551
Minority interest - - - 12,264,398 12,264,398
Stockholders' equity 11,978,921 75,667,424 36,399,284 (86,462,529) 37,583,100
-------------------------------------------------------------------------------
$ 284,590,434 $ 368,732,025 $ 38,172,990 $(207,608,522) $ 483,886,927
===============================================================================
11
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2002
Unconsolidated
-----------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
--------------------------------------------------------------------------------
Revenue $ 21,037,089 $ 85,941,322 $ 1,751,366 $ (2,503,471) $ 106,226,306
Expenses 20,208,285 80,443,365 1,659,828 (2,596,020) 99,715,458
--------------------------------------------------------------------------------
Operating income 828,804 5,497,957 91,583 92,549 6,510,848
Nonoperating income (expense) (16,051,073) 2,288 3,268 - (16,045,517)
--------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest (15,222,269) 5,500,245 94,806 92,549 (9,534,669)
Provision (credit) for income taxes (5,243,320) 2,527,201 - - (2,716,119)
--------------------------------------------------------------------------------
Income (loss) before minority interest (9,978,949) 2,973,044 94,806 92,549 (6,818,550)
Minority interest - - - (79,947) (79,947)
--------------------------------------------------------------------------------
Net income (loss) $ (9,978,949) $ 2,973,044 $ 94,806 $ 12,602 $ (6,898,497)
================================================================================
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2001
Unconsolidated
------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
---------------------------------------------------------------------------------
Revenue $ 22,784,263 $ 84,637,880 $ 1,720,254 $ (3,798,853) $ 105,343,544
Expenses 21,438,282 81,523,903 1,695,886 (3,517,321) 101,140,750
---------------------------------------------------------------------------------
Operating income (loss) 1,345,981 3,113,977 24,368 (281,532) 4,202,794
Nonoperating income (expense) (4,071,272) 6,012 15,692 - (4,049,568)
---------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest (2,725,291) 3,119,989 40,060 (281,532) 153,226
Provision (credit) for income taxes 560,535 (555,005) - - 5,530
---------------------------------------------------------------------------------
Income (loss) before minority interest (3,285,826) 3,674,994 40,060 (281,532) 147,696
Minority interest - - - (13,220) (13,220)
---------------------------------------------------------------------------------
Net income (loss) $ (3,285,826) $ 3,674,994 $ 40,060 $ (294,752) $ 134,476
=================================================================================
12
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2002
Unconsolidated
-------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
---------------------------------------------------------------------------------
Revenue $ 40,106,115 $ 169,216,689 $ 3,564,164 $ (4,647,628) $ 208,239,340
Expenses 41,065,813 161,023,211 3,307,436 (5,097,677) 200,298,783
---------------------------------------------------------------------------------
Operating income (loss) (959,698) 8,193,478 256,728 450,049 7,940,557
Nonoperating income 2,265,409 4,496 7,275 - 2,277,180
---------------------------------------------------------------------------------
Income before income taxes
and minority interest 1,305,711 8,197,974 264,003 450,049 10,217,737
Provision for income taxes 535,342 3,541,071 - - 4,076,413
---------------------------------------------------------------------------------
Income before minority interest 770,369 4,656,903 264,003 450,049 6,141,324
Minority interest - - - (87,121) (87,121)
---------------------------------------------------------------------------------
Net income $ 770,369 $ 4,656,903 $ 264,003 $ 362,928 $ 6,054,203
=================================================================================
CONSOLIDATING CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2001
Unconsolidated
-----------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
---------------------------------------------------------------------------------
Revenue $ 43,455,300 $ 163,136,055 $ 3,302,136 $ (7,671,704) $ 202,221,787
Expenses 43,105,742 161,819,917 3,440,367 (7,408,728) 200,957,298
---------------------------------------------------------------------------------
Operating income (loss) 349,558 1,316,138 (138,231) (262,976) 1,264,489
Nonoperating income (expense) (10,319,541) 4,955 15,692 - (10,298,894)
---------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest (9,969,983) 1,321,093 (122,539) (262,976) (9,034,405)
Provision (credit) for income taxes (2,710,209) 113,910 - - (2,596,299)
---------------------------------------------------------------------------------
Income (loss) before minority interest (7,259,774) 1,207,183 (122,539) (262,976) (6,438,106)
