As filed with the Securities and Exchange Commission on May 20, 2003
Registration No. 333-_____________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_____________________________
Journal Communications, Inc.
(Exact name of co-registrant as specified in its charter)
Journal Employees' Stock Trust Agreement
(Exact name of co-registrant as specified in its charter)
Wisconsin 333 West State Street 39-0382060
(State or other Milwaukee, Wisconsin 53203 (I.R.S. Employer
jurisdiction of (414) 224-2425 Identification No. of Journal
incorporation or (Address, including zip Communications, Inc.)
organization of code, and telephone number,
each registrant) including area code, of 39-6153189
each registrant's principal (I.R.S. Employer
executive offices) Identification No. of Journal
Employees' Stock
Trust Agreement)
___________________________________________
Steven J. Smith
Chairman and Chief Executive Officer
Journal Communications, Inc.
333 West State Street
Milwaukee, Wisconsin 53203
(414) 224-2425
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Benjamin F. Garmer, III
Russell E. Ryba
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-2400
----------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[ ]
If the registrants elect to deliver their latest annual reports to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box.[ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) of
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) of
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
______________________________
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Amount to Proposed Maximum Proposed Maximum Amount of
Title of Shares to be Registered be Registered Offering Price Per Unit Aggregate Offering Price Registration Fee
- -------------------------------- ------------- ----------------------- ------------------------ ----------------
Units of Beneficial Interest 318,517 $37.78(1) $11,234,998(2) $909(3)
- -------------------------------- ------------- ----------------------- ------------------------ ----------------
(1) Highest price, excluding interest, to be payable per unit in connection with the rescission offer covered by
this registration statement. The price per unit will range from $31.41 to $37.78, depending on the price
originally paid by the offeree.
(2) Aggregate purchase price, excluding interest, estimated to be payable if the rescission offer covered by this
registration statement is accepted in full.
(3) Calculated pursuant to Rule 457(j) on the basis of the amount at which the units were sold.
______________________
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS (Subject to Completion)
Issued May 20, 2003
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
securities and exchange commission is effective. This prospectus is not an offer
to sell these securities nor a solicitation of an offer to buy these securities
in any state where the offer or sale is not permitted.
[LOGO]
JOURNAL COMMUNICATIONS, INC.
THE JOURNAL EMPLOYEES' STOCK TRUST
318,517 UNITS OF BENEFICIAL INTEREST
__________________
The Trust and the Company:
The Journal Employees' Stock Trust was established to promote and facilitate the
acquisition and ownership of a beneficial interest in common stock of Journal
Communications, Inc. by employees of Journal Communications and to promote
stability and continuity of management and control of Journal Communications.
Journal Communications is a diversified media and communications company with
operations in publishing, radio and television broadcasting, telecommunications
and printing services. Neither Journal Communications' common stock nor units of
beneficial interest in the Journal Employees' Stock Trust are listed on any
national securities exchange or the Nasdaq Stock Market, Inc.
The Rescission Offer:
The units of beneficial interest represent beneficial interests in the Journal
Employees' Stock Trust established under the Journal Employees' Stock Trust
Agreement, dated May 15, 1937, as amended. The Journal Employees' Stock Trust,
in turn, owns shares of common stock of Journal Communications. We are offering
to rescind the sale of all of the units of beneficial interest purchased during
certain periods by employees or former employees who purchased the units in
California, Idaho, Louisiana, Maryland, Minnesota, Missouri, Nebraska and
Tennessee because our sales of these units may have been in violation of certain
state securities laws' requirements.
The price per unit to be paid in the rescission offer ranges from $31.41 to
$37.78, depending on the price paid by an employee for each unit, plus interest
at a rate depending on the state in which the units were purchased, less any
dividends due or paid on such units. The aggregate purchase price, including
interest, estimated to be payable if the rescission offer is accepted in full is
$12,469,036.
Expiration Date: The rescission offer expires at 5:00 p.m., Central Daylight
Time, on _______, 2003 or the date that is 30 calendar days after a unitholder's
receipt of this rescission offer, whichever date is later.
__________________
Investing in units of beneficial interest involves risks. See "Risk Factors"
beginning on page 4.
__________________
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
__________________
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................4
FORWARD-LOOKING STATEMENTS...................................................14
QUESTIONS AND ANSWERS ABOUT OUR RESCISSION OFFER.............................16
OUR RESCISSION OFFER.........................................................19
JOURNAL EMPLOYEES' STOCK TRUST...............................................23
JOURNAL COMMUNICATIONS.......................................................24
SELECTED FINANCIAL DATA......................................................34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................38
BRIEF DESCRIPTION OF RECAPITALIZATION........................................67
DESCRIPTION OF UNITS OF BENEFICIAL INTEREST..................................73
MARKET AND DIVIDEND INFORMATION..............................................76
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................77
LEGAL MATTERS................................................................77
EXPERTS......................................................................77
WHERE YOU CAN FIND MORE INFORMATION..........................................77
INDEX TO FINANCIAL STATEMENTS...............................................F-1
APPENDIX A - LETTER TO UNITHOLDERS..........................................A-1
APPENDIX B - ELECTION FORM FOR RESCISSION...................................B-1
____________________________
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any rescission of the sale of units of beneficial
interest.
-i-
Prospectus Summary
This summary highlights information contained elsewhere in this prospectus.
Because this is a summary, it is not complete and does not contain all of the
information that may be important to you. For a more complete understanding of
us and this rescission offer, we encourage you to read this prospectus in its
entirety, especially the risks of investing in units discussed under "Risk
Factors" and our consolidated financial statements, including the notes thereto.
As used herein "we" and "our" generally refer to Journal Communications, Inc.,
but where appropriate they also include the Journal Employees' Stock Trust.
Journal Employees' Stock Trust
The Journal Employees' Stock Trust (which we refer to as "JESTA" or the
"Stock Trust") is a trust established under the Journal Employees' Stock Trust
Agreement, dated May 15, 1937, as amended ("Trust Agreement"). The purpose of
the Stock Trust is to promote and facilitate the acquisition and ownership of a
beneficial interest in our common stock by our employees and to promote
stability and continuity of management and control in the interest of our
shareholders and employees. Currently, the Stock Trust owns 90% of our common
stock and the heirs of Harry J. Grant, our former chairman, own the balance.
Many of our employees own units of beneficial interest representing
beneficial interests in the Stock Trust, with each unit representing beneficial
ownership in one share of our common stock held by the Stock Trust. A unit is
different than a share of common stock offered by publicly traded companies.
Units cannot be traded on the open market. In most circumstances, a unit only
can be sold to another employee, certain of our shareholders or to us. A unit
does not provide a unitholder with all of the rights typically associated with
stock ownership. The Trust Agreement governs all aspects of unitholders' rights
and obligations. The Trust Agreement is filed as an exhibit to the registration
statement of which this prospectus is a part and is incorporated by reference
herein.
Journal Communications
Founded in 1882, we are a diversified media and communications company with
operations in publishing, radio and television broadcasting, telecommunications
and printing services. We publish the Milwaukee Journal Sentinel, which serves
as the only major daily newspaper for the Milwaukee metropolitan area, and more
than 90 community newspapers and shoppers in eight states. We own and operate 36
radio stations and six television stations in 11 states. Through our
telecommunications subsidiary, Norlight Telecommunications, Inc., which provides
both wholesale telecommunications services and business-to-business
telecommunications services, we own and operate a regional fiber optic network
and provide integrated data communications solutions in seven states. We also
provide a wide range of commercial printing services including publications,
professional journals and documentation material, as well as electronic
publishing, kit assembly and fulfillment. In 2002, our total operating revenue
was $801.4 million, 57.9% of which was generated from our publishing and
broadcasting operations, 18.6% from telecommunications and 23.5% from printing
services and other operations.
The Rescission Offer
Under the Trust Agreement, we offered and sold units of beneficial interest
to our employees. For federal securities law purposes, we registered these
offers and sales on one or more Registration Statements on Form S-8. We did not
register the units under the state securities laws. Instead, we relied on
exemptions from the securities registration requirements for the offer and sale
of the units. It appears that, due to the nature of the Trust Agreement and the
nature of the offers and sales, the offer and sale of some of these units may
not have qualified for an exemption from registration under the securities laws
of California, Idaho, Louisiana, Maryland, Minnesota, Missouri, Nebraska or
Tennessee. We are making the rescission offer to address these state compliance
issues by offering to rescind the sale of all of the units covered by this
rescission offer and paying to the participating employees the purchase price
paid for the units, less any dividends due or paid on such units.
1
We believe that your receipt of this rescission offer will preclude you
from later seeking similar relief in connection with our failure to comply with
the securities registration requirements for your units under the securities
laws of your state. You are urged to consult with an attorney regarding all of
your legal rights and remedies before deciding whether or not to accept the
rescission offer. If you fail to accept or affirmatively reject our rescission
offer, then you will retain ownership of the units of beneficial interest that
you purchased and will not receive any cash for those units in this rescission
offer.
To the extent you accept the rescission offer for some or all of your
affected units of beneficial interest, following payment for those units in the
rescission offer, you will cease to have any further right, title or interest in
those units and any subsequent appreciation in the value of the shares of our
common stock underlying the units.
In deciding whether to participate in the rescission offer or retain your
units, you should understand that concurrently with this rescission offer we are
seeking unitholder and shareholder approval of a transaction, including a share
exchange with a wholly-owned subsidiary, pursuant to which we will change the
current capital structure of Journal Communications by exchanging shares of our
common stock for new shares of class B common stock of "New Journal" (which is
how we refer to our company after the share exchange), which shares will be
distributed to unitholders upon termination of JESTA following the share
exchange. After the share exchange, we intend to conduct an initial public
offering and offer to purchase some of our class B shares pursuant to a tender
offer (we do not expect that you would be able to tender all of your class B
shares in the tender offer). Assuming the recapitalization transaction takes
place, acceptance of this rescission offer will eliminate your ability to
participate in the recapitalization with respect to the rescinded units.
Further, you should be aware that the offering price in the tender offer, should
it occur, may be higher than the rescission offer price.
On October 25, 2002, we suspended the purchase and sale of units. Assuming
the recapitalization transaction does not take place and the suspension is
lifted, then we anticipate that you would receive more for your units upon a
sale pursuant to the Trust Agreement, based on the current option price under
the Trust Agreement, than you would in the rescission offer. However, there is
no assurance that we would elect to buy units offered for sale in the future, as
we have in the past, or that there would be a liquid market for the units.
The Recapitalization
As part of our ongoing efforts to position our company for continued
success in an increasingly competitive world while preserving our independence
and long-standing employee-owned culture, concurrently with this rescission
offer we are seeking unitholder and shareholder approval of a transaction,
including a share exchange with a wholly-owned subsidiary, pursuant to which we
will change our current capital structure by exchanging shares of our common
stock for new shares of class B common stock of New Journal, which shares will
be distributed to unitholders upon termination of JESTA following the share
exchange. After the share exchange, we intend to conduct an initial public
offering and offer to purchase some of our class B shares pursuant to a tender
offer (we do not expect that you would be able to tender all of your class B
shares in the tender offer). Assuming the recapitalization transaction takes
place, acceptance of this rescission offer will eliminate your ability to
participate in the recapitalization with respect to the rescinded units.
Further, you should be aware that the offering price in the tender offer, should
it occur, may be higher than the rescission offer price. See "Brief Description
of Recapitalization."
If you elect not to participate in this rescission offer and to retain your
units, and the recapitalization transaction takes place, then you will retain
the right to receive class B shares of common stock of New Journal in exchange
for the retained units. The rescission offer will expire prior to the
recapitalization transaction being effected. See "Brief Description of
Recapitalization."
New Journal has filed with the SEC a Registration Statement on Form S-4
(Joint Proxy Statement/Prospectus), File No. 333-105209, relating to the share
exchange.
2
Risks Relating to Our Business, the Rescission Offer and the Recapitalization
In connection with the rescission offer, you should take into account the
risks we face in our business. You should also be aware that there are various
risks involved in continuing your investment in our common stock by continuing
your investment in units. For more information about these and other risks, see
"Risk Factors" beginning on page 4. You should carefully consider these risks
factors together with all of the other information included in this prospectus.
_______________________
Our principal executive offices are located at 333 West State Street,
Milwaukee, Wisconsin 53203, and our telephone number is (414) 224-2374. Our web
site is www.jc.com. Information contained on our web site is not incorporated by
reference into this prospectus and you should not consider information on our
web site as part of this prospectus.
3
Risk Factors
An investment in units of beneficial interest involves risk. You should
carefully consider the risks we describe below before deciding whether to retain
the units subject to this rescission offer. In assessing these risks, you should
also refer to the other information included in this prospectus, including
financial statements and the notes thereto.
Risks Relating to Units of Beneficial Interest
An investment in units is an equity investment in Journal Communications
and involves risks. You should carefully consider these risks as you determine
whether to retain your units or participate in the rescission offer. Risks you
should consider include, among others:
o The value of your investment depends on our overall financial
performance.
o There is currently no public trading market for units, and neither
Journal Communications nor anyone else has any obligation to purchase
units from you in the future.
o An investment in units does not, by itself, provide a diversified
investment portfolio. An appropriate level of diversification is one
of the key risk management safeguards that financial planning
professionals generally recommend.
o While in the past the value of units, as reflected in the option price
for units, has gone up from one year to the next, there is no
guarantee that the price of units will be higher in the future.
o If you retain your units, then they may be exchanged for class B
shares of common stock of New Journal in the recapitalization.
Risks Relating to Journal Communications' Diversified Media Business
DECREASES IN ADVERTISING SPENDING, RESULTING FROM ECONOMIC DOWNTURN, WAR,
TERRORISM OR OTHER FACTORS, COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Approximately 47.5% of our revenue in 2002 was generated from the sale of
local, regional and national advertising appearing in our newspapers and
shoppers and for broadcast on our radio and television stations. Advertisers
generally reduce their advertising spending during economic downturns, so a
recession or further economic downturn could have an adverse effect on our
financial condition and results of operations. Also, our advertising revenue
tends to decline in times of national or local crisis because our radio and
television stations broadcast more news coverage and sell less advertising time.
For example, the threatened outbreak of hostilities in Iraq in March 2003 and
the war itself had a negative impact on our broadcast results due to reduced
spending levels by some advertisers, cancellations by some advertisers for the
duration of war coverage and elimination of advertising inventory available from
our television networks during their continuous coverage of the war. As a
result, the war in Iraq, additional terrorist attacks or other wars involving
the United States could adversely affect our financial condition and results of
operations.
Additionally, some of our printed publications and our radio and television
stations generate a large percentage of their advertising revenue from a limited
number of sources, including the automotive industry, political advertising and
professional sports contracts. As a result, even in the absence of a recession
or further economic downturn, adverse changes specifically affecting these
advertising sources could significantly reduce advertising revenue and have a
material adverse affect on our financial condition and results of operations.
In addition, our advertising revenue and circulation revenue depend upon a
variety of other factors specific to the communities that we serve. Changes in
those factors could negatively affect those revenues. These factors include,
among others, the size and demographic characteristics of the local population,
the concentration of retail stores, and local economic conditions in general. If
the population demographics, prevailing retail environment, or local economic
conditions of a
4
community served by us were to change adversely, revenue could decline and our
financial condition and results of operations could be adversely affected. This
is especially true with respect to the metropolitan Milwaukee market, which is
served by our daily newspaper, the Milwaukee Journal Sentinel, one of our
television stations, two of our radio stations and a number of our community
newspapers and shoppers, and from which we derived approximately 36.1% of our
operating revenue in 2002.
OUR DIVERSIFIED MEDIA BUSINESSES OPERATE IN HIGHLY COMPETITIVE MARKETS, AND WE
MAY LOSE MARKET SHARE AND ADVERTISING REVENUE TO COMPETING NEWSPAPERS, RADIO AND
TELEVISION STATIONS, AS WELL AS TO OTHER TYPES OF MEDIA COMPETITORS OR THROUGH
CONSOLIDATION OF MEDIA COMPETITORS.
Our diversified media businesses operate in highly competitive markets. Our
newspapers, shoppers, radio stations and television stations compete for
audiences and advertising revenue with other newspapers, shoppers, radio
stations and television stations, as well as with other media such as magazines,
cable television, satellite television, satellite radio, outdoor advertising,
the Internet and direct mail. Some of our current and potential competitors have
greater financial, marketing, programming and broadcasting resources than we do.
In newspapers and shoppers, our revenue primarily consists of advertising
and paid circulation. Competition for advertising expenditures and paid
circulation comes from local, regional and national newspapers, shoppers,
magazines, broadcast and cable television, radio, direct mail, yellow pages and
the Internet and other media. Competition for newspaper advertising revenue is
based largely upon advertiser results, advertising rates, readership,
demographics and circulation levels, while competition for circulation is based
largely upon the content of the newspaper, its price, editorial quality and
customer service. Our local and regional competitors in community newspapers and
shoppers are typically unique to each market, but we have many competitors for
advertising revenue that are larger and have greater financial and distribution
resources than us. Circulation revenue and our ability to achieve price
increases for our print products are affected by competition from other
publications and other forms of media available in our various markets,
declining consumer spending on discretionary items like newspapers, decreasing
amounts of free time, and declining frequency of regular newspaper buying among
young people. We may incur increasing costs competing for advertising
expenditures and paid circulation. If we are not able to compete effectively for
advertising expenditures and paid circulation, our revenue may decline and our
financial condition and results of operations may be adversely affected.
Our radio and television broadcasting businesses compete for audiences and
advertising revenue primarily on the basis of programming content and
advertising rates. Advertising rates are set based upon a variety of factors,
including a program's popularity among the advertiser's target audience, the
number of advertisers competing for the available time, the size and demographic
make-up of the market served and the availability of alternative advertising in
the market. Our ability to maintain market share and competitive advertising
rates depends in part on audience acceptance of our network, syndicated and
local programming. Changes in market demographics, the entry of competitive
stations to our markets, the introduction of competitive local news or other
programming by cable and satellite providers, or the adoption of competitive
formats by existing stations could result in lower ratings and have a material
adverse effect on our financial condition and results of operations.
In addition, our operations may be adversely affected by consolidation in
the broadcast industry, especially if competing stations in our markets are
acquired by competitors who have a greater national scope and can offer a
greater variety of national and syndicated programming for listeners and viewers
and enhanced opportunities for advertisers to reach broader markets. If current
regulatory restrictions on ownership of multiple stations in a single market are
lifted, industry consolidation would be more likely to occur.
SEASONAL AND CYCLICAL CHANGES IN ADVERTISING VOLUME AFFECT OUR QUARTERLY REVENUE
AND RESULTS OF OPERATIONS AND MAY CAUSE OUR STOCK PRICE TO BE VOLATILE.
Our quarterly revenue and results of operations are subject to seasonal and
cyclical fluctuations that we expect to continue to affect our results of
operations in future periods. Our first fiscal quarter of the year tends to be
our weakest quarter because advertising volume is typically at its lowest levels
following the holiday season. Our fourth fiscal quarter tends to be our
strongest quarter, primarily because of revenue from holiday season advertising.
Our quarterly revenue also varies based on the dynamics of the television
broadcast industry. In particular, we experience fluctuations, primarily during
our third and
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fourth quarters, during political voting periods as advertising dramatically
increases. Also, since NBC has exclusive rights to broadcast the Olympics
through 2008, our NBC affiliate stations experience increased viewership and
revenue during Olympic broadcasts. Other factors that affect our quarterly
revenue and results of operations may be beyond our control, including changes
in the pricing policies of our competitors, the hiring and retention of key
personnel, wage and cost pressures, changes in newsprint prices and general
economic factors. These quarterly fluctuations in revenue and results of
operations may cause our stock price to be volatile.
WE MAY NOT BE ABLE TO ACQUIRE RADIO STATIONS, TELEVISION STATIONS OR NEWSPAPERS,
SUCCESSFULLY MANAGE ACQUIRED PROPERTIES, OR INCREASE OUR PROFITS FROM THESE
OPERATIONS.
Our diversified media business has in the past expanded through
acquisitions of radio and television stations and community newspapers and
shoppers in selected markets. We intend to pursue continued growth through
selected acquisitions if we are able to identify strategic acquisition
candidates, negotiate definitive agreements on acceptable terms and, as
necessary, secure additional financing.
Our acquisition strategy includes certain risks. For example:
o we may encounter unforeseen expenses, difficulties, complications or
delays in connection with the integration of acquired entities and the
expansion of operations;
o we may fail to achieve acquisition synergies;
o we may encounter regulatory delays or other impediments in connection
with proposed transactions;
o our acquisition strategy may divert management's attention from the
day-to-day operation of our businesses;
o key personnel at acquired companies may leave employment; or
o we may be required to focus resources on integration of operations
rather than more profitable areas.
In addition, we may compete for certain acquisition targets with companies
having greater financial resources than us. We cannot assure you that we will be
able to successfully make future acquisitions or what effects those acquisitions
may have on our financial condition and results of operations.
We have in the past and may in the future "cluster" multiple radio and
television stations in markets that we believe have demographic characteristics
and growth potential suitable to further our business objectives. Multiple
stations in the same geographic market area could make our results of operations
more vulnerable to adverse local economic or demographic changes than they would
otherwise be if our stations were located in geographically diverse areas.
We anticipate that we would finance potential acquisitions through cash
provided by operating activities and/or borrowings, which would reduce our cash
available for other purposes. We cannot assure you, however, that we would be
able to obtain needed financing in the event strategic acquisition opportunities
are identified. Assuming the recapitalization transaction takes place, we may
also consider financing acquisitions by issuing additional shares of class A
common stock (we anticipate issuing class A common stock in our proposed public
offering), which would dilute your ownership. Another potential source of
financing for future acquisitions is to incur more debt, which would lead to
increased leverage and debt service requirements. Inherent in any future
acquisitions is the risk of transitioning company cultures and facilities which
could have a material adverse effect on our financial condition and results of
operations, particularly during the period immediately following any
acquisitions.
6
OUR PUBLISHING BUSINESS MAY SUFFER IF THERE IS A SIGNIFICANT INCREASE IN THE
PRICE OF NEWSPRINT OR A REDUCTION IN THE AVAILABILITY OF NEWSPRINT.
The basic raw material for newspapers and shoppers is newsprint. Our
newsprint consumption related to our publications totaled approximately $37.7
million in 2002, which was 12.1% of our total publishing revenue. We currently
purchase approximately 95% of our newsprint from two suppliers. Our inability to
obtain an adequate supply of newsprint in the future or significant increases in
newsprint costs could have a material adverse effect on our financial condition
and results of operations.
WE MAY ENCOUNTER DIFFICULTIES OR DELAYS ASSOCIATED WITH OUR NEW PRINTING
FACILITY FOR THE MILWAUKEE JOURNAL SENTINEL, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our daily newspaper, the Milwaukee Journal Sentinel, completed construction
of a new $112 million production facility in West Milwaukee, Wisconsin to house
all printing, packaging, inserting and transportation processes. Although the
installation and start-up of the new offset lithography presses is complete, we
cannot assure you that we will not encounter unexpected difficulties or delays
in connection with the new printing equipment or employee training on new press
operation. Any such difficulties could result in a reduction in consumer
confidence, a decline in circulation and a decline in advertising revenue, and
could have a material adverse effect on our financial condition and results of
operations.
CHANGES RELATING TO INFORMATION COLLECTION AND USE COULD ADVERSELY AFFECT OUR
ABILITY TO COLLECT AND USE DATA, WHICH COULD HARM OUR PUBLISHING BUSINESS.
Recent public concern over methods of information gathering has led to the
enactment of legislation in certain jurisdictions that restricts the collection
and use of information. Our publishing business relies in part on telemarketing
sales, which are affected by recent "do not call" legislation at both the
federal and state levels. Further legislation, industry regulations, the
issuance of judicial interpretations or a change in customs relating to the
collection, management, aggregation and use of consumer information could
materially increase the cost of collecting that data, or limit our ability to
provide that information to our customers, and could adversely affect our
results of operations.
IF WE ARE UNABLE TO RESPOND TO CHANGES IN TECHNOLOGY AND EVOLVING INDUSTRY
STANDARDS, OUR RADIO STATIONS MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The broadcast media industry is subject to the emergence of new media
technologies and evolving industry standards. Several new technologies are being
developed which may compete with our radio stations, including:
o audio programming by cable television systems, direct broadcast
satellite systems, personal communications systems, Internet content
providers and other digital audio broadcast formats;
o satellite digital audio radio service, with sound quality comparable
to that of compact discs, which has resulted in the introduction of
several new satellite radio services including numerous niche formats;
o in-band on-channel digital radio, which could improve the quality of
existing AM and FM stations, including stations owned by us; and
o expanded approval of low-power FM radio, which could result in
additional FM radio broadcast outlets designed to serve small,
localized areas.
These new technologies have the potential to introduce new market competitors or
change the means by which radio advertisers can most efficiently and effectively
reach their target audiences. We may not have the resources to acquire new
technologies or to introduce new services that could compete with these new
technologies.
7
IF WE ARE UNABLE TO RESPOND TO CHANGES IN TECHNOLOGY AND EVOLVING INDUSTRY
STANDARDS, OUR TELEVISION STATIONS MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
New technologies could also adversely affect our television stations.
Programming alternatives such as cable, direct satellite-to-home services,
pay-per-view, the Internet and home video and entertainment systems have
fractionalized television viewing audiences. Over the past decade, cable
television programming services have captured an increasing market share, while
the aggregate viewership of the major television networks has declined. In
addition, the expansion of cable television and other technological changes have
increased, and may continue to increase, competitive demand for programming.
Such increased demand, together with rising production costs, may in the future
increase our programming costs or impair our ability to acquire programming.
In addition, video compression techniques, now in use with direct broadcast
satellites and, potentially soon, for cable and wireless cable, are expected to
permit greater numbers of channels to be carried within existing bandwidth.
These compression techniques, as well as other technological developments, are
applicable to all video delivery systems, including over-the-air broadcasting,
and have the potential to provide vastly expanded programming to highly targeted
audiences. Reduction in the cost of creating additional channel capacity could
lower entry barriers for new channels and encourage the development of
increasingly specialized niche programming. This ability to reach very narrowly
defined audiences may alter the competitive dynamics for advertising
expenditures. We are unable to predict the effect that these technological
changes will have on the television industry or the future results of our
television broadcast business.
IF THE NETWORK PROGRAMMING WE BROADCAST PURSUANT TO NETWORK AFFILIATION
AGREEMENTS DOES NOT MAINTAIN SATISFACTORY VIEWERSHIP LEVELS, OUR ADVERTISING
REVENUES, FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY
AFFECTED.
The television viewership levels, and ultimately advertising revenue, for
each station are materially dependent upon network programming, which is
provided pursuant to network affiliation agreements. We cannot assure you that
network programming will achieve or maintain satisfactory viewership levels. In
particular, because three of our stations (including our low-power station) are
parties to affiliation agreements with ABC and two with NBC, failures of ABC or
NBC network programming to attract viewers or generate satisfactory ratings may
have an adverse effect on our financial condition and results of operations. In
addition, we cannot assure you that we will be able to renew our network
affiliation agreements on as favorable terms or at all. The termination or
non-renewal, or renewal on less favorable terms, of the affiliation agreements
could have an adverse effect on us.
THE COSTS OF TELEVISION PROGRAMMING MAY INCREASE, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
Television programming is a significant operating cost component in our
broadcasting operations. We cannot assure you that we will not be exposed in the
future to increased programming costs. Should such an increase occur, it could
have an adverse effect on our results of operations. In addition, television
networks have been seeking arrangements from their affiliates to share the
networks' programming costs and to eliminate network compensation traditionally
paid to broadcast affiliates. We cannot predict the nature or scope of any such
potential compensation arrangements or the effect, if any, on our operations.
Acquisitions of program rights for syndicated programming are usually made two
or three years in advance and may require multi-year commitments, making it
difficult to predict accurately how a program will perform. In some instances,
programs must be replaced before their costs have been fully amortized,
resulting in write-offs that increase station operating costs and decrease
station earnings.
IF OUR KEY ON-AIR TALENT DOES NOT REMAIN WITH US OR LOSES POPULARITY, OUR
ADVERTISING REVENUE AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
We employ or independently contract with a number of on-air personalities
and hosts of television and radio programs whose ratings success depends in part
on audience loyalty in their respective markets. Although we have entered into
long-term agreements with some of our key on-air talent and program hosts to
protect our interests in those relationships, we cannot assure you that all or
any of these key employees will remain with us over the long term. Furthermore,
the popularity and audience loyalty of our key on-air talent and program hosts
is highly sensitive to rapidly changing public tastes. A loss of such popularity
or audience loyalty could reduce ratings and may impact our ability to generate
advertising revenue.
8
In addition, our key local management employees are extremely important to
our business since we believe that our growth and future success depends on
retaining local management with knowledge of the community, its audience and its
advertisers. Our inability to attract or retain these skilled personnel could
have a material adverse impact on our financial condition and results of
operations.
CHANGES IN THE PROFESSIONAL SPORTS INDUSTRY COULD RESULT IN DECREASED RATINGS
FOR OUR MILWAUKEE RADIO STATION AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Our Milwaukee radio station, WTMJ-AM, currently maintains exclusive radio
broadcast rights for the Green Bay Packers, Milwaukee Bucks and Milwaukee
Brewers, and arranges a statewide radio network for these organizations. Our
advertising revenue could be adversely affected by changes in the professional
sports industry, such as a relocation of one of the local professional sports
teams from the Wisconsin market or the potential loss of exclusivity due to
league or team initiatives such as pay-per-listen, satellite radio or Internet
broadcast of games. In addition, we could lose our exclusive broadcast rights
during periodic bidding, or suffer damage to the marketplace value of sports
advertising due to factors such as a players' strike, negative publicity or
downturn in on-field performance of a team.
