BLOCK COMMUNICATIONS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark one)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2005.

OR

o		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)

N/A

(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 þ NO o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

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 May 11, 2005		428,613 shares as of May 11, 2005

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and procedures
PART II. OTHER INFORMATION
	Item 6. Exhibits
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Block Communications, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31		December 31
	2005		2004
	*(unaudited)*		*(note 1)*
Assets
Current assets:
Cash and cash equivalents	$	6,876,484	$	3,548,624
Receivables, less allowances for doubtful accounts and discounts of $3,678,000 and $3,840,000, respectively		43,353,260		49,100,824
Recoverable income taxes		7,405,990		7,331,215
Inventories		7,337,225		4,331,026
Prepaid expenses		5,524,128		5,867,479
Broadcast rights		6,283,675		7,203,065

Total current assets		76,780,762		77,382,233

Property, plant and equipment:
Land and land improvements		12,826,657		12,792,916
Buildings and leasehold improvements		46,797,686		46,668,444
Machinery and equipment		228,855,825		227,764,973
Cable television distribution systems and equipment		245,914,526		245,009,957
Security alarm and video systems installation costs		7,642,226		7,529,792
Construction in progress		5,471,103		1,730,462

		547,508,023		541,496,544
Less allowances for depreciation and amortization		301,305,124		289,719,855

		246,202,899		251,776,689

Other assets:
Goodwill		52,034,273		52,034,273
Other intangibles, net of accumulated amortization		27,985,579		28,270,099
Cash value of life insurance		30,495,981		29,955,235
Pension intangibles		9,472,626		9,472,626
Prepaid pension costs		2,902,022		2,902,022
Deferred financing costs		7,675,950		8,167,411
Broadcast rights, less current portion		1,666,973		2,058,756
Other		784,326		735,771

		133,017,730		133,596,193


	$	456,001,391	$	462,755,115

See accompanying notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


	March 31			December 31
	2005			2004
	*(unaudited)*			*(note 1)*
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	10,059,761		$	12,844,567
Salaries, wages and payroll taxes		12,555,757			13,670,056
Workers’ compensation and medical reserves		8,292,214			9,622,884
Other accrued liabilities		40,319,245			35,738,157
Current maturities of long-term debt		1,267,010			1,259,043

Total current liabilities		72,493,987			73,134,707

Long-term debt, less current maturities		261,437,454			264,084,074

Other long-term obligations		155,750,542			152,912,139

Minority interest		8,990,118			9,039,713

Stockholders’ equity (deficit):
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; 428,613 shares issued and outstanding		42,861			42,861
Accumulated other comprehensive loss		(30,377,924	)		(30,404,234	)
Additional paid-in capital		1,058,687			1,058,687
Retained deficit		(14,659,274	)		(8,377,772	)

		(42,670,710	)		(36,415,518	)

	$	456,001,391		$	462,755,115

See accompanying notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Block Communications, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)


	Three months ended March 31
	2005			2004

Revenue:
Publishing	$	60,082,146		$	60,928,375
Cable		30,912,074			29,665,392
Broadcasting		9,096,828			9,715,342
Other communications		4,988,456			5,133,073

		105,079,504			105,442,182

Expense:
Cost of revenue:
Publishing		45,687,014			44,719,958
Cable		22,669,588			21,039,546
Broadcasting		5,747,075			5,765,657
Other communications		2,449,175			2,318,375

		76,552,852			73,843,536

Selling, general & administrative expense:
Publishing		17,935,799			19,490,307
Cable		6,628,303			6,059,849
Broadcasting		3,438,866			3,428,144
Other communications		1,887,911			2,100,864
Corporate expenses		1,095,518			1,752,212

		30,986,397			32,831,376

		107,539,249			106,674,912


Operating loss		(2,459,745	)		(1,232,730	)

Nonoperating income (expense):
Interest expense		(6,148,344	)		(4,662,529	)
Change in fair value of interest rate swaps		2,318,461			(4,582,656	)
Investment income		(25,358	)		140,525

		(3,855,241	)		(9,104,660	)


Loss before income taxes and minority interest		(6,314,986	)		(10,337,390	)

Provision (credit) for income taxes:
Federal:
Current		—			—
Deferred		—			(9,475	)

		—			(9,475	)
State and local		16,111			220,023

		16,111			210,548

Loss before minority interest		(6,331,097	)		(10,547,938	)
Minority interest		49,595			16,470

Net loss	$	(6,281,502	)	$	(10,531,468	)

See accompanying notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Block Communications, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity (Deficit) (unaudited)


													Accumulated
					Common Stock								Other			Additional
	Class A Stock				Voting				Non-Voting				Comprehensive			Paid-in		Retained
	Shares		Amount		Shares		Amount		Shares		Amount		Loss			Capital		Earnings			Total

Balances at January 1, 2005		12,620	$	1,262,000		29,400	$	2,940		428,613	$	42,861	$	(30,404,234	)	$	1,058,687	$	(8,377,772	)	$	(36,415,518	)

Net loss																			(6,281,502	)		(6,281,502	)

Amortization of fair value of interest rate swaps at January 1, 2001														26,310								26,310

Total comprehensive loss																						(6,255,192	)


Balances at March 31, 2005		12,620	$	1,262,000		29,400	$	2,940		428,613	$	42,861	$	(30,377,924	)	$	1,058,687	$	(14,659,274	)	$	(42,670,710	)


Balances at January 1, 2004		12,620	$	1,262,000		29,400	$	2,940		428,613	$	42,861	$	(29,303,806	)	$	1,058,687	$	(376,391	)	$	(27,313,709	)

Net loss																			(10,531,468	)		(10,531,468	)

Amortization of fair value of interest rate swaps at January 1, 2001 (net of deferred tax of $9,475)														16,835								16,835

Total comprehensive loss																						(10,514,633	)


Balances at March 31, 2004		12,620	$	1,262,000		29,400	$	2,940		428,613	$	42,861	$	(29,286,971	)	$	1,058,687	$	(10,907,859	)	$	(37,828,342	)

See accompanying notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Block Communications, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	Three months ended March 31,
	2005			2004