Minority interest - - - 40,438 40,438
---------------------------------------------------------------------------------
Net income (loss) $ (7,259,774) $ 1,207,183 $ (122,539) $ (222,538) $ (6,397,668)
=================================================================================
13
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
Unconsolidated
--------------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
---------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ (16,311,823) $ 38,260,888 $ (818,180) $ 447,093 $ 21,577,978
Additions to property, plant and equipment (352,297) (11,312,302) (545,089) (438,211) (12,647,899)
Other investing activities 11,638,263 2,268 - - 11,640,531
---------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 11,285,966 (11,310,034) (545,089) (438,211) (1,007,368)
Issuance of subordinated notes 175,000,000 - - - 175,000,000
Borrowings on term loan 75,000,000 - - - 75,000,000
Payments on long-term debt (234,999,000) - - - (234,999,000)
Other financing activity 16,277,839 (26,824,311) - (8,882) (10,555,354)
---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 31,278,839 (26,824,311) - (8,882) 4,445,646
---------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 26,252,982 126,543 (1,363,269) - 25,016,256
Cash and equivalents at beginning of period 3,186,078 (64,937) 2,761,591 - 5,882,732
---------------------------------------------------------------------------------
Cash and equivalents at end of period $ 29,439,060 $ 61,606 $ 1,398,322 $ - $ 30,898,988
=================================================================================
14
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
Unconsolidated
-----------------------------------------------
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ (5,424,679) $ 17,634,121 $ 2,061,258 $ 262,976 $ 14,533,676
Additions to property, plant and equipment (2,027,420) (35,269,121) (42,937) (262,976) (37,602,454)
Other investing activities 5,864,048 41,477 - - 5,905,525
----------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 3,836,628 (35,227,644) (42,937) (262,976) (31,696,929)
Payments on long-term debt (6,500,000) - - - (6,500,000)
Borrowings on long-term revolver 30,000,000 - - - 30,000,000
Other financing activity (20,285,293) 17,151,923 - - (3,133,370)
----------------------------------------------------------------------------
Net cash provided by financing activities 3,214,707 - - - 20,366,630
----------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 1,626,656 (441,600) 2,018,321 - 3,203,377
Cash and equivalents at beginning of period 2,021,900 1,290,070 901,000 - 4,212,970
----------------------------------------------------------------------------
Cash and equivalents at end of period $ 3,648,556 $ 848,470 $ 2,919,321 $ - $ 7,416,347
============================================================================
15
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following analysis of the financial condition and results of
operations of Block Communications, Inc. (the "Company") should be read in
conjunction with our unaudited Consolidated Financial Statements and notes
thereto included elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures. We base our estimates and judgments on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. We evaluate these estimates and judgments
on a continual basis. Actual results may differ from these estimates and
judgments.
We believe the following critical accounting policies affect our
significant estimates and judgments used in the preparation of the consolidated
financial statements. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to change, resulting in an
impairment of their ability to make payments, additional allowances could be
required. We maintain various employment related liabilities, such as workers'
compensation and medical reserves, based on historical performance and current
trends. Actual results could differ from estimates resulting in adjustments to
the recorded liability. Actuarial assumptions have a significant impact on the
determination of net periodic pension costs and credits and other
post-employment benefits. If actual experience differs from these assumptions,
future periodic pension and post-employment costs could be adversely affected.
GENERAL
For the three months ended June 30, 2002, we had revenues, EBITDA and
net loss of $106.2 million, $18.7 million and $6.9 million, respectively. This
represented increases in revenues and EBITDA over the quarter ended June 30,
2001 of $883,000 and $3.2 million, respectively. The net loss is due to a $9.0
million loss on early extinguishment of debt. Advertising revenues are generally
highest in the fourth quarter, due in part to increases in retail advertising in
the period leading up to and including the holiday season. In addition,
broadcasting advertising revenues are generally higher in even numbered election
years due to political advertising.