IF CABLE SYSTEMS DO NOT CARRY OUR NEW DIGITAL CHANNELS, OUR REVENUE AND RESULTS
OF OPERATIONS MAY BE ADVERSELY AFFECTED.
Since our television stations are highly dependent on carriage by cable
systems in many of the areas they service, any rules of the Federal
Communications Commission (which we refer to as the "FCC") that impose no or
limited obligations on cable systems to carry digital television signals in
their local markets could result in some of our television stations not being
carried on cable systems, which could adversely affect our revenue and results
of operations.
IF WE CANNOT RENEW OUR FCC BROADCAST LICENSES, OUR BUSINESS WILL BE IMPAIRED.
Our business depends upon maintaining our broadcast licenses, which are
issued by the FCC. Our broadcast licenses will expire between 2004 and 2006 and
are renewable. Interested parties may challenge a renewal application. The FCC
has the authority to revoke licenses, not renew them, or renew them only with
significant qualifications, including renewals for less than a full term. We
cannot assure you that our future renewal applications will be approved, or that
the renewals will not include conditions or qualifications that could adversely
affect our operations. If we fail to renew any of our licenses, or renew them
with substantial conditions or modifications (including renewing one or more of
our licenses for a term of fewer than eight years), it could prevent us from
operating the affected station and generating revenue from it.
THE FCC MAY IMPOSE SANCTIONS OR PENALTIES FOR VIOLATIONS OF RULES OR
REGULATIONS.
If we or any of our officers, directors or significant shareholders
materially violate the FCC's rules and regulations or are convicted of a felony
or are found to have engaged in unlawful anticompetitive conduct or fraud upon
another government agency, the FCC may, in response to a petition by a third
party or on its own initiative, in its discretion, commence a proceeding to
impose sanctions upon us which could involve the imposition of monetary
penalties, the denial of a license renewal application, revocation of our
broadcast licenses or sanctions. If the FCC were to issue an order denying a
license renewal application or revoking a license, we would be required to cease
operating the broadcast station only after we had exhausted all administrative
and judicial review without success.
WE COULD EXPERIENCE DELAYS IN EXPANDING OUR BUSINESS DUE TO ANTITRUST LAWS.
The Federal Trade Commission, the United States Department of Justice and
the FCC carefully review our proposed business acquisitions and dispositions
under their respective regulatory authority, focusing on the effects on
competition, the number of stations owned in a market and the effects on
concentration of market revenue share. Recently, the Department of Justice has
challenged a number of radio broadcasting transactions. Some of these challenges
ultimately resulted in consent decrees requiring, among other things,
divestitures of certain stations. In general, the Department of Justice has more
closely scrutinized radio broadcasting acquisitions that result in local market
shares in excess of 40% of radio advertising revenue. Any delay, prohibition or
modification required by regulatory authorities could adversely affect the terms
of a proposed transaction or could require us to modify or abandon an otherwise
attractive opportunity. The filing of petitions or complaints against us or
9
any FCC licensee from which we acquire a station could result in the FCC
delaying the grant of, or refusing to grant or imposing conditions on its
consent to the assignment or transfer of control of licenses.
REGULATORY CHANGES MAY RESULT IN INCREASED COMPETITION IN OUR RADIO AND
TELEVISION BROADCASTING BUSINESS.
The radio and television broadcasting industry is subject to extensive and
changing federal regulation. Among other things, the Communications Act of 1934,
as amended, and FCC rules and policies limit the number of broadcasting
properties in which any person or entity may have an attributable interest in
any market and require FCC approval for transfers of control and assignments of
licenses. These restrictions include a national limit on broadcast television
stations to an aggregate audience reach of 35% of all households. These
restrictions also include a variety of local limits on ownership, such as a
limit of one television station in medium and smaller markets and two stations
in larger markets as long as one station is not a top-four rated station (known
as the duopoly rule), prohibitions on ownership of a daily newspaper and
broadcast station in the same market and limits of four to eight radio stations
and one television station in the same market. These regulations currently
prevent us from entering dual-station ownership and cross-ownership arrangements
in various attractive markets.
In February 2002, the U.S. Court of Appeals determined that the FCC has not
provided legal justification for its long-standing 35% national ownership cap.
The FCC is now charged with either justifying a cap or eliminating it
altogether. If the national ownership cap is liberalized or abolished,
television operators that are currently at the limit will be able to acquire
additional stations, which may give them a competitive advantage over us, since
they have much greater financial and other resources than we have. In addition,
the networks' ability to acquire additional stations could give them "leverage"
over their affiliates on issues such as compensation and program clearance, in
part because of the risk that a network facing an uncooperative affiliate could
acquire a station in the market and terminate its agreement with that affiliate.
The FCC is also currently reviewing several of its other ownership restrictions,
including the restriction on ownership of more than one television station in
medium and smaller markets, the restrictions on ownership of both radio and
television stations in the same market, and the current prohibition on ownership
of a daily newspaper and a broadcast station (radio or television) in the same
market. Should the FCC decide to limit or eliminate any of these restrictions,
which is not expected until June 2003, at the earliest, we may then face
increasing competition with larger and more diversified entities for circulation
and advertising revenue.
RISKS RELATING TO JOURNAL COMMUNICATIONS' TELECOMMUNICATIONS BUSINESS
TELECOMMUNICATIONS TECHNOLOGY CHANGES VERY RAPIDLY, WHICH COULD RESULT IN PRICE
DECLINES OR RENDER OUR TELECOMMUNICATIONS TECHNOLOGY OBSOLETE.
We expect that new telecommunications products and technologies will emerge
and that existing products and technologies, including high speed data
transmission, voice transmission over the Internet and wireless technologies,
will further develop. These new products and technologies may reduce the prices
for our telecommunications services or they may be superior to, and render
obsolete, the products and services we offer and the technologies we use. As a
result, our most significant competitors in the future may be new entrants to
our markets which would not be burdened by an installed base of older equipment.
It may be very expensive for us to upgrade our products and technology in order
to continue to compete effectively. The future success of our telecommunications
business depends, in part, on our ability to anticipate and adapt in a timely
manner to technological changes.
Advances in transmission equipment used with fiber optic technology have
resulted in significant per circuit price declines in the fiber optic cable
transmission industry. Recent changes in technology have continued to lower the
cost of providing services. If there is less demand than we project or a bigger
drop in prices than we project, it could adversely affect our operating margins
and, accordingly, our results of operations. We cannot be certain, even if our
projections with respect to those factors are realized, that we will be able to
implement our strategy or that our strategy will be successful in the rapidly
evolving telecommunications market.
10
CONTINUED OVERCAPACITY AND INTENSE COMPETITION MAY NECESSITATE FURTHER PRICE
DECREASES WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
While many competitors in the telecommunications industry have been
acquired or ceased operations within the past two fiscal years, our
telecommunications business continues to compete with multiple large national
carriers, regional carriers and local exchange carriers. Many of these
competitors have built large fiber optic networks that remain underutilized,
resulting in excess capacity that places downward pressure on the prices we and
others are able to charge for our telecommunications services. Continued excess
capacity and price competition could further decrease the prices we are able to
charge our customers, which could have an adverse effect on our results of
operations.
THE EXPENDITURES NECESSARY TO SUFFICIENTLY DEVELOP OUR TELECOMMUNICATIONS
NETWORK TO REACH CUSTOMERS WITHIN THE LOCAL EXCHANGE NETWORK AND DEVELOP OUR
TELECOMMUNICATIONS SERVICES IN ORDER TO SATISFY OUR CUSTOMERS DEMANDS MAY
SURPASS OUR AVAILABLE CASH, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL TO
DEVELOP OUR SERVICES ON A TIMELY BASIS AND ON ACCEPTABLE TERMS.
Although we have expended significant resources in building our
telecommunications network and the developing telecommunications customer base,
we may require significant additional cash to develop local access capacity and
the range of services we can offer throughout our service area in order to
remain competitive in our market. We may have to expand or adapt our
telecommunications network components to respond to the following:
o a need for new product offerings, specifically local access capacity;
o an increasing number of customers;
o demand for greater transmission capacity;
o changes in our customers' service requirements; and
o technological advances.
These expenditures for expansion and for more services, together with
associated operating expenses, may reduce our cash flow and profitability. We
cannot guarantee that additional financing will be available to us or, if
available, that we can obtain it on a timely basis and on acceptable terms.
SERVICE INTERRUPTIONS ON THE NETWORK COULD CAUSE IMMEDIATE LOSS OF REVENUE,
PAYMENT OF OUTAGE CREDITS TO OUR CUSTOMERS AND THE LOSS OF OUR CUSTOMERS'
CONFIDENCE AND OUR BUSINESS REPUTATION.
Our success in marketing our telecommunications services to our customers
requires that we provide high reliability, high bandwidth and a secure network.
Our network and the infrastructure upon which it depends requires the
coordination and integration of sophisticated and highly specialized hardware
and software technologies and equipment located throughout the world, and are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security and other disruptions beyond our control that may cause
interruptions in service or reduced capacity for customers. While we have
built-in system redundancies to reduce these risks, a prolonged network failure
could jeopardize our ability to continue operations. Our agreements with our
customers typically provide for the payment of outage related credits (a
predetermined reduction or offset against our lease rate when a customer's
leased facility is non-operational or otherwise does not meet certain operating
parameters). In the case of a large-scale disruption of our network or the
support infrastructure, these credits could be substantial and could
significantly decrease our net revenue. In addition, should a significant
service interruption occur, our ongoing customers may choose a different
provider and our reputation may be damaged, reducing our attractiveness to new
customers.
To the extent that any disruption or security breach results in a loss or
damage to our customers' data or applications, or inappropriate disclosure of
confidential information, we may incur liability and suffer from adverse
publicity. We may also incur additional costs to remedy the damage caused by
these disruptions or security breaches.
11
OUR NETWORK UTILIZATION IS DEPENDENT ON MAINTAINING OUR RIGHTS-OF-WAY AND
INDEFEASIBLE RIGHTS OF USE.
The construction and operation of significant portions of our fiber optic
network depend upon rights-of-way from railroads, utilities, governmental
authorities and third-party landlords, and we also have obtained indefeasible
rights of use (called "IRUs") from other telecommunications providers that are
critical to our ability to operate our fiber optic network. Our rights-of-way
and IRUs are generally subject to expiration at some future date. We cannot
guarantee that we will be able to maintain all of our existing rights-of-way and
IRUs, and the loss of a substantial number of existing rights-of-way or IRUs or
our inability to renew existing agreements would have a material adverse impact
on our business, financial condition and results of operations.
While IRUs are commonly used in the telecommunications industry, they
remain a relatively new concept in property law. Although they give the holder a
number of rights to control the relevant rights-of-way or fiber optic filaments,
legal title remains with the grantor of the rights. Therefore, the legal status
of IRUs remains uncertain, and our IRUs might be voidable in the event of
bankruptcy of the grantor. If we were to lose an IRU in a key portion of our
network, our ability to service our customers could become seriously impaired
and we could be required to incur significant expense to resume the operation of
our fiber optic network in the affected areas.
WE NEED TO OBTAIN ADDITIONAL CAPACITY FOR THE NETWORK FROM OTHER PROVIDERS IN
ORDER TO SERVE OUR CUSTOMERS AND KEEP OUR COSTS DOWN.
We lease telecommunications capacity and obtain rights to use dark fiber
from both long distance and local telecommunications carriers in order to extend
the scope of our network. Any failure by these companies to provide service to
us would adversely affect our ability to serve our customers or increase our
costs of doing so. Costs of obtaining local services from other carriers
comprise a significant proportion of the operating expenses of long distance
carriers, including our telecommunications business.
WE COULD BE HARMED BY THE RECENT ADVERSE DEVELOPMENTS AFFECTING OTHER
TELECOMMUNICATIONS COMPANIES.
WorldCom and Global Crossing together accounted for 20.1% and 22.5% of our
telecommunications revenue in 2002 and 2001, respectively. Global Crossing filed
for Chapter 11 bankruptcy protection in January 2002 and WorldCom filed for
Chapter 11 bankruptcy protection in July 2002, and both companies are also
currently under investigation by the Securities and Exchange Commission and the
Justice Department. The loss of the ongoing business from either of these two
customers would have a significant adverse effect on our results of operations.
A renewal service contract with Global Crossing is being negotiated, though
Global Crossing retains the right to accept or reject our current contract under
federal bankruptcy law. WorldCom also has a right to accept or reject our
current contract under federal bankruptcy law. Continued weakness in the
telecommunications industry could have future adverse effects on us, including
reducing our ability to collect receivables and to access the capital markets on
favorable terms.
FEDERAL REGULATION OF THE TELECOMMUNICATIONS INDUSTRY IS CHANGING RAPIDLY AND WE
COULD BECOME SUBJECT TO UNFAVORABLE NEW RULES AND REQUIREMENTS WHICH COULD
IMPOSE SUBSTANTIAL FINANCIAL AND ADMINISTRATIVE BURDENS ON US AND INTERFERE WITH
OUR ABILITY TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGIES.
Regulation of the telecommunications industry is changing rapidly. Since
our relationships with the telecommunications companies with whom we deal are
all affected by our respective positions in the federal, state and local
regulatory scheme, existing and future federal, state, and local governmental
regulations will influence our viability. Consequently, undesirable regulatory
changes could adversely affect our business, financial condition and results of
operations. For example, the FCC continues to consider and approve the
applications of the incumbent local exchange carriers (ILECs) to expand service
offerings to include long distance services. One such ILEC (SBC) has been
granted this right in certain parts of its operating region and is expected to
receive qualified approval to offer this service in much of Norlight's footprint
during 2003 and 2004. Increased competition by SBC resulting from these
regulatory changes may adversely affect our revenue. In addition, the FCC has
recently completed its second Triennial Review of the Telecommunications Act of
1996. A number of changes affecting the availability and pricing of ILEC
facilities and services may adversely affect our results of operations. The
12
FCC may also increase regulation over our Internet access services and subject
our business to increased assessments to support universal service.
THE ROLE OF THE STATES IN REGULATION OF COMPANIES PROVIDING TELECOMMUNICATIONS
SERVICES IS INCREASING, ALTHOUGH THE RULES CONTINUE TO VARY SUBSTANTIALLY FROM
STATE TO STATE, AND WE MAY BECOME INCREASINGLY SUBJECT TO BURDENSOME AND
RESTRICTIVE STATE REGULATIONS.
The FCC's Triennial Review appears to have expanded the role of the states
in the determination of service availability, pricing and other factors having
an impact on competition at the state level. Heightened legislative activity and
state public utility commission involvement is anticipated, requiring continued
vigilance and the commitment of resources. Depending on factors unique to the
local marketplace, the rules can and will vary substantially from state to
state. Moreover, if we expand our fiber optic network into a broader geographic
area, we may be subject to additional state regulations. The costs of
maintaining compliance with and abiding by state regulatory obligations could
have a material adverse effect on our results of operations.
MUNICIPAL REGULATION OF OUR ACCESS TO PUBLIC RIGHTS-OF-WAY IS SUBJECT TO CHANGE
AND COULD IMPOSE ADMINISTRATIVE BURDENS THAT WOULD ADVERSELY AFFECT OUR
BUSINESS.
Local governments affect the timing and costs associated with our use of
public rights-of-way because they typically retain the ability to license public
rights-of-way, subject to the federal requirement that local governments may not
prohibit the provision of telecommunications services. Change in local
government regulation could impose additional costs on our business and limit
our operations.
RISKS RELATING TO JOURNAL COMMUNICATIONS PRINTING SERVICES BUSINESS AND OTHER
SEGMENT
WE ARE DEPENDENT ON A FEW LARGE CUSTOMERS, AND THE LOSS OF ONE OF THOSE
CUSTOMERS COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS.
Our printing services and label printing businesses currently generate a
significant percentage of their operating revenue from a few large customers. In
2002, a single customer accounted for 37.6% of our printing services revenue and
a different customer accounted for 50.7% of our label printing business'
revenue. As a result, the loss of either of these customers could have a
material adverse affect on our business. We cannot guarantee that our current
customers will continue to do business with us after the expiration of their
existing commitments.
POSTAL RATE INCREASES AND DISRUPTIONS IN POSTAL SERVICES COULD LEAD TO REDUCED
VOLUME OF BUSINESS.
Our printing services business, as well as our direct marketing business,
have been negatively impacted from time to time during the past years by postal
rate increases. In 2002, first class rates and standard class rates were
increased. These increases will be likely to force customers to mail fewer and
lighter pieces. Additionally, the amount of mailings could be reduced in
response to disruptions in and concerns over the security of the U.S. mail
system. These sorts of responses by customers could negatively impact us by
decreasing the amount of printing and direct marketing services or other
services that our customers purchase from us, which could result in decreased
revenue.
SHIFTS IN TRENDS IN THE COMPUTER HARDWARE AND SOFTWARE MARKETS COULD HAVE A
MATERIAL ADVERSE IMPACT ON OUR PRINTING SERVICES BUSINESS.
Our printing services business currently relies in significant part on
revenue from computer hardware and software manufacturers. The computer hardware
and software markets are often volatile and subject to changes depending upon,
among other things, technological improvements and consumer preferences. Trends
in these markets towards printing user manuals containing fewer pages, or making
those manuals accessible on-line, could have an adverse impact on our printing
services business. In addition, as the rate of technological improvement slows
and the sales of computer hardware and software lag, the pace of introduction of
new products by hardware and software manufacturers slows as well. As a result,
computer hardware and software manufacturers are placing an increasing emphasis
on the price of printing services in addition to the quality of
13
customer service. We may not be able to provide our customers with printing
services at lower cost than some of our larger, national competitors.
REVENUE FROM OUR DIRECT MARKETING BUSINESS MAY DECLINE IF OUR DATA PRODUCTS DO
NOT MAINTAIN TECHNOLOGICAL COMPETITIVENESS.
Our direct marketing service business is affected by the complexity and
uncertainty of new technologies. If we are not able to maintain technological
competitiveness in our data products, processing functionality or software
systems and services, we may not be able to provide effective or efficient
service to our customers, and our revenue may decline.
OTHER BUSINESS RISKS OF JOURNAL COMMUNICATIONS
WE DEPEND ON KEY PERSONNEL, AND WE MAY NOT BE ABLE TO OPERATE AND GROW OUR
BUSINESS EFFECTIVELY IF WE LOSE THE SERVICES OF ANY OF OUR SENIOR EXECUTIVE
OFFICERS OR ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL IN THE FUTURE.
We are dependent upon the efforts of our senior executive officers. The
success of our business is heavily dependent on our ability to retain our
current management and to attract and retain qualified personnel in the future.
Competition for senior management personnel is intense and we may not be able to
retain our personnel. We have not entered into employment agreements with our
key personnel, and these individuals may not continue in their present capacity
with us for any particular period of time. We do not have key man insurance for
any of our executive officers or key personnel. The loss of any senior executive
officer could require the remaining executive officers to divert immediate and
substantial attention to seeking a replacement. Our inability to find a
replacement for any departing executive officer on a timely basis could
adversely affect our ability to operate and grow our business.
OUR BUSINESS MAY BE NEGATIVELY AFFECTED BY WORK STOPPAGES, SLOWDOWNS OR STRIKES
BY OUR EMPLOYEES.
Currently, there are fourteen bargaining units representing approximately
1,100 (or approximately 18%) of our total number of employees. We have entered
into various collective bargaining agreements with these bargaining units, some
of which expire in 2003, and some of which expire shortly thereafter. We cannot
assure you as to the results of negotiations of future collective bargaining
agreements, whether future collective bargaining agreements will be negotiated
without interruptions in our businesses, or the possible impact of future
collective bargaining agreements on our financial condition and results of
operations. We also cannot assure you that strikes will not occur in the future
in connection with labor negotiations or otherwise. Any prolonged strike or work
stoppage could have a material adverse effect on our financial condition and
results of operations.
Forward-Looking Statements
We make certain statements in this prospectus that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. We intend these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Act, and we
are including this statement for purposes of those safe harbor provisions. These
forward-looking statements generally include all statements other than
statements of historical fact, including statements regarding future financial
position, business strategy, budgets, projected revenues and expenses, expected
regulatory actions and plans and objectives of management for future operations.
We use words such as "may," "will," "intend," "anticipate," "believe," or
"should" and similar expressions in this prospectus to identify forward-looking
statements.
These forward-looking statements are not guarantees of future performance
and are subject to risks, uncertainties and other factors, some of which are
beyond our control. These risks, uncertainties and other factors could cause
actual results to differ materially from those expressed or implied by those
forward-looking statements. Among such risks, uncertainties and other factors
that may impact us are those described in "Risk Factors" and the following:
o changes in advertising demand;
o changes in newsprint prices and other costs of materials;
14
o changes in federal or state laws and regulations or their
interpretations (including changes in regulations governing the number
and types of broadcast and cable system properties, newspapers and
licenses that a person may control in a given market or in total);
o the availability of quality broadcast programming at competitive
prices;
o changes in network affiliation agreements;
o quality and rating of network over-the-air broadcast programs
available to our customers;
o effects of the loss of commercial inventory resulting from
uninterrupted television news coverage and potential advertising
cancellations due to war or terrorist acts;
o effects of the rapidly changing nature of the publishing,
broadcasting, telecommunications, and printing industries, including
general business issues and the introduction of new technologies;
o effects of bankruptcies and government investigations on customers of
our telecommunications wholesale services;
o the ability of regional telecommunications companies to expand service
offerings to include intra-exchange services;
o changes in interest rates;
o the outcome of pending or future litigation;
o energy costs;
o the availability and effect of acquisitions, investments, and
dispositions on our results of operations or financial condition; and
o changes in general economic conditions.
We caution you not to place undue reliance on these forward-looking
statements, which we have made as of the date of this prospectus.
15
QUESTIONS AND ANSWERS ABOUT OUR RESCISSION OFFER
This discussion contains forward-looking statements. See "Forward-Looking
Statements" for a discussion of uncertainties, risks and assumptions associated
with these statements.
Q: What is a rescission offer?
A: A rescission offer is an offer by an issuer or another seller of
securities to rescind the sale of the securities and pay to the purchaser his or
her purchase price plus statutory interest from the date of purchase, less any
income received by the purchaser respecting such securities and less any amounts
received upon the sale of such securities.
Q: Why are you making the rescission offer?
A: Under the Journal Employees' Stock Trust Agreement, we offered and sold
units of beneficial interest to our employees. For federal securities law
purposes, we registered these offers and sales on one or more Registration
Statements on Form S-8. We did not register the units under the state securities
laws. Instead, we relied on exemptions from the securities registration
requirements for the offer and sale of the units. It appears that, due to the
nature of the Trust Agreement and the nature of the offers and sales, the offer
and sale of some of these units may not have qualified for any exemption from
registration under the securities laws of California, Idaho, Louisiana,
Maryland, Minnesota, Missouri, Nebraska or Tennessee. We are making the
rescission offer to address these state compliance issues by offering to rescind
the sale of all of the units of beneficial interest purchased during certain
periods by employees or former employees who purchased the units in the listed
states and paying to the participating employees the purchase price paid for the
units, less any dividends due or paid on such units. We have listed below by
state the time period of sales of the units covered by this rescission offer:
California - sales that occurred within two (2) years from the date of this
prospectus.
Idaho - sales that occurred within three (3) years from the date of this
prospectus.
Louisiana - sales that occurred within three (3) years from the date of
this prospectus.
Maryland - sales that occurred within three (3) years from the date of this
prospectus.
Minnesota - sales that occurred within three (3) years from the date of
this prospectus.
Missouri - sales that occurred in 2000 and are within three (3) years from
the date of this prospectus.
Nebraska - sales that occurred prior to July 1, 2002 and are within the
three (3) years from the date of this prospectus.
Tennessee - sales that occurred within two (2) years from the date of this
prospectus.
If you purchased units from us in any of the states listed above during the
corresponding time periods, then the sale of those units is eligible for
rescission on the terms described in this prospectus.
We determined the applicable time period for each state based on that
state's statute of limitations under its securities laws. In Missouri and
Nebraska, we also took into account the fact an exemption for the sale of units
was available for a portion of the time during which the sales were made.
Q: What if I did not purchase units in one of the covered states, but I now
live in one?
A: If the purchase of the units did not take place in California, Idaho,
Louisiana, Maryland, Minnesota, Missouri, Nebraska or Tennessee, then you may
not participate in the rescission offer, even if you currently reside or work in
one of these states.
16
Q: What will I receive if I accept the rescission offer?
A: If you accept our rescission offer, then we will rescind the sale of all
or some of the units, as you elect, that you purchased during the time periods
specified above and pay to you the purchase price you paid for those units, less
any dividends due or paid on such units. We will also pay you interest from the
date of your purchase of the units until the rescission offer expires at the
current statutory interest rate per year mandated by the state in which the
units were purchased by you. Depending on the state in which the units of
beneficial interest were purchased by you, you will be entitled to receive
interest at the following annual rate:
10.0% in Maryland and Tennessee;
8.0% in Missouri;
7.0% in California;
6.0% in Idaho, Minnesota and Nebraska; and
4.5% in Louisiana.
Q: What if I already sold some or all of my units of beneficial interest
subject to the rescission offer?
A: You may participate in the rescission offer only if you sold your units
subject to the rescission offer at a loss. In this event, you are entitled to
receive the amount of your "damages." Damages are the amount that would be
recoverable upon a tender (such as this rescission offer), less the value of the
units when you disposed of them and interest at the annual state interest rate
from the date of disposition. If you have already received more for those units
than you would otherwise be entitled to under the rescission offer, then you
will not receive anything under the rescission offer.
Q: Would I receive more for my units in this rescission offer or in the
recapitalization and tender offer?
A: We anticipate that you would receive more for your units in the
recapitalization and tender offer, but we cannot be certain of this because the
recapitalization and tender offer may not occur and, even if they do occur, (a)
the actual tender offer will not be determined for some time and (b) the number
of units that you are able to tender will be limited. Before the initial public
offering and tender offer can take place, the shareholders, unitholders and
JESTA trustees must approve the recapitalization transaction and our board of
directors must elect to proceed. If we proceed, then we currently intend to
launch the tender offer as soon as possible after the initial public offering,
and we will make the tender offer available to all holders of our class B common
stock, excluding the Grant family shareholders who have agreed not to
participate. At that time, we will determine the tender offer price, which will
be at or above the initial public offering price of the class A shares. The
tender offer price may be at, above or below the market price of the class A
shares at the time of the tender.
On October 25, 2002, we suspended the purchase and sale of units. Assuming
the recapitalization transaction does not take place and the suspension is
lifted, then we anticipate that you would receive more for your units upon a
sale pursuant to the Trust Agreement, based on the current option price under
the Trust Agreement, than you would in the rescission offer. However, there is
no assurance that we would elect to buy units offered for sale in the future, as
we have in the past, or that there would be a liquid market for the units.
Q: What will happen if I affirmatively reject or fail to accept the
rescission offer?
A: If you fail to accept or affirmatively reject the rescission offer, then
you will retain ownership of the units of beneficial interest you purchased and
will not receive any cash for those units in this recission offer. Your units
would then be subject to exchange for class B shares of common stock of New
Journal in the recapitalization (unitholders who participate in the share
exchange and do not perfect dissenters' rights will receive a special dividend
in an amount to be determined), as we describe in "Brief Description of
Recapitalization," if the recapitalization takes place. Generally, under state
securities laws, if you fail to accept this offer, then in the future you will
be precluded from requiring us to rescind our sale of units to you because
17
of our failure to register the offer and sale of the units under applicable
state securities laws. As to your legal rights in connection with this offer,
you should consult with your own legal counsel regarding all of your legal
rights and remedies before deciding whether or not to accept this rescission
offer.
Assuming the recapitalization transaction takes place, this rescission
offer will expire before the recapitalization transaction takes place.
Q: Can I accept the offer for some and not all of my units?
A: Yes, you may tender some or all of your units that are subject to this
rescission offer.
Q: When does the rescission offer expire?
A: Our rescission offer expires at 5:00 p.m., Central Daylight Time, on
_______, 2003 or the date that is 30 calendar days after your receipt of this
offer, whichever date is later, which we refer to as the "expiration date."
Q: What do I need to do to accept the rescission offer?
A: Prior to the expiration date, you should complete, sign and date the
accompanying election form and return it to us in the enclosed return envelope,
which must be postmarked on or before the expiration date.
Q: What happens if I do not return my election form?
A: If you do not return your election form to us in the enclosed return
envelope, with a postmark on or before the expiration date of our rescission
offer, then you will be deemed to have rejected our offer.
Q: Can I change my mind after I have mailed my signed election form?
A: Yes. You can change your decision about accepting or rejecting our
rescission offer at any time before the expiration date. You can do this by
completing and submitting a new election form in an envelope with a postmark on
or before the expiration date of the rescission offer.
Q: If I accept the rescission offer, will you withhold any taxes?
A: No, generally we will not withhold any taxes. We strongly urge you to
consult with your tax advisor as to the tax consequences of accepting or
rejecting the rescission offer.
Q: When and how will payments be made?
A: We will mail a payment to the address included on the election form
within fifteen business days after the expiration of the offer, provided we have
received your executed and properly completed election form, within the
prescribed time period.
Q: Who can help answer my questions?
A: We suggest that you consult your legal counsel and tax advisor prior to
making your decision about accepting or rejecting our rescission offer. In
addition, you can call Paul E. Kritzer, our Secretary, at (414) 224-2374 with
any questions about the rescission offer. Neither we nor our officers or
directors may make any recommendations to you with respect to our rescission
offer.