Operating activities
Net loss	$	(6,281,502	)	$	(10,531,468	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		13,301,886			12,066,116
Amortization of intangibles and deferred charges		668,962			772,438
Amortization of broadcast rights		1,515,320			1,552,166
Payments for broadcast rights		(1,761,131	)		(1,634,272	)
Deferred income taxes		—			(9,475	)
Provision for bad debts		893,608			1,041,442
Minority interest		(49,595	)		(16,470	)
Change in fair value of interest rate swaps		(2,318,461	)		4,582,656
Cash received on swap contracts		1,460,000			—
Loss on disposal of property and equipment		289,731			239,654
Changes in operating assets and liabilities:
Receivables		4,853,956			2,040,648
Inventories		(3,006,199	)		(1,189,474	)
Prepaid expenses		343,351			756,285
Accounts payable		(2,784,806	)		(2,511,779	)
Salaries, wages, payroll taxes and other accrued liabilities		2,668,650			6,115,690
Other assets		266,328			667,322
Postretirement benefits and other long-term obligations		2,930,909			1,456,838

Net cash provided by operating activities		12,991,007			15,398,317

Investing activities
Additions to property, plant and equipment		(8,099,404	)		(13,183,264	)
Change in cash value of life insurance		(540,746	)		(503,246	)
Proceeds from disposal of property and equipment		71,977			13,700

Net cash used in investing activities		(8,568,173	)		(13,672,810	)

Financing activities
Payments on term loan		(210,450	)		(212,500	)
Net payments on short term revolver		(782,743	)		—
Payments on capital leases		(101,781	)		(90,943	)

Net cash used in financing activities		(1,094,974	)		(303,443	)


Increase in cash and cash equivalents		3,327,860			1,422,064
Cash and cash equivalents at beginning of period		3,548,624			11,461,283

Cash and cash equivalents at end of period	$	6,876,484		$	12,883,347

See accompanying notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

BLOCK COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 of America 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-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the December 31, 2004 audited consolidated financial statements and footnotes thereto.

The balance sheet at December 31, 2004 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 of America for complete financial statements.

New Accounting Standards

In December 2004, SFAS No. 153, Accounting for Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29, was issued and applies to non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. SFAS No. 153 replaces the exception in Opinion 29 for non-monetary exchanges of similar productive assets with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under the statement, a non-monetary exchange is deemed to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of this standard is expected to have no impact on the Company’s financial position or results of operations.

NOTE 2—RETIREMENT AND PENSION PLANS

The Company and certain subsidiaries have several defined benefit pension plans covering substantially all active and retired employees. Benefits are generally based on compensation and length of service. The components of net periodic pension cost are as follows:


	Three months ended March 31,
	2005			2004

Service cost	$	1,085,984		$	1,298,927
Interest cost		3,708,926			3,708,846
Expected return on plan assets		(3,729,644	)		(3,733,503	)
Amortization of prior service cost		433,990			436,435
Actuarial (gain) loss recognized		851,395			608,122

	$	2,350,651		$	2,318,827

The assumptions used in the determination of 2005 net periodic pension cost include a discount rate of 6.00%, expected return on plan assets of 8.18%, and a rate of compensation increase of 4.34%, all calculated on a weighted average basis.

The Company has contributed $1,015,000 to these defined benefit pension plans during the three months ended March 31, 2005 and estimates that total 2005 contributions to these plans will be approximately $7,500,000. Various factors, such as investment performance and shifts worked, may cause actual contributions to differ from this estimate.

NOTE 3—POST-RETIREMENT BENEFITS OTHER THAN PENSIONS

The Company and certain subsidiaries provide access to health care benefits for certain retired employees. The components of non-pension post-retirement benefit cost are as follows:

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


	Three months ended March 31,
	2005			2004

Service cost	$	666,500		$	590,000
Interest cost		1,504,250			1,350,500
Amortization of prior service cost		(333,250	)		(250,000	)
Actuarial (gain) loss recognized		442,000			146,000

	$	2,279,500		$	1,836,500

The 2005 non-pension post-retirement benefit cost reflects an assumed discount rate of 6.00%.

The Company has contributed $912,000 to these post-retirement benefit plans during the three months ended March 31, 2005 and estimates that total 2005 contributions to these plans will be approximately $5,000,000. As contributions are based on claims paid by the plans, actual experience may differ from this estimate.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted. Provisions of the Act include a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company provides a prescription drug benefit for certain groups of retirees and has assessed that benefit to be at least actuarially equivalent to the benefit provided under Medicare Part D based on available information. Accordingly, under the guidance of Financial Accounting Standards Board Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), the Company has accounted for anticipated subsidies under the Act. The non-pension post-retirement benefit cost for all periods presented includes the effect of anticipated subsidies.

NOTE 4—LONG-TERM DEBT

Long-term debt consists of the following:


	March 31,		December 31,
	2005		2004

Subordinated notes	$	175,000,000	$	175,000,000
Fair value adjustment of subordinated notes		1,332,514		2,876,193

Subordinated notes, as adjusted		176,332,514		177,876,193

Senior term loans		83,968,550		84,179,000
Capital leases		2,403,400		2,505,181
Short-term revolver		—		782,743

		262,704,464		265,343,117
Current maturities		1,267,010		1,259,043

	$	261,437,454	$	264,084,074

The Company is exposed to market risk arising from changes in interest rates and therefore participates in interest-rate swap contracts as it deems necessary to minimize interest expense while stabilizing cash flows. At March 31, 2005, the Company participates in three interest–rate swap contracts relating to its long-term debt. During the first quarter of 2005, the company terminated several interest-rate swap contracts in exchange for cash received of $1,460,000. The terminated swaps include two contracts that had previously been accounted for as fair value hedges. In accordance with the guidance of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the adjustments to the fair value of the hedge were recorded with an offset to the fair value of the underlying debt. Upon termination of these contracts, the remaining fair value adjustment of the subordinated notes will be amortized as interest expense using the effective interest rate method over the remaining life of the notes.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 4—LONG-TERM DEBT (Continued)

The remaining contracts either do not qualify for hedge accounting or the Company has not elected to implement hedge accounting. Accordingly, the Company has recognized a derivative valuation gain of $2,318,461 for the three months ended March 31, 2005 and a derivative valuation loss of $4,582,656 for the same period of the prior year.