For the six-month period ended June 30, 2002, we had revenues, EBITDA
and net income of $208.2 million, $32.6 million and $6.1 million, respectively.
This represented increases in revenues and EBITDA over the six-month period
ended June 30, 2001 of $6.0 million and $9.3 million, respectively. The net
income is due a $21.6 million gain on disposition of Monroe Cablevision
partially offset by the loss on early extinguishment of debt.
Set forth below are the operating results and a reconciliation of net
income to EBITDA for the three months ended June 30, 2002 and 2001 and the six
months ended June 30, 2002 and 2001.
16
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------
2002 2001
------------------------ ------------------------
Revenue:
Publishing $ 64,646,626 60.9% $ 67,859,634 64.4%
Cable 25,240,422 23.8 22,237,089 21.1
Broadcasting 9,686,810 9.1 8,865,495 8.4
Other Communications 6,652,448 6.3 6,381,326 6.1
---------------------------------------------------
106,226,306 100.0 105,343,544 100.0
Expense:
Publishing 61,227,791 57.6 65,295,840 62.0
Cable 22,392,149 21.1 18,641,371 17.7
Broadcasting 8,954,146 8.4 9,421,843 8.9
Other Communications 6,635,577 6.2 7,181,472 6.8
Corporate general and administrative 505,795 0.5 600,224 0.6
---------------------------------------------------
99,715,458 93.9 101,140,750 96.0
---------------------------------------------------
Operating income 6,510,848 6.1% 4,202,794 4.0%
Nonoperating income (expense):
Interest expense (5,894,078) (4,746,827)
Gain on disposition of Monroe Cablevision - -
Loss on early extinguishment of debt (8,989,786) -
Change in fair value of interest rate swaps (1,183,769) 674,797
Interest income 22,116 22,462
-----------------------------------------
(16,045,517) (4,049,568)
-----------------------------------------
Income (loss) before income taxes
and minority interest (9,534,669) 153,226
Provision (credit) for income taxes: (2,716,119) 5,530
Minority interest (79,947) (13,220)
-----------------------------------------
Net income (loss) $ (6,898,497) $ 134,476
=========================================
Add:
Interest expense 5,894,078 4,746,827
Provision for income taxes (2,716,119) 5,530
Depreciation 10,954,638 10,027,203
Amortization of intangibles and deferred charges 920,926 1,011,072
Amortization of broadcast rights 1,748,818 1,612,863
Loss on disposal of assets 5,948 36,610
Change in fair value of interest rate swaps 1,183,769 (674,797)
Loss on early extinguishment of debt 8,989,786 -
Less:
Film payments (1,351,658) (1,406,012)
-----------------------------------------
EBITDA $ 18,731,689 $ 15,493,772
-----------------------------------------
17
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------
Revenue:
Publishing $126,209,428 60.6% $129,714,071 64.1%
Cable 50,337,257 24.2 43,384,995 21.5
Broadcasting 18,687,463 9.0 17,592,705 8.7
Other Communications 13,005,192 6.2 11,530,016 5.7
-------------------------------------------------------------------------
208,239,340 100.0 202,221,787 100.0
Expense:
Publishing 122,747,104 58.9 130,783,321 64.7
Cable 45,206,105 21.7 37,085,564 18.3
Broadcasting 18,009,185 8.6 18,601,069 9.2
Other Communications 12,879,314 6.2 13,537,085 6.7
Corporate general and administrative 1,457,075 0.7 950,259 0.5
-------------------------------------------------------------------------
200,298,783 96.2 200,957,298 99.4
-------------------------------------------------------------------------
Operating income 7,940,557 3.8% 1,264,489 0.6%
Nonoperating income (expense):
Interest expense (10,642,227) (9,422,453)
Gain on disposition of Monroe Cablevision 21,600,189 -
Loss on early extinguishment of debt (8,989,786) -
Change in fair value of interest rate swaps 278,057 (905,023)
Interest income 30,947 28,582
-----------------------------------------------------
2,277,180 (10,298,894)
-----------------------------------------------------
Income (loss) before income taxes
and minority interest 10,217,737 (9,034,405)
Provision (credit) for income taxes: 4,076,413 (2,596,299)
Minority interest (87,121) 40,438
-----------------------------------------------------
Net income (loss) $ 6,054,203 $ (6,397,668)
=====================================================
Add:
Interest expense 10,642,227 9,422,453
Provision for income taxes 4,076,413 (2,596,299)
Depreciation 22,277,829 19,792,377
Amortization of intangibles and deferred 1,293,452 1,895,479
charges
Amortization of broadcast rights 3,322,689 3,052,523
Loss on disposal of assets 402,814 36,610
Change in fair value of interest rate swaps (278,057) 905,023
Loss on early extinguishment of debt 8,989,786 -
(Gain) on disposal of Monroe Cablevision (21,600,189) -
Less:
Film payments (2,531,544) (2,792,012)
-----------------------------------------------------
EBITDA $ 32,649,623 $ 23,318,486
-----------------------------------------------------
18
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues
Total revenues for the three-month period ended June 30, 2002 increased
$883,000, or 0.8%, over the same period of the prior year, to $106.2 million
from $105.3 million. This increase was primarily attributable to cable,
broadcast and telephony operations discussed below, offset by a decrease in
publishing revenues.