18
OUR RESCISSION OFFER
This discussion contains forward-looking statements. See "Forward-Looking
Statements" for a discussion of uncertainties, risks and assumptions associated
with these statements.
Background
During the period from June 1, 2000 to October 25, 2002, we offered and
sold in the aggregate 318,517 units of beneficial interest to certain of our
employees in California, Idaho, Louisiana, Maryland, Minnesota, Missouri,
Nebraska and Tennessee. We sold the units at prices ranging from $31.41 to
$37.78 per unit. For federal securities law purposes, we registered these offers
and sales on one or more Registration Statements on Form S-8. We did not
register the units under the state securities laws. Instead, we relied on
exemptions from the securities registration requirements for the offer and sale
of the units. It appears that, due to the nature of the Trust Agreement and the
nature of the offers and sales, the offer and sale of some of these units may
not have qualified for any exemption from registration under the securities laws
of California, Idaho, Louisiana, Maryland, Minnesota, Missouri, Nebraska or
Tennessee.
We are offering to rescind the sale of all of the units of beneficial
interest purchased during certain periods by employees or former employees who
purchased the units in California, Idaho, Louisiana, Maryland, Minnesota,
Missouri, Nebraska and Tennessee. We are offering to rescind the sale of these
units and pay to the participating employees the purchase price paid for the
units, less any dividends due or paid on such units. We will also pay you
interest from the date of your purchase of the units until the rescission offer
expires at the current statutory interest rate per year mandated by the state in
which the units were purchased by you.
You may also participate in the rescission offer if you sold your units
subject to the rescission offer at a loss. In this event, you are entitled to
receive the amount of your "damages." Damages are the amount that would be
recoverable upon a tender (such as this rescission offer), less the value of the
units when you disposed of them and interest at the annual state interest rate
from the date of disposition. If you have already received more for those units
than you would otherwise be entitled to under the rescission offer, then you
will not receive anything under the rescission offer.
We have listed below the period for each state during which purchases of
units in that state are subject to this rescission offer.
California - sales that occurred within two (2) years from the date of this
prospectus.
Idaho - sales that occurred within three (3) years from the date of this
prospectus.
Louisiana - sales that occurred within three (3) years from the date of
this prospectus.
Maryland - sales that occurred within three (3) years from the date of this
prospectus.
Minnesota - sales that occurred within three (3) years from the date of
this prospectus.
Missouri - sales that occurred in 2000 and are within three (3) years from
the date of this prospectus.
Nebraska - sales that occurred prior to July 1, 2002 and are within three
(3) years from the date of this prospectus.
Tennessee - sales that occurred within two (2) years from the date of this
prospectus.
Based upon the number of units covered by this rescission offer, and if all
such units were tendered in this rescission offer, the out-of-pocket cost to us
of repurchasing those units would be approximately $11,234,998, plus interest of
$1,234,038. While these amounts are significant, we do not expect the rescission
offer will have a material adverse effect on our results of operations or
financial condition.
19
In deciding whether to participate in the rescission offer or retain your
units, you should understand that concurrently with this rescission offer we are
seeking unitholder and shareholder approval of a transaction, including a share
exchange with a wholly-owned subsidiary, pursuant to which we will change the
current capital structure of Journal Communications by exchanging shares of our
common stock for new shares of class B common stock of New Journal, which shares
will be distributed to unitholders upon termination of JESTA following the share
exchange. After the share exchange, we intend to conduct an initial public
offering and offer to purchase some of our class B shares pursuant to a tender
offer (we do not expect that you would be able to tender all of your class B
shares in the tender offer). Assuming the recapitalization transaction takes
place, acceptance of this rescission offer will eliminate your ability to
participate in the recapitalization with respect to the rescinded units.
Further, you should be aware that the offering price in the tender offer, should
it occur, may be higher than the rescission offer price.
Further, we anticipate that you would receive more for your units in the
recapitalization and tender offer, but we cannot be certain of this because the
recapitalization and tender offer may not occur and, even if they do occur, (a)
the actual tender offer will not be determined for some time and (b) the number
of units that you are able to tender will be limited. Before the initial public
offering and tender offer can take place, the shareholders, unitholders and
JESTA trustees must approve the recapitalization transaction and our board of
directors must elect to proceed. If we proceed, then we currently intend to
launch the tender offer as soon as possible after the initial public offering,
and we will make the tender offer available to all holders of our class B common
stock, excluding the Grant family shareholders who have agreed not to
participate. At that time, we will determine the tender offer price, which will
be at or above the initial public offering price of the class A shares. The
tender offer price may be at, above or below the market price of the class A
shares at the time of the tender.
On October 25, 2002, we suspended the purchase and sale of units. Assuming
the recapitalization transaction does not take place and the suspension is
lifted, then we anticipate that you would receive more for your units upon a
sale pursuant to the Trust Agreement, based on the current option price under
the Trust Agreement, than you would in the rescission offer. However, there is
no assurance that we would elect to buy units offered for sale in the future, as
we have in the past, or that there would be a liquid market for the units.
Rescission Offer and Price
Because the offers and sales of units of beneficial interest discussed
above may have failed to comply with the securities registration requirements
under various state securities laws at various times, we may have incurred a
contingent liability respecting the units sold in the states enumerated above
because persons who purchased such units may have a claim against us for their
purchase and sale up to the period when the statute of limitations lapses for
such sales under the respective state securities laws. Accordingly, we are
offering to rescind certain of the sales of the units in California, Idaho,
Louisiana, Maryland, Minnesota, Missouri, Nebraska and Tennessee. If you accept
our rescission offer, then we will rescind the sale of any or all of the units,
as you elect, that you purchased that are subject to the rescission offer and
pay to you the purchase price you paid for the units, less any dividends due or
paid on such units. We will also pay you interest from the date of your purchase
of the units until the rescission offer expires at the current statutory
interest rate per year mandated by the state in which the units were purchased
by you.
You may also participate in the rescission offer if you sold your units
subject to the rescission offer at a loss. In this event, you are entitled to
receive the amount of your "damages." Damages are the amount that would be
recoverable upon a tender (such as this rescission offer), less the value of the
units when you disposed of them and interest at the annual state interest rate
from the date of disposition. If you have already received more for those units
than you would otherwise be entitled to under the rescission offer, then you
will not receive anything under the rescission offer.
Depending on the state in which the units were purchased by you, you will
be entitled to receive interest at the following annual rate:
10.0% in Maryland and Tennessee;
8.0% in Missouri;
20
7.0% in California;
6.0% in Idaho, Minnesota and Nebraska; and
4.5% in Louisiana.
Acceptance of Rescission Offer
You may accept our rescission offer by completing and signing the election
form accompanying this prospectus and returning it to us in the enclosed return
envelope, which must be postmarked on or before the expiration date. Unless
otherwise indicated in the registration statement filed with this prospectus,
all acceptances of the rescission offer will be deemed to be effective on the
expiration date of the rescission offer. Unless you accept the rescission offer
before the expiration date, your right to accept the rescission offer will
terminate.
You can revoke your acceptance or rejection of our rescission offer. You
can do this by completing and submitting a new election form in an envelope that
is postmarked on or before the expiration date. Payment for units of beneficial
interest as to which the rescission offer has been accepted will be made within
fifteen business days after the expiration date.
Other Terms and Conditions
We have not retained nor do we intend to retain any person to make
solicitations or recommendations to you in connection with our rescission offer.
Unless extended by us, our rescission offer will expire at 5:00 p.m., Central
Daylight Time, on _______, 2003, or the date that is 30 calendar days after your
receipt of this offer, whichever date is later. Unless a fully completed and
executed election form is received by the expiration date from those persons
receiving notice of the rescission offer through this prospectus, the rescission
offer will be deemed to have been rejected by such offerees. Neither we nor our
officers or directors may make any recommendations to you with respect to our
rescission offer. We urge you to read this prospectus carefully and to make an
independent evaluation with respect to the rescission offer.
Effect of Rescission Offer
We believe that your receipt of this rescission offer will preclude you
from later seeking similar relief in connection with our failure to comply with
the securities registration requirements for your units under the securities
laws of your state. If you affirmatively reject or fail to accept our rescission
offer, then you will retain ownership of the units of beneficial interest that
you purchased and will not receive any cash for those units in this rescission
offer. We urge you to consult with an attorney regarding all of your legal
rights and remedies before deciding whether or not to accept the rescission
offer.
In deciding whether to participate in the rescission offer or retain your
units, you should understand that concurrently with this rescission offer we are
seeking unitholder and shareholder approval of a transaction, including a share
exchange with a wholly-owned subsidiary (unitholders who participate in the
share exchange and do not perfect dissenters' rights will receive a special
dividend in an amount to be determined), pursuant to which we will change the
current capital structure of Journal Communications by exchanging shares of our
common stock for new shares of class B common stock of New Journal, which shares
will be distributed to unitholders upon termination of JESTA following the share
exchange. After the share exchange, we intend to conduct an initial public
offering and offer to purchase some of our class B shares pursuant to a tender
offer (we do not expect that you would be able to tender all of your class B
shares in the tender offer). Assuming the recapitalization transaction takes
place, acceptance of this rescission offer will eliminate your ability to
participate in the recapitalization with respect to the rescinded units.
Further, you should be aware that the offering price in the tender offer, should
it occur, may be higher than the rescission offer price.
On October 25, 2002, we suspended the purchase and sale of units. Assuming
the recapitalization transaction does not take place and the suspension is
lifted, then we anticipate that you would receive more for your units upon a
sale pursuant to the Trust Agreement, based on the current option price under
the Trust Agreement, than you would in the rescission offer. However, there is
no assurance that we would elect to buy units offered for sale in the future, as
we have in the past, or that there would be a liquid market for the units.
21
Funding of the Rescission Offer
We will fund any payments required under our rescission offer from
borrowings under our revolving credit facility.
Material Federal Income Tax Considerations
The following discussion summarizes the material federal income tax
considerations relevant to unitholders that are subject to the rescission offer.
We do not discuss or analyze all income tax considerations that may be relevant
to particular unitholders in light of their individual circumstances, and we do
not address any foreign, state or local tax considerations. This summary is
limited to those persons that hold units as "capital assets" within the meaning
of Section 1221 of the Internal Revenue Code (the "Code"). Unitholders are urged
to consult their own tax advisors as to the tax consequences of the rescission
offer.
The law applicable to the federal income tax consequences of the rescission
offer is unclear and we have not received an opinion of counsel or a ruling from
the Internal Revenue Service ("IRS") regarding such tax consequences. For
federal income tax purposes, we will treat the portion of our payment that is
denominated as interest as constituting additional purchase price for any units
that are tendered in the rescission offer. The IRS may contend, however, that
such portion should be treated for federal income tax purposes as interest, in
which event you would be subject to tax on such portion at ordinary income rates
(rather than at capital gains rates).
Rescinding the sale of your units pursuant to the rescission offer should
be treated as a transaction in which capital gain or loss (rather than dividend
income taxable at ordinary income rates) is recognized by you, provided that the
rescission constitutes a redemption that is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code). In general,
rescinding the sale of your units pursuant to the rescission offer should be
treated as being a redemption that is "not essentially equivalent to a dividend"
if the tender of units by you and any other unitholders (together with any
transaction that occurs as part of a common plan with your rescission, in which
transaction you acquire, directly or constructively, additional units) results
in a decrease in the percentage interest that you hold, directly or
constructively under the attribution rules of Section 318 of the Code, in our
outstanding common stock. For this purpose, the shares of our common stock
represented by the units that are held by us are not deemed to be outstanding.
Under the attribution rules of Section 318 of the Code, you are deemed to own
constructively any units held by your spouse, parents, children, and
grandchildren, and you are deemed to own constructively any units held by
certain entities (such as corporations, partnerships, estates, and trusts) in
which you have an interest.
If you elect to tender only a portion of the units covered by this
rescission offer, then it is possible that your percentage interest in our
outstanding common stock may actually increase as a result of the rescission
offer, in which event all of your proceeds from the rescission offer (and not
merely the excess of the proceeds over your original purchase price for the
rescinded units) would be treated as a dividend taxable at ordinary income
rates.
22
JOURNAL EMPLOYEES' STOCK TRUST
In this prospectus, we summarize certain terms of the Journal Employees'
Stock Trust Agreement, which governs employee-ownership of units of beneficial
interest. However, this prospectus is only a summary of those terms and does not
include all the terms of the Trust Agreement. In addition, the Trust Agreement
may be amended from time to time, and will be terminated if the recapitalization
is consummated. We urge you to read the Trust Agreement because it, rather than
this prospectus, defines your rights. You may request a copy of the Trust
Agreement from Paul E. Kritzer, Secretary, Journal Communications, Inc., P.O.
Box 661, Milwaukee, Wisconsin 53201-0661, (414) 224-2374.
Description of Trust
The Journal Employees' Stock Trust is a trust established under the Journal
Employees' Stock Trust Agreement, dated May 15, 1937, as amended. The purpose of
the trust is to promote and facilitate the acquisition and ownership of a
beneficial interest in common stock of Journal Communications by its employees
and to promote stability and continuity of management and control of Journal
Communications in the interest of Journal Communications, its shareholders and
employees. Currently, the trust owns 90% of our common stock and the heirs of
Harry J. Grant, our former chairman, own the balance.
Employees own units of beneficial interest representing beneficial
interests in the trust with each unit representing beneficial ownership in one
share of common stock of Journal Communications. A unit is different than a
share of common stock offered by publicly traded companies. Units cannot be
traded on the open market. In most circumstances, a unit only can be sold to
another employee, certain shareholders of Journal Communications or to Journal
Communications. A unit does not provide a unitholder with all of the rights
typically associated with stock ownership. The Trust Agreement governs all
aspects of unitholders' rights and obligations. The Trust Agreement is filed as
an exhibit to the registration statement of which this prospectus is a part and
is incorporated by reference herein.
The Journal Employees' Stock Trust is administered by five trustees who
currently are each an officer and a director of Journal Communications. It
engages in no business other than being the holder of record of Journal
Communications common stock, issuing units in exchange for shares of Journal
Communications' common stock, and in limited instances, voting shares of Journal
Communications' common stock held by it.
A trustee holds office until resignation, termination of employment, death,
incapacity or prolonged absence from the United States or until he or she ceases
to be an owner of one or more units. Successor trustees are elected by the
trustees remaining in office or, if there are none so remaining or if those
remaining fail to act within one month of a vacancy, by majority vote of the
units owned by active employee unitholders and employee benefit trusts. The
trustees receive no remuneration for their service as trustees.
We have paid and intends to continue to pay all administrative costs of the
Journal Employees' Stock Trust, and so long as that continues neither Journal
Communications nor the Stock Trust will impose any charges or deductions for
these items and liabilities against unitholders or against trust assets. There
are no liens on any trust assets. However, unitholders may pledge units to
secure loans in accordance with the Journal Employees' Stock Trust Agreement and
upon terms offered by lenders.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The results of operations of the Journal Employees' Stock Trust consist
solely of the receipt of dividends from Journal Communications on the shares of
Journal Communications' common stock that the Stock Trust holds. Cash dividends
generally are paid directly to unitholders at the direction of the trustees of
the Stock Trust.
23
JOURNAL COMMUNICATIONS
Description of Journal Communications
We are a diversified media and communications company with operations in
publishing, radio and television broadcasting, telecommunications and printing
services. In newspaper publishing, we publish the Milwaukee Journal Sentinel,
which serves as the only major daily and Sunday newspaper for the Milwaukee
metropolitan area, and we publish more than 90 community newspapers and shoppers
in eight states. We own and operate 36 radio stations and six television
stations in 11 states. Through our subsidiary, Norlight Telecommunications,
Inc., we provide telecommunications services through our large fiber optic
network. We also provide a wide range of commercial printing services including
publications, professional journals and documentation material, as well as
electronic publishing, kit assembly and fulfillment. In 2002, our total
operating revenue was $801.4 million, 57.9% of which was generated from our
publishing and broadcasting operations, 18.6% from telecommunications and 23.5%
from printing services and other operations.
We were founded in 1882 as a newspaper publisher serving Milwaukee,
Wisconsin. Our media business mix was expanded in 1927 when we signed on WTMJ
radio station, and again in 1947 when we put WTMJ-TV on the air. In 1937, Harry
J. Grant founded our employee ownership plan, which has contributed
significantly to our company's positive culture and growth by creating the
Journal Employees' Stock Trust. We believe employee ownership has served as a
competitive advantage for our company since JESTA was established. We have been
able to attract and retain motivated people who have a passion for the business
and a level of commitment and sense of accountability that is heightened due to
their participation in ownership. As of March 23, 2003, 2,405 of our 4,235
full-time employees owned units in JESTA, representing 58% of our full-time
workforce. Our culture is reinforced by our strong commitment to high ethical
standards.
Over the last 10 years, we have purchased approximately 40 businesses, most
of which have been acquisitions of publishing or broadcasting properties. Our
1999 purchase of the Great Empire radio group, consisting of 13 radio stations,
was our largest acquisition during this period. As a result of this expansion,
we have significantly expanded our diversified media operations beyond our
Milwaukee base. We plan to continue to search for acquisitions that fit our
growth strategy, focusing on TV and radio broadcast stations in both existing
markets and in new markets with an economic profile similar to those we
presently serve.
In order to appropriately match management resources to the manner in which
our businesses are actually run, we reorganized our business segments in 2002 as
follows: (i) publishing; (ii) broadcasting; (iii) telecommunications; (iv)
printing services; and (v) other. Our publishing segment consists of a daily
newspaper, the Milwaukee Journal Sentinel, and more than 90 community newspapers
and shoppers. Our broadcasting segment consists of 36 radio stations and six
television stations in 11 states. Our telecommunications segment provides
wholesale and business-to-business telecommunications services through a high
speed fiber optic telecommunications network that covers more than 4,400 route
miles in seven states. Our printing services segment reflects the operations of
our printing and assembly and fulfillment business. Our other segment consists
of a label printing business and a direct marketing services business.
The operating revenue generated by each operating segment, as a percentage
of our consolidated operating revenue, for the last three years is shown below.
2000 2001 2002
-------------- -------------- --------------
Publishing 42.1% 39.6% 38.8%
Broadcasting 18.3 16.7 19.1
Telecommunications 15.5 18.8 18.6
Printing Services 13.1 14.2 12.2
Other 11.0 10.7 11.3
-------------- -------------- --------------
100.0% 100.0% 100.0%
============== ============== ==============
24
Publishing
Our publishing business consists of our daily newspaper, the Milwaukee
Journal Sentinel, and our community newspapers and shoppers. Our publishing
business accounted for 38.8% of our operating revenue and 26.6% of our operating
earnings for the year ended December 31, 2002. Within our publishing segment,
our daily newspaper accounted for 68.4% of our publishing operating revenue and
94.7% of our publishing operating earnings in 2002. See note 12 to our
consolidated financial statements for additional financial information regarding
our publishing business.
Daily Newspaper
Published continuously from 1882, the Milwaukee Journal Sentinel has the
largest circulation of all newspapers published in Wisconsin, with a circulation
of approximately 445,000 on Sunday and 250,000 daily. The Milwaukee Journal
Sentinel serves as the only major daily and Sunday newspaper for the Milwaukee
metropolitan area. According to a 2002 readership survey conducted by
Scarborough Research, the Sunday Milwaukee Journal Sentinel ranks number one in
readership penetration among the 50 largest geographic markets in the United
States, and the daily newspaper ranks number seven. These rankings are
calculated by dividing the number of adults reading the newspaper in a
newspaper's Metropolitan Statistical Area divided by the number of persons over
the age of 18 in the newspaper's MSA. The Milwaukee Journal Sentinel's MSA,
which ranks among the top 50 in the United States, consists of Milwaukee,
Waukesha, Washington and Ozaukee counties. In addition, according to data
published by the Audit Bureau of Circulations, for the six months ended
September 30, 2002, the Milwaukee Journal Sentinel's Sunday circulation ranked
number 23 in the United States.
We were selected, together with The Boston Globe, as a finalist for the
2003 Pulitzer Prize in explanatory reporting, which was won by The Wall Street
Journal. In addition, we have won numerous recent print media awards, including:
o 2003 National Headliner Awards, first place for local interest column;
o 2002 Inland Press Association, first place for explanatory writing,
editorial excellence, and news picture contest; second place for front
page contest;
o 2002 Annual Society for News Design, three awards for excellence,
illustration and photography; and
o 2002 Better Newspaper Contest conducted by the Wisconsin Newspaper
Association, Newspaper of the Year among the state's largest
newspapers.
In addition to our traditional print media, we operate a number of websites
that provide editorial and advertising content, including JSOnline.com and
OnWisconsin.com. Also, we have developed a subscription-based website,
Packerinsider.com, dedicated to coverage of the Green Bay Packers, to which
viewers must pay to subscribe. We expect our online operations to cover their
direct operating costs for 2003, and we continue to seek ways to best serve the
growing population interested in deriving news from the Internet.
Our new production facility, which became operational in early 2003, is the
largest capital investment in our history at a cost of $112 million. The 448,750
square-foot facility is on a 41-acre site in an industrial area in the village
of West Milwaukee. The facility houses all printing, packaging, inserting,
recycling and transportation processes for the Milwaukee Journal Sentinel. We
expect that our new presses will provide improved print reproduction quality and
increased productivity, as well as additional opportunities to pursue commercial
printing revenue from third parties.
The Milwaukee Journal Sentinel is distributed primarily by independent
contract carriers throughout southeastern Wisconsin and a small portion of
northern Illinois. Agents deliver the Milwaukee Journal Sentinel to single copy
outlets throughout the rest of Wisconsin.
Our primary goal is to grow readership, circulation, revenue growth and
margins in our five county primary market area (which we refer to as our "PMA").
While our efforts center on this five county region, we also actively seek
attractive expansion opportunities in nearby market areas provided they meet
strict requirements for return on invested capital. In order to
25
achieve this goal, we have developed strategies based on the findings of the
nationwide survey of 37,000 newspaper readers by the Readership Institute at
Northwestern University. This study, conducted in 2001 in about 100 markets
including Milwaukee, concluded that the most important objective for the
newspaper industry is readership growth. The Institute identified four
cornerstones for increasing readership growth: compelling content, a strong
brand, over-the-top customer service and a constructive culture. We have adopted
those cornerstones as our strategic imperatives. The Milwaukee Journal Sentinel
is focused on increasing the appeal of both its editorial and advertising
content in order to better meet readers' interests and to make the paper easier
to read and navigate. We have undertaken concentrated efforts to develop,
implement, communicate and track strategies to grow our well-established brand.
We are committed to on-time delivery as our top customer service priority.
Finally, we are focused on enhancing our constructive, collaborative internal
culture to support additional readership growth.
Although the penetration of the Milwaukee Journal Sentinel among
southeastern Wisconsin readers is generally high, the newspaper still has
significant growth potential, especially in targeted ZIP codes in which the
newspaper's penetration level remains low. As part of a targeted readership
growth strategy, we have undertaken a program called the "Milwaukee Initiative,"
with discounted subscription and single copy offers and outreach programs at
churches, educational institutions and apartment complexes. We believe this
initiative will increase circulation and subscription revenue and enhance our
appeal to advertisers in Milwaukee County.
The following table sets forth our circulation data based on Audit Bureau
of Circulation averages for the six-month periods ended September 30:
Average Net Paid Circulation
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Daily............ 283,115 284,515 277,027 253,768 240,637
Sunday........... 456,906 460,103 461,025 455,862 434,023
The decline in average net paid circulation from 2001 to 2002 was caused
primarily by the elimination of home delivery in all but 12 counties in
southeastern Wisconsin, as part of our cost reduction initiatives, as well as
the impact of a weakened national economy. As a result, average net paid
circulation for the six months ending September 30, 2002 decreased by 5.2% for
our daily paper and 4.8% for our Sunday paper compared to the average net paid
circulation for the six months ending September 20, 2001.
Circulation revenue accounted for 21.3% of our daily newspaper's total
operating revenue in 2002. The Milwaukee Journal Sentinel single copy prices are
$0.50 for daily and $1.75 for Sunday.
Advertising revenue accounted for 77.0% of our daily newspaper's total
operating revenue in 2002. We have set forth in the table below annual
advertising volume as printed on our presses (measured in column inches) and the
number of preprints (which are individual customer's advertisements that are
provided by the customer and that are inserted into the newspapers) inserted
into the Milwaukee Journal Sentinel's daily and Sunday editions and its total
market coverage (TMC) product, Weekend plus, for the last five calendar years.
We believe the advertising volume decline during 2002 in "full run" (which
refers to advertisements that are published in all editions of the newspaper, as
opposed to "part run" which refers to advertisements published in only certain
editions of the newspaper) was a result of advertisers switching to preprints,
the downturn in employment advertising and several large retailers decreasing
their advertising expenditures. We believe more advertisers are switching to
preprints because preprints can offer better opportunities for targeted
advertising, better print quality and lower cost.
26
Annual Advertising Volume
1998 1999 2000 2001 2002
-----------------------------------------------
(inches in thousands)
Full run in column inches 2,030.6 1,987.0 2,015.2 1,763.0 1,668.3
Part run in column inches 20.6 15.4 24.2 70.7 80.3
Preprint pieces (in millions) 650.0 659.0 665.7 719.5 773.5
Community Newspapers and Shoppers
We own and operate more than 90 community newspapers and shoppers and seven
printing plants through our subsidiary, Add, Inc. Advertising revenue and
circulation revenue accounted for 70% and 3%, respectively, of our community
newspapers' and shoppers' total operating revenue in 2002. We publish 39
shoppers with a combined circulation of more than 780,000 each week. Shoppers
are free publications, primarily carrier-delivered to each household in a
geographic area, featuring advertisements primarily from local and regional
businesses. A few of our shoppers also include local interest stories and weekly
columns, such as fishing/hunting reports, obituaries and television listings.
These shoppers are delivered to various communities in Wisconsin, Ohio,
Louisiana, Vermont and Massachusetts.
We publish 47 community newspapers, with a combined paid and unpaid
circulation of more than 300,000 weekly. Our community newspapers focus on local
news and events that are of interest to the local residents. In some markets,
our community newspapers are the only source of local news. These local
newspapers serve communities in Wisconsin, Connecticut and Florida.
We also publish 10 niche publications that appeal to a very specific
advertiser and reader. A few examples of the niche products are automotive and
boating focused publications. We provide niche publications in Wisconsin,
Louisiana, Florida and New York.
In addition to our publishing operations, we also provide commercial
printing services including cold-web printing, electronic prepress, bindery and
inserting mostly for other weekly niche publications. Revenue from commercial
printing accounted for 27% of our community newspapers' and shoppers' total
operating revenue in 2002.
We recently appointed a new president at Add, Inc. The management team is
focused on reducing overall costs and improving performance by leveraging our
well developed clusters and strong local franchises.
Newsprint
The basic raw material of newspapers is newsprint. We currently purchase
approximately 95% of our estimated newsprint requirements from two suppliers. We
pay market prices for quantities we determine will meet our requirements. The
remaining 5% of our newsprint could come from these suppliers or from other
suppliers in the spot market.
We believe we will continue to receive an adequate supply of newsprint for
our needs. Newsprint prices fluctuate based upon market factors, which include
newsprint production capacity, inventory levels, demand and consumption. Price
fluctuations for newsprint can have a significant effect on our results of
operations. The average net price per ton was $446 in 2002 compared to an
average net price per ton of $573 in 2001. Our total cost of newsprint decreased
$12.3 million during 2002. Our consumption of newsprint declined to 77,161
metric tons in 2002 from 77,900 metric tons in 2001. The decrease in consumption
in 2002 is attributed to fewer advertising pages and a decrease in average net
paid circulation. This decrease in consumption was partially offset by our
decision to print the weekly television guide on our own new presses versus
having it printed by another firm and the use of newsprint for the startup of
the new presses.
27
Broadcasting
Our broadcasting business is conducted through our wholly-owned subsidiary,
Journal Broadcast Corporation (doing business as Journal Broadcast Group), and
its subsidiaries, which together operate six television stations and 36 radio
stations in 11 states. Our broadcasting business accounted for 19.1% of our
operating revenue and 29.3% of our operating earnings for the year ended
December 31, 2002. See note 12 to our consolidated financial statements for
additional financial information regarding our broadcasting business.
Our radio and television stations focus on providing targeted and relevant
local programming that is responsive to the interests of the communities in
which they compete. We promote a local focus that allows our stations and
clusters to serve listeners, viewers and advertisers more effectively,
strengthens each station's brand identity and allows our stations to provide
effective marketing solutions for local advertisers by reaching their targeted
audiences.
Radio Broadcasting
Based on the Fall 2002 Arbitron ratings book, we have the number one
station in terms of station audience rank in four of the eight markets in which
our radio stations operate, including in Milwaukee where WTMJ-AM has been the
top rated radio station for 26 consecutive Arbitron rating periods. We have
grown our radio operations primarily through recent acquisitions of stations in
mid-sized growth markets. We have acquired 15 of our 36 radio stations since
1999. In 2002, operating revenue from radio operations accounted for 51.2%
percent of our broadcasting operating revenue.
Our radio stations are set forth below.