NOTE 5—OTHER LONG-TERM OBLIGATIONS

Other long-term obligations consist of the following:


	March 31,		December 31,
	2005		2004

Other postretirement benefits	$	90,093,869	$	88,722,000
Pension liabilities		50,567,222		49,207,229
Deferred compensation obligations		8,748,361		8,783,418
Broadcast rights payable		2,980,301		3,731,715
Other		3,360,789		2,467,777

	$	155,750,542	$	152,912,139

NOTE 6—INCOME TAXES

The provision for income taxes reflected in the Condensed Consolidated Statement of Operations for all periods presented includes adjustments necessary to maintain a full valuation allowance against the net balance of deferred tax assets. The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the net deferred tax asset balance such that a full valuation allowance is warranted. Factors considered include the existence of cumulative losses in the most recent fiscal years, the length of time over which temporary differences are expected to reverse, and the availability of prudent and feasible tax strategies.

NOTE 7—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 commercial telephony, and security system sales and monitoring. The following table presents certain financial information for the three reportable segments and the other category.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 7—BUSINESS SEGMENT INFORMATION (Continued)


	Three months ended March 31,
	2005			2004

Revenues:
Publishing	$	60,963,881		$	61,898,334
Intersegment		(881,735	)		(969,959	)

External Publishing		60,082,146			60,928,375

Cable		30,979,766			29,694,635
Intersegment		(67,692	)		(29,243	)

External Cable		30,912,074			29,665,392

Broadcasting		9,096,828			9,715,342
Other		4,988,456			5,133,073

	$	105,079,504		$	105,442,182


Operating income (loss):
Publishing	$	(2,739,281	)	$	(2,370,849	)
Intersegment		(801,386	)		(911,041	)

Net Publishing		(3,540,667	)		(3,281,890	)

Cable		770,914			1,610,874
Intersegment		843,269			955,123

Net Cable		1,614,183			2,565,997

Broadcasting		(89,113	)		521,541
Other		651,370			713,834
Corporate expenses		(1,095,518	)		(1,752,212	)

		(2,459,745	)		(1,232,730	)

Nonoperating expense, net		(3,855,241	)		(9,104,660	)

Loss before income taxes and minority interest	$	(6,314,986	)	$	(10,337,390	)

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION

The Company’s senior credit facilities and senior subordinated notes 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.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION (continued)

CONSOLIDATING CONDENSED BALANCE SHEET
March 31, 2005


	Unconsolidated
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiary		Eliminations			Consolidated

Assets:
Current assets	$	13,144,793		$	59,114,200	$	3,136,014	$	1,385,755		$	76,780,762
Property, plant and equipment, net		22,250,470			220,720,618		4,360,980		(1,129,169	)		246,202,899
Intangibles, net		3,882,204			56,248,259		19,690,900		198,489			80,019,852
Cash value of life insurance		30,495,981			—		—		—			30,495,981
Prepaid pension costs		—			2,902,022		—		—			2,902,022
Pension intangibles		1,675,480			7,797,146		—		—			9,472,626
Investments in subsidiaries		159,583,958			—		—		(159,583,958	)		—
Other		(10,329,749	)		20,451,581		5,417		—			10,127,249

	$	220,703,137		$	367,233,826	$	27,193,311	$	(159,128,883	)	$	456,001,391


Liabilities and stockholders’ equity:
Current liabilities	$	19,265,872		$	51,157,730	$	686,973	$	1,383,412		$	72,493,987
Long-term debt		261,437,454			—		—		—			261,437,454
Other long-term obligations		4,914,831			237,583,244		4,875		(86,752,408	)		155,750,542
Minority interest		—			—		—		8,990,118			8,990,118
Stockholders’ equity		(64,915,020	)		78,492,852		26,501,463		(82,750,005	)		(42,670,710	)

	$	220,703,137		$	367,233,826	$	27,193,311	$	(159,128,883	)	$	456,001,391

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION (continued)

CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2004


	Unconsolidated
	Parent			Guarantor		Non-Guarantor
	Company			Subsidiaries		Subsidiary		Eliminations			Consolidated

Assets:
Current assets	$	13,408,705		$	59,438,154	$	3,317,023	$	1,218,351		$	77,382,233
Property, plant and equipment, net		22,577,843			225,992,152		4,559,607		(1,352,913	)		251,776,689
Intangibles, net		3,889,430			56,525,553		19,690,900		198,489			80,304,372
Cash value of life insurance, net		29,955,235			—		—		—			29,955,235
Prepaid pension costs		—			2,902,022		—		—			2,902,022
Pension intangibles		1,675,480			7,797,146		—		—			9,472,626
Investments in subsidiaries		162,723,208			—		—		(162,723,208	)		—
Other		(9,837,772	)		20,766,777		32,933		—			10,961,938

	$	224,392,129		$	373,421,804	$	27,600,463	$	(162,659,281	)	$	462,755,115


Liabilities and stockholders’ equity:
Current liabilities	$	15,703,721		$	55,297,926	$	916,645	$	1,216,415		$	73,134,707
Long-term debt		264,084,074			—		—		—			264,084,074
Other long-term obligations		4,040,814			238,731,323		32,067		(89,892,065	)		152,912,139
Minority interest		—			—		—		9,039,713			9,039,713
Stockholders’ equity		(59,436,480	)		79,392,555		26,651,751		(83,023,344	)		(36,415,518	)

	$	224,392,129		$	373,421,804	$	27,600,463	$	(162,659,281	)	$	462,755,115

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION (continued)

CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2005


	Unconsolidated
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiary			Eliminations			Consolidated

Revenue	$	20,064,024		$	85,712,948		$	1,508,765		$	(2,206,233	)	$	105,079,504
Expenses		21,708,235			86,595,222			1,665,769			(2,429,977	)		107,539,249

Operating income (loss)		(1,644,211	)		(882,274	)		(157,004	)		223,744			(2,459,745	)
Nonoperating income (expense)		(3,860,639	)		(1,318	)		6,716			—			(3,855,241	)

Income (loss) before income taxes and minority interest		(5,504,850	)		(883,592	)		(150,288	)		223,744			(6,314,986	)
Provision for income taxes		—			16,111			—			—			16,111

Loss before minority interest		(5,504,850	)		(899,703	)		(150,288	)		223,744			(6,331,097	)
Minority interest		—			—			—			49,595			49,595

Net income (loss)	$	(5,504,850	)	$	(899,703	)	$	(150,288	)	$	273,339		$	(6,281,502	)

CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2004


	Unconsolidated
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiary			Eliminations			Consolidated

Revenue	$	20,061,339		$	89,796,521		$	1,633,417		$	(6,049,095	)	$	105,442,182
Expenses		22,211,895			88,191,857			1,684,074			(5,412,914	)		106,674,912