Cable Television. Cable revenue increased $3.0 million, or 13.5%, over
the same period of the prior year, to $25.2 million. The increase in cable
revenue was principally the result of an increase of $7.96 to $54.80 in the
average monthly revenue per basic subscriber. An increase in the monthly basic
cable service charge and continued roll-out of new services drove the increase
in average monthly revenue per subscriber, with average monthly high-speed data
revenue per subscriber of $45.21, up $5.45 over the second quarter of 2001.
Since the launch of the digital product in fall of 2001, average monthly digital
revenue per subscriber has grown to $14.54 for the second quarter ended June 30,
2002. Revenue generating units increased in the digital and high-speed data
categories during the quarter ended June 30, 2002. Net digital additions totaled
2,820 during the quarter, resulting in 12,661 digital customers as of June 30,
2002. Net high-speed data additions totaled 1,119 during the quarter, resulting
in 18,547 high-speed data customers as of June 30, 2002. Basic subscribers at
the end of the period totaled 153,540, a decrease of 4,698 basic subscribers
from the prior year. This decrease reflects the differential of 3,381 basic
subscribers between the system exchanged and the system received on the date of
the like-kind exchange of Monroe Cablevision.
Newspaper Publishing. Publishing revenue decreased $3.2 million, or
4.7%, over the same period of the prior year, to $64.6 million. The decrease was
comprised of a $3.3 million, or 5.9%, decrease in advertising revenue due
primarily to a decrease in classified advertising of $1.2 million, or 6.0%,
resulting from continued softness in help-wanted advertising. Local and national
advertising decreased $1.6 million, or 5.9% and $1.2 million, or 14.4%,
respectively. Circulation revenue and other revenue, which is comprised of third
party and total market delivery, were consistent with same period of the prior
year.
Television Broadcasting. Broadcasting revenue increased $821,000, or
9.3%, over the same period of the prior year to $9.7 million. The increase in
broadcasting revenue was due primarily to an increase in national advertising
revenue of $613,000, or 20.4%, and an increase in political advertising of
$172,000.
Other Communications. Other communications revenue increased $271,000,
or 4.2%, over the same period of the prior year to $6.7 million, due primarily
to increases in telephony switched services revenue.
Operating Expenses
Operating expenses decreased $1.4 million, or 1.4%, over the same
period of the prior year to $99.7 million. The decrease in operating expense was
largely attributable to decreased publishing expenses, which are partially
offset by increased cable expenses.
Cable Television. Cable operating expenses increased $3.8 million, or
20.1%, over the same period of the prior year, to $22.4 million. The increase
was primarily due to a $1.6 million, or 31.0%, increase in depreciation to $6.6
million attributable to the capital expenditures associated with the rebuild of
our Toledo cable system and continued roll-out of cable modems and digital cable
service. Basic cable programming expenses increased $812,000, or 16.8%, to $5.6
million, due to price increases from programming suppliers. General and
administrative expenses increased $888,000, partially due to increases in
personal property tax.