Total
Station Stations
Year Audience in FCC License
Market and Station City of License Acquired Format Rank(1) Market(2) Class(3)
- ------------------- ------------------- ---------- ------------------------ -------- ---------- -----------
Milwaukee, WI
WTMJ-AM Milwaukee, WI 1927 News/Talk/Sports 1 28 B
WKTI-FM Milwaukee, WI 1940 Adult Contemporary 6+ 28 B
Omaha, NE
KOSR-AM Omaha, NE 1995 Sports 17 21 C
KHLP-AM(4) Omaha, NE 1997 Talk N/A 21 B
KEZO-FM Omaha, NE 1995 Rock 4 21 C
KKCD-FM Omaha, NE 1995 Classic Hits 7 21 C2
KSRZ-FM Omaha, NE 1998 Hot Adult Contemporary 11 21 C
KOMJ-AM Omaha, NE 1999 Adult Standards 6 21 B
KQCH-FM Omaha, NE 1999 Contemporary Hits 3 21 C
KBBX-FM Nebraska City, NE 1997 Regional Mexican 14 21 C1
Tucson, AZ
KFFN-FM Tucson, AZ 1996 Sports Radio 22 27 C
KMXZ-FM Tucson, AZ 1996 Adult Contemporary 1 27 C
KZPT-FM Tucson, AZ 1996 Hot Adult Contemporary 10+ 27 A
KGMG-FM Oracle, AZ 1998 Rhythmic Oldies 13 27 C2
Knoxville, TN
WQBB-AM Powell, TN 1998 Sports 21+ 24 D
WMYU-FM Karns, TN 1997 Classic Hits 6 24 A
WWST-FM Sevierville, TN 1997 Contemporary Hits 3 24 C1
WBON-FM Knoxville, TN 1998 Classic Rock 12+ 24 A
Boise, ID
KGEM-AM Boise, ID 1998 Adult Standards 9+ 25 B
KJOT-FM Boise, ID 1998 Rock 17 25 C
KQXR-FM Boise, ID 1998 Alternative Rock 6+ 25 C1
KTHI-FM Caldwell, ID 1998 Classic Hits 9+ 25 C
28
Total
Station Stations
Year Audience in FCC License
Market and Station City of License Acquired Format Rank(1) Market(2) Class(3)
- ------------------- ------------------- ---------- ------------------------ -------- ---------- -----------
KRVB-FM Nampa, ID 2000 Adult Alternative 14 25 C
KCID-AM(4) Caldwell, ID 1998 Oldies N/A 25 C
Wichita, KS
KFTI-AM Wichita, KS 1999 Classic Country 4 21 B
KFDI-FM Wichita, KS 1999 Country 1 21 C
KICT-FM Wichita, KS 1999 Rock 5 21 C1
KFXJ-FM Augusta, KS 1999 Classic Hits 10 21 C2
KYQQ-FM Arkansas City, KS 1999 Regional Mexican 18+ 21 C
KMXW-FM Newton, KS 2000 Hot Adult Contemporary 16+ 21 C1
Springfield, MO
KSGF-AM Springfield, MO 1999 News/Talk 15+ 20 B
KTTS-FM Springfield, MO 1999 Country 1 20 C
KSPW-FM Sparta, MO 1999 Contemporary Hits 6 20 C2
Tulsa, OK
KFAQ-AM Tulsa, OK 1999 Talk 17+ 26 A
KVOO-FM Tulsa, OK 1999 Country 5+ 26 C
KXBL-FM Henryetta, OK 1999 Classic Country 17+ 26 C1
(1) Station audience rank equals the ranking of each station, in its market,
according to the Fall 2002 Arbitron ratings book. The ranking is determined
based on the estimated share of persons 12 years and older listening during
an average 15-minute increment (also known as "average quarterly hour," or
"AQH," share) occurring Monday-Friday between 6:00 a.m. and midnight. A "+"
indicates a tie with another station in the market.
(2) Includes stations qualified to be reported in the Fall 2002 Arbitron
ratings book. In order to be qualified to be reported, a station must have
received five or more minutes of listening in at least 10 diaries in the
market from 6:00 a.m. to midnight, Monday through Sunday, during the survey
period.
(3) The FCC license class is a designation for the type of license based upon
the radio broadcast service area according to radio broadcast rules
compiled in the Code of Federal Regulations.
(4) Did not qualify to be reported in the Fall 2002 Arbitron ratings book.
Most of our radio broadcasting operating revenue is generated from the sale
of local advertising, with the balance generated from the sale of national,
political and issue advertising. Our goal is to achieve a top two radio
advertising revenue share in all of our markets. We employ a variety of
sales-related and programming strategies to pursue this goal. Our sales-related
strategy includes developing a highly trained sales force which employs a
solution-based selling approach, through which we seek to partner with our key
advertisers to realize their marketing goals and maximize our share of their
advertising spending. We believe that developing local station "clusters" allows
us to more effectively pursue this solution-based approach because it allows us
to offer a variety of format alternatives to reach a broader range of local
advertisers. Our programming strategy includes seeking to develop and retain
local on-air talent to drive ratings and provide local promotional value for our
advertisers. For example, our top-rated morning show hosted by Todd and Tyler at
KEZO-FM in Omaha has been on the air with us for nearly 10 years. We have
long-term contracts with many of our on-air personalities.
We base our advertising rates primarily on each station's ability to
attract audiences having certain demographic characteristics in the market areas
which advertisers want to reach, as well as the number of stations competing in
the market. Advertising rates generally are the highest during morning and
evening drive-time hours. We have predetermined the number of commercials that
are broadcast each hour, depending on the format of a particular station. We
attempt to determine the number of commercials broadcast hourly that can
maximize available revenue dollars without diminishing listening levels.
Although the number of advertisements broadcast during a given time period may
vary, the total number of advertisements broadcast on a particular station
generally does not vary significantly from year to year, unless there has been a
format change.
29
In an effort to maximize our operating margins, we have implemented a
continuing focus on cost reduction. Our cost control strategy includes a
centralized management approach to certain functions such as engineering, IT,
finance and human resources, in order to generate economies of scale and
incorporate best practices. In other areas such as sales and programming, we
have adopted a decentralized market-centric approach, which we believe
contributes to a differentiated and deep local focus and appeals to our
advertisers and listeners.
We have successfully grown our radio group over the past several years by
acquiring stations and aligning them in clusters within a market, in many cases
building out the cluster around a lead station. We seek to build a unique and
differentiated brand position at each station within a cluster so that we can
offer distinct solutions for a variety of advertisers in any given market. This
clustering strategy has allowed us to target our stations' formats and sales
efforts to better serve advertisers and listeners as well as leverage operating
expenses to maximize the performance of each station and the cluster.
We currently intend to continue our acquisition program following our
cluster strategy in certain existing and new mid-sized growth markets. We have
developed a highly disciplined and targeted acquisition strategy. We have
generally avoided auction processes and have a high rate of success in
completing acquisitions we have pursued. We believe that our entrepreneurial
employee ownership culture, long history in the business, and reputation in the
industry all represent competitive advantages for us in identifying and
completing future acquisitions.
Television Broadcasting
Based on the November 2002 Nielsen ratings book, we are among the top three
stations in terms of station audience rating in all of the six markets in which
our television stations operate. As of November 2002, WTMJ-TV, our Milwaukee
television station, had the top rated late night local newscast in its
Designated Market Area in 43 of the previous 44 ratings periods (based on the
percentage of the total potential household audience). In 2002, operating
revenue from television operations accounted for 48.8% of our broadcasting
operating revenue.
Our television stations are:
Total
Station Station Stations
Year Network Audience Audience in
Station Market Acquired Affiliation Rating(1) Share(1) Market(2)
- ------------ ----------------- -------- ----------- --------- -------- ---------
WTMJ-TV Milwaukee, WI 1947 NBC 6 15 13
KTNV-TV Las Vegas, NV 1979 ABC 3 7 12
WSYM-TV Lansing, MI 1984 Fox 2 6 7
KMIR-TV Palm Springs, CA 1999 NBC 3 11 9
KIVI-TV Boise, ID 2001 ABC 3 12 7
KSAW-TV(3) Twin Falls, ID 2001 ABC 2 6 6
(1) Ratings equal the percentage of the total potential household audience in
the Designated Market Area and shares equal the percentages of the audience
in the Designated Market Area actually watching television. The percentages
are based on surveys conducted 5:00 a.m. to 2:00 a.m., seven days a week,
as published in the November 2002 Nielsen ratings book.
(2) Includes all television stations whose city of origin is within the
Designated Market Area that meet the minimum reporting standards.
(3) Low-power television station.
The affiliation by a station with one of the four major networks (NBC, ABC,
CBS and Fox) has a significant impact on the composition of the station's
programming, revenue, expenses and operations. The success of our NBC affiliate
stations in Milwaukee and Palm Springs is partially attributable to the strong
ratings NBC network programming has generated in recent years. Likewise, lower
ratings at ABC have contributed to the relative underperformance at our Las
Vegas and Boise stations. We believe that both Las Vegas and Boise are markets
with attractive demographic and growth profiles and that as a result, there is
significant opportunity for growth and operating improvement at these stations
notwithstanding the recent ratings of ABC network programming. We believe all of
our television stations are strong affiliates with good relationships with the
respective networks.
30
In all of our markets and regardless of network affiliation, we focus on
developing leading local news programming and contracting popular syndicated
programming with the objective of maximizing our share of advertising spending
in a given market. Based on the November 2002 Nielsen ratings book, we had the
number one local late evening news program in two of our five markets (based on
the percentage of the total potential household audience), including our recent
acquisition, KMIR-TV in Palm Springs, California, and WTMJ-TV in Milwaukee.
We derive the vast majority of our television broadcasting revenue from
advertising. Our television advertising revenue and rates in even-numbered years
benefit from political, issue, and Olympics-related advertising. NBC has
purchased the right to broadcast the Olympics through 2008, and we expect higher
operating revenue in these years because the expected increased ratings for our
two NBC affiliates will allow them to sell advertising at premium rates.
We intend to pursue additional acquisitions of television stations,
particularly stations in mid-sized growth markets with potential for operating
improvement. Depending on the outcome of current discussions on deregulation at
the FCC, we may seek to add second stations in our existing markets and exploit
other potential clustering or cross-ownership opportunities as they arise.
We have made substantial investments in digital conversion equipment at our
stations and are fully compliant with FCC mandates on digital broadcasting. We
do not currently anticipate significant additional future capital investment
associated with our digital conversion.
Telecommunications
We conduct our telecommunications business through our subsidiary Norlight
Telecommunications, Inc., which provides both wholesale telecommunications
services, sometimes referred to as "carrier services," and business-to-business
telecommunications services, sometimes referred to as "enterprise services," or
"commercial services." We have operated our telecommunications business for more
than 30 years, and during this time it has emerged as a premier service provider
focused on mid-to smaller-sized cities in the Great Lakes region. Our
telecommunications business accounted for 18.6% of our operating revenue and
35.9% of our operating earnings for the year ended December 31, 2002. See note
12 to our consolidated financial statements for additional financial information
regarding our telecommunications business.
Throughout the history of our telecommunications business, we have applied
a disciplined approach to our cost structure and the investment of capital,
consistent with our desire to build and maintain a high quality fiber optic
network while earning a substantial return on our investment. Our
telecommunications business has in the aggregate generated over $338 million of
EBITDA compared to $153 million in capital expenditures over the last 10 years,
and continues to contribute a large portion of our consolidated EBITDA. Over the
last five years, our telecommunications capital expenditures averaged $22.7
million per year, with a maximum of $37.0 million in 1999. Given industry
conditions, however, we reduced capital expenditures to $10.1 million in 2002,
and we expect to continue our disciplined return-based investment approach.
The following table presents telecommunications EBITDA and capital
expenditures, as well as a reconciliation of our telecommunications operating
earnings to telecommunications EBITDA, for 1993 through 2002:
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in millions)
Operating earnings $8.7 $9.0 $9.4 $9.6 $12.3 $24.2 $32.5 $40.1 $48.0 $41.0
Depreciation 6.8 7.3 7.5 7.5 8.1 8.6 9.4 11.4 14.7 17.1
Amortization 0.4 0.7 0.9 0.9 0.7 0.4 0.3 -- -- --
------- -------- --------- -------- ---------- ------- ------- ------ -------- ----------
EBITDA $15.9 $ 17.0 $ 17.8 $ 18.0 $ 21.1 $ 33.2 $ 42.2 $51.5 $ 62.7 $ 58.1
======= ======== ========= ======== ========== ======= ======= ====== ======== ==========
Capital
Expenditures $ 5.2 $6.4 $2.6 $ 12.3 $ 12.9 $ 10.2 $ 37.0 $28.8 $ 27.5 $ 10.1
======= ======== ========= ======== ========== ======= ======= ====== ======== ==========
31
Our wholesale telecommunications business provides network transmission
solutions for other telecommunications carriers, including interexchange
(nationwide long distance) carriers, wireless carriers, Internet service
providers, incumbent local exchange carriers and competitive local exchange
carriers in order to provide voice, video, data and Internet applications for
their customers. Our business-to-business service provides integrated voice and
data communications solutions, specifically dedicated circuits, frame relay
(statistically multiplexed packet data service), ATM (Asynchronous Transfer Mode
- - a very high speed transmission technology), Internet access and switched voice
services (pay-by-the-minute long distance including domestic, international and
calling card services) to small and medium sized businesses in the upper
Midwest. Our satellite and video services provide terrestrial and satellite
transmission of broadcast quality video signals to broadcast, entertainment and
sports industries, educational institutions and businesses.
The foundation for our telecommunications success has been our customer
loyalty focused strategy. Our telecommunications business generally receives
high marks for strong brand recognition and for customer satisfaction, with the
results of a 2002 survey conducted by Peregrine Marketing Research showing that
86.8% of our enterprise customers are generally very satisfied with our service.
This strategy reflects the view that the continued and future success of our
telecommunications business is dependent upon reliability and responsiveness to
customers. Each customer has its own dedicated account team to manage and design
effective telecommunications solutions.
We refer to the employees of our telecommunications business as the
"Guardians of Data." This message is meant as an indication of our commitment to
being the provider of choice in providing innovative solutions within the data
product category.
We own and operate 3,794 route miles of fiber optic network connecting
Wisconsin, Michigan, Indiana, Minnesota, Illinois, Iowa and Ohio. We also own an
additional 669 route miles that are available for future network traffic. The
network is designed to carry telecommunications traffic to second and third tier
markets (population sizes greater than 50,000) within its footprint. The
transport layer of the network uses SONET (Synchronous Optical Network)
technology to transport digital signals. The network is configured in a ring
physical topology, with multiple fibers providing redundancy. Given this
configuration, in the event that an individual fiber strand suffers a
catastrophic failure, traffic is automatically re-routed to avoid service
interruption. Our network terminates in many smaller cities such as Green Bay,
Wisconsin, Battle Creek, Michigan and Rochester, Minnesota, as well as first
tier markets. This ability to provide our customers with deeper direct
penetration differentiates us from many of our competitors. Pricing to and from
these markets has also experienced somewhat less pressure than in the larger
cities.
WorldCom, Inc. and Global Crossing, our largest telecommunications
customers, together accounted for 20.1% of our total telecommunications
operating revenue in 2002. Global Crossing filed for Chapter 11 bankruptcy
protection in January 2002 and WorldCom filed for Chapter 11 bankruptcy
protection in July 2002. Both companies are also currently under investigation
by the Securities and Exchange Commission and the Justice Department. However,
we continue to provide services to both WorldCom and Global Crossing and receive
payments for those services in the ordinary course of business. The loss of the
ongoing business of either of these two customers would have a significant and
adverse effect on our results of operations.
Printing Services
Our printing services business is conducted through our subsidiary IPC
Communication Services, Inc. Our printing services business accounted for 12.2%
of our operating revenue and 1.8% of our operating earnings for the year ended
December 31, 2002. See note 12 to our consolidated financial statements for
additional financial information regarding our printing services business.
IPC, which was founded in 1949 and acquired by us in 1992, provides a wide
range of commercial printing services including publications, professional
journals and documentation material, as well as electronic publishing, kit
assembly and fulfillment. The foundation of our printing business includes
printing scientific, medical and technical journals. We generally utilize
conventional and electronic pre-press processes, web and sheet-fed printing and
complete bindery and finishing in our printing processes. We are also a
Microsoft authorized replicator of certificates of authenticity applied to
various software products. All of these markets are served through our direct
sales force.
32
Our printing services business is highly competitive and generally
characterized by lower operating margins. As a result, we maintain a disciplined
and aggressive approach to managing costs. We have recently shut down certain
unprofitable operations and implemented other cost containment initiatives. In
addition, we consistently seek opportunities to grow revenue through existing or
new business. For example, we believe there are opportunities for growth in
providing printing products and services to OEMs (original equipment
manufacturers). We believe our experience in providing these services to the
technology marketplace is a competitive advantage, and we intend to leverage
that advantage by expanding our services to other OEMs including industrial and
consumer products OEMs.
A large computer hardware OEM accounted for 37.6% of our printing services
operating revenue in 2002. The loss of this customer could have a material
adverse effect on our results of operations.
Other
Our other businesses consist of our label printing business conducted
through our subsidiary NorthStar Print Group and our direct marketing services
business conducted through our subsidiary PrimeNet Marketing Services. These
businesses accounted for 11.8% of our operating revenue and 3.1% of our
operating earnings for the year ended December 31, 2002. See note 12 to our
consolidated financial statements for additional financial information regarding
these businesses.
Our label printing business has three production facilities in Wisconsin
and Michigan's Upper Peninsula and produces glue-applied, in-mold, and pressure
sensitive labels for the beverage, automotive products, household chemical and
other major industries. Our label printing business is dedicated to providing
all of its customers with exceptional performance and flexibility. SAB/Miller
Brewing Company accounted for 50.7% of our label printing business' revenue in
2002. In 2002, our label printing business was in the second year of a five-year
contract with SAB/Miller Brewing Company. The loss of SAB/Miller Brewing Company
could have a material adverse effect on our results of operations.
Our direct marketing business provides nationwide direct marketing support
services to marketers of automotive, retail, publishing, financial and other
services. Our direct marketing business is committed to providing innovative
data, print and mail solutions that are always on time and right.
33
SELECTED FINANCIAL DATA
The following table presents our selected consolidated historical financial
data. The selected consolidated financial data for the years ended December 31,
2000, 2001 and 2002 and as of December 31, 2001 and 2002 have been derived from
our audited consolidated financial statements, including the notes thereto,
appearing elsewhere in this prospectus. The selected consolidated financial data
for the years ended December 31, 1998 and 1999 and as of December 31, 1998, 1999
and 2000 have been derived from our audited consolidated financial statements,
including the notes thereto, not included in this prospectus. The selected
consolidated financial data for the first quarters ended March 24, 2002 and
March 23, 2003 are derived from our unaudited condensed consolidated financial
statements, appearing elsewhere in this prospectus, which include all
adjustments, consisting of only normal adjustments that management considers
necessary for the fair presentation of the consolidated financial position and
results of operations for these interim periods. You should not consider results
for the quarter ended March 23, 2003 to be indicative of results for the year
ended December 31, 2003. This table should be read together with our other
financial information, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements, including the notes thereto, appearing elsewhere in this prospectus.
Fox Cities Newspapers and IPC Communication Services, S.A. have been reflected
as discontinued operations in all years presented.
First Quarter Ended(3)
----------------------------
Year Ended December 31, March 24, March 23,
--------------------------------------------------------------------------
1998 (1) 1999 (2) 2000 2001 2002 2002 2003
---------- ------------ ------------ ----------- ------------ ------------ ------------
(in thousands, except per share amounts)
Statement of Earnings
Data:
Operating revenue.........$ 731,033 $ 753,360 $ 819,232 $ 808,787 $ 801,376 $ 180,055 $ 174,467
Operating costs and
expenses............... 636,858 642,806 710,041 724,683 687,303 159,575 155,215
---------- ------------ ------------ ----------- ------------ ------------ -----------
Operating earnings
(4)(5)................. 94,175 110,554 109,191 84,104 114,073 20,480 19,252
Non-operating income
(expense), net......... 6,237 4,227 884 1,235 339 486 (414)
---------- ------------ ------------ ----------- ------------ ------------ -----------
Earnings from
continuing
operations before
income taxes and
accounting change...... 100,412 114,781 110,075 85,339 114,412 20,966 18,838
Income taxes............... 41,998 44,537 44,162 35,860 49,418 8,714 7,536
---------- ------------ ------------ ----------- ------------ ------------ -----------
Earnings from
continuing
operations before
accounting
change................. 58,414 70,244 65,913 49,479 64,994 12,252 11,302
Gain (loss) from
discontinued
operations, net of
taxes.................. 2,294 (795) 471 (1,722) (565) 1,595 --
Cumulative effect of
accounting change,
net of taxes........... -- -- -- -- (6,509) (6,509) --
---------- ------------ ------------ ----------- ------------ ------------ -----------
Net earnings (4)..........$ 60,708 $ 69,449 $ 66,384 $ 47,757 $ 57,920 $ 7,338 $ 11,302
========== ============ ============ =========== ============ ============ ===========
Weighted average shares
outstanding-basic and
diluted.................... 28,124 27,393 27,101 28,084 26,430 26,775 25,916
========== ============ ============ =========== ============ ============ ===========
Basic and Diluted
Earnings Per Share
Amounts
Continuing operations
before accounting
change.................$ 2.08 $ 2.56 $ 2.43 $ 1.76 $ 2.46 $ 0.46 $ 0.44
Discontinued
operations, net of
taxes.................. 0.08 (0.02) 0.02 (0.06) (0.02) 0.06 --
Cumulative effect of
accounting change,
net of taxes........... -- -- -- -- (0.25) (0.25) --
---------- ------------ ------------ ----------- ------------ ------------ -----------
Net earnings (4)..........$ 2.16 $ 2.54 $ 2.45 $ 1.70 $ 2.19 $ 0.27 $ 0.44
========== ============ ============ =========== ============ ============ ===========
Cash dividends............$ 1.10 $ 1.14 $ 1.35 $ 1.35 $ 1.20 $ 0.30 $ 0.30
========== ============ ============ =========== ============ ============ ===========
34
Segment Data
Operating revenue:
Publishing............$ 344,565 $ 347,137 $ 345,321 $ 320,615 $ 311,138 $ 69,517 $ 68,337
Broadcasting.......... 115,113 130,857 149,886 134,801 152,749 30,680 29,462
Telecommunications.... 81,875 101,428 126,586 151,992 148,674 34,905 33,750
Printing services..... 107,564 91,663 107,334 114,612 97,841 25,028 21,025
Other................. 81,916 82,275 90,105 86,767 90,974 19,925 21,893
---------- ------------ ------------ ----------- ------------ ------------ -----------
Total operating
revenue...........$ 731,033 $ 753,360 $ 819,232 $ 808,787 $ 801,376 $ 180,055 $ 174,467
========== ============ ============ =========== ============ ============ ===========
Operating earnings
(loss): (4)(5)
Publishing............$ 48,196 $ 48,670 $ 39,265 $ 24,898 $ 30,315 $ 5,235 $ 3,582
Broadcasting.......... 34,015 27,817 30,435 15,453 33,384 4,703 3,406
Telecommunications.... 24,092 32,474 40,114 48,007 40,956 10,316 9,212
Printing services..... (13,450) 2,621 3,336 (756) 2,131 750 1,122
Other................. 1,322 (1,028) (3,959) (3,498) 7,287 (524) 1,930
---------- ------------ ------------ ----------- ------------ ------------ -----------
Total operating
earnings..........$ 94,175 $ 110,554 $ 109,191 $ 84,104 $ 114,073 $ 20,480 $ 19,252
========== ============ ============ =========== ============ ============ ===========
First Quarter Ended
----------------------------
Year Ended December 31, March 24, March 23,
--------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002 2003
------------ ------------- ------------ ------------ ----------- ------------ -----------
Other Financial
Data:
Depreciation (5).....$ 33,549 $ 36,657 $ 38,710 $ 40,882 $ 44,726 $ 9,977 $ 10,433
Amortization (5).....$ 8,618 $ 8,940 $ 11,408 $ 10,814 $ 1,909 $ 352 $ 396
EBITDA (5)...........$ 136,342 $ 156,151 $ 159,309 $ 135,800 $ 160,708 $ 30,809 $ 30,081
Capital
expenditures.........$ 44,821 $ 68,529 $ 96,758 $ 90,172 $ 53,169 $ 16,323 $ 16,784
Cash dividends.......$ 31,057 $ 31,286 $ 36,765 $ 37,866 $ 31,597 $ 7,942 $ 7,775
Cash Flow Data:
Net cash provided by (used for):
Operating
activities.......$ 106,181 $ 117,481 $ 133,123 $ 118,411 $ 86,060 $ 24,530 $ 37,579
Investing
activities.......$ (63,412) $ (199,893) $ (94,030) $ (108,144) $ (51,409) $ (16,257) $ (16,755)
Financing
activities.......$ (25,371) $ (38,798) $ (33,035) $ (11,918) $ (31,714) $ (9,004) $ (22,680)
As of December 31, As of
-------------------------------------------------------------------------------- ----------------------------
March 24, March 23,
1998(1) 1999(2) 2000 2001 2002 2002 2003
------------ ------------- ------------ ------------ ----------- ------------ ------------
(in thousands)
Balance Sheet Data:
Property and
equipment, net.......$ 175,602 $ 214,615 $ 271,293 $ 320,436 $ 324,405 $ 326,784 $ 330,661
Intangible assets,
net (4)..............$ 119,588 $ 258,876 $ 253,239 $ 261,346 $ 249,605 $ 252,456 $ 249,209
Total assets (4).....$ 583,684 $ 638,506 $ 687,035 $ 730,778 $ 744,752 $ 715,531 $ 740,838
Total debt...........$ -- $ 12,115 $ -- $ 4,420 $ 90,775 $ 69,395 $ 75,870
Shareholders'
equity...............$ 447,484 $ 465,697 $ 508,519 $ 532,880 $ 476,544 $ 466,487 $ 480,073
_____________________
(1) Includes Omaha, Nebraska radio stations KESY-FM (renamed KSRZ-FM) and
KBBX-AM (renamed KHLP-AM) from January 1; Knoxville, Tennessee radio
stations WQBB-FM (renamed WQIX-FM, WBON-FM) and WQBB-AM from April 20;
Oracle, Arizona radio station KLQB-FM (renamed KIXD-FM, KGMG-FM) from June
9; and Caldwell, Idaho radio stations KCID-AM and KCID-FM (renamed
KTHI-FM), Payette, Idaho radio station KQXR-FM, Boise, Idaho radio stations
KGEM-AM and KJOT-FM and Ontario, Oregon radio stations KSRV-AM and KSRV-FM
from July 1. We sold KSRV-AM and KSRV-FM in April 2000.
(2) Includes Wichita, Kansas ratio stations KFDI-AM, KFDI-FM and KICT-FM;
Arkansas City, Kansas radio station KYQQ-FM; Augusta, Kansas radio station
KLLS-FM (renamed KFXJ-FM); Springfield, Missouri radio stations KTTS-FM and
KTTS-AM (renamed KTTF-AM, KSGF-AM); Sparta, Missouri radio station KLTQ-FM
(renamed KMXH-FM, KSPW-FM); Tulsa, Oklahoma radio stations KVOO-FM and
KVOO-AM (renamed KFAQ-
35
AM); Henryetta, Oklahoma radio station KCKI-FM (renamed KXBL-FM); and
Omaha, Nebraska radio stations WOW-FM (renamed KMXM-FM, KQCH-FM) and WOW-AM
(renamed KOMJ-AM) from June 14; and Palm Springs, California television
station KMIR-TV from August 1.
(3) We divide our calendar year into 13 four-week accounting periods, except
that the first and thirteenth periods may be longer or shorter to the
extent necessary to make each accounting year end on December 31. We follow
a practice of reporting our quarterly information at the end of the third
accounting period (our first quarter), at the end of the sixth accounting
period (our second quarter), and at the end of the tenth accounting period
(our third quarter).
(4) Effective January 1, 2002, we adopted Statement No. 142, "Goodwill and
Other Intangible Assets." Under Statement No. 142, goodwill and intangible
assets deemed to have indefinite lives, including broadcast licenses and
network affiliation agreements, are no longer amortized but are reviewed
for impairment and written down and charged to net earnings when their
carrying amounts exceed their estimated fair values. Adjusted net earnings,
earnings per share, segment operating earnings, intangible assets, net,
total assets and shareholders' equity are presented below, assuming this
accounting change is applied retroactively as of January 1, 1998. The
adjustment represents amortization expense for indefinite-lived intangible
assets in 1998 through 2001 and the transitional impairment charge
recognized in 2002.
First Quarter Ended
----------------------------
Year Ended December 31, March 24, March 23,
--------------------------------------------------------------------------
1998 (1) 1999 (2) 2000 2001 2002 2002 2003
----------- ------------ ------------- ----------- ----------- ------------ ------------
(in thousands, except per share amounts)
Net earnings........... $ 60,708 $ 69,449 $ 66,384 $ 47,757 $ 57,920 $ 7,338 $ 11,302
Adjustment............. 1,985 3,916 5,523 5,530 6,509 6,509 --
----------- ------------ ------------- ----------- ----------- ------------ ------------
Adjusted net earnings.. $ 62,693 $ 73,365 $ 71,907 $ 53,287 $ 64,429 $ 13,847 $ 11,302
=========== ============ ============= =========== =========== ============ ============
Adjusted basic and
diluted earnings per
share.................. $ 2.23 $ 2.68 $ 2.65 $ 1.90 $ 2.44 $ 0.52 $ 0.44
=========== ============ ============= =========== =========== ============ ============
Adjusted operating
earnings (loss):
Publishing......... $ 49,312 $ 49,662 $ 40,253 $ 25,802 $ 30,315 $ 5,235 $ 3,582
Broadcasting....... 36,006 32,298 37,075 22,182 33,384 4,703 3,406
Telecommunications. 24,116 32,489 40,129 48,022 40,956 10,316 9,212
Printing services.. (13,450) 2,621 3,336 (756) 2,131 750 1,122
Other.............. 1,623 (728) (3,659) (3,197) 7,287 (524) 1,930
----------- ------------ ------------- ----------- ----------- ------------ ------------
Total adjusted
operating
earnings....... $ 97,607 $ 116,342 $ 117,134 $ 92,053 $ 114,073 $ 20,480 $ 19,252
=========== ============ ============= =========== =========== ============ ============
As of
----------------------------
As of December 31, March 24, March 23,
--------------------------------------------------------------------------
1998 (1) 1999 (2) 2000 2001 2002 2002 2003
----------- ------------ ------------- ----------- ----------- ------------ ------------
(in thousands)
Adjusted intangible
assets, net....... $ 123,020 $ 268,096 $ 270,402 $ 286,455 $ 282,384 $ 285,235 $ 281,988
Adjusted total assets. $ 587,116 $ 647,726 $ 704,198 $ 755,887 $ 777,531 $ 748,310 $ 773,617
Adjusted shareholders'
equity............ $ 449,869 $ 471,598 $ 519,943 $ 549,839 $ 500,007 $ 489,950 $ 503,536
(5) EBITDA is defined as operating earnings plus depreciation and amortization.