Operating income (loss)		(2,150,556	)		1,604,664			(50,657	)		(636,181	)		(1,232,730	)
Nonoperating income (expense)		(9,080,493	)		(24,915	)		748			—			(9,104,660	)

Income (loss) from continuing operations before income tax and minority interest		(11,231,049	)		1,579,749			(49,909	)		(636,181	)		(10,337,390	)
Provision (credit) for income taxes		(9,475	)		220,023			—			—			210,548

Income (loss) from continuing operations before minority interest		(11,221,574	)		1,359,726			(49,909	)		(636,181	)		(10,547,938	)
Minority interest		—			—			—			16,470			16,470

Net income (loss)	$	(11,221,574	)	$	1,359,726		$	(49,909	)	$	(619,711	)	$	(10,531,468	)

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION (continued)

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2005


	Unconsolidated
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiary			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(44,956	)	$	12,742,558		$	70,068		$	223,337		$	12,991,007

Additions to property, plant and equipment		(683,442	)		(7,156,592	)		(35,626	)		(223,744	)		(8,099,404	)
Other investing activities		(536,046	)		62,114			5,163			—			(468,769	)

Net cash used in investing activities		(1,219,488	)		(7,094,478	)		(30,463	)		(223,744	)		(8,568,173	)

Payments on term loans		(210,450	)		—			—			—			(210,450	)
Net payments on short-term revolver		(782,743	)											(782,743	)
Other financing activity		2,811,403			(2,913,591	)		—			407			(101,781	)

Net cash provided by (used in) financing activities		1,818,210			(2,913,591	)		—			407			(1,094,974	)


Increase in cash and equivalents		553,766			2,734,489			39,605			—			3,327,860
Cash and equivalents at beginning of period		2,020,814			(320,631	)		1,848,441			—			3,548,624

Cash and equivalents at end of period	$	2,574,580		$	2,413,858		$	1,888,046		$	—		$	6,876,484

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION (continued)

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2004


	Unconsolidated
	Parent			Guarantor			Non-Guarantor
	Company			Subsidiaries			Subsidiary			Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	(303,248	)	$	15,614,503		$	736,404		$	(649,242	)	$	15,398,317

Additions to property, plant and equipment		(724,576	)		(13,080,141	)		(14,728	)		636,181			(13,183,264	)
Other investing activities		(493,746	)		4,200			—			—			(489,546	)


Net cash provided by (used in) investing activities		(1,218,322	)		(13,075,941	)		(14,728	)		636,181			(13,672,810	)

Payments on term loan		(212,500	)		—			—			—			(212,500	)
Other financing activity		2,353,618			(2,457,622	)		—			13,061			(90,943	)


Net cash provided by (used in) financing activities		2,141,118			(2,457,622	)		—			13,061			(303,443	)


Increase in cash and equivalents		619,548			80,940			721,576			—			1,422,064
Cash and equivalents at beginning of period		10,828,912			89,752			542,619			—			11,461,283

Cash and equivalents at end of period	$	11,448,460		$	170,692		$	1,264,195		$	—		$	12,883,347

PART I. FINANCIAL INFORMATION
Item 2. 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 Condensed Financial Statements and notes thereto included elsewhere herein and with the management’s discussion and analysis, consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

We are a privately held diversified media company with our primary operations in cable television, newspaper publishing and television broadcasting. We provide cable television service to the greater Toledo, Ohio metropolitan area, including Michigan suburbs, (Buckeye CableSystem) and the Sandusky, Ohio area (Erie County CableSystem). At December 31, 2004, we had approximately 146,000 subscribers. We publish two daily metropolitan newspapers, the Pittsburgh Post-Gazette in Pittsburgh, Pennsylvania, and The Blade in Toledo, Ohio, each of which is the leading publication in its market. The combined average daily and Sunday paid circulation of our two newspapers is approximately 383,200 and 590,200, respectively, as of December 31, 2004. We own and operate four television stations: two in Louisville, Kentucky, and one each in Boise, Idaho and Lima, Ohio; and we are a two-thirds owner of a television station in Decatur, Illinois. We also have other communication operations including a commercial telecom business and a home security business.

Since our diversified media operations include several advertising dependent companies, our financial performance is significantly impacted by advertising revenues. In general, advertising revenue is 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. Advertising growth continues to be soft due in part to the lagging response to the economic rebound by the Midwest markets in which we operate.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and reflect practices appropriate to our businesses. 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 we believe 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. Management has discussed with our Board of Directors the development, selection and disclosure of the critical accounting policies and estimates and the application of these policies and estimates.

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 self-insurance liabilities and 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. We also make estimates and judgments in determining certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. Our other critical accounting policies include accounting for broadcast rights, goodwill and other intangible assets, stock-based compensation, and our revenue recognition policies. Please refer to our 2004 Form 10-K filed March 24, 2005, for a more detailed discussion of our critical accounting policies and estimates. In addition, there are other items within the financial statements that require estimation, but are not deemed to be critical accounting policies and estimates. Changes in the estimates used in these and other items could have a material impact on our financial statements.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Block Communications, Inc. and Subsidiaries

Results of Operations (unaudited)


	Three months ended March 31,
	2005					2004
Revenue:
Publishing	$	60,082,146		57.2	%	$	60,928,375		57.8	%
Cable		30,912,074		29.4			29,665,392		28.1
Broadcasting		9,096,828		8.7			9,715,342		9.2
Other communications		4,988,456		4.7			5,133,073		4.9

		105,079,504		100.0			105,442,182		100.0

Expense:
Cost of revenue:
Publishing		45,687,014		43.5			44,719,958		42.4
Cable		22,669,588		21.6			21,039,546		20.0
Broadcasting		5,747,075		5.5			5,765,657		5.5
Other communications		2,449,175		2.3			2,318,375		2.2

		76,552,852		72.9			73,843,536		70.0

Selling, general & administrative expense:
Publishing		17,935,799		17.1			19,490,307		18.5
Cable		6,628,303		6.3			6,059,849		5.7
Broadcasting		3,438,866		3.3			3,428,144		3.3
Other communications		1,887,911		1.8			2,100,864		2.0
Corporate expenses		1,095,518		1.0			1,752,212		1.7

		30,986,397		29.5			32,831,376		31.1


		107,539,249		102.3			106,674,912		101.2


Operating loss		(2,459,745	)	-2.3			(1,232,730	)	-1.2

Nonoperating income (expense):
Interest expense		(6,148,344	)				(4,662,529	)
Change in fair value of interest rate swaps		2,318,461					(4,582,656	)
Investment income		(25,358	)				140,525