Newspaper Publishing. Publishing operating expenses decreased $4.1
million, or 6.2%, from the same period of the prior year, to $61.2 million. The
decrease was due to a $2.6 million, or 26.3%, decrease in newsprint and ink,
resulting from a weighted-average price per ton decrease of $150.48, or 25.7%,
and a 3.5% decrease in consumption from the same period of the prior year.
Additional savings resulted from overall cost controls and headcount reductions.
Television Broadcasting. Broadcasting operating expenses decreased
$468,000, or 5.0%, over the same period of the prior year, to $9.0 million. The
decrease results primarily from cost controls implemented to offset salary and
inflationary costs, with programming and news departments reporting decreases of
$373,000 and $120,000, respectively.
19
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other Communications. Other communications operating expenses decreased
$546,000, or 7.6%, over the same period of the prior year, to $6.6 million. The
decrease is due to a $510,000 decrease in operating expenses related to security
alarm system sales and monitoring.
Operating Income
Operating income increased $2.3 million over the same period of the
prior year. Cable operating income decreased $747,000 primarily due to increases
in depreciation and basic cable programming expenses, partially offset by
revenue growth generated from rate increases and roll-out of new services.
Publishing operating income increased $855,000, primarily due to newsprint
savings and the implementation of an overall expense reduction program, offset
by decreases in advertising revenue. Broadcasting operating income increased
$1.3 million due to revenue growth primarily from national and political
advertising and an overall expense reduction program. Other communications
operating income increased $817,000 due to revenue growth from increased
telephony sales. Corporate general and administrative expenses were consistent
with prior year, reporting a decrease of $94,000.
Depreciation and Amortization
Depreciation and amortization increased $837,000, or 7.6%, over the
same period of the prior year. The increase was primarily due to asset additions
resulting from the rebuild of our cable system in Toledo and other capital
expenditures to maintain operating assets, partially offset by the effect of the
non-amortization provisions of SFAS No. 142, adopted in the current year.
EBITDA
As a result of the foregoing, EBITDA increased $3.2 million, or 20.9%,
over the same period of the prior year. EBITDA is defined as net income before
interest expense, provision for income taxes, depreciation and amortization
(including amortization of broadcast rights), other non-cash charges, gains or
losses on disposition of assets, and extraordinary items and after payments for
broadcast rights. EBITDA as a percentage of revenue increased to 17.6% in the
three months ended June 30, 2002 from 14.7% in the same period of the prior
year. The increase in EBITDA margin was primarily due to the continued roll-out
of high margin advanced cable products, lower newsprint prices and the
implementation of overall expense reduction programs.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenues
Total revenues for the six-month period ended June 30, 2002 increased
$6.0 million, or 3.0%, over the same period of the prior year, to $208.2 million
from $202.2 million. This increase was primarily attributable to cable and
telephony operations discussed below.
Cable Television. Cable revenue increased $7.0 million, or 16.0%, over
the same period of the prior year, to $50.3 million. The increase in cable
revenue was principally the result of an increase of $8.94 to $54.64 in the
average monthly revenue per basic subscriber. An increase in the monthly basic
cable service charge and continued roll-out of new services drove the increase
in average monthly revenue per subscriber, with average monthly high-speed data
revenue per subscriber of $42.89, up $7.54 over the first six months of 2001.
Since the launch of the digital product in fall of 2001, average monthly digital
revenue per subscriber has grown to $13.11 for the six months ended June 30,
2002. Revenue generating units increased in the digital and high-speed data
categories during the six months ended June 30, 2002. Basic subscribers at the
end of the period totaled 153,540, a decrease of 4,698 basic subscribers from
the prior year. This decrease reflects the differential of 3,381 basic
subscribers between the system exchanged and the system received on the date of
the like-kind exchange of Monroe Cablevision.