We believe the presentation of EBITDA is relevant and useful because it
helps improve our investors' ability to understand our operating
performance and makes it easier to compare our results with other companies
that have different financing and capital structures or tax rates. Our
management uses EBITDA, among other things, to evaluate our operating
performance, to value prospective acquisitions and as a component of
incentive compensation targets for certain management personnel. In
addition, our lenders use EBITDA to measure our ability to service our
debt. EBITDA is not a measure of performance calculated in accordance with
generally accepted accounting principles in the United States. EBITDA
should not be considered in isolation of, or as a substitute for, net
earnings as an indicator of operating performance or cash flows from
operating activities as a measure of liquidity. EBITDA, as we calculate it,
may not be comparable to EBITDA measures reported by other companies. In
addition, EBITDA does not represent funds available for discretionary use.
36
The following table presents a reconciliation of our consolidated operating
earnings to our consolidated EBITDA:
First Quarter Ended
---------------------------
Year Ended December 31, March 24, March 23,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002 2003
------------ ------------ ------------ ----------- ----------- ------------ -----------
(in thousands)
Operating earnings.. $ 94,175 $ 110,554 $ 109,191 $ 84,104 $ 114,073 $ 20,480 $ 19,252
Depreciation........ 33,549 36,657 38,710 40,882 44,726 9,977 10,433
Amortization........ 8,618 8,940 11,408 10,814 1,909 352 396
------------ ------------ ------------ ----------- ----------- ------------ -----------
EBITDA ............. $ 136,342 $ 156,151 $ 159,309 $ 135,800 $ 160,708 $ 30,809 $ 30,081
============ ============ ============ =========== =========== ============ ===========
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our unaudited consolidated financial
statements for the quarters ended March 24, 2002 and March 23, 2003, including
the notes thereto, appearing elsewhere in this prospectus, and our audited
consolidated financial statements for the three years ended December 31, 2002,
including the notes thereto, appearing elsewhere in this prospectus. This
discussion contains forward-looking statements. See "Forward-Looking Statements"
for a discussion of uncertainties, risks and assumptions associated with these
statements.
Overview
Our business segments are based on the organizational structure used by
management for making operating and investment decisions and for assessing
performance. We previously reported eight business segments, which included our
corporate operations and the operations of each one of our wholly-owned
subsidiaries. In order to better reflect our operations as a diversified media
and communications company, and to reflect certain changes in the way our
management receives internal financial information, we determined it appropriate
under Statement No. 131, "Disclosures About Segments of an Enterprise and
Related Information," to aggregate previously reported segments and identify new
segments by type of business rather than by names of individual operating
entities. As a result, we changed our reportable business segments in 2002 to
the following: (i) publishing; (ii) broadcasting; (iii) telecommunications; (iv)
printing services; and (v) other. Our publishing segment consists of a daily
newspaper, the Milwaukee Journal Sentinel, and more than 90 community newspapers
and shoppers. Our broadcasting segment consists of 36 radio stations and six
television stations in 11 states. Our telecommunications segment consists of
wholesale and business-to-business telecommunications services provided through
a high speed fiber optic telecommunications network that covers more than 4,400
route miles in seven states. Our printing services segment reflects the
operations of our printing and assembly and fulfillment business. Our other
segment consists of a label printing business and a direct marketing services
business. Also included in other are corporate expenses and eliminations.
Acquisition and Sale
On December 31, 2001, we acquired the business and certain assets of a
television station, KIVI-TV, in Boise, Idaho and a low-power television station,
KSAW-LP, in Twin Falls, Idaho. The cash purchase price for the stations was
approximately $22.1 million.
On March 2, 2001, we sold certain assets of the Milwaukee operation of our
label printing business. The cash sale price was approximately $4.4 million.
Results of Operations
First Quarter Ended March 23, 2003 compared to First Quarter Ended
March 24, 2002
Consolidated
Our consolidated operating revenue in the first quarter of 2003 was $174.5
million, a decrease of $5.6 million, or 3.1%, compared to $180.1 million in the
first quarter of 2002. Our consolidated operating costs and expenses in the
first quarter of 2003 were $102.6 million, a decrease of $1.2 million, or 1.2%,
compared to $103.8 million in the first quarter of 2002. Our consolidated
selling and administrative expenses in the first quarter of 2003 were $52.6
million, a decrease of $3.2 million, or 5.5%, compared to $55.8 million in the
first quarter of 2002.
38
The following table presents our total operating revenue by segment, total
operating costs and expenses, selling and administrative expenses and total
operating earnings as a percent of total operating revenue for the first quarter
of 2002 and 2003:
Percent of Percent of
Total Total
Operating Operating
2002 Revenue 2003 Revenue
-------------- --------------- -------------- --------------
(dollars in millions)
Operating revenue:
Publishing.......................................... $ 69.5 38.6% $ 68.3 39.1%
Broadcasting........................................ 30.7 17.0 29.5 16.9
Telecommunications.................................. 34.9 19.4 33.8 19.4
Printing services................................... 25.0 13.9 21.0 12.0
Other............................................... 20.0 11.1 21.9 12.6
-------------- --------------- -------------- --------------
Total operating revenue.................... $ 180.1 100.0% $ 174.5 100.0%
Total operating costs and expenses.................. $ 103.8 57.6% $ 102.6 58.8%
Selling and administrative expenses................. 55.8 31.0 52.6 30.1
-------------- --------------- -------------- --------------
Total operating costs and expenses and selling and
administrative expenses........................... 159.6 88.6 155.2 88.9
-------------- --------------- -------------- --------------
Total operating earnings................... $ 20.5 11.4% $ 19.3 11.1%
============== =============== ============== ==============
The decrease in total operating revenue was primarily due to Olympic,
political and issue advertising in our television broadcasting business in the
first quarter of 2002, a reduction in revenue from our largest customer in our
printing services business, service disconnections in our wholesale
telecommunications business and the decrease in circulation revenue and
classified advertising in our publishing businesses. These decreases were
partially offset by increases in our label printing business and our commercial
telecommunications business.
The decrease in total operating costs and expenses was primarily due to the
closure of our CD-ROM mastering and replication operations of our printing
services business. The decrease in selling and administrative expenses was
primarily due to the decrease in administrative payroll and benefits expense
resulting from our cost control initiatives.
Our consolidated operating earnings in the first quarter of 2003 were $19.3
million, a decrease of $1.2 million, or 6.0%, compared to $20.5 million in the
first quarter of 2002. The following table presents our operating earnings by
segment for the first quarter of 2002 and 2003:
Percent of Percent of
Total Total
Operating Operating
2002 Earnings 2003 Earnings
-------------- --------------- -------------- --------------
(dollars in millions)
Publishing.......................................... $ 5.2 25.4% $ 3.6 18.7%
Broadcasting........................................ 4.7 22.9 3.4 17.6
Telecommunications.................................. 10.3 50.2 9.2 47.7
Printing services................................... 0.8 3.9 1.1 5.7
Other............................................... (0.5) (2.4) 2.0 10.3
-------------- --------------- -------------- --------------
Total operating earnings............................ $ 20.5 100.0% $ 19.3 100.0%
============== =============== ============== ==============
The decrease in total operating earnings was primarily due to the $5.6
million decrease in operating revenue, the additional costs related to the daily
newspaper's new production facility and the decrease in the profit margin on
operating revenue on telecommunications services due to service disconnections
and price reductions during 2002, partially offset by decreases in operating
costs and expenses and selling and administrative expenses resulting from our
cost control initiatives.
39
Our consolidated EBITDA in the first quarter of 2003 was $30.1 million, a
decrease of $0.7 million, or 2.4%, compared to $30.8 million in the first
quarter of 2002. EBITDA is defined as operating earnings plus depreciation and
amortization. We believe the presentation of EBITDA is relevant and useful
because it helps improve our investors' ability to understand our operating
performance and makes it easier to compare our results with other companies that
have different financing and capital structures or tax rates. Our management
uses EBITDA, among other things, to evaluate our operating performance, to value
prospective acquisitions and as a component of incentive compensation targets
for certain management personnel. In addition, our lenders use EBITDA to measure
our ability to service our debt. EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles in the
United States. EBITDA should not be considered in isolation of, or as a
substitute for, net earnings as an indicator of operating performance or cash
flows from operating activities as a measure of liquidity. EBITDA, as we
calculate it, may not be comparable to EBITDA measures reported by other
companies. In addition, EBITDA does not represent funds available for
discretionary use.
The following table presents a reconciliation of our operating earnings to
EBITDA by segment for the first quarter of 2002 and 2003:
2002 2003
--------------------------------------------------- --------------------------------------------------
Depreciation Percent of Depreciation Percent of
Operating and Total Operating and Total
Earnings Amortization EBITDA EBITDA Earnings Amortization EBITDA EBITDA
--------- ------------ -------- ---------- ---------- ----------- -------- ---------
(dollars in millions)
Publishing.......... $5.2 $3.0 $8.2 26.6% $3.6 $3.8 $7.4 24.6%
Broadcasting........ 4.7 1.6 6.3 20.5 3.4 1.7 5.1 17.0
Telecommunications.. 10.3 3.9 14.2 46.1 9.2 3.9 13.1 43.5
Printing services... 0.8 1.1 1.9 6.2 1.1 0.8 1.9 6.3
Other............... (0.5) 0.7 0.2 0.6 2.0 0.6 2.6 8.6
--------- ------------ -------- ---------- ---------- ----------- -------- ---------
Total............... $20.5 $10.3 $30.8 100.0% $19.3 $10.8 $30.1 100.0%
========= ============ ======== ========== ========== =========== ======== =========
The decrease in total EBITDA was primarily due to decreases in operating
earnings in our publishing, broadcasting and telecommunications reportable
segments partially offset by an increase in operating earnings in our other
reportable segment.
Publishing
Operating revenue from publishing in the first quarter of 2003 was $68.3
million, a decrease of $1.2 million, or 1.7%, compared to $69.5 million in the
first quarter of 2002. Operating earnings from publishing were $3.6 million, a
decrease of $1.6 million, or 31.6%, compared to $5.2 million in the first
quarter of 2002. EBITDA from publishing in the first quarter of 2003 was $7.4
million, a decrease of $0.8 million, or 9.8%, compared to $8.2 million in the
first quarter of 2002 (see table above for a reconciliation of publishing
operating earnings to publishing EBITDA).
The following table presents our publishing operating revenue, operating
earnings and EBITDA by daily newspaper and community newspapers and shoppers for
the first quarter of 2002 and 2003:
2002 2003
------------------------------------------------ ------------------------------------------------
Community Community
Daily Newspapers Daily Newspapers
Newspaper & Shoppers Total Newspaper & Shoppers Total
------------- --------------- ------------ -------------- --------------- ------------
(in millions)
Operating revenue.... $ 48.0 $ 21.5 $ 69.5 $ 47.9 $ 20.4 $ 68.3
============= =============== ============ ============== =============== ============
Operating earnings
(loss)............... $ 5.6 $ (0.4) $ 5.2 $ 4.2 $ (0.6) $ 3.6
============= =============== ============ ============== =============== ============
EBITDA............... $ 7.5 $ 0.7 $ 8.2 $ 7.0 $ 0.4 $ 7.4
============= =============== ============ ============== =============== ============
40
The following table presents our publishing operating revenue by category
for the first quarter of 2002 and 2003:
2002 2003
---------------------------------------------- --------------------------------------------
Community Community
Daily Newspapers Daily Newspapers
Newspaper & Shoppers Total Newspaper & Shoppers Total
------------- -------------- ---------- ------------- --------------- ---------
(in millions)
Advertising revenue:
Retail.................... $ 15.7 $ 11.9 $ 27.6 $ 16.4 $ 11.6 $ 28.0
Classified................ 13.8 2.0 15.8 13.6 1.5 15.1
General................... 2.4 -- 2.4 2.5 -- 2.5
Other..................... 3.8 0.2 4.0 3.9 0.4 4.3
------------- --------------- ---------- ------------- --------------- --------
Total advertising revenue. 35.7 14.1 49.8 36.4 13.5 49.9
Circulation revenue.......... 10.5 0.8 11.3 9.7 0.7 10.4
Other revenue................ 1.8 6.6 8.4 1.8 6.2 8.0
------------- --------------- ---------- ------------- --------------- --------
Total operating revenue...... $ 48.0 $ 21.5 $ 69.5 $ 47.9 $ 20.4 $ 68.3
============= =============== ========== ============= =============== ========
Advertising revenue in the first quarter of 2003 accounted for 73.1% of
total publishing revenue compared to 71.7% in the first quarter of 2002. Retail
advertising revenue in the first quarter of 2003 was $28.0 million, an increase
of $0.4 million, or 1.4%, compared to $27.6 million in the first quarter of
2002. The increase is comprised of a $0.9 million increase in daily newspaper
retail preprints partially offset by a $0.3 million decrease in community
newspaper retail advertising and a $0.2 million decrease in daily newspaper
retail ROP (run-of-press) advertisements. The shift toward retail preprints of
certain major local advertisers has continued in 2003.
Classified advertising revenue in the first quarter of 2003 was $15.1
million, a decrease of $0.7 million, or 4.4%, compared to $15.8 million in the
first quarter of 2002. At the daily newspaper, decreases in employment
advertising of $0.4 million and automotive advertising of $0.4 million were
partially offset by increases in general advertising of $0.5 million and real
estate advertising of $0.1 million. The decrease in employment advertising,
which accounted for almost 40.1% of total classified advertising in the first
quarter of 2003, represented a 7.3% decrease from the first quarter of 2002. We
believe the decrease in employment and automotive advertising resulted primarily
from continuing economic weakness and uncertainty.
General advertising revenue in the first quarter of 2003 was $2.5 million,
an increase of $0.1 million, or 4.2%, compared to $2.4 million in the first
quarter of 2002. The increase was primarily attributable to an increase in
general ROP advertising mainly from our telecommunications customers.
41
The following table presents the advertising linage of our daily newspaper
by category for the first quarter of 2002 and 2003:
2002 2003 Change
-------------------- -------------------- --------------------
(inches in thousands)
Advertising linage (in inches):
Retail................................... 155.5 148.2 - 4.7%
Classified............................... 196.4 186.7 - 4.9%
General.................................. 10.7 11.2 + 4.7%
-------------------- --------------------
Total advertising linage (in inches).......... 362.6 346.1 - 4.6%
==================== ====================
Preprint pieces (in millions)................. 182.7 190.2 + 4.1%
==================== ====================
Total advertising linage in the first quarter of 2003 decreased 4.6%
compared to the first quarter of 2002. The decrease was largely due to a 4.9%
decrease in classified advertising and a 4.7% decrease in retail advertising
partially offset by a 4.7% increase in general advertising. The decrease in
classified advertising lineage is consistent with the decrease in the classified
advertising revenue. Retail advertising linage decreased while preprint
advertising pieces rose 4.1% primarily as a result of the shift to preprint
advertising from certain major local retail customers.
The following table presents the full pages of advertising and revenue per
page of our community newspapers and shoppers for the first quarter of 2002 and
2003:
2002 2003 Change
-------------------- -------------------- --------------------
Full pages of advertising:
Community newspapers...................... 19,834 19,174 - 3.3%
Shoppers.................................. 22,752 20,406 - 10.3%
-------------------- --------------------
Total full pages of advertising............... 42,586 39,580 - 7.1%
==================== ====================
Revenue per page.............................. $304.87 $311.51 + 2.2%
==================== ====================
Total pages of full page advertising in the first quarter of 2003 decreased
7.1% compared to the first quarter of 2002. The decrease was largely due to a
10.3% decrease in advertising in shoppers and a 3.3% decrease in advertising in
community newspapers. Revenue per page increased 2.2% due to rate increases.
Other advertising revenue, consisting of revenue from direct marketing
efforts, JSOnline, niche publications and event marketing, in the first quarter
of 2003 was $4.3 million, an increase of $0.3 million, or 7.5%, compared to $4.0
million in the first quarter of 2002. The increase was largely due to increased
online classified advertising and event marketing.
Circulation revenue in the first quarter of 2003 accounted for 15.2% of
total publishing revenue compared to 16.3% in the first quarter of 2002.
Circulation revenue in the first quarter of 2003 was $10.4 million, a decrease
of $0.9 million, or 8.0%, compared to $11.3 million in the first quarter of
2002. The decrease in circulation revenue is mainly attributed to an increase in
circulation reduced rate offerings at the daily newspaper. Average net paid
circulation for the Milwaukee Journal Sentinel's weekday edition increased 5.3%
in the first quarter of 2003 compared to the first quarter of 2002. Average net
paid circulation for Milwaukee Journal Sentinel's Sunday edition increased 0.8%
in the first quarter of 2003 compared to the first quarter of 2002. On June 30,
2002, in an effort to increase readership in certain areas of Milwaukee County,
we began offering greater discounts on home delivery and single copy sales.
Circulation in those areas has increased since offering the discounts. Average
paid circulation for our community newspapers decreased 0.8% in the first
quarter of 2003 compared to the first quarter of 2002.
Other revenue, which consists primarily of revenue from commercial printing
opportunities at the print plants for our community newspapers and shoppers, in
the first quarter of 2003 accounted for 11.7% of total publishing revenue
compared to 12.1% in the first quarter of 2002. Other revenue in the first
quarter of 2003 was $8.0 million, a decrease of $0.4 million, or
42
4.8%, compared to $8.4 million in the first quarter of 2002. The decrease was
primarily attributed to reduced press runs and page counts from existing
commercial printing customers.
Publishing operating earnings in the first quarter of 2003 were $3.6
million, a decrease of $1.6 million, or 31.6%, compared to $5.2 million in the
first quarter of 2002. Contributing to the decrease was $3.9 million in
additional net costs related to the daily newspaper's new production facility in
the first quarter of 2003 compared to $1.7 million in the first quarter of 2002.
As of March 30, 2003, all production and distribution of the daily
newspaper have been transitioned to the new production facility. Although the
facility is operational, many final adjustments to the equipment have not yet
been made and our operators are still learning how to effectively utilize the
features of the new equipment. We expect that our new presses will provide
improved print reproduction quality and increased productivity, as well as
additional opportunities to pursue commercial printing revenue from third
parties. We do not expect to achieve full benefit from the operating
efficiencies of the new production facility before at least the end of the year.
The threatened outbreak of hostilities in Iraq in March 2003 and the war
itself have resulted in certain daily newspaper advertising customers reducing
their advertising spending in our daily newspaper. We have also incurred
additional news gathering costs.
Broadcasting
Operating revenue from broadcasting in the first quarter of 2003 was $29.5
million, a decrease of $1.2 million, or 4.0%, compared to $30.7 million in the
first quarter of 2002. Operating earnings from broadcasting in the first quarter
of 2003 were $3.4 million, a decrease of $1.3 million, or 27.6%, compared to
$4.7 million in the first quarter of 2002. EBITDA from broadcasting in the first
quarter of 2003 was $5.1 million, a decrease of $1.2 million, or 19.0%, compared
to $6.3 million in the first quarter of 2002 (see page 40 for a reconciliation
of broadcasting operating earnings to broadcasting EBITDA).
The following table presents our broadcasting operating revenue, operating
earnings and EBITDA by radio stations and television stations for the first
quarter of 2002 and 2003:
2002 2003
------------------------------------------------ ------------------------------------------------
Radio Television Total Radio Television Total
------------- --------------- ------------ -------------- --------------- ------------
(in millions)
Operating revenue... $ 14.9 $ 15.8 $ 30.7 $ 14.4 $ 15.1 $ 29.5
============= ============== ============= ============= ============== =============
Operating earnings.. $ 1.6 $ 3.1 $ 4.7 $ 1.7 $ 1.7 $ 3.4
============= ============== ============= ============= ============== =============
EBITDA.............. $ 2.4 $ 3.9 $ 6.3 $ 2.5 $ 2.6 $ 5.1
============= ============== ============= ============= ============== =============
Operating revenue from our radio stations in the first quarter of 2003 was
$14.4 million, a decrease of $0.5 million, or 3.4%, compared to $14.9 million in
the first quarter of 2002. The decrease was primarily attributed to a $0.5
million decrease in local advertising revenue and a $0.3 million decrease from
other advertising revenue, offset by a $0.3 million increase in national
advertising revenue across most markets.
Operating earnings from our radio stations in the first quarter of 2003
were $1.7 million, an increase of $0.1 million, or 6.3%, compared to $1.6
million in the first quarter of 2002. The increase was primarily attributed to a
decrease in operating costs and expenses resulting from cost control initiatives
at all of our radio stations.
Operating revenue from our television stations in the first quarter of 2003
was $15.1 million, a decrease of $0.7 million, or 4.4%, compared to $15.8
million in the first quarter of 2002. The decrease was primarily attributed to a
$2.7 million decrease in Olympic, political and issue advertising revenue
partially offset by a $1.5 million increase in local advertising revenue and a
$0.5 million increase in national advertising revenue.
Operating earnings from our television stations in the first quarter of
2003 were $1.7 million, a decrease of $1.4 million, or 45.2%, compared to $3.1
million in the first quarter of 2002. The decrease was primarily attributed to
the $0.7
43
million decrease in revenue and increases in depreciation, syndicated
programming costs, selling and technology expenses at certain television
stations.
The threatened outbreak of hostilities in Iraq in March 2003 and the war
itself had a $0.3 million negative impact on our broadcasting revenue due to
reduced spending levels by some advertisers. There was hesitancy on the part of
some advertisers to place schedules during the period of time leading up to the
war, cancellations by some advertisers for the duration of war coverage and
elimination of advertising inventory available from our television networks, our
local news products and syndicated and local programming during their coverage
of the war.
Telecommunications
Operating revenue from telecommunications in the first quarter of 2003 was
$33.8 million, a decrease of $1.1 million, or 3.3%, compared to $34.9 million in
the first quarter of 2002. Operating earnings from telecommunications in the
first quarter of 2003 were $9.2 million, a decrease of $1.1 million, or 10.7%,
compared to $10.3 million in the first quarter of 2002. EBITDA from
telecommunications in the first quarter of 2003 was $13.1 million, a decrease of
$1.1 million, or 7.7%, compared to $14.2 million in the first quarter of 2002
(see page 40 for a reconciliation of telecommunications operating earnings to
telecommunications EBITDA).
Wholesale telecommunication services provide network transmission solutions
for other service providers by offering bulk transmission capacity. Operating
revenue from wholesale services in the first quarter of 2003 was $21.4 million,
a decrease of $1.9 million, or 8.2%, compared to $23.3 million in the first
quarter of 2002. The decrease was primarily attributed to service
disconnections. Monthly recurring revenue from wholesale services at the end of
the first quarter of 2003 was $7.4 million compared to $7.5 million at the
beginning of 2003 and $8.0 million at the end of the first quarter of 2002.
During the first quarter of 2003, new customers and new circuit connections of
$0.1 million in monthly recurring revenue were more than offset by service
disconnections, price reductions and lost customers.
Commercial telecommunication services provide advanced data communications
and long distance service to small and medium sized businesses in the Upper
Midwest, principally in Wisconsin, Michigan, Indiana, Minnesota and Illinois.
Operating revenue from commercial services in the first quarter of 2003 was
$12.4 million, an increase of $0.8 million, or 6.9%, compared to $11.6 million
in the first quarter of 2002. The increase was attributed to an increase in long
distance services and the addition of new customers and service offerings.
Monthly recurring revenue from commercial advanced data services at the end of
the first quarter of 2003 of $3.1 million compared to $3.0 million at the
beginning of 2003 and at the end of the first quarter of 2002. During the first
quarter of 2003, new customers and new circuit connections of $0.2 million in
monthly recurring revenue were offset by service disconnections, price
reductions and lost customers.
The decrease in operating earnings from telecommunications was primarily
attributed to service disconnections and the decrease in profit margins on
services provided due to price reductions in 2002. We expect continued service
disconnections and price reductions in our wholesale telecommunications business
will cause an increasing downward trend that could result in a significant
decrease in our telecommunications operating earnings during 2003.
WorldCom and Global Crossing together accounted for 27.7% and 29.9% of our
telecommunications revenue in the first quarter of 2003 and 2002, respectively.
Global Crossing filed for Chapter 11 bankruptcy protection in January 2002 and
WorldCom filed for Chapter 11 bankruptcy protection in July 2002. We had a
pre-petition receivable, net of applicable "set-off" accounts payable, from
WorldCom, which was sold to a third party in April 2003. The loss of the ongoing
business from either of these two customers would have a significant adverse
effect on our results of operations. A renewal service contract with Global
Crossing is being negotiated, though Global Crossing retains the right to accept
or reject our current contract under federal bankruptcy law. WorldCom also has a
right to accept or reject our current contract under federal bankruptcy law. If
either contract is rejected, we would have an unsecured claim for the balance
due on the contracts in the bankruptcy proceeding.
We do not believe we have a material bad debt exposure because we bill all
data services for both wholesale and commercial customers in advance of
providing services. Most customers are required to pay their bill before
services are provided. We continue to provide services to WorldCom and Global
Crossing and receive timely payment for those services.
44
Printing Services
Operating revenue from printing services in the first quarter of 2003 was
$21.0 million, a decrease of $4.0 million, or 16.0%, compared to $25.0 million
in the first quarter of 2002. Operating earnings from printing services in the
first quarter of 2003 were $1.1 million, an increase of $0.3 million, or 49.6%,
compared to $0.8 million in the first quarter of 2002. EBITDA from printing
services in the first quarter of 2003 was $1.9 million, an increase of $0.1
million, or 5.6%, compared to $1.8 million in the first quarter of 2002 (see
page 40 for a reconciliation of printing services operating earnings to printing
services EBITDA).
The decrease in printing services operating revenue was primarily
attributed to the reduction in revenue from our largest customer due to a change
in their business, the closure of our Ireland operations in early 2002 and the
elimination of our assembly and fulfillment operations in the fall of 2002 from
our CD-ROM mastering and replications operation. Our entire CD-ROM operation was
closed in February 2003.
The increase in printing services operating earnings was primarily
attributed to a reduction in operational costs and an increase in the sale of
products with higher margins. These increases were partially offset by the
decrease in revenue and $0.3 million in closure costs related to the CD-ROM
mastering and replications operations.
A large computer hardware OEM (original equipment manufacturer) accounted
for 28.4% and 34.4% of our printing services revenue in the first quarter of
2003 and 2002, respectively. The loss of this business could have a material
adverse effect on our results of operations.
Other
Other operating revenue in the first quarter of 2003 was $21.9 million, an
increase of $1.9 million, or 9.9%, compared to $20.0 million in the first
quarter of 2002. Other operating earnings in the first quarter of 2003 were $2.0
million, an increase of $2.5 million compared to losses of $0.5 million in the
first quarter of 2002. Other EBITDA in the first quarter of 2003 was $2.6
million, an increase of $2.4 million, compared to $0.2 million in the first
quarter of 2002 (see page 40 for a reconciliation of other operating earnings to
other EBITDA).
The following table presents our other operating revenue, operating
earnings and EBITDA by business for the first quarter of 2002 and 2003:
2002 2003
------------------------------------------------------ ----------------------------------------------------
Direct Corporate Direct Corporate
Label Marketing and Label Marketing and
Printing Services Eliminations Total Printing Services Eliminations Total
----------- ------------- --------------- ----------- ---------- ------------- --------------- -----------
(in millions)
Operating revenue. $ 12.1 $ 8.7 $ (0.8) $ 20.0 $ 13.7 $ 8.9 $ (0.7) $ 21.9
=========== ============= =============== =========== ========== ============= =============== ===========
Operating earnings
(loss)............ $ (0.2) $ (1.0) $ 0.7 $ (0.5) $ 0.3 $ 0.4 $ 1.3 $ 2.0
=========== ============= =============== =========== ========== ============= =============== ===========
EBITDA............ $ 0.3 $ (0.9) $ 0.8 $ 0.2 $ 0.7 $ 0.6 $ 1.3 $ 2.6
=========== ============= =============== =========== ========== ============= =============== ===========
The increase in other operating revenue was primarily attributed to an
increase in the gravure label printing operation in new products for our
consumer goods and beverage customers and in print and mail services and
database marketing services in our direct marketing services business. Included
in operating revenue from our direct marketing services is $4.6 million and $4.8
million of postage amounts billed to customers in the first quarter of 2003 and
2002, respectively.