		(3,855,241	)				(9,104,660	)


Loss before income taxes and minority interest		(6,314,986	)				(10,337,390	)
Provision for income taxes		16,111					210,548
Minority interest		49,595					16,470

Net loss		(6,281,502	)				(10,531,468	)

Add:
Interest expense		6,148,344					4,662,529
Provision for income taxes		16,111					210,548
Depreciation		13,301,886					12,066,116
Amortization of intangibles and deferred charges		668,962					772,438
Amortization of broadcast rights		1,515,320					1,552,166
Loss on disposal of property and equipment		289,731					239,654
Change in fair value of interest rate swaps		(2,318,461	)				4,582,656

Less:
Payments on broadcast rights		(1,761,131	)				(1,634,272	)


Adjusted EBITDA	$	11,579,260				$	11,920,367

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Set forth below is a reconciliation of net income (loss) to adjusted EBITDA by operating segment for the three-month periods ended March 31, 2005 and 2004.

Block Communications, Inc. and Subsidiaries
Reconciliation of Net Income to Adjusted EBITDA by Segment


	Publishing			Cable			Broadcasting			Other		Corporate			Consolidated
	Three months ended March 31, 2005
Net income (loss)	$	(3,581,299	)	$	1,614,609		$	(32,802	)	$	635,259	$	(4,917,269	)	$	(6,281,502	)
Adjustments to net income (loss):
Interest expense		40,647			—			—			—		6,107,697			6,148,344
Provision for income taxes		—			—			—			16,111		—			16,111
Depreciation		2,658,130			8,833,208			620,059			1,190,489		—			13,301,886
Amortization of intangibles and deferred charges		89,143			184,891			4,235			—		390,693			668,962
Amortization of broadcast rights		—			64,111			1,451,209			—		—			1,515,320
Film payments		—			(69,885	)		(1,691,246	)		—		—			(1,761,131	)
(Gain) loss on disposal of assets		(17,136	)		302,811			(5,163	)		9,219		—			289,731
Change in fair value of derivatives		—			—			—			—		(2,318,461	)		(2,318,461	)

Adjusted EBITDA	$	(810,515	)	$	10,929,745		$	346,292		$	1,851,078	$	(737,340	)	$	11,579,260


	Three months ended March 31, 2004
Net income (loss)	$	(3,572,280	)	$	2,566,526		$	538,759		$	713,834	$	(10,778,307	)	$	(10,531,468	)
Adjustments to net income (loss):
Interest expense		70,463			—			—			—		4,592,066			4,662,529
Provision (credit) for income taxes		220,023			—			—			—		(9,475	)		210,548
Depreciation		2,268,938			8,043,904			686,232			1,067,042		—			12,066,116
Amortization of intangibles and deferred charges		89,143			184,891			4,235			—		494,169			772,438
Amortization of broadcast rights		—			62,737			1,489,429			—		—			1,552,166
Film payments		—			(58,439	)		(1,575,833	)		—		—			(1,634,272	)
(Gain) loss on disposal of assets		(9,500	)		249,123			(200	)		231		—			239,654
Change in fair value of derivatives		—			—			—			—		4,582,656			4,582,656

Adjusted EBITDA	$	(933,213	)	$	11,048,742		$	1,142,622		$	1,781,107	$	(1,118,891	)	$	11,920,367

We define adjusted EBITDA as net income (loss) before provision (credit) for income taxes, interest expense, depreciation and amortization (including amortization of broadcast rights), and other non-cash charges, gains or losses on disposition of assets, and extraordinary items and after payments for broadcast rights. We calculate adjusted EBITDA in accordance with the definition set forth in our senior debt agreements. Accordingly, we have excluded the change in fair value of derivatives from adjusted EBITDA because our derivatives consist of interest rate swap contracts. Since interest expense is a recurring charge excluded from adjusted EBITDA, we also exclude the changes in value of swap contracts, as these are put in place in order to manage our cost of debt. Furthermore, we have excluded gains or losses on the disposition of assets, since the losses typically represent the undepreciated cost of disposed assets and their exclusion is a logical extension of excluding depreciation from adjusted EBITDA. In the interest of consistency, gains are also excluded.

When we present adjusted EBITDA for our business segments, we exclude certain expenses consisting primarily of corporate general and administrative expenses that have not been allocated to individual segments. Corporate general and administrative expenses were $1.1 million and $1.8 million for the periods ending March 31, 2005 and 2004, respectively.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other media companies may measure adjusted EBITDA in a different manner. We have included adjusted EBITDA data because such data is commonly used as a measure of performance for media companies and is also used by investors to measure a company’s ability to service debt. Furthermore, management uses adjusted EBITDA as a key performance measure upon which budgets are established at the subsidiary level and upon which incentive compensation is awarded. Adjusted EBITDA is used as one method of measuring growth and trends in the financial performance of our business units and is the financial measure used by our Board of Directors to determine the amount of quarterly dividends paid to our shareholders. Adjusted EBITDA is also a significant component of the financial covenants contained in our senior debt agreement.

As stated above, we have calculated adjusted EBITDA in accordance with the definition set forth in the senior debt agreement dated May 15, 2002, as amended. This agreement governs all of our senior credit facilities, which represent 32% of our debt outstanding at March 31, 2005, and includes certain key financial covenants. The covenants provide, among other things, restrictions on total and senior leverage, minimum required amounts of adjusted EBITDA, and limits on capital expenditures. Specific covenants include consolidated total and senior leverage ratios which are defined as the ratio of consolidated total or senior funded indebtedness to consolidated adjusted EBITDA. As of March 31, 2005, the maximum allowable consolidated total and senior leverage ratios were 5.25 to 1.00 and 2.50 to 1.00, respectively. The maximum allowable consolidated total leverage ratio decreases to 5.00 to 1.00 at September 30, 2005, and the maximum allowable consolidated senior leverage ratio decreases to 2.25 to 1.00 at September 30, 2005. Other material covenants include interest coverage ratio and consolidated coverage ratio. Interest coverage ratio is defined as the ratio of consolidated adjusted EBITDA to consolidated interest charges. As of March 31, 2005, the minimum allowable interest coverage ratio was 2.25 to 1.00, increasing to 2.50 to 1.00 at December 31, 2005. Consolidated coverage ratio is defined as the ratio of consolidated adjusted EBITDA to consolidated debt service. Consolidated debt service includes interest payments and scheduled principal payments. The minimum allowable consolidated coverage ratio is 2.25 to 1.00, remaining at that level through September 30, 2007.