Newspaper Publishing. Publishing revenue decreased $3.5 million, or
2.7%, over the same period of the prior year, to $126.2 million from $129.7
million. The decrease was comprised of a $3.9 million, or 3.7%, decrease in
advertising revenue due primarily to a decrease in classified advertising of
$2.5 million, or 6.2%, resulting from continued
20
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
softness in help-wanted advertising. The decrease in advertising revenue is due
to the continued economic conditions that are generating lower than expected
advertising sales. Circulation revenue increased $447,000, or 1.8%, to $24.8
million due to an increase in Sunday circulation revenue caused by the
occurrence of one additional Sunday in the six months ended June 30, 2002 as
compared with the six months ended June 30, 2001. Other revenue, which is
comprised of third party and total market delivery, was consistent with same
period of the prior year.
Television Broadcasting. Broadcasting revenue increased $1.1 million,
or 6.2%, over the same period of the prior year to $18.7 million. The increase
in broadcasting revenue was due primarily to an increase in national advertising
revenue of $664,000, or 11.9%, and an increase in political advertising of
$631,000.
Other Communications. Other communications revenue increased $1.5
million, or 12.8%, over the same period of the prior year to $13.0 million. The
increase resulted from growth in telephony switched services revenue.
Operating Expenses
Operating expenses decreased $659,000, or 0.3%, over the same period of
the prior year to $200.3 million. The decrease in operating expense was largely
attributable to decreased publishing expenses, which are partially offset by
increased cable expenses.
Cable Television. Cable operating expenses increased $8.1 million, or
21.9%, over the same period of the prior year, to $45.2 million. The increase
was primarily due to a $3.3 million, or 32.5%, increase in depreciation to $13.3
million attributable to the capital expenditures associated with the rebuild of
our Toledo cable system and continued roll-out of cable modems and digital cable
service. Basic cable programming expenses increased $1.6 million, or 16.4%, to
$11.3 million, due to price increases from programming suppliers.
Newspaper Publishing. Publishing operating expenses decreased $8.0
million, or 6.1%, from the same period of the prior year, to $122.7 million. The
decrease was principally due to a $4.4 million, or 22.8%, decrease in newsprint
and ink, resulting from a weighted-average price per ton decrease of $129.19, or
22.2%, and a 2.8% decrease in consumption from the same period of the prior
year. Additional savings resulted from overall cost controls and headcount
reductions.
Television Broadcasting. Broadcasting operating expenses decreased
$592,000, or 3.2%, over the same period of the prior year, to $18.0 million.
This decrease reflects a decrease of $369,000 in amortization expense due to
implementation of SFAS No. 142 in the current year. Otherwise, operating
expenses were held essentially flat due to general cost controls implemented to
offset salary and inflationary costs.
Other Communications. Other communications operating expenses decreased
$658,000, or 4.9%, over the same period of the prior year, to $12.9 million. The
decrease was a result of a $780,000, or 16.1%, decrease in operating expenses
relating to security alarm system sales and monitoring due to a decrease in
sales volumes as well as cost control initiatives.
Operating Income
Operating income increased $6.7 million over the same period of the
prior year. Cable operating income decreased $1.2 million primarily due to
increases in depreciation and basic cable programming expenses, partially offset
by revenue growth generated from rate increases and roll-out of new services.
Publishing operating income increased $4.5 million, primarily due to newsprint
savings and the implementation of an overall expense reduction program.
Broadcasting operating income increased $1.7 million due to revenue growth
primarily from national and political advertising and an overall expense
reduction program. Other communications operating income increased $2.1 million
due to revenue growth from increased telephony sales. Corporate general and
administrative expenses increased $507,000 from prior year due primarily to
increases in salary, professional fees, and amortization of deferred financing
costs.
Depreciation and Amortization
Depreciation and amortization increased $1.9 million, or 8.7%, over the
same period of the prior year. The increase was primarily due to asset additions
resulting from the rebuild of our cable system in Toledo and other capital
expenditures to maintain operating assets, partially offset by the effect of the
non-amortization provisions of SFAS No. 142, adopted in the current year.