The increase in other operating earnings was primarily attributed to the
$1.3 million loss on impairment of a customer list recorded in the first quarter
of 2002 at our direct marketing services business, the increase in operating
revenue from our label printing and direct marketing services businesses and the
decrease in operating costs and expenses resulting from our cost control
initiatives.
45
SAB/Miller Brewing Company accounted for 43.6% and 54.7% of our label
printing business' revenue in the first quarter of 2003 and 2002, respectively.
In 2003, our label printing business was in the third year of a five-year
contract with SAB/Miller Brewing Company. The loss of SAB/Miller Brewing Company
could have a material adverse effect on our results of operations.
Non Operating Income and Taxes from Continuing Operations
Interest income and dividends in the first quarter of 2003 were $0.1
million, a decrease of $0.5 million, or 87.8%, compared to $0.6 million in the
first quarter of 2002. The decrease was primarily attributed to the decrease in
cash and cash equivalents and interest income received in the first quarter of
2002 from refunds of state income taxes. Interest expense in the first quarter
of 2003 was $0.5 million compared to $0.1 million in the first quarter of 2002.
Gross interest expense from borrowings under our credit agreement in the first
quarter of 2003 was $0.5 million compared to $0.3 million in the first quarter
of 2002. Interest expense capitalized as part of our construction of the
Milwaukee Journal Sentinel production facility in the first quarter of 2003 was
$0.1 million compared to $0.2 million in the first quarter of 2002.
The effective tax rate on continuing operations was 40.0% in the first
quarter of 2003 compared to 41.4% in the first quarter of 2002. The difference
between the statutory federal tax rate and the effective tax rate in the first
quarter of 2002 was primarily the result of non deductible expenses related to
litigation that was settled in 2002.
Discontinued Operations
In January 2002, we announced the closure of Fox Cities Newspapers, located
in Appleton, Wisconsin, which published six community newspapers. These
community newspapers were part of the publishing reportable segment.
On April 29, 2002, the board of directors of our French printing services
subsidiary, approved a resolution to proceed through a liquidation process. The
remaining operations of IPC Communication Services, S.A., were turned over to a
liquidator on December 31, 2002.
The operations of Fox Cities Newspapers and IPC Communication Services,
S.A. have been reflected as discontinued operations in our consolidated
financial statements and, accordingly, the first quarter of 2002 has been
restated to reflect this treatment.
Net revenue from discontinued operations in the first quarter of 2002 was
$1.6 million. Net assets of discontinued operations at March 23, 2003 and
December 31, 2002 were zero. Income from discontinued operations in the first
quarter of 2002 was $1.6 million. Applicable income tax benefits were $2.7
million in the first quarter of 2002.
Cumulative Effect of Accounting Change
Effective January 1, 2002, we adopted Statement No. 142, "Goodwill and
Other Intangible Assets." Under Statement No. 142, goodwill and intangible
assets deemed to have indefinite lives, including broadcast licenses and network
affiliation agreements, are no longer amortized but are reviewed for impairment
and written down and charged to results of operations when their carrying
amounts exceed their estimated fair values. We performed transitional impairment
tests on our goodwill and indefinite-lived intangible assets. The resulting
impairment charges of $7.7 million ($6.5 million after tax) were recorded during
the first quarter ended March 24, 2002 and are reported as the cumulative effect
of accounting change in our consolidated statements of earnings.
2002 compared to 2001
Consolidated
Our consolidated operating revenue in 2002 was $801.4 million, a decrease
of $7.4 million, or 0.9%, compared to $808.8 million in 2001. Our consolidated
operating costs and expenses in 2002 were $447.6 million, a decrease of $16.1
46
million, or 3.5%, compared to $463.7 million in 2001. Our consolidated selling
and administrative expenses in 2002 were $239.7 million, a decrease of $21.3
million, or 8.2%, compared to $261.0 million in 2001.
The following table presents our total operating revenue by segment, total
operating costs and expenses, selling and administrative expenses and total
operating earnings as a percent of total operating revenue for 2001 and 2002:
Percent of Percent of
Total Total
Operating Operating
2001 Revenue 2002 Revenue
----------- ------------- ----------- --------------
(dollars in millions)
Operating revenue:
Publishing......................................... $ 320.6 39.6% $ 311.1 38.8%
Broadcasting....................................... 134.8 16.7 152.8 19.1
Telecommunications................................. 152.0 18.8 148.7 18.6
Printing services.................................. 114.6 14.2 97.8 12.2
Other.............................................. 86.8 10.7 91.0 11.3
----------- ------------- ----------- --------------
Total operating revenue................... 808.8 100.0 801.4 100.0
Total operating costs and expenses................. 463.7 57.3 447.6 55.9
Selling and administrative expenses................ 261.0 32.3 239.7 29.9
----------- ------------- ----------- --------------
Total operating costs and expenses and selling and
administrative expenses........................ 724.7 89.6 687.9 85.8
----------- ------------- ----------- --------------
Total operating earnings.................. $ 84.1 10.4% $ 114.1 14.2%
=========== ============= =========== ==============
The decrease in total operating revenue was primarily due to the decrease
in classified advertising in our publishing businesses, service disconnections
and price reductions in our telecommunications business and the consolidation of
our U. S. printing services operations and the continued slowdown in our
publication printing services business. These decreases were partially offset by
increases in Olympic, political and issue advertising in our television
broadcasting business. In addition, operating revenue in 2001 was adversely
impacted by $1.8 million from preempted advertising due to the uninterrupted
news coverage and certain advertising cancellations on television and radio
stations following the September 11 terrorist attacks.
The decrease in total operating costs and expenses and selling and
administrative expenses was primarily due to the decrease in the total cost of
newsprint, the discontinuation of goodwill, broadcast license and network
affiliation agreement amortization expense and the decrease in operating costs
and expenses resulting from our cost control initiatives.
Our consolidated operating earnings in 2002 were $114.1 million, an
increase of $30.0 million, or 35.6%, compared to $84.1 million in 2001. The
following table presents our operating earnings by segment for 2001 and 2002:
Percent of Percent of
Total Total
Operating Operating
2001 Revenue 2002 Revenue
----------- ------------- ----------- --------------
(dollars in millions)
Publishing......................................... $ 24.9 29.6% $ 30.3 26.6%
Broadcasting....................................... 15.5 18.4 33.4 29.3
Telecommunications................................. 48.0 57.1 41.0 35.9
Printing services.................................. (0.8) (0.9) 2.1 1.8
Other.............................................. (3.5) (4.2) 7.3 6.4
----------- ------------- ----------- --------------
Total operating earnings.................. $ 84.1 100.0% $ 114.1 100.0%
=========== ============= =========== ==============
47
The increase in total operating earnings was primarily due to the decrease
in the total cost of newsprint, the increase in Olympic, political and issue
advertising, the decrease in operating costs and expenses resulting from cost
control initiatives, workforce reductions and the closure or transition of
certain business units, the discontinuation of goodwill, broadcast license and
network affiliation agreement amortization expense and the adverse impact on
third quarter 2001 earnings following the September 11 terrorist attacks offset
by the decrease in the profit margin on telecommunication services. Effective
January 1, 2002, we adopted Statement No. 142, "Goodwill and Other Intangible
Assets," and, accordingly, we ceased amortizing goodwill, broadcast licenses and
network affiliation agreements. If Statement No. 142 had been adopted effective
January 1, 2001, our total operating earnings would have been $92.1 million.
Our consolidated EBITDA in 2002 was $160.7 million, an increase of $24.9
million, or 18.3%, compared to $135.8 million in 2001. EBITDA is defined as
operating earnings plus depreciation and amortization. We believe the
presentation of EBITDA is relevant and useful because it helps improve our
investors' ability to understand our operating performance and makes it easier
to compare our results with other companies that have different financing and
capital structures or tax rates. Our management uses EBITDA, among other things,
to evaluate our operating performance, to value prospective acquisitions and as
a component of incentive compensation targets for certain management personnel.
In addition, our lenders use EBITDA to measure our ability to service our debt.
EBITDA is not a measure of performance calculated in accordance with generally
accepted accounting principles in the United States. EBITDA should not be
considered in isolation of, or as a substitute for, net earnings as an indicator
of operating performance or cash flows from operating activities as a measure of
liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures
reported by other companies. In addition, EBITDA does not represent funds
available for discretionary use.
The following table presents a reconciliation of our operating earnings to
EBITDA by segment for 2001 and 2002:
2001 2002
---------------------------------------------------------- ------------------------------------------
Depreciation Percent Depreciation
Operating and of Total Operating and
Earnings Amortization EBITDA EBITDA Earnings Amortization EBITDA
---------- ------------- ------------ ----------- ---------- -------------- ----------
(dollars in millions)
Publishing.......... $ 24.9 $ 13.9 $ 38.8 28.6% $ 30.3 $ 14.2 $ 44.5
Broadcasting........ 15.5 13.3 28.8 21.2 33.4 7.3 40.7
Telecommunications.. 48.0 14.7 62.7 46.2 41.0 17.1 58.1
Printing services... (0.8) 6.2 5.4 4.0 2.1 5.2 7.3
Other............... (3.5) 3.6 0.1 -- 7.3 2.8 10.1
---------- ------------- ------------ ----------- ---------- -------------- ----------
Total............... $ 84.1 $ 51.7 $ 135.8 100.0% $ 114.1 $ 46.6 $ 160.7
========== ============= ============ =========== ========== ============== ==========
The increase in total EBITDA was primarily due to increases in operating
earnings in our publishing, broadcasting, printing services and other reportable
segments offset by a decrease in our telecommunications segment.
Publishing
Operating revenue from publishing in 2002 was $311.1 million, a decrease of
$9.5 million, or 3.0%, compared to $320.6 million in 2001. Operating earnings
from publishing were $30.3 million, an increase of $5.4 million, or 21.8%,
compared to $24.9 million in 2001. EBITDA from publishing in 2002 was $44.5
million, an increase of $5.7 million, or 14.6%, compared to $38.8 million in
2001 (see table above for a reconciliation of publishing operating earnings to
publishing EBITDA).
48
The following table presents our publishing operating revenue, operating
earnings and EBITDA by daily newspaper and community newspapers and shoppers for
2001 and 2002:
2001 2002
--------------------------------------------- --------------------------------------------
Community Community
Daily Newspapers Daily Newspapers
Newspaper & Shoppers Total Newspaper & Shoppers Total
------------- ------------- ---------- ------------- ------------ ---------
(in millions)
Operating revenue..... $ 218.8 $ 101.8 $ 320.6 $ 212.9 $ 98.2 $ 311.1
============= ============= ========== ============= ============= =========
Operating earnings.... $ 23.3 $ 1.6 $ 24.9 $ 28.7 $ 1.6 $ 30.3
============= ============= ========== ============= ============= =========
EBITDA................ $ 31.7 $ 7.1 $ 38.8 $ 38.5 $ 6.0 $ 44.5
============= ============= ========== ============= ============= =========
The following table presents our publishing operating revenue by category
for 2001 and 2002:
2001 2002
----------------------------------------- ------------------------------------------
Community Community
Daily Newspapers Daily Newspapers
Newspaper & Shoppers Total Newspaper & Shoppers Total
----------- ------------- --------- ------------ ------------- ---------
(in millions)
Advertising revenue:
Retail................. $ 74.6 $ 55.7 $ 130.3 $ 75.5 $ 56.9 $ 132.4
Classified............. 67.9 10.9 78.8 62.4 9.8 72.2
General................ 9.7 -- 9.7 10.1 -- 10.1
Other.................. 14.1 1.4 15.5 15.9 1.5 17.4
----------- ------------- --------- ------------ ------------- ---------
Total advertising revenue.. 166.3 68.0 243.3 163.9 68.2 232.1
Circulation revenue........ 48.1 3.3 51.4 45.3 3.2 48.5
Other revenue.............. 4.4 30.5 34.9 3.7 26.8 30.5
----------- ------------- --------- ------------ ------------- ---------
Total operating revenue.... $ 218.8 $ 101.8 $ 320.6 $ 212.9 $ 98.2 $ 311.1
=========== ============= ========= ============ ============= =========
Advertising revenue in 2002 accounted for 74.6% of total publishing revenue
compared to 73.1% in 2001. Retail advertising revenue in 2002 was $132.4
million, an increase of $2.1 million, or 1.6%, compared to $130.3 million in
2001. The increase is comprised of a $3.0 million increase in daily newspaper
retail preprints and a $1.2 million increase in community newspaper retail
advertising and inserts, in part due to rate increases, offset by a $2.1 million
decrease in daily newspaper retail ROP (run-of-press) advertisements. We believe
the shift toward retail preprints in 2002 was due in part to changes in
marketing strategies of certain major national retail advertisers. Additionally,
in 2001, many advertisers reduced or eliminated their newspaper advertisements
following the September 11 terrorist attacks.
Classified advertising revenue in 2002 was $72.2 million, a decrease of
$6.6 million, or 8.4%, compared to $78.8 million in 2001. At the daily
newspaper, decreases in employment advertising of $8.6 million and real estate
advertising of $0.1 million were partially offset by increases in automotive
advertising of $2.8 million and general advertising of $0.4 million. The
decrease in employment advertising, which accounted for almost 37.5% of total
classified advertising in 2002, represented a 27.0% decrease from 2001. We
believe the decrease in employment advertising resulted primarily from
continuing economic uncertainty; however, with each quarter in 2002 compared to
2001, the decrease in total classified advertising has reduced. The increase in
automotive advertising is primarily attributed to auto manufacturers promoting
0% financing programs.
General advertising revenue in 2002 was $10.1 million, an increase of $0.4
million, or 4.1%, compared to $9.7 million in 2001. The increase was primarily
attributable to an increase in general ROP advertising mainly from our
telecommunications customers.
49
The following table presents the advertising linage of our daily newspaper
by category for 2001 and 2002:
2001 2002 Change
------------------ ---------------- ------------
(inches in thousands)
Advertising linage (in inches):
Retail.................................................. 812.0 773.6 -4.7%
Classified.............................................. 970.6 922.4 -5.0%
General................................................. 51.1 52.7 +3.1%
------------------ ----------------
Total advertising linage (in inches)........................ 1,833.7 1,748.7 -4.7%
================== ================
Preprint pieces (in millions)............................... 719.5 773.5 +7.5%
================== ================
Total advertising linage in 2002 decreased 4.7% compared to 2001. The
decrease was largely due to a 5.0% decrease in classified advertising and a 4.7%
decrease in retail advertising partially offset by a 3.1% increase in general
advertising. The decrease in classified advertising lineage is consistent with
the decrease in the classified advertising revenue. Retail advertising linage
decreased while preprint advertising pieces rose 7.5% primarily as a result of
the shift to preprint advertising from a major national retail customer.
The following table presents the full pages of advertising and revenue per
page of our community newspapers and shoppers for 2001 and 2002:
2001 2002 Change
------------------ ---------------- ------------
(inches in thousands)
Full pages of advertising:
Community newspapers.................................... 94,898 93,888 -1.1%
Shoppers................................................ 113,846 105,545 -7.3%
------------------ ----------------
Total full pages of advertising............................. 208,744 199,433 -4.5%
================== ================
Revenue per page............................................ $ 288.61 $ 305.86 +6.0%
================== ================
Total pages of full page advertising in 2002 decreased 4.5% compared to
2001. The decrease was largely due to a 7.3% decrease in advertising in the
shoppers and a 1.1% decrease in advertising in the community newspapers. Revenue
per page increased 6.0% due to rate increases.
Other advertising revenue, consisting of revenue from direct marketing
efforts, JSOnline and event marketing, in 2002 was $17.4 million, an increase of
$1.9 million, or 12.3%, compared to $15.5 million in 2001. The increase was
largely due to increased direct mail advertising and online classified
advertising.
Circulation revenue in 2002 accounted for 15.6% of total publishing revenue
compared to 16.0% in 2001. Circulation revenue in 2002 was $48.5 million, a
decrease of $2.9 million, or 5.6%, compared to $51.4 million in 2001. The
decrease was mainly attributed to the 4.1% decrease in average net paid
circulation for Milwaukee Journal Sentinel's weekday edition and 3.1% decrease
in average net paid circulation for Milwaukee Journal Sentinel's Sunday edition,
a 3.5% decrease in paid circulation for our community newspapers and greater
discounts given to new subscribers. In January 2002, we eliminated home delivery
of the Milwaukee Journal Sentinel in all but 12 counties in southeastern
Wisconsin. As of the end of 2002, this decision contributed to a decrease in net
paid circulation for the daily and Sunday edition of 3.6% and 4.9%,
respectively. On June 30, 2002, in an effort to increase readership in certain
areas of Milwaukee County, we began offering greater discounts on home delivery
and single copy sales. Circulation in those areas has increased since offering
the discounts.
Other revenue, which consists primarily of revenue from commercial printing
opportunities at the print plants for our community newspapers and shoppers, in
2002 accounted for 9.8% of total publishing revenue compared to 10.9% in 2001.
Other revenue in 2002 was $30.5 million, a decrease of $4.4 million, or 12.6%,
compared to $34.9 million in 2001. The decrease was primarily attributed to
reduced press runs and page counts from existing commercial printing customers
and the loss of three commercial printing customers.
50
Publishing operating earnings in 2002 were $30.3 million, an increase of
$5.4 million, or 21.8%, compared to $24.9 million in 2001. Contributing to the
increase was a $12.3 million reduction in the cost of newsprint and ink compared
to 2001 and a $6.8 million decrease in direct wages and selling and
administrative expenses, which resulted primarily from workforce reductions at
the daily newspaper. These cost reductions were partially offset by $4.6 million
in start up costs in 2002 related to the new production facility.
We anticipate that our new production facility will be fully operational in
early 2003. We expect that our new presses will provide improved print
reproduction quality and increased productivity, as well as additional
opportunities to pursue commercial printing revenue from third parties.
The threatened outbreak of hostilities in Iraq in March 2003 and the war
itself has resulted in certain daily newspaper advertising customers reducing
their advertising spending in our daily newspaper. We have also incurred
additional news gathering costs.
Broadcasting
Operating revenue from broadcasting in 2002 was $152.7 million, an increase
of $17.9 million, or 13.3%, compared to $134.8 million in 2001. Operating
earnings from broadcasting in 2002 were $33.4 million, an increase of $17.9
million, or 116.0%, compared to $15.5 million in 2001. EBITDA from broadcasting
in 2002 was $40.7 million, an increase of $12.0 million, or 41.8%, compared to
$28.7 million in 2001 (see page 48 for a reconciliation of broadcasting
operating earnings to broadcasting EBITDA).
On December 31, 2001, we acquired the business and certain of the assets of
a television station, KIVI-TV, in Boise, Idaho and a low-power television
station, KSAW-LP, in Twin Falls, Idaho, for approximately $22.1 million in cash.
We began operating the stations on January 1, 2002.
The following table presents our broadcasting operating revenue, operating
earnings and EBITDA by radio stations and television stations for 2001 and 2002:
2001 2002
----------------------------------------------- ---------------------------------------------
Radio Television Total Radio Television Total
-------------- --------------- --------- ------------- --------------- --------
(in millions)
Operating revenue. $ 73.9 $ 60.9 $ 134.8 $ 78.2 $ 74.5 $ 152.7
============== =============== ========= ============= =============== ========
Operating earnings $ 5.9 $ 9.6 $ 15.5 $ 15.2 $ 18.2 $ 33.4
============== =============== ========= ============= =============== ========
EBITDA............ $ 14.8 $ 13.9 $ 28.7 $ 18.2 $ 22.5 $ 40.7
============== =============== ========= ============= =============== ========
Operating revenue from our radio stations in 2002 was $78.2 million, an
increase of $4.3 million, or 5.8%, compared to $73.9 million in 2001. The
increase was primarily attributed to a $2.9 million increase in local
advertising revenue and a $0.7 million increase from national advertising
revenue across most markets, and a $0.7 million increase in political and issue
advertising revenue. These increases in advertising revenue from the radio
stations reflect a $0.5 million adverse impact in 2001 from advertising
cancellations and the loss of advertising spots following the September 11
terrorist attacks.
Operating earnings from our radio stations in 2002 were $15.2 million, an
increase of $9.3 million, or 157.6%, compared to $5.9 million in 2001. The
increase was primarily attributed to the discontinuation of $5.7 million of
goodwill and broadcast license amortization expense, the $4.3 million increase
in revenue and the decrease in operating costs and expenses resulting from cost
control initiatives at all of our radio stations.
Operating revenue from our television stations in 2002 was $74.5 million,
an increase of $13.6 million, or 22.3%, compared to $60.9 million in 2001. The
increase was primarily attributed to a $7.8 million increase in Olympic,
political and issue advertising revenue, a $4.6 million increase in local
advertising revenue and a $1.5 million increase in national advertising revenue.
Included in the revenue increase is $5.3 million from the two stations in Idaho
that were acquired on December 31,
51
2001. These increases in advertising revenue from the television stations
reflect in part the $1.3 million adverse impact in 2001 of the loss of
advertising spots during the uninterrupted news coverage and certain advertising
cancellations following the September 11 terrorist attacks.
Operating earnings from our television stations in 2002 were $18.2 million,
an increase of $8.6 million, or 89.6%, compared to $9.6 million in 2001. The
increase was primarily attributed to the $13.6 million increase in revenue, the
discontinuation of $1.0 million of goodwill, broadcast license and network
affiliation agreement amortization expense and the effects of cost control
initiatives at all of our television stations.
The threatened outbreak of hostilities in Iraq in March 2003 and the war
itself has had a negative impact on our broadcast results due to reduced
spending levels by some advertisers. There was a hesitancy on the part of some
advertisers to place schedules during the period of time leading up to the war,
cancellations by some advertisers for the duration of war coverage and
elimination of advertising inventory available from our television networks
during their continuous coverage of the war.
Telecommunications
Operating revenue from telecommunications in 2002 was $148.7 million, a
decrease of $3.3 million, or 2.2%, compared to $152.0 million in 2001. Operating
earnings from telecommunications in 2002 were $41.0 million, a decrease of $7.0
million, or 14.7%, compared to $48.0 million in 2001. EBITDA from
telecommunications in 2002 was $58.1 million, a decrease of $4.6 million, or
7.3%, compared to $62.7 million in 2001 (see page 48 for a reconciliation of
telecommunications operating earnings to telecommunications EBITDA).
Wholesale telecommunication services provide network transmission solutions
for other service providers by offering bulk transmission capacity. Operating
revenue from wholesale services in 2002 was $97.3 million, a decrease of $5.3
million, or 5.2%, compared to $102.6 million in 2001. The decrease was primarily
attributed to service disconnections and price reductions. Monthly recurring
revenue from wholesale services at the end of 2002 was $7.5 million compared to
$8.1 million at the beginning of 2002 and $7.8 million at the beginning of 2001.
During 2002, new customers and new circuit connections of $1.3 million in
monthly recurring revenue were more than offset by service disconnections, price
reductions and lost customers.
Commercial telecommunication services provide advanced data communications
and long distance service to small and medium sized businesses in the Upper
Midwest, principally in Wisconsin, Michigan, Indiana, Minnesota and Illinois.
Operating revenue from commercial services in 2002 was $51.4 million, an
increase of $2.0 million, or 4.0%, compared to $49.4 million in 2001. The
increase was primarily attributed to an increase in long distance services.
Monthly recurring revenue from commercial advanced data services at the end of
2002 of $3.0 million was virtually equal to the amount at the beginning of 2002
and $0.2 million higher than the $2.8 million at the beginning of 2001. During
2002, new customers and new circuit connections of $0.7 million in monthly
recurring revenue were offset by service disconnections, price reductions and
lost customers.
The decrease in operating earnings from telecommunications was primarily
attributed to service disconnections, the decrease in profit margins on services
provided due to price reductions and the increase in depreciation expense of
$2.5 million resulting from the completion of several capital investment
initiatives during 2001. We expect continued service disconnections and price
reductions in our wholesale telecommunications business will cause an increasing
downward trend that could result in a significant decrease in our
telecommunications operating earnings into 2003.
WorldCom and Global Crossing together accounted for 20.1% and 22.5% of our
telecommunications revenue in 2002 and 2001, respectively. Global Crossing filed
for Chapter 11 bankruptcy protection in January 2002 and WorldCom filed for
Chapter 11 bankruptcy protection in July 2002. We had a pre-petition receivable,
net of applicable "set-off" accounts payable, from WorldCom, which was sold to a
third party in April 2003. We recorded a reserve in the amount of the net
receivable in the third quarter of 2002. The loss of the ongoing business from
either of these two customers would have a significant adverse effect on our
results of operations. A renewal service contract with Global Crossing is being
negotiated, though Global Crossing retains the right to accept or reject our
current contract under federal bankruptcy law. WorldCom also has a right to
52
accept or reject our current contract with them under federal bankruptcy law. If
either contract is rejected, we would have an unsecured claim for the balance
due on the contracts in the bankruptcy proceeding.
We do not believe we have a material bad debt exposure because we bill all
data services for both wholesale and commercial customers in advance of
providing services. Most customers are required to pay their bill before
services are provided. We continue to provide services to WorldCom and Global
Crossing and receive timely payment for those services.
Printing Services
Operating revenue from printing services in 2002 was $97.8 million, a
decrease of $16.8 million, or 14.6%, compared to $114.6 million in 2001.
Operating earnings from printing services in 2002 were $2.1 million, an increase
of $2.9 million, compared to losses of $0.8 million in 2001. EBITDA from
printing services in 2002 was $7.3 million, an increase of $1.9 million, or
35.2%, compared to $5.4 million in 2001 (see page 48 for a reconciliation of
printing services operating earnings to printing services EBITDA).
The decrease in printing services operating revenue was primarily
attributed to the consolidation of our U.S. operations to eliminate customers
that did not fit our long-term strategic business plans and continued slowdown
in the publication printing services business. CD-ROM replication continued at
essentially the same level as in the prior year; however, we continue to
experience intense price competition for this product in all markets.
The increase in printing services operating earnings was primarily
attributed to a reduction in operational costs and an increase in the sale of
products with higher margins. These were partially offset by the decrease in
revenue and a $2.5 million loss on impairment of CD-ROM related equipment.
A large computer hardware OEM (original equipment manufacturer) accounted
for 37.6% and 29.8% of our printing services revenue in 2002 and 2001,
respectively. The loss of this customer could have a material adverse effect on
our results of operations.
On February 4, 2003, we announced the closure of our CD-ROM mastering and
replications operations. We do not expect the costs to close these operations to
have a material adverse effect on our results of operations.
Other
Other operating revenue in 2002 was $91.0 million, an increase of $4.2
million, or 4.8%, compared to $86.8 million in 2001. Other operating earnings in
2002 were $7.3 million, an increase of $10.8 million compared to losses of $3.5
million in 2001. Other EBITDA in 2002 was $10.1 million, an increase of $10.0
million, compared to $0.1 million in 2001 (see page 48 for a reconciliation of
other operating earnings to other EBITDA).
The following table presents our other operating revenue, operating
earnings and EBITDA by business for 2001 and 2002:
2001 2002
---------------------------------------------------- ---------------------------------------------------
Direct Corporate Direct Corporate
Label Marketing and Label Marketing and
Printing Services Eliminations Total Printing Services Eliminations Total
---------- ------------- ------------- ----------- ---------- -------------- -------------- --------
(in millions)
Operating revenues.. $ 55.7 $ 35.9 $ (4.8) $ 86.8 $ 56.5 $ 38.3 $ (3.8) $ 91.0
========== ============= =========== =========== ========== ============== =========== ========
Operating earnings.. $ (0.6) $ (1.2) $ (1.7) $ (3.5) $ 2.4 $ (0.1) $ 5.0 $ 7.3
========== ============= =========== =========== ========== ============== =========== ========
EBITDA.............. $ 1.4 $ 0.0 $ (1.3) $ 0.1 $ 4.2 $ 0.5 $ 5.4 $ 10.1
========== ============= =========== =========== ========== ============== =========== ========
The increase in other operating revenue was primarily attributed to an
increase in the gravure label printing operation of new label products for our
largest label printing customer, SAB/Miller Brewing Company, and in print and
mail services and database marketing services in our direct marketing services
business. Included in operating revenue from our direct marketing
53
services is $21.6 million and $21.3 million of postage amounts billed to
customers in 2002 and 2001, respectively. Other operating revenue in 2001 was
adversely impacted by the September 11 terrorist attacks and the anthrax scare,
which resulted in advertisers reducing the amount of direct mail.
The increase in other operating earnings was primarily attributed to the
decrease in the litigation reserve by $4.1 million to reflect the settlement of
the Newspaper Merger Class Action Suit (discussed in note 8 in our notes to
consolidated financial statements), the $3.2 million increase in operating
revenue from our label printing and direct marketing services businesses, the
decrease in operating costs and expenses resulting from our cost control
initiatives and the discontinuation of $0.4 million of goodwill amortization
expense partially offset by the $1.3 million loss on impairment of a customer
list at our direct marketing services business.
SAB/Miller Brewing Company accounted for 50.7% and 47.4% of our label
printing business' revenue in 2002 and 2001, respectively. In 2002, our label
printing business was in the second year of a five year contract with SAB/Miller
Brewing Company. The loss of SAB/Miller Brewing Company could have a material
adverse effect on our results of operations.
Non Operating Income and Taxes from Continuing Operations
Interest income and dividends in 2002 were $1.0 million, a decrease of $0.6
million, or 37.5%, compared to $1.6 million in 2001. The decrease was primarily
attributed to the decrease in cash and cash equivalents offset by interest
income received from refunds of state income taxes. Interest expense in 2002 was
$0.6 million compared to $0.4 million in 2001. Gross interest expense from
borrowings under our credit agreement in 2002 was $1.8 million compared to $0.5
million in 2001. Interest expense capitalized as part of our construction of the
Milwaukee Journal Sentinel production facility in 2002 was $1.2 million compared
to $0.1 million in 2001.