We are in compliance with all of our debt covenants. At March 31, 2005, our total leverage ratio is 4.30 to 1.00, senior leverage ratio is 1.57 to 1.00, interest coverage is 2.99 to 1.00, and our consolidated coverage ratio is 2.83 to 1.00.

Non-compliance with any of these covenants could have a significant impact on our liquidity. We would be required to either amend our existing credit agreements or refinance all or a portion of our senior credit facilities. The actual impact of non-compliance can not be predicted with certainty, as it would be dependent upon our financial condition as well as the condition of financial markets at that time.

We understand the material limitations associated with the use of a non-GAAP measure. Accordingly, adjusted EBITDA is not, and should not be used as, an indicator of or alternative to operating income (loss), net income (loss) or cash flow as reflected in our consolidated financial statements, is not intended to represent funds available for debt service, dividends or other discretionary uses, is not a measure of financial performance under accounting principles generally accepted in the United States of America, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America. Refer to our financial statements, including our statement of cash flows, which appear elsewhere in this report. The preceding calculations of adjusted EBITDA are not necessarily comparable to similarly titled amounts of other companies.

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Revenues

Total revenue for the three-month period ended March 31, 2005 was $105.1 million, a decrease of $363,000, or 0.3%, as compared to the same period of the prior year. This decrease was attributable to revenue declines in publishing, broadcasting, and other communications, partially offset by cable revenue growth.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cable Television. Cable revenue for the quarter was $30.9 million, an increase of $1.2 million, or 4.2%, as compared to the same period of 2004. The increase in cable revenue was principally the result of an increase of $4.30, to $70.59, in the average monthly revenue per basic subscriber, based on the average number of subscribers throughout the quarter. An increase in the monthly basic cable service charge and continued rollout of new services drove the increase in average monthly revenue per subscriber. Average monthly high-speed data revenue per data customer of $42.00 decreased $2.08 as compared to the first quarter of 2004. The decrease in high-speed data average revenue resulted from packaging discounts and promotional offers, along with the launch of lower speed and lower-priced tiers designed to compete against dial-up internet and DSL services. For the quarter ended March 31, 2005, average monthly digital revenue per digital home was $17.08, an increase of $2.56 as compared to the same period of the prior year. The increase in the average digital revenue resulted from an increase in the monthly digital cable service charge, increases in Video on Demand purchases due to greater market awareness, and a greater number of high-definition converters and DVR converters deployed during the first quarter of 2005, partially offset by packaging discounts and promotional offers. The discounts and promotional offers were continued throughout the first quarter of 2005 due to the increasingly competitive environment, primarily in the Toledo market. During the quarter, Buckeye-TEL, our residential telephone service, was launched in the Toledo market. As of March 31, 2005, our residential telephone subscribers did not have a significant impact on cable revenue.

Revenue generating units increased in the high-speed data and digital categories during the three-month period ended March 31, 2005. The net increase in high-speed data subscribers totaled 3,094 and the net increase in digital homes totaled 2,141, during the quarter. This resulted in 40,796 high-speed data subscribers and 52,866 digital homes as of March 31, 2005. Basic subscribers at the end of the period totaled 145,980, a net increase of 29 during the first quarter of 2005. Buckeye CableSystem recognized a net increase of 40 basic subscribers, while the Erie County system recognized a net decrease of 11 basic subscribers. As of March 31, 2005, we had 658 Buckeye telephone subscribers.

Newspaper Publishing. Publishing revenue for the quarter was $60.1 million, a decrease of $846,000, or 1.4%, as compared to the first quarter of 2004. The decrease consisted of a $221,000, or 0.5%, decrease in advertising revenue due primarily to a decrease in national advertising of $1.3 million, or 15.9%, partially offset by increases in retail, classified, and internet advertising of $228,000, or 1.0%, $90,000, or 0.5%, and $327,000, or 47.1%, respectively. Other advertising revenue increased $430,000, primarily due to fluctuations in trade. Circulation revenue decreased $608,000, or 5.0%, as compared to the same period of 2004, primarily due to a decrease in both daily and Sunday circulation compounded by declining average earned rates per copy. Other revenue, which consists of third party and total market delivery, was consistent with the same quarter of the previous year.

Television Broadcasting. Broadcasting revenue for the quarter was $9.1 million, a decrease of $619,000, or 6.4%, as compared to the three months ended March 31, 2004. The decrease in broadcasting revenue was due to decreases in all advertising revenue classifications. Local, national, and political advertising decreased $60,000, $330,000, and $419,000, respectively, partially offset by a decrease in agency commissions of $69,000. Other revenue, which consists of network, production and trade, increased $121,000 as compared to the same period of the prior year.

Other Communications. Other communications revenue for the quarter was $5.0 million, a decrease of $145,000, or 2.8%, as compared to the same period of the prior year. Telecom revenue for the quarter was $4.3 million, a decrease of $141,000, due primarily to a decrease in carrier access billings, long-distance revenue and reciprocal compensation of $172,000, $65,000, and $34,000, respectively. These decreases were partially offset by an increase in competitive access and local exchange/switched service revenue of $147,000, due to the net addition of 134 telecom customers, representing a 19.2% increase in the customer base. Revenue from the home security business was consistent with the prior year.

Operating Expenses

Operating expenses for the quarter were $107.5 million, an increase of $864,000, or 0.8%, as compared to the first quarter of 2004. The increase in operating expense was attributable to increased cable expenses, partially offset by decreased publishing, broadcasting, other communications, and corporate general and administrative expenses.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cable Television. Cable cost of revenue was $22.7 million, an increase of $1.6 million, or 7.8%, as compared to the same period of the prior year. The increase was primarily due to a $789,000, or 9.8%, increase in depreciation expense resulting from the capital expenditures required for the rollout of advanced products, the Erie County rebuild, and the acceleration of depreciation of analog converters. Cost of revenue further increased due to a $239,000, or 3.1%, increase in basic programming expenses, a $106,000, or 17.1%, increase in cable modem associated expenses, and a $296,000, or 52.7%, increase in programming expenses for the digital tier. Technical and network operation expenses increased $127,000 and $47,000, respectively, due to the launch of Buckeye-TEL, our residential telephone service, during the first quarter of 2005. Basic cable programming expenses increased due to price increases from programming suppliers. Cable modem expenses increased as a result of additional customer service representatives and network and product improvements implemented in response to subscriber growth. Programming expense for the digital tier increased due to increases in digital carriage fees and an increase in the number of digital subscribers as compared to the same quarter of the prior year.