21
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EBITDA
As a result of the foregoing, EBITDA increased $9.3 million, or 40.0%,
over the same period of the prior year. EBITDA is defined as net income before
interest expense, provision for income taxes, depreciation and amortization
(including amortization of broadcast rights), other noncash charges, gains or
losses on disposition of assets, and extraordinary items and after payments for
broadcast rights. EBITDA as a percentage of revenue increased to 15.7% in the
first six months of 2002 from 11.5% in the same period of the prior year. The
increase in EBITDA margin was primarily due to the continued roll-out of high
margin advanced cable products, lower newsprint prices and the implementation of
overall expense reduction programs.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity have been cash flow from
operations and borrowings under our senior credit facilities. The need for
liquidity arises primarily from capital expenditures and interest payable on the
senior subordinated notes and the senior credit facility.
Net cash provided by operating activities was $21.6 million and $14.5
million for the six months ended June 30, 2002 and June 30, 2001, respectively.
The net cash provided by operating activities is determined by adding back
depreciation and amortization and adjusting for other non-cash items, including
for the six months ended June 30, 2002, a $278,000 gain resulting from the
change in fair value of interest rate swaps, a $21.6 million gain attributable
to the exchange of Monroe Cablevision, Inc., and a $2.7 million write off of
deferred financing costs related to extinguished debt. Cash used in investing
activities was $1.0 million for the six months ended June 30, 2002, compared to
$31.7 million from the same period of the prior year. Offsetting the net cash
used in investing activities in the six months ended June 30, 2002, was $12.1
million of proceeds received from Comcast Corp. in the exchange of Monroe
Cablevision, Inc.
Our capital expenditures have historically been financed with cash flow
from operations and borrowings under our senior credit facility. We made capital
expenditures of $13.6 million and $37.6 million, including capital leases, for
the six months ended June 30, 2002 and June 30, 2001, respectively. Capital
expenditures for the six months ended June 30, 2001 were used primarily to
rebuild the Toledo cable system and maintain other operating assets. We expect
to make capital expenditures of $24.9 million in the last two quarters of 2002,
primarily to continue the roll-out of advanced cable services, to convert our
television stations to FCC-required digital format and for various other
improvements to the publishing and broadcasting operations.
Financing activities provided $4.4 million of cash for the six months
ended June 30, 2002, compared to $20.4 million from the same period of the prior
year. During the first half of 2002, we refinanced the entirety of our previous
debt outstanding, resulting in new proceeds of $250.0 million and $10.0 million
of deferred finance costs. At June 30, 2002, the balances outstanding and
available under our new senior credit facilities and subordinated notes were
$250.0 million and $112.8 million, respectively, and the interest rate on the
balance outstanding was 8.03%. At June 30, 2001, the balances outstanding and
available under our previous senior credit facility and senior notes were $231.7
million and $31.5 million, respectively, and the interest rate on the balance
outstanding was 7.90%. The increase in the balance outstanding and the effective
interest rate generated an increase in interest expense of $1.2 million, or
13.0%.
In April 2002, we issued $175 million of 9 1/4% senior subordinated
notes. As noted above, the proceeds were used to repay our existing senior term
loan and senior notes and prepay a portion of our existing senior revolving
credit facility. In May 2002, we entered into new senior credit facilities
totaling $200.0 million. The proceeds were used to refinance the remaining
balance of the existing senior revolving credit facility and will be used to
fund future capital expenditures. The new senior credit facilities are
guaranteed by substantially all of our present and future domestic subsidiaries
and are collateralized by a pledge of substantially all of our and the guarantor
subsidiaries' material assets.
Subsequent to June 30, 2002 we made cash payments of $20.2 million for
payoffs of cash advances on life insurance policies and contributions to the
corporate pension plan.
We believe that funds generated from operations and the borrowing
availability under our new senior credit facilities will be sufficient to
finance our current operations, our cash obligations in connection with the
planned capital expenditures, and our current and future financial obligations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
22
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our revolving credit and term loan agreements bear interest at floating
rates. Accordingly, we are exposed to potential losses related to changes in
interest rates. We do not enter into derivatives or other financial instruments
for trading or speculative purposes; however, in order to manage our exposure to
interest rate risk, we have entered into interest rate swaps. As of June 30,
2002, our interest rate swap agreements expire in varying amounts through April
2009.