The effective tax rate on continuing operations was 43.2% in 2002 compared
to 42.0% in 2001. The difference between the statutory federal tax rate and the
effective tax rate was primarily the result of the litigation that was settled
during 2002.
Discontinued Operations
In January 2002, we announced the closure of Fox Cities Newspapers, located
in Appleton, Wisconsin, which published six community newspapers. These
community newspapers were part of the publishing reportable segment.
On April 29, 2002, the board of directors of our French printing services
subsidiary, IPC Communication Services, S.A., a business in our printing
services segment, approved a resolution to proceed to close IPC Communication
Services, S.A. through a liquidation process. The remaining operations of IPC
Communication Services, S.A., were turned over to a liquidator on December 31,
2002.
The operations of Fox Cities Newspapers and IPC Communication Services,
S.A. have been reflected as discontinued operations in our consolidated
financial statements and, accordingly, prior periods have been restated to
reflect this treatment.
Net revenue from discontinued operations in 2002 was $3.3 million, a
decrease of $11.9 million, or 78.3%, compared to $15.2 million in 2001. Net
assets of discontinued operations at December 31, 2002 were zero and $3.3
million at December 31, 2001. Loss from discontinued operations in 2002 was $7.2
million compared to $2.2 million in 2001. Applicable income tax benefits were
$6.6 million and $0.5 million in 2002 and 2001, respectively.
Cumulative Effect of Accounting Change
Effective January 1, 2002, we adopted Statement No. 142, "Goodwill and
Other Intangible Assets." Under Statement No. 142, goodwill and intangible
assets deemed to have indefinite lives, including broadcast licenses and network
affiliation agreements, are no longer amortized but are reviewed for impairment
and written down and charged to results of operations when their carrying
amounts exceed their estimated fair values. We performed transitional impairment
tests on our goodwill and indefinite-lived intangible assets. The resulting
impairment charges of $7.7 million ($6.5 million after tax) were recorded
54
during the first quarter ended March 24, 2002 and are reported as the cumulative
effect of accounting change in our consolidated statements of earnings.
2001 compared to 2000
Consolidated
Our consolidated operating revenue in 2001 was $808.8 million, a decrease
of $10.4 million, or 1.3%, compared to $819.2 million in 2000. Our consolidated
operating costs and expenses in 2001 were $463.7 million, an increase of $16.4
million, or 3.7%, compared to $447.3 million in 2000. Our consolidated selling
and administrative expenses in 2001 were $261.0 million, a decrease of $1.7
million, or 0.1%, compared to $262.7 million in 2000.
The following table presents our total operating revenue by segment, total
operating costs and expenses, selling and administrative expenses and total
operating earnings as a percent of total operating revenue for 2000 and 2001:
Percent of
Percent of Total
Total Operating Operating
2000 Revenue 2001 Revenue
-------------- ----------------- ------------- ---------------
(dollars in millions)
Operating revenue:
Publishing.............................. $ 345.3 42.1% $ 320.6 39.6%
Broadcasting............................ 149.9 18.3 134.8 16.7
Telecommunications...................... 126.6 15.5 152.0 18.8
Printing services....................... 107.3 13.1 114.6 14.2
Other................................... 90.1 11.0 86.8 10.7
-------------- ----------------- ------------- ---------------
Total operating revenue........... 819.2 100.0 808.8 100.0
Total operating costs and expenses...... 447.3 54.6 463.7 57.3
Selling and administrative expenses..... 262.7 32.1 261.0 32.3
-------------- ----------------- ------------- ---------------
Total operating costs and expenses and
selling and administrative expenses 710.0 86.7 724.7 89.6
-------------- ----------------- ------------- ---------------
Total operating earnings.......... $ 109.2 13.3% $ 84.1 10.4%
============== ================= ============= ===============
The decrease in operating revenue was primarily attributed to the decrease
in advertising revenue in our publishing business and the decrease in television
operating revenue due to the decline in political and issue advertising and the
economic downturn offset by the increase in telecommunications operating revenue
attributed to new sales opportunities and network expansion. In addition,
operating revenue in 2001 was adversely impacted by $1.8 million from preempted
advertising due to the uninterrupted television news coverage and certain
advertising cancellations on television and radio stations following the
September 11 terrorist attacks.
The increase in total operating costs and expenses and selling and
administrative expenses was primarily due to the cost of workforce reduction and
business transition charges, the increase in the cost of raw materials other
than newsprint and the increase in the cost of payroll and benefits.
Our operating earnings in 2001 were $84.1 million, a decrease of $25.1
million, or 23.0%, compared to $109.2 million in 2000. The following table
presents our operating earnings by segment for 2000 and 2001:
55
Percent of
Percent of Total
Total Operating Operating
2000 Revenue 2001 Revenue
-------------- ----------------- ------------- ---------------
(dollars in millions)
Publishing.............................. $ 39.3 36.0% $ 24.9 29.6%
Broadcasting............................ 30.4 27.9 15.5 18.4
Telecommunications...................... 40.1 36.7 48.0 57.1
Printing services....................... 3.3 3.0 (0.8) (0.9)
Other................................... (3.9) (3.6) (3.5) (4.2)
-------------- ----------------- ------------- ---------------
Total operating earnings....... $ 109.2 100.0% $ 84.1 100.0%
============== ================= ============= ===============
The decrease in operating earnings was primarily due to the decrease in
operating revenue, the cost of workforce reduction and business transition
charges, the cost of accrued litigation and the adverse impact on third quarter
2001 earnings following the September 11 terrorist attacks.
Our consolidated EBITDA in 2001 was $135.8 million, a decrease of $23.5
million, or 14.8%, compared to $159.3 million in 2000. The following table
presents a reconciliation of our operating earnings to EBITDA by segment for
2000 and 2001:
2000 2001
------------------------------------------------- --------------------------------------------------
Depreciation Percent Depreciation Percent
Operating and of Total Operating and of Total
Earnings Amortization EBITDA EBITDA Earnings Amortization EBITDA EBITDA
---------- ------------- ---------- ---------- ----------- ------------- ---------- ----------
(dollars in millions)
Publishing.......... $ 39.3 $ 14.2 $ 53.5 33.6% $ 24.9 $ 13.9 $ 38.8 28.6%
Broadcasting........ 30.4 13.6 44.0 27.6 15.5 13.3 28.8 21.2
Telecommunications.. 40.1 11.4 51.5 32.3 48.0 14.7 62.7 46.2
Printing services... 3.3 6.7 10.0 6.3 (0.8) 6.2 5.4 4.0
Other............... (3.9) 4.2 0.3 0.2 (3.5) 3.6 0.1 --
---------- ------------- ---------- ---------- ----------- ------------- ---------- ----------
Total............... $ 109.2 $ 50.1 $ 159.3 100.0% $ 84.1 $ 51.7 $ 135.8 100.0%
========== ============= ========== ========== =========== ============= ========== ==========
The decrease in total EBITDA was primarily due to decreases in operating
earnings in our publishing, broadcasting, printing services and other reportable
segments partially offset by an increase in our telecommunications segment.
Publishing
Operating revenue from publishing in 2001 was $320.6 million, a decrease of
$24.7 million, or 7.2%, compared to $345.3 million in 2000. Operating earnings
from publishing were $24.9 million, a decrease of $14.4 million, or 36.6%,
compared to $39.3 million in 2000. EBITDA from publishing in 2001 was $38.8
million, a decrease of $14.7 million, or 27.5%, compared to $53.5 million in
2000 (see table above for a reconciliation of publishing operating earnings to
publishing EBITDA).
The following table presents our publishing operating revenue, operating
earnings and EBITDA by daily newspaper and community newspapers and shoppers for
2000 and 2001:
2000 2001
-------------------------------------------- --------------------------------------------
Community Community
Daily Newspapers & Daily Newspapers
Newspaper Shoppers Total Newspaper & Shoppers Total
------------- -------------- --------- ------------- ------------- ---------
(in millions)
Operating revenue..... $ 237.0 $ 108.3 $ 345.3 $ 218.8 $ 101.8 $ 320.6
============= ============== ========= ============= ============= =========
Operating earnings.... $ 38.4 $ 0.9 $ 39.3 $ 23.3 $ 1.6 $ 24.9
============= ============== ========= ============= ============= =========
EBITDA................ $ 46.5 $ 7.0 $ 53.5 $ 31.7 $ 7.1 $ 38.8
============= ============== ========= ============= ============= =========
56
The following table presents our publishing operating revenue by category
for 2000 and 2001:
2000 2001
------------------------------------------- -------------------------------------------
Community Community
Daily Newspapers & Daily Newspapers
Newspaper Shoppers Total Newspaper & Shoppers Total
------------ -------------- --------- ------------ ------------- ---------
(in millions)
Advertising revenue:
Retail................ $ 74.2 $ 56.8 $ 131.0 $ 74.6 $ 55.7 $ 130.3
Classified............ 85.4 12.1 97.5 67.9 10.9 78.8
General............... 10.9 -- 10.9 9.7 -- 9.7
Other................. 13.3 1.4 14.7 14.1 1.4 15.5
------------ -------------- --------- ------------ ------------- ---------
Total advertising revenue. 183.8 70.3 254.1 166.3 68.0 234.3
Circulation revenue....... 48.3 3.5 51.8 48.1 3.3 51.4
Other revenue............. 4.9 34.5 39.4 4.4 30.5 34.9
------------ -------------- --------- ------------ ------------- ---------
Total operating revenue... $ 237.0 $ 108.3 $ 345.3 $ 218.8 $ 101.8 $ 320.6
============ ============== ========= ============ ============= =========
Advertising revenue in 2001 accounted for 73.1% of total publishing revenue
compared to 73.6% in 2000. Retail advertising revenue in 2001 was $130.3
million, a decrease of $0.7 million, or 0.5%, compared to $131.0 million in
2000. The decrease is comprised of a $1.1 million decrease in community
newspapers retail advertising and a $0.4 million decrease in daily newspaper
retail ROP advertisements offset by a $0.8 million increase in daily newspaper
retail preprints. We believe certain major national retail advertisers have
changed their marketing strategies and have shifted toward retail preprints.
Additionally, in 2001, many advertisers reduced or eliminated their newspaper
advertisements following the September 11 terrorist attacks.
Classified advertising revenue in 2001 was $78.8 million, a decrease of
$18.7 million, or 19.2%, compared to $97.5 million in 2000. At the daily
newspaper, the decrease in employment advertising of $19.4 million was partially
offset by increases in real estate advertising, automotive advertising and
general advertising. The decrease in employment advertising, which accounted for
almost 47.7% of total classified advertising in 2001, represented a 37.5%
decrease from 2000. We believe the decrease in employment advertising resulted
primarily from continuing economic weakness.
General advertising revenue in 2001 was $9.7 million, a decrease of $1.2
million, or 11.0%, compared to $10.9 million in 2000. The decrease was primarily
attributable to a decrease in general ROP and preprint advertising mainly from
our airline customers.
The following table presents the advertising linage of our daily newspaper
by category for 2000 and 2001:
2000 2001 Change
------------------ ---------------- ------------
(inches in thousands)
Advertising linage (in inches):
Retail.................................................. 811.5 812.0 -0.1%
Classified.............................................. 1,164.3 970.6 -16.6%
General................................................. 63.6 51.1 -19.7%
------------------ ----------------
Total advertising linage (in inches)........................ 2,039.4 1,833.7 -10.0%
================== ================
Preprint pieces (in millions)............................... 665.7 719.5 +8.1%
================== ================
Total advertising linage in 2001 decreased 10.0% compared to 2000. The
decrease was largely due to a 16.6% decrease in classified advertising, an 0.1%
decrease in retail advertising and a 19.7% decrease in general advertising.
Retail advertising linage decreased primarily as a result of the shift in major
retail advertising to more preprint advertising. Preprint advertising pieces
rose 8.1% in 2001 primarily due to an increase in preprint advertising from
major national retail customers.
57
The following table presents the full pages of advertising and revenue
per page of our community newspapers and shoppers for 2000 and 2001:
2000 2001 Change
------------------ ---------------- ------------
(inches in thousands)
Full pages of advertising:
Community newspapers.................................... 111,440 94,898 -14.8%
Shoppers................................................ 134,057 113,846 -15.1%
------------------ ----------------
Total full pages of advertising............................. 245,497 208,744 -15.0%
================== ================
Revenue per page............................................ $258.94 $288.61 +11.5%
================== ================
Total pages of full page advertising in 2001 decreased 15.0% compared to
2000. The decrease was largely due to a 15.1% decrease in advertising in the
shoppers and a 14.8% decrease in advertising in the community newspapers.
Revenue per page increased 11.5% due to rate increases.
Other advertising revenue, consisting of revenue from direct marketing
efforts, JSOnline, event marketing, legal notices and Internet products in 2001
was $15.5 million, an increase of $0.8 million, or 5.4%, compared to $14.7
million in 2000. The increase was largely due to increased direct mail
advertising and online classified advertising.
Circulation revenue in 2001 accounted for 16.0% of total publishing revenue
compared to 15.0% in 2000. Circulation revenue in 2001 was $51.4 million, a
decrease of $0.4 million, or 0.8%, compared to $51.8 million in 2000. The
decrease was mainly attributed to a 7.4% decrease in average net paid
circulation for Journal Sentinel's weekday edition, a 1.6% decrease in average
net paid circulation for Journal Sentinel's Sunday edition and a 4.7% decrease
in paid circulation for our community newspapers.
Other revenue, which consists primarily of revenue from commercial printing
at the print plants for our community newspapers and shoppers, in 2001 accounted
for 10.9% of total publishing revenue compared to 11.4% in 2000. Other revenue
in 2001 was $34.9 million, a decrease of $4.5 million, or 11.4%, compared to
$39.4 million in 2000. The decrease was primarily attributed to reduced press
runs and page counts from existing commercial printing customers.
Publishing operating earnings in 2001 were $24.9 million, a decrease of
$14.3 million, or 36.5%, compared to $39.2 million in 2000. Contributing to the
decrease was a $24.7 million decrease in the total publishing operating revenue
and $3.3 million in workforce reductions partially offset by a decrease of $3.4
million in the cost of newsprint and ink and a $8.4 million decrease in direct
wages and selling and administrative expenses, which resulted primarily from
workforce reductions at the daily newspaper.
Broadcasting
Operating revenue from broadcasting in 2001 was $134.8 million, a decrease
of $15.1 million, or 10.1%, compared to $149.9 million in 2000. Operating
earnings in 2001 were $15.5 million, a decrease of $14.9 million, or 49.0%,
compared to $30.4 million in 2000. EBITDA in 2001 was $28.7 million, a decrease
of $15.3 million, or 34.8%, compared to $44.0 million in 2000 (see page 56 for a
reconciliation of broadcasting operating earnings to broadcasting EBITDA).
The following table presents our broadcasting operating revenue, operating
earnings and EBITDA by radio stations and television stations for 2000 and 2001:
2000 2001
---------------------------------------- -----------------------------------------
Radio Television Total Radio Television Total
---------- ----------- ---------- ------------- ------------ --------
(in millions)
Operating revenue........... $ 73.5 $ 76.4 $ 149.9 $ 73.9 $ 60.9 $ 134.8
========== =========== ========== ============= ============ ========
Operating earnings.......... $ 5.0 $ 25.4 $ 30.4 $ 5.9 $ 9.6 $ 15.5
========== =========== ========== ============= ============ ========
EBITDA...................... $ 14.4 $ 29.6 $ 44.0 $ 14.8 $ 13.9 $ 28.7
========== =========== ========== ============= ============ ========
58
Operating revenue from our radio stations in 2001 was $73.9 million, an
increase of $0.4 million, or 0.5%, compared to $73.5 million in 2000. The
increase was primarily attributed to a $0.7 million increase in local
advertising revenue and a $0.6 million increase in network and other revenue
offset by a $0.6 million decrease in political and issue advertising revenue and
a $0.4 million decrease in national advertising revenue. These changes in
advertising revenue from the radio stations in 2001 reflect the $0.5 million
adverse impact from cancellations and the loss of advertising spots following
the September 11 terrorist attacks.
Operating earnings from our radio stations in 2001 were $5.9 million, an
increase of $0.9 million, or 18.0%, compared to $5.0 million in 2000. The
increase was primarily attributed to the $0.4 million increase in revenue and
the $1.0 million decrease in payroll costs and other selling expenses.
Operating revenue from our television stations in 2001 was $60.9 million, a
decrease of $15.5 million, or 20.3%, compared to $76.4 million in 2000. The
decrease was primarily attributed to a $9.1 million decrease in Olympic,
political and issue advertising revenue, a $3.6 million decrease in local
advertising revenue and a $2.5 million decrease from national advertising
revenue across all markets. Of these decreases in advertising revenue from the
television stations in 2001, $1.3 million was due to the uninterrupted news
coverage and certain advertising cancellations following the September 11
terrorist attacks.
Operating earnings from our television stations in 2001 were $9.6 million,
a decrease of $15.8 million, or 62.2%, compared to $25.4 million in 2000. The
decrease was primarily attributed to the $15.5 million decrease in revenue.
Telecommunications
Operating revenue from telecommunications in 2001 was $152.0 million, an
increase of $25.4 million, or 20.1%, compared to $126.6 million in 2000.
Operating earnings from telecommunications in 2001 were $48.0 million, an
increase of $7.9 million, or 19.7%, compared to $40.1 million in 2000. EBITDA
from telecommunications in 2001 was $62.7 million, an increase of $11.2 million,
or 21.7%, compared to $51.5 million in 2000 (see page 56 for a reconciliation of
telecommunications operating earnings to telecommunications EBITDA).
Operating revenue from wholesale services in 2001 was $102.6 million, an
increase of $18.4 million, or 21.9%, compared to $84.2 million in 2000. The
increase was primarily attributed to strong demand for our services and the
network expansion into Michigan and Indiana. Monthly recurring revenue from
wholesale services at the end of 2001 was $8.1 million compared to $7.8 million
at the beginning of 2001 and $5.5 million at the beginning of 2000. During 2001,
new customers and new circuit connections of $2.9 million in monthly recurring
revenue were partially offset by service disconnections, price reductions and
lost customers.
Operating revenue from commercial services in 2001 was $49.4 million, an
increase of $7.0 million, or 16.5%, compared to $42.4 million in 2000. The
increase was primarily attributed to an increase in data services. Monthly
recurring revenue from commercial data services at the end of 2001 was $3.0
million compared to $2.8 million at the beginning of 2001 and $2.4 million at
the beginning of 2000. During 2001, new customers and new circuit connections of
$0.8 million in monthly recurring revenue were partially offset by service
disconnections, price reductions and lost customers.
The increase in operating earnings from telecommunications was primarily
attributed to the $25.4 million increase in revenue offset by a decrease in
profit margins due to price reductions. We expect continued price reductions and
service disconnections will cause a downward trend in earnings in 2002.
WorldCom and Global Crossing together accounted for 22.5% and 23.7% of our
telecommunications operating revenue in 2001 and 2000, respectively. The loss of
the ongoing business from either of these two customers would have a significant
adverse effect on our results of operations.
We do not believe we have a material bad debt exposure because we bill all
data services for both wholesale and commercial customers in advance of
providing services. Most customers are required to pay their bill before
services are provided.
59
Printing Services
Operating revenue from printing services in 2001 was $114.6 million, an
increase of $7.3 million, or 6.8%, compared to $107.3 million in 2000. The
operating loss from printing services in 2001 was $0.8 million, a decrease of
$4.1 million, compared to earnings of $3.3 million in 2000. EBITDA from printing
services was $5.4 million in 2001, a decrease of $4.6 million, or 46.0%,
compared to $10.0 million in 2000 (see page 56 for a reconciliation of printing
services operating earnings to printing services EBITDA).
The increase in printing services operating revenue was primarily
attributed to an increase in assembly services. The decrease in operating
earnings was primarily attributed to $2.3 million in expense related to the
transition of the Eastern and Western Regions into one operational unit called
IPC U.S. Operations and $0.7 million in costs related to the shutdown of
operations in Ireland.
A large computer hardware OEM (original equipment manufacturer) accounted
for 29.8% and 24.4% of our printing services revenue in 2001 and 2000,
respectively. The loss of this customer could have a material adverse effect on
our results of operations.
Other
Other operating revenue in 2001 was $86.8 million, a decrease of $3.3
million, or 3.7%, compared to $90.1 million in 2000. Other operating losses in
2001 were $3.5 million, a decrease of $0.5 million, or 11.6%, compared to losses
of $4.0 million in 2000. Other EBITDA in 2001 was $0.1 million, a decrease of
$0.2 million, compared to $0.3 million in 2000 (see page 56 for a reconciliation
of other operating earnings to other EBITDA).
The following table presents our other operating revenue, operating
earnings and EBITDA by business for 2000 and 2001:
2000 2001
--------------------------------------------------- ---------------------------------------------------
Direct Corporate Direct Corporate
Label Marketing and Label Marketing and
Printing Services Eliminations Total Printing Services Eliminations Total
----------- ----------- -------------- --------- ---------- ----------- ------------- ----------
(in millions)
Operating revenues $ 59.6 $ 34.3 $ (3.8) $ 90.1 $ 55.7 $ 35.9 $ (4.8) $ 86.8
=========== =========== ============== ========= ========== =========== ============= ==========
Operating earnings $ (0.9) $ 0.1 $ (3.2) $ (4.0) $ (0.6) $ (1.2) $ (1.7) $ (3.5)
=========== =========== ============== ========= ========== =========== ============= ==========
EBITDA............ $ 1.6 $ 1.3 $ (2.6) $ 0.3 $ 1.4 $ 0.0 $ (1.3) $ 0.1
=========== =========== ============== ========= ========== =========== ============= ==========
The decrease in operating revenue was primarily attributed to the March
2001 sale of the Milwaukee label printing business offset by the increase in
print and mail services in our direct marketing services business. Operating
revenue in 2001 was adversely impacted by the terrorist attacks and the anthrax
scare, which resulted in advertisers reducing their use of direct mail. Included
in operating revenue from our direct marketing services was $21.3 million and
$19.7 million of postage amounts billed to customers in 2001 and 2000,
respectively.
In 2000 and 2001, the operating losses were primarily attributed to an
increase in the litigation reserve.
SAB/Miller Brewing Company accounted for approximately 47.4% and 27.5% of
our label printing operating revenue in 2001 and 2000, respectively. In 2001,
our label printing business was in the first year of a five year contract with
SAB/Miller Brewing Company. The loss of SAB/Miller Brewing Company could have a
material adverse effect on our results of operations.
Non Operating Income and Taxes from Continuing Operations
Interest income and dividends in 2001 were $1.6 million, an increase of
$0.3 million, or 23.1%, compared to $1.3 million in 2000. The increase was
primarily attributed to the increase in cash available for commercial paper and
money market investments throughout 2001. Interest expense was $0.4 million in
2001 and 2000. Gross interest expense from borrowings
60
under our credit agreement in 2001 was $0.5 million compared to $1.3 million in
2000. Interest expense capitalized as part of our construction of the Journal
Sentinel production facility in 2001 was $0.1 million compared to $0.9 million
in 2000.
The effective tax rate on continuing operations was 42.0% in 2001 compared
to 40.1% in 2000. The difference between the statutory federal tax rate and the
effective tax rate was primarily due to the reduction of deferred tax assets for
state net operating losses.
Discontinued Operations
Net revenue from discontinued operations in 2001 was $15.2 million, a
decrease of $4.1 million, or 21.2%, compared to $19.3 million in 2000. Net
assets of discontinued operations at December 31, 2001 were $3.3 million. The
loss from discontinued operations in 2001 was $2.2 million compared to $0.1
million in 2000. Applicable income tax benefits in 2001 was $0.5 million and
$0.6 million in 2000.
Liquidity and Capital Resources
Our principal liquidity and capital requirements have historically been to
pay dividends that have supported employee ownership and to meet our working
capital and capital expenditure needs. Since 2000, we have also required
liquidity to purchase units in JESTA from employees and former employees to
ensure liquidity for them. Historically, we have relied on cash flow from
operations and, in 2002, supplemented these cash flows with borrowings under our
revolving credit facility, to satisfy our liquidity and capital requirements. We
intend to replace our current revolving credit facility prior to the public
offering and put in place a debt structure with more appropriate terms for our
new capital structure. Recently we extended our revolving credit agreement,
which now expires in April 2004. After giving effect to the recapitalization,
including the application of the net proceeds of the public offering, as well as
new debt facility to be entered into prior to the closing of the public offering
and the tender offer, we expect that the aggregate dividend amount paid on our
common stock will initially be reduced, and our debt service obligation will be
increased, from levels that existed before the public offering. We believe that
current cash balances, which were $6.6 million at March 23, 2003, expected cash
flows from operations and borrowings under our extended revolving credit
facility or a new debt facility will be adequate for the foreseeable future to
provide for our capital expenditures, cash dividends, working capital and debt
service.
In certain states, we may have inadvertently failed to file required state
securities forms in connection with our sale of JESTA units to our employees.
Consequently, we currently intend to offer to rescind purchases of JESTA units
made by employees in those states during certain time periods. If all employees
to whom the rescission offer is made accept the offer, then we could incur costs
of up to approximately $15 million in connection with the purchase of units in
the rescission offer. We do not expect the rescission offer will have a material
adverse effect on our results of operations or financial condition.
Cash Flow For First Quarter Ended March 23, 2003
Cash provided by operating activities was $37.6 million in the first
quarter of 2003 compared to $24.6 million in the first quarter of 2002. The
increase is primarily attributed to recording a $8.2 million liability for
equipment for the daily newspapers' new production facility.
Cash used for investing activities was $16.8 million in the first quarter
of 2003 compared to $16.3 million in the first quarter of 2002. Capital
expenditures for property and equipment were $16.8 million in the first quarter
of 2003 and $16.3 million in the first quarter of 2002. We continued to invest
in the equipment and the building for our daily newspaper production facility
and upgrades to our telecommunications fiber optic network.
Cash used for financing activities was $22.7 million in the first quarter
of 2003 compared to $9.0 million in the first quarter of 2002. We decreased our
borrowing under our credit agreement by $14.9 million in the first quarter of
2003 compared to the increase in borrowing of $65.0 million in the first quarter
of 2002. The increased borrowing in 2002 was primarily used to purchase units of
beneficial interest from employees and former employees. In the first quarter of
2003, there were no sales or purchases of units compared to purchases of units
of $79.9 million and sales of units of $14.0 million in the first quarter of
2002. We paid cash dividends of $7.8 million and $7.9 million in the first
quarter of 2003 and 2002, respectively.
61
Cash used for discontinued operations was $0.4 million in the first quarter
of 2002.
We have a $120.0 million bank revolving credit agreement, expiring April
30, 2004, to support our cash requirements. As of March 23, 2003, we had
borrowings of $75.9 million under this credit agreement, including $4.9 million
bearing interest at the base rate of 4.25% and $71.0 million bearing interest at
the LIBOR based rate of 2.21%, and immediately available credit of $44.1
million.
Cash Flow for Year Ended December 31, 2002
Cash provided by operating activities was $86.1 million in 2002 compared to
$118.4 million in 2001 and $133.1 million in 2000. The decrease was mainly due
to funding of the pension plan obligations of $44.5 million in 2002.
Cash used for investing activities was $51.4 million in 2002 compared to
$108.1 million in 2001 and $94.0 million in 2000. Capital expenditures for
property and equipment were $53.2 million in 2002, $90.2 million in 2001 and
$96.8 million in 2000. We continued to invest in the building of our daily
newspaper production facility, digital television equipment and upgrades to the
telecommunications fiber optic network. Cash used for acquisitions was zero in
2002, $22.1 million in 2001 and $8.0 million in 2000. Cash received from sales
of assets was $1.5 million in 2002, $5.2 million in 2001, including $4.4 million
from the sale of certain of the assets of the Milwaukee label printing
operation, and $3.2 million in 2000. In 2000, we received $7.1 million from the
redemption of the preferred stock received from the 1995 sale of Perry Printing,
a former subsidiary.
Cash used for financing activities was $31.7 million in 2002 compared to
$11.9 million in 2001 and $33.0 million in 2000. We increased our borrowing
under our credit agreement by $86.4 million in 2002. The increased borrowing was
primarily used to purchase units of beneficial interest from employees and
former employees and for funding of pension plan obligations. In 2002, purchases
of units were $125.3 million compared with $84.4 million in 2001 and $77.1
million in 2000. Sales of units were $38.9 million, $101.8 million and $90.6
million in 2002, 2001 and 2000, respectively. We paid cash dividends of $31.6
million, $37.9 million and $36.8 million in 2002, 2001 and 2000 respectively.
Cash used for discontinued operations was $3.4 million in 2002 and $3.7
million in 2000. Cash provided by discontinued operations was $0.5 million in
2001.
We have a $120.0 million bank revolving credit agreement, expiring April
30, 2004, to support our cash requirements. As of December 31, 2002, we had
borrowings of $90.8 million under this credit agreement, including $2.8 million
bearing interest at the base rate of 4.25% and $88.0 million bearing interest at
the LIBOR based rate of 2.40%, and immediately available credit of $29.2
million.
Stock Trust
As of March 23, 2003, our treasury, our employees, and former employees
owned units representing beneficial ownership of 90% of our stock. As of March
23, 2003, we believe that employees and former employees had outstanding
balances under demand notes secured by pledges of units from various financial
institutions totaling approximately $432.4 million.
Eligible optionees under the Stock Trust, including certain categories of
designated employees, the Grant family shareholders and us, have the right to
purchase units offered for sale. We are not obligated to purchase units, though
in recent years prior to the suspension of trading on October 25, 2002, we have
elected to do so for the convenience of Stock Trust unitholders.