Selling, general & administrative expense was $6.6 million, an increase of $568,000, or 9.4%. General and administrative expenses increased $490,000, or 13.8%, due to an increase of $54,000 recorded in the loss on disposal of assets, increases of $122,000 in medical expense due to negative trending, and additional administrative expenses of $234,000 due to the launch of Buckeye-TEL. Information services and business operations expense increased $53,000 and $65,000, respectively, due to the launch of residential telephone service.

Newspaper Publishing. Publishing cost of revenue was $45.7 million, an increase of $967,000, or 2.2%, over the three months ended March 31, 2004. The increase was partially due to a $121,000, or 1.6%, increase in the cost of newsprint and ink, resulting from a weighted-average price per ton increase of $44.34, or 8.9%, partially offset by a decrease in consumption of 7.0%, due primarily to the web-width reduction at the Pittsburgh Post-Gazette. Cost of revenue further increased due to increases in circulation, advertising sales department, and depreciation expense of $273,000, $119,000, and $389,000, respectively. Depreciation expense increased due to the capital improvement projects primarily at the Post-Gazette.

Selling, general and administrative expense was $17.9 million, a decrease of $1.6 million, or 8.0%, primarily due to decreases in the Post-Gazette’s workers’ compensation costs of $2.1 million, as compared to the first quarter of 2004. The publishing group also recognized savings in health insurance related expense of $78,000. These overall savings were offset by increases in other post-employment benefits and pension expense of $412,000 and $166,000, respectively. Workers’ compensation expense decreased as compared to the same period of the prior year due to improvements in overall claim management and a decrease in the average dollar value associated with outstanding claims.

Television Broadcasting. Broadcasting cost of revenue was $5.7 million, a decrease of $19,000, or 0.3%, from the same period of the prior year, primarily due to decreases in broadcast film amortization and depreciation expense of $38,000 and $66,000, respectively. Other departmental expenses reported favorable variances due to tight budgetary controls. These decreases were partially offset by increases in news, engineering and programming departmental expenses of $78,000, $14,000, and $15,000, respectively.

Selling, general and administrative expense was $3.4 million, an increase of $11,000, or 0.3%, due to a $30,000, or 1.5%, increase in general administrative expenses attributable to employee benefit costs. These administrative increases were partially offset by a decrease in selling and promotion expenses of $19,000, or 1.5%, due to tight budgetary controls.

Other Communications. Other communications cost of revenue was $2.4 million, an increase of $131,000, or 5.6%, from the same period of 2004. Telecom cost of revenue increased $152,000, or 7.8%, due primarily to an increase in depreciation, internet, and technical expenses of $128,000, $55,000, and $62,000, respectively. These increases were partially offset by decrease in long-distance expense of $103,000. Home security alarm system sales and monitoring cost of revenue decreased $21,000, or 5.5%, due to tight expense controls.

Selling, general and administrative expense was $1.9 million, a decrease of $213,000, or 10.1%. Telecom selling, general and administrative expense decreased $248,000, or 13.9%, due primarily to a decrease in marketing, bad debt expense, and a decrease in gross receipts tax of $84,000, $163,000, and $68,000, respectively. These decreases were partially offset by increases in sales and billing expenses of $48,000 and $42,000, respectively. Selling, general and administrative expenses for our residential security business increased $35,000, or 11.3%, due to increase in sales expense of $23,000 and general inflationary factors.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Income

Operating loss increased $1.2 million, to $2.5 million, as compared to the three months ended March 31, 2004.

Cable operating income decreased $952,000, or 37.1%, due to increases in programming expenses, operational and administrative expenses related to the launch of residential telephone service and increased depreciation expense, partially offset by revenue growth generated from rate increases and continued rollout of advanced services.

Publishing operating loss increased $259,000, or 7.9%, primarily due to a decrease in advertising and circulation revenues. The increase in operating loss is also attributable to increased newsprint and departmental expenses, partially offset by savings in workers’ compensation.

Broadcasting operating income decreased $611,000, or 117.1%, due to decreases in advertising revenue, primarily national and political advertising, and flat operating expenses.

Other communications operating income decreased $62,000, or 8.8%, due to revenue declines in both operating units, partially offset by decreased telecom operating expenses.

Operating loss attributable to corporate expenses decreased $657,000, or 37.5%, due to overall decreases in legal and professional fees of $286,000 and a decrease in amortization expense of $103,000 due to the expiration of various non-compete agreements. Other general and administrative expenses reported a favorable variance of $262,000 due to tight general cost controls.

Non-operating Income or Expense

Our non-operating income and expense consist of interest expense, investment income, change in fair value of interest rate swaps, and any non-recurring items that are not directly related to our primary operations. Net non-operating expense decreased $5.2 million, or 57.7%, as compared to the three months ended March 31, 2004. Interest expense increased $1.5 million, or 31.9%, due primarily to an increase in the effective interest rate. The income attributable to the change in the fair value of our non-hedge interest rate swaps increased $6.9 million as compared to 2004 due to the specific swaps in effect during the two periods and changes in the interest rate environment. Investment income decreased $166,000 due to the performance of company owned life insurance company stock during the two quarters ending March 31, 2005 and 2004.

Net Loss

For the three months ended March 31, 2005, we reported a net loss of $6.3 million, compared to a net loss of $10.5 million reported for the same period of the prior year. This decrease in net loss is primarily due to a favorable variance of $6.9 million on the change in fair value of interest-rate swaps, partially offset by an increase in interest expense of $1.5 million and an increase in operating loss of $1.2 million. Furthermore, the provision for income taxes was $16,000 for the first quarter of 2005 compared to a provision for income taxes of $211,000 for the same quarter of the previous year.