The fair market value of $75.0 million of our long-term debt
approximates its carrying value as it bears interest at floating rates. As of
June 30, 2002, the estimated fair value of our interest rate swap agreements was
a $5.3 million liability, which represents the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted market
prices.
As of June 30, 2002, we had entered into interest rate swaps that
approximated $221 million, or 88.4%, of our borrowings under all of our credit
facilities. The interest rate swaps consist of $121.0 million relating to our
revolving credit and term loan agreements, and $100.0 million principal amount
of the senior subordinated notes. In addition, we had entered into an interest
rate swap agreement that has the economic effect of substantially offsetting
$55.0 million notional amount of the $121.0 million notional amount of the swap
agreements. Accordingly, a hypothetical 100 basis point increase in interest
rates along the entire interest rate yield curve would have increased our annual
interest expense by approximately $1.1 million.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of the
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement Nos. 137 and 138,
(collectively, SFAS No. 133), which requires the Company to record all
derivatives on the balance sheet at fair value. At June 30, 2002, the Company
participates in six interest-rate swap contracts. One of these contracts is
accounted for as a fair value hedge and therefore changes in the fair value of
the derivative have no impact on the Company's results of operations. The
remaining contracts either do not qualify for hedge accounting or the Company
has not elected to implement hedge accounting. Accordingly, a non-cash
derivative valuation gain (loss) of $278,057 and $(905,023) has been recognized
during the six-month periods ended June 30, 2002 and 2001, respectively.
Effective January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased
goodwill and indefinite lived intangible assets are no longer amortized but
reviewed annually for impairment, or more frequently if impairment indicators
arise. Intangible assets with lives restricted by contractual, legal or other
means will continue to be amortized over their useful lives. During the six
month period ended June 30, 2001, the Company recognized $1,674,070 of
amortization expense related to goodwill and indefinite-lived intangibles,
resulting in net loss of $4,723,598 when adjusted for the non-amortization
provisions of SFAS No. 142. The Company has completed the initial impairment
testing required by SFAS No. 142. No impairment charges have been recognized
based on the results of this testing.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of. The adoption of this standard has had no effect on the
Company's consolidated results of operations or financial position for the six
months ended June 30, 2002.
In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was
issued and requires a gain or loss related to the extinguishment of debt to no
longer be recorded as extraordinary item. The Company has elected early adoption
as encouraged by SFAS No. 145, which would not otherwise require adoption until
fiscal year 2003. As a result, losses on extinguishment of debt totaling $9.0
million are included in income from continuing operations at June 30, 2002.
In July 2002, SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, was issued and applies to fiscal years beginning after
December 31, 2002. The pronouncement requires certain costs associated with a
restructuring, discontinued operation or plant closing to be recognized as
incurred rather than at the date of commitment to an exit or disposal plan. The
Company does not expect the adoption of this standard to significantly impact
its financial position or results of operations.
23
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially from expectations contained in such statements.
Factors that may materially affect our future financial condition and
results of operations, as well as any forward-looking statements, include
economic and market conditions and many other factors beyond our control. For an
additional discussion of risk factors relating to our future financial condition
and results of operations, reference is made to the discussion under the caption
"Risk Factors" in the Registration Statement on Form S-4 dated July 17, 2002.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification of the Managing Director pursuant to
18 U.S.C. Sec. 1350.
Exhibit 99.2 Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Sec. 1350.
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 2002.
25
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.
BLOCK COMMUNICATIONS, INC.
(Registrant)
Date: September 19, 2002 By: /s/ Allan Block
------------------------ ------------------------
Allan Block
Managing Director
Date: September 19, 2002 By: /s/ Gary J. Blair
------------------------ ------------------------
Gary J. Blair
Executive Vice President/
Chief Financial Officer
CERTIFICATION OF THE MANAGING DIRECTOR
I, Allan Block, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Block Communications,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
/s/ Allan Block
------------------------
Name: Allan Block
Title: Managing Director
Date: September 19, 2002
-------------------
26
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Gary J. Blair, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Block Communications,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
/s/ Gary J. Blair
- --------------------------
Name: Gary Blair
Title: Executive Vice-President/Chief Financial Officer
Date: September 19, 2002
-------------------------------
27