Depreciation and Amortization

Depreciation and amortization increased $1.1 million, or 8.8%, as compared to the same period of the prior year. The increase was primarily due to an increase in cable operations depreciation expense of $789,000 due to the acceleration of depreciation on analog converters beginning in the second quarter of 2004 and the recognition of a full year of depreciation on the Erie County rebuild, which was completed during the second quarter of 2004. In addition, publishing depreciation increased $389,000 due to the capital improvement projects primarily at the Post-Gazette. These increases were partially offset by a decrease in corporate amortization expense of $103,000, due to the expiration of various non-compete agreements.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Adjusted EBITDA

Adjusted EBITDA decreased $341,000, or 2.9%, as compared to the first quarter of 2004. A reconciliation of adjusted EBITDA to net loss is provided on a previous page. The adjusted EBITDA originally reported for the first quarter of 2004 has been increased by $498,000 due to the implementation of FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. During the third quarter of 2004, we elected retroactive application to the date of enactment of FAS 106-2 and remeasured the plans’ accumulated postretirement benefit obligation (APBO) to include the effects of the subsidy as of December 31, 2003. This remeasurement resulted in a reduction of the plans’ APBO and reduced the net periodic non-pension postretirement benefit cost for the entire 2004 fiscal year. Accordingly, we have adjusted EBITDA for the first two quarters of 2004 to recognize the reduction in benefit cost.

Adjusted EBITDA as a percentage of revenue for the quarter ended March 31, 2005 decreased to 11.0% from 11.3% for the quarter ended March 31, 2004. The decrease in adjusted EBITDA as a percentage of revenue was primarily due to the decreases in revenue from all operations, excluding cable, and increases in cable operating expense. Net loss as a percentage of revenue was 6.0% as of March 31, 2005, as compared to net loss as a percentage of revenue at March 31, 2004 of 10.0%. This is primarily due to the favorable variance on the change in fair value of interest rate swaps, offset by the increase in interest expense.

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 $13.0 million and $15.4 million for the three months ended March 31, 2005 and March 31, 2004, respectively. The net cash provided by operating activities is determined by adding back depreciation and amortization, and adjusting for other non-cash items. Cash used in investing activities was $8.6 million and $13.7 million for the three months ended March 31, 2005 and March 31, 2004, respectively.

Our capital expenditures have historically been financed with cash flow from operations and borrowings under our senior credit facility. We made capital expenditures of $8.1 million and $13.2 million, including capital leases, for the three months ended March 31, 2005 and March 31, 2004, respectively. Capital expenditures during the first quarter of 2005 were used primarily to rollout advanced cable services, including residential telephony, continue the Pittsburgh Post-Gazette facility upgrade, and further our digital conversion at our broadcast properties. Capital expenditures in 2004 were used primarily in the rebuild of the Erie County Cable system, the Post-Gazette facility upgrade, and the maintenance of other operating assets. We expect to make capital expenditures of $31.3 million in the last three quarters of 2005. These include the continued rollout of advanced cable services, completion of the Pittsburgh Post-Gazette production facility upgrade, and various other improvements to our operations.

Financing activities used $1.1 million of cash for the three months ended March 31, 2005, compared to $303,000 of cash used in financing activities from the same period of the prior year. The financing activities in the first quarter of 2005 included a $783,000 voluntary prepayment on our revolving credit facility. At March 31, 2005, the balances outstanding and available under our senior credit facilities and subordinated notes were $259.0 million and $67.5 million, respectively, and the average interest rate on the balance outstanding was 8.46%. At March 31, 2005, our covenants on our senior credit facilities would allow additional borrowing of $61.2 million based on our twelve month trailing adjusted EBITDA. At March 31, 2004, the balances outstanding and available under our senior credit facility and senior notes were $265.1 million and $70.9 million, respectively, and the average interest rate on the balance outstanding was 6.58%.

Notwithstanding our substantial debt, we believe that funds generated from operations and the borrowing availability under our senior credit facilities will be sufficient to finance our current operations, our cash obligations in connection with planned capital expenditures, and our financial obligations for the next twelve months.

PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our senior credit facilities 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. Our interest rate swap agreements in effect at March 31, 2005 expire in varying amounts through February 2008.

The fair value of $84.0 million of our long-term debt approximates its carrying value as it bears interest at floating rates. As of March 31, 2005, the estimated fair value of our interest rate swap agreements was a liability of $1.4 million, which represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. This is reflected in our financial statements as other long-term obligations. Changes in the fair value of derivative financial instruments are recognized either in income or as an adjustment to the carrying value of the underlying debt depending on whether the derivative financial instruments qualify for hedge accounting. At March 31, 2005, we had $175.0 million outstanding on our 9¹/4% senior subordinated notes, with a carrying value of $176.3 million, as adjusted for the fair value hedge.

As of March 31, 2005, we had entered into interest-rate swaps that approximated $30.0 million, including the effect of any offsetting swaps, or 11.6%, of our borrowings under all of our credit facilities. The interest-rate swaps consist of $85.0 million relating to our revolving credit and term loan agreements. In addition, we had entered into an interest rate swap agreement that has the economic effect of substantially offsetting $55.0 million of the swap agreements totaling $85.0 million. During the first quarter of 2005, we terminated several swap contracts related to the $175 million in senior subordinated notes and received a cash payment of $1.5 million. The terminated swaps include two contracts that had previously been accounted for as fair value hedges. In accordance with the guidance of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the adjustments to the fair value of the hedge were recorded with an offset to the fair value of the underlying debt. Upon termination of these contracts, the remaining fair value adjustment of the subordinated notes will be amortized as interest expense using the effective interest rate method over the remaining life of the notes. In the event of an increase in market interest rates, the change in interest expense would be dependent upon the weighted average outstanding borrowings and derivative instruments in effect during the reporting period following the increase. Based on our outstanding borrowings and interest rate swap agreements as of March 31, 2005, a hypothetical 100 basis point increase in interest rates along the entire interest rate yield curve would increase our interest expense for the following twelve month period by approximately $540,000.

Recent Accounting Pronouncements

Forward-Looking Statements

Certain statements contained herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward looking. We use words such as anticipates, believe, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

Factors that may cause actual results to differ from management’s expectations include economic and market conditions and many other factors beyond our control. For an additional discussion of risks and uncertainties relating to our future financial condition and results of operations, reference is made to the discussion under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K dated March 24, 2005.

PART I. FINANCIAL INFORMATION
Item 4. Controls and procedures

The Chairman and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chairman and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


		BLOCK COMMUNICATIONS, INC.
		(Registrant)

Date:	May 12, 2005	By:	/s/ Allan Block

			Allan Block
			Chairman

Date:	May 12, 2005	By:	/s/ Gary J. Blair

			Gary J. Blair
			Executive Vice President /
			Chief Financial Officer

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