62
Contractual Obligations and Commitments
As of December 31, 2002, our contractual obligations are summarized below.
Payments Due by Period
---------------------------------------------------------------------
Contractual Obligations Less than 1
Total year 1-4 years After 4 years
-------------- --------------- ------------- --------------
(in millions)
Other long-term liabilities................. $ 3.7 $ 1.6 $ 1.1 $ 1.0
Operating leases............................ 69.1 15.7 33.3 20.1
-------------- --------------- ------------- --------------
Total contractual obligations............... $ 72.8 $ 17.3 $ 34.4 $ 21.1
============== =============== ============= ==============
Other long-term liabilities consist primarily of obligations for
non-compete agreements resulting from acquisitions and deposits received from
subleases of building operating leases. We lease office space, certain
broadcasting facilities, distribution centers, printing plants and equipment
under both short-term and long-term leases accounted for as operating leases.
Some of the lease agreements contain renewal options and rental escalation
clauses, as well as provisions for the payment of utilities, maintenance and
taxes by us.
Amount of Commitment Expiration per Period
---------------------------------------------------------------------
Less than 1
Other Commitments Total year 1-4 years After 4 years
-------------- --------------- -------------- --------------
(in millions)
Other long-term liabilities................. $ 122.4 $ 39.4 $ 82.9 $ 0.1
Operating leases............................ 1.2 1.2 -- --
-------------- --------------- -------------- --------------
Total contractual obligations............... $ 123.6 $ 40.6 $ 82.9 $ 0.1
============== =============== ============== ==============
A purchase commitment for newsprint for our publishing businesses, which
runs through 2006, from a newsprint supplier as of December 31, 2002, was $104.7
million. The commitment is based on market prices for quantities we determine
will meet our newsprint requirements over the term of the contract. In the
unlikely event that newsprint is no longer required in our business, our
commitment would expire without obligation. Purchase commitments related to
capital expenditures for our daily newspaper's new production facility were
approximately $8.1 million as of March 23, 2003. As March 23, 2003, we had spent
an aggregate of $104.5 million on this project, which was nearly completed as of
the date of this prospectus. In addition, we have the right to broadcast certain
television programs during the years 2003-2008 under contracts aggregating $8.3
million. We have $1.2 million of standby letters of credit for business
insurance purposes.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk on our short-term notes payable to
banks and foreign currency exchange rates in the normal course of business.
However, a 10% change in the interest rate is not expected to have a material
impact on our earnings before income taxes. In addition, we have shut down our
operations outside the United States and have not entered into any foreign
currency derivative instruments.
Many of our unitholders have borrowed funds to pay for their purchase of
units. Dividends on our common stock passed through to our unitholders have in
the past helped our unitholders make required periodic interest payments on
those loans. Increases in the interest rates on unitholder loans could result in
our unitholders seeking increased dividends from us. Dividends are established
by our board of directors in their sole discretion, and we are under no
obligation to pay dividends on our common stock. A 10% increase in the interest
rate on unitholder loans is not expected to have a material impact on dividends
declared by our board of directors.
63
Critical Accounting Policies
Our management's discussion and analysis of financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related footnote disclosures. On an on-going basis,
we evaluate our estimates, including those related to doubtful accounts,
property and equipment, intangible assets, income taxes, litigation, pension and
other postretirement benefits. We base our estimates on historical experience
and on 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 values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Allowance for doubtful accounts
We evaluate the collectibility of our accounts receivable based on a
combination of factors. We specifically review historical write-off activity by
market, large customer concentrations, customer creditworthiness and changes in
our customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. In circumstances where we are aware of a specific customer's
inability to meet its financial obligations to us (such as bankruptcy filings,
credit history, etc.), we record a specific reserve for bad debts against
amounts due to reduce the net recognized receivable to the amount we reasonably
believe will be collected. For all other customers, we recognize reserves for
bad debts based on past loss history, the length of time the receivables are
past due and the current business environment. If our evaluations of the
collectibility of our accounts receivable differ from actual results, increases
or decreases in bad debt expense and allowances may be required.
Property and equipment
We assign useful lives for our property and equipment based on our estimate
of the amount of time that we will use those assets and we have selected the
straight-line method to depreciate the majority of the property and equipment. A
change in the estimated useful lives or the depreciation method used could have
a material impact upon our results of operations.
We evaluate our property and equipment for impairment whenever indicators
of impairment exist. Accounting standards require that if the sum of the future
cash flows expected to result from a company's assets, undiscounted and without
interest charges, is less than the carrying amount of the asset, an asset
impairment must be recognized in the financial statements. The estimated future
cash flows related to an asset or group of assets is highly susceptible to
change because we must make assumptions about future revenue and the related
cost of sales. Changes in our assumptions could require us to recognize a loss
for asset impairment.
Impairment of goodwill and indefinite-lived intangibles
Goodwill, broadcast licenses and other indefinite-lived intangible assets
account for 32.9% and 34.6% of total assets in 2002 and 2001, respectively. The
annual impairment tests for goodwill and indefinite-lived intangibles under
Statement No. 142 require us to make certain assumptions in determining fair
value, including assumptions about cash flow growth rates of our businesses.
Additionally, the fair values are significantly impacted by factors including
competitive industry valuations and long-term interest rates that exist at the
time the annual impairment tests are performed. Accordingly, we may incur
additional impairment charges in future periods under Statement No. 142 to the
extent we do not achieve our expected cash flow growth rates, and to the extent
that market values and long-term interest rates in general decrease and
increase, respectively.
Accrued Income Taxes
The Internal Revenue Service and various state Departments of Revenue
routinely examine our federal and state tax returns. From time to time, the IRS
and the state Departments of Revenue may challenge certain of our tax positions.
We
64
believe our tax positions comply with applicable tax law and we would vigorously
defend these positions if challenged. The final disposition of any positions
challenged by the IRS or state Departments of Revenue could require us to make
additional tax payments. Nonetheless, we believe that we have adequately
reserved for any foreseeable payments related to such matters and consequently
do not anticipate any material earnings impact from the ultimate resolution of
such matters.
Accrued Litigation
We are subject to various legal actions, administrative proceedings and
claims. When necessary, we may need to record a liability for an estimate of the
probable costs for the resolution of such claims. The estimate would be
developed in consultation with counsel and would be based upon an analysis of
potential results, assuming a combination of litigation and settlement
strategies. We believe that such unresolved legal actions and claims would not
materially affect our results of operations, financial position or cash flows.
Employee Benefits
We are self-insured for a majority of our employee related health and
disability benefits and workers compensation claims. A third party administrator
is used to process all claims. Liabilities for unpaid claims are based on our
historical claims experience. Liabilities for workers compensation claims are
developed from actuarial valuations. Actual amounts could vary significantly
from such estimates which would require us to record additional expense in the
future.
We rely upon actuarial valuations to determine pension costs and funding.
We provide the actuarial firms with certain assumptions that have a significant
effect on our obligations such as:
o the discount rate - used to arrive at the net present value of the
obligations;
o the return on assets - used to estimate the growth in invested asset
value available to satisfy certain obligations;
o the salary increases - used to calculate the impact future pay
increases will have on postretirement obligations; and
o the employee turnover statistics - used to estimate the number of
employees to be paid postretirement benefits.
Moody's Aa Corporate bonds, as of the measurement date, is the benchmark we
use to determine the assumed discount rate, which was reduced from 7.25% in 2001
to 6.75% for 2002. We make other assumptions that affect the accounting for
pension benefits, such as the expected rate of return on plan assets (decreased
from 9.5% in 2001 to 8.5% in 2002) and the rate of compensation increase (4.5%
in 2002 and 2001). Changes in these assumptions affect the benefit obligations
and the service and interest cost components of the pension plan and the other
postretirement plan and the required funding of the pension plan. We review
these assumptions on an annual basis.
We also rely upon actuarial valuations to determine post retirement benefit
costs other than pension. We provide the actuarial firms with the assumption of
the discount rate and medical cost inflation. These assumptions could have a
significant effect on our obligation. The discount rate is used to arrive at the
net present value of the obligation. The medical cost of inflation is used to
calculate the impact future medical costs would have on postretirement
obligations.
New Accounting Standards
Effective January 1, 2002, we adopted Statement No. 141, "Business
Combinations," and Statement No. 142. Statement No. 141 addresses financial
accounting and reporting for business combinations completed after June 30,
2001. As required by Statement No. 142, we performed transitional impairment
tests on our goodwill and indefinite-lived intangible assets. The resulting
impairment charges of $7.7 million ($6.5 million after tax) were recorded during
the first quarter ended March 24, 2002 and are reported as the cumulative effect
of accounting change in the consolidated statements of earnings.
Effective January 1, 2002, we adopted Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to
65
be disposed of, as well as broadening the accounting and reporting of
discontinued operations. Accordingly, the closures of Fox Cities Newspapers and
IPC Communication Services, S.A., as discussed in note 10 to our consolidated
financial statements, have been treated as discontinued operations.
In June 2002, Statement No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," was issued. Statement No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies the previous guidance on the subject. It requires, among other
things, that a liability for a cost associated with an exit or disposal activity
be recognized, at fair value, when the liability is incurred rather than at the
commitment date to the exit or disposal plan. The provisions for Statement No.
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. Accordingly, Statement No. 146 may affect when future costs
associated with exit or disposal activities are recognized.
Effect of Inflation
Our results of operations and financial condition have not been
significantly affected by general inflation. We have reduced the effects of
rising costs through improvements in productivity, cost containment programs
and, where the competitive environment exists, increased selling prices.
However, changes in newsprint prices could have an impact on costs, which we may
not be able to offset fully in our pricing or cost containment programs.
66
BRIEF DESCRIPTION OF RECAPITALIZATION
New Journal has filed with the SEC a Registration Statement on Form S-4,
File No. 333-105209, relating to the share exchange. You should be aware that
the Journal Employees' Stock Trust will terminate in the event the share
exchange discussed below takes place.
You should read about and understand the effects of the recapitalization
because, if you do not accept this rescission offer, then you will retain your
units and they will become shares of class B common stock of New Journal in the
recapitalization, assuming the recapitalization takes place. However, if you
accept this rescission offer and we rescind the sale of the subject units, then
those units will not be exchanged for shares of class B common stock of New
Journal, discussed below, and you will not become a shareholder of New Journal
in the recapitalization with respect to those units. This means that, since the
rescinded units will not become shares of class B common stock of New Journal,
you will not have the opportunity to sell class B shares in the tender offer or
receive the special dividend with respect to those units, assuming the tender
offer takes place. The price to be paid for class B shares in the tender offer
has not been determined, but we anticipate it will be above the rescission offer
price. However, the actual tender offer price may be at, above or below the
price to be paid for units in this rescission offer.
Overview
There are four basic steps in the recapitalization:
o The share exchange;
o The amendment and termination of JESTA;
o The initial public offering; and
o The tender offer, which enables unitholders to significantly reduce
their personal JESTA loans.
The Share Exchange
Immediately prior to the initial public offering, we will effect a share
exchange with New Journal, pursuant to which we will become a wholly owned
subsidiary of New Journal and upon completion of which New Journal will change
its name to Journal Communications, Inc. In connection with the share exchange:
o Each outstanding share of common stock of Journal Communications will
automatically be exchanged for either (a) shares of class B common stock of
New Journal (at a share exchange ratio to be determined) or (b) such amount
of cash as may be due upon the perfection of dissenters' rights under the
Wisconsin Business Corporation Law. Of each Journal Communications share
for which dissenters' rights are not perfected, as equally as possible:
>> one-half will be exchanged for shares of class B-1 common stock, which
will consist of your most recently purchased one-half shares or units,
and
>> one-half will be exchanged for shares of class B-2 common stock, which
will consist of your earliest purchased one-half shares or units; and
o JESTA will terminate and every JESTA unit you own with respect to a share
of Journal Communications stock for which dissenters' rights are not
perfected and which you do not tender to Journal Communications in this
rescission offer will automatically represent shares of class B common
stock of New Journal (at a share exchange ratio to be determined).
Each share of class B-1 and B-2 common stock will be identical except for
restrictions on when you can convert them into class A common stock and sell
them to the public. Under these public sale restriction periods of New Journal's
articles of
67
incorporation, class B-l and class B-2 shares may not be sold or transferred
until 360 days or 540 days after the pricing of the initial public offering, as
the case may be, except for:
o sales in the tender offer,
o permitted transfers to trusts for estate planning or charitable
purposes, and
o offers to sell and sales of class B shares under the offer procedures
set forth in New Journal's articles of incorporation.
Pursuant to New Journal's articles of incorporation, you also will be
prohibited from buying a put option, selling a call option, short selling or
entering into any other hedging or insurance transaction that transfers to
another, in whole or in part, any of the economic consequences of ownership of
your restricted class B shares during the applicable public sale restriction
periods.
Following the expiration of the applicable public sale restriction period,
Class B shares must first be offered for sale to active employees and other
eligible purchasers under New Journal's articles of incorporation and if the
sale does not occur within three business days, such class B shares will, at
your option, either remain class B shares held by you or be converted into class
A shares, which are freely tradeable in the public market subject to applicable
laws.
New Journal's Articles of Incorporation
New Journal's articles of incorporation will be different from our current
articles of incorporation in the following principal ways:
o They will authorize a class of common stock, called class A common
stock, that will be entitled to one vote per share and will be issued
to the public in the initial public offering.
o They will authorize a class of common stock, called class B common
stock, that will be entitled to ten votes per share and will be issued
to you in exchange for your current shares of Journal Communications
common stock and JESTA units.
o They will authorize a class of common stock, called class C common
stock, that will be entitled to two votes per share on any matter that
comes before the shareholders, will receive cumulative dividends equal
to the dividend on the class A and class B shares, provided that the
dividend on the class C shares will not be less than a certain dollar
amount to be determined, divided by the share exchange ratio, and will
be issued to the Grant family shareholders in exchange for a portion
of their class B common stock, their rights under JESTA and their
covenants under the agreement entered into with Journal Communications
and New Journal (see "Agreement with the Grant Family Shareholders"
below).
o They will have provisions restricting the transferability of the
shares of class B-1 and class B-2 common stock for a period of time to
allow us to establish an orderly trading market for our publicly
traded class A shares.
o They will have provisions requiring the class B shares to first be
offered for sale to active employees and other eligible purchasers
before they can be converted into the publicly traded class A shares
after the expiration of the applicable public sale restriction
periods.
o They will authorize a class of preferred stock that the board of
directors will have the authority to issue without shareholder
approval and upon such terms as the board of directors may determine,
including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be
greater than the rights of the holders of New Journal's common stock.
o In addition to the preferred stock provisions, they will have
provisions that help protect New Journal from the risk of unsolicited
takeovers by third parties that are not approved by the board of
directors, including by providing for a
68
classified board of directors and providing that a vote of two-thirds
(2/3rds) of all of the outstanding shares of New Journal's stock
entitled to vote will be required to approve (a) a sale or other
business combination of New Journal, (b) a sale of the Milwaukee
Journal Sentinel or (c) a relocation of the corporate headquarters
outside of the Milwaukee area or to amend certain anti-takeover
provisions of the articles of incorporation or bylaws.
There are additional differences between New Journal's articles of
incorporation and our current articles. In addition, New Journal's bylaws will
provide for advance notice requirements for shareholder proposals and director
nominations, as our current bylaws do.
Voting Rights
Holders of class A common stock will be entitled to one vote per share on
all matters voted upon by our shareholders. Holders of class B common stock will
be entitled to ten votes per share on all matters voted upon by our
shareholders. Holders of class C common stock will be entitled to two votes per
share on any matter voted upon by our shareholders.
Dividend Rights
Pursuant to New Journal's articles of incorporation, each class of common
stock has equal rights with respect to cash dividends, except that dividends on
class C shares are cumulative and will not be less than a certain dollar amount
to be determined, divided by the share exchange ratio.
What Will be Received in the Recapitalization
When we consummate the share exchange, each share of Journal Communications
outstanding common stock will automatically be exchanged for either (a) shares
of New Journal's class B common stock, divided as equally as possible among
class B-1 and class B-2 shares (at a share exchange rate to be determined), or
(b) such amount of cash as may be due upon the perfection of dissenters' rights
under the Wisconsin Business Corporation Law, and each JESTA unit you own with
respect to a share of Journal Communications stock for which dissenters' rights
are not perfected and which you do not tender to us in this rescission offer
will automatically represent shares of class B common stock of New Journal (at a
share exchange rate to be determined). Each class B share will be identical
except for the applicable public sale restriction periods.
Shareholders and unitholders who do not perfect dissenters' rights in the
share exchange will also receive a special dividend, in an amount to be
determined, upon consummation of the transaction. This special dividend will not
be paid on rescinded units.
Transfer Restrictions on Class B Shares
You will not be able to convert class B shares into New Journal's publicly
traded and unrestricted class A shares until the applicable public sale
restriction periods expire. In addition, you will not be able to sell or
transfer class B shares until the applicable public sale restriction period
expires, except for:
o sales in the tender offer,
o permitted transfers to trusts for estate planning or charitable
purposes, and
o offers to sell class B shares under the offer procedures set forth in
New Journal's articles of incorporation.
Except as noted above, class B-1 shares may not be sold or transferred
until 360 days after the pricing of the initial public offering and class B-2
shares may not be sold or transferred until 540 days after the pricing of the
initial public offering.
In a permitted transfer to trusts for estate planning or charitable
purposes, such trusts will continue to be subject to the applicable public sale
restriction periods for the shares they receive. Such permitted transfers are
limited to transfers, in trust,
69
for the benefit of individual beneficiaries or corporations, associations or
foundations organized for charitable, educational or religious purposes.
Pursuant to New Journal's articles of incorporation, you also will be
prohibited from buying a put option, selling a call option, short selling or
entering into any other hedging or insurance transaction that transfers to
another, in whole or in part, any of the economic consequences of ownership of
your restricted class B shares during the applicable public sale restriction
periods.
The public sale restriction periods permit trading of the publicly traded
class A common stock to take place in the public market without the introduction
of a significant number of additional shares, which could negatively impact the
price. Our financial advisers tell us that sales of class B shares into the
public market should be introduced over time in order to establish an orderly
trading market for our publicly traded class A shares.
Offer Procedures--Voluntary Transfers
After the public sale restriction periods expire, if you want to sell any
shares of class B common stock or convert any class B shares into class A shares
in order to sell them to the public, you must first offer to sell your shares of
class B common stock to active employees and other eligible purchasers under New
Journal's articles of incorporation. The purpose of this is to keep the high
vote class B shares in the hands of employees and the Grant family shareholders.
This is an important part of how we intend to remain a family and
employee-controlled company in the future.
If you so choose to offer your class B shares for sale and no eligible
purchaser under New Journal's articles of incorporation buys your class B shares
within three business days, class B shares will, at your option, either remain
class B shares held by you or be converted into class A shares, which are freely
tradeable in the public market subject to applicable laws.
Listing
The class B common stock and the class C common stock will not be listed on
a national securities exchange or traded in an organized over-the-counter
market. We intend to apply to list the class A common stock on the New York
Stock Exchange under the symbol "JRN."
The Initial Public Offering
If unitholder, Grant family shareholder and trustee approvals of the share
exchange and the amendment and termination of JESTA are obtained (the Grant
family shareholder approval was previously obtained), we will proceed with the
initial public offering of shares of class A common stock as soon as our board
of directors deems advisable. The board will proceed with the initial public
offering at a time when it believes the offering is likely to be well received
in the marketplace.
The initial public offering price of the class A shares will be determined
by negotiations between us and the managing underwriters, who will underwrite
the proposed initial public offering. When making their recommendation regarding
the price for the initial public offering, the underwriters will take into
account many factors including the trading value of other comparable companies
in the market, and overall market conditions.
The underwriters may also recommend a share exchange ratio, or "stock
split," which will not change the aggregate value of your holdings, but may
affect both the number of and the price of your holdings.
The Tender Offer
We intend to use the net proceeds of the initial public offering, as well
as borrowings from our new debt facility, to purchase class B shares issued in
the transaction (in an amount to be determined). We will purchase these shares
by launching a cash tender offer to all holders of class B common stock,
excluding the Grant family shareholders who have agreed not to participate. We
intend for the tender offer to comprise the second step of a "synthetic
secondary offering," a primary offering
70
followed by stock purchases using the proceeds of the initial public offering,
as well as other funds, to accomplish substantially the same goal as allowing
existing shareholders and unitholders to participate in the initial public
offering.
We are conducting the tender offer in order to enable our employee and
former employee unitholders to reduce their significant personal JESTA loans. We
currently intend to launch the tender offer as soon as practicable after the
initial public offering. We will determine the tender offer price, which will be
at or above the initial public offering price of the class A shares. The tender
offer price may also be at, above or below the market price of the class A
shares at the time of the tender offer. In the tender offer, it is expected that
each class B shareholder will be permitted to tender only a percentage of his or
her class B shares. In setting the final percentages which shareholders will be
permitted to tender, our board of directors will take into consideration the
availability of funds under our new debt facility, the amount of net proceeds we
receive in the initial public offering and the market price per share of the
class A common stock.
The amount tendered by a class B shareholder in the tender offer must
consist solely of class B-1 shares. Neither the class B-2 shares, the class A
common stock sold in the initial public offering nor the class C common stock to
be received by the Grant family shareholders in exchange for a portion of their
class B common stock, their rights under JESTA and their covenants under the
agreement entered into with Journal Communications and New Journal (see
"Agreement with the Grant Family Shareholders" below) can be tendered in the
tender offer.
We will purchase class B shares in the tender offer pursuant to an offer to
purchase and related materials, which we will distribute when we commence the
tender offer. We will also file a tender offer statement on Schedule TO with the
SEC in connection with the tender offer. We cannot assure you that the tender
offer will occur or that it will occur on the terms described in this
prospectus.
Agreement with the Grant Family Shareholders
The following is a summary of the material terms of the shareholders
agreement recently entered into by Journal Communications, New Journal, Matex
Inc. and the Abert Family Journal Stock Trust. In this summary, we refer to
Matex Inc. and the Abert Family Journal Stock Trust as the family shareholders.
This summary is not a complete description of the shareholders agreement and is
qualified in its entirety by reference to the full text of the shareholders
agreement, a copy of which is filed as an exhibit to the registration statement
of which this prospectus is a part and is incorporated by reference herein.
Pursuant to the terms and conditions of the shareholders agreement, the
family shareholders agreed to vote all of their shares of Journal Communications
common stock in favor of all components of the recapitalization, including the
share exchange and the amendment and termination of JESTA; in favor of New
Journal's 2003 Equity Incentive Plan and New Journal's 2003 Employee Stock
Purchase Plan; and against any non-approved transaction or any action or
agreement that would delay, prevent or nullify the transaction or the
shareholders agreement. The family shareholders also granted Journal
Communications an irrevocable proxy to vote the family shareholders' shares with
respect to the foregoing matters.
In addition to approving the share exchange, the family shareholders agreed
that, following the share exchange but before the termination of JESTA and the
initial public offering, they will engage in a voluntary share exchange with New
Journal, pursuant to which approximately 41.5% of the class B shares they
receive in the share exchange, together with their rights under JESTA and their
covenants under the shareholders agreement, will be exchanged for a number of
shares of class C common stock equivalent to 1,088,000 multiplied by the share
exchange ratio.
Alternatively, if the family shareholders have not obtained a favorable
private letter ruling with respect to the tax treatment of the transaction as it
pertains to their unique situation by the second business day following receipt
of the first comment letter from the SEC relating to the Registration Statement
on Form S-4, File No. 333-105209, in connection with the recapitalization, then
the family shareholders can elect to either (a) eliminate either or both of the
redemption provisions of the class C shares or (b) to receive 2,880,000 class B
shares multiplied by the share exchange ratio, 288,000 class A shares multiplied
by the share exchange ratio and $2,600,000, in either case in exchange for all
of their Journal Communications common stock, their rights under JESTA and their
covenants under the shareholders agreement. If they so elect, the family
71
shareholders will receive these shares and cash instead of the class B and class
C shares they would have received in connection with the share exchange and
second, voluntary share exchange described above.
Pursuant to the shareholders agreement, the family shareholders may elect
to sell a portion of their New Journal shares in the initial public offering,
subject to certain limitations, but they agreed not to tender any of their New
Journal shares in the tender offer. The family shareholders also agreed to not
transfer their New Journal shares during the three years following the initial
public offering, except as otherwise provided for in the agreement or pursuant
to a board-approved business combination transaction or under Rule 144 of the
Securities Act of 1933. In addition, the family shareholders agreed that they
will not exercise their rights under New Journal's articles of incorporation to
purchase any available shares of class B common stock if, after the proposed
purchase, the family shareholders would own more than 17% of the class B common
stock then outstanding.
The shareholders agreement gives New Journal the right to redeem
approximately 17% of the family shareholders' class B shares, at 105% of the
average closing price of the class A shares, during the period beginning 540
days after and ending 720 days after the pricing of the initial public offering.
In addition, each year after consummation of the transaction New Journal may
redeem, at 105% of the average closing price of the class A shares, class B
shares then owned by the family shareholders if the family shareholders own more
than 17% of the class B shares then outstanding. In either case, the family
shareholders may, before the redemption occurs, convert their class B shares
subject to the redemption into class A shares without complying with the class B
offer procedures set forth in New Journal's articles of incorporation.
The shareholders agreement provides the family shareholders with certain
rights to register with the SEC some or all of their New Journal shares for
resale to the public. Beginning 720 days after the pricing of the initial public
offering, the family shareholders have the right to "demand" the registration of
their shares, for resale, subject to the limitations described below. The family
shareholders also have the right to participate in certain of New Journal's
proposed stock offerings to the public, subject to certain conditions.
Notwithstanding these rights, New Journal will not be obligated to effect any
family shareholder "demand" to register shares within 180 days after (1) the
effective date of a registration in which the family shareholders were notified
of their rights to participate in a New Journal offering or (2) any other
registration of theirs. In addition, New Journal may postpone for up to 180 days
the filing or the effectiveness of any such family shareholders' "demand"
registration statement if the board of directors determines that effecting such
registration would have certain negative consequences.
The shareholders agreement also provides that, beginning with the first
annual meeting of the shareholders of New Journal following the initial public
offering, the family shareholders will have the right to nominate one director
to the board of directors of New Journal (or, if the board of directors is
comprised of more than eleven directors, the family shareholders will have the
right to nominate two directors). This right terminates when the family
shareholders hold less than 5% of the outstanding shares of New Journal's common
stock. The family shareholders' nominee will be subject to applicable
professional and governance standards. In connection therewith, the family
shareholders agreed, as shareholders of New Journal, to take all actions
necessary to elect all of New Journal's recommended nominees for director.
The shareholders agreement terminates if the transaction is not consummated
by December 31, 2005 or if the aggregate number of common shares held by the
family shareholders is less than 300,000 multiplied by the share exchange ratio.
In consideration of the agreements and covenants of the family shareholders
under the shareholders agreement, Journal Communications agreed to reimburse the
family shareholders up to $50,000 for their legal and financial fees incurred on
or after April 1, 2003 in connection with the transaction.
72
DESCRIPTION OF UNITS OF BENEFICIAL INTEREST
Our employee-owners do not own shares of Journal Communications' stock
directly. Instead, they own units of beneficial interest representing beneficial
interests in the Journal Employees' Stock Trust that the Journal Employees'
Stock Trust Agreement established. The Stock Trust, in turn, owns shares of
Journal Communications' common stock. Employees who participate in the
employee-ownership program are called "unitholders." The terms of the Trust
Agreement exclusively govern all aspects of employee-ownership. We urge you to
read the Trust Agreement because it, rather than this prospectus, defines your
rights. You may request a copy of the Trust Agreement from Paul E. Kritzer,
Secretary, Journal Communications, Inc., P.O. Box 661, Milwaukee, Wisconsin
53201-0661, (414) 224-2374.
Purchases and Sales of Units
All purchases and sales of units are transacted at the option price set
forth by the Trust Agreement. The option price is based upon a formula
prescribed within the Trust Agreement. The formula uses Journal Communications'
book value and the past five year's net income as factors in calculating the
option price. An option price is calculated approximately every four weeks.
After a 90-day waiting period, full-time employees of Journal
Communications and its subsidiaries are eligible to take part in the
employee-ownership program. Part-time employees are eligible to buy units if
they have 1,000 or more hours of service during each of the two then most recent
calendar years. As we add new operations and companies, our employees become
eligible for employee-ownership under these rules. Journal Communications and
the Grant family shareholders are also eligible to purchase and hold units. In
addition, employee benefit trusts established by us or our subsidiaries or
established by employees to provide retirement benefits and certain other trusts
for the benefit of individual beneficiaries or charities are eligible to own
units.
In recent years, we offered units to eligible employees on a rotation
basis. A rotation schedule determined the time we would make the offering to the
group to which each employee had been assigned for purposes of the
employee-ownership rotation. Most often, we assigned all the employees of a
given business unit to the same group, which only included employees from that
business unit. However, we reserved the right to divide the employees of a
business unit into two or more groups for rotation purposes. The frequency of
the rotation and the number of units offered to employees depended on the number
of units that we had, or anticipated having, available to sell and the number of
units that we desired to sell.
In addition to offering units to employees on a rotation basis, we from
time to time allowed participants in some incentive plans to use all or a
portion of a cash incentive award to purchase units. For this purpose, units
were valued at the option price then in effect. Units that participants acquired
in this manner are subject to all terms and conditions of the Trust Agreement.
All units are subject to mandatory offers to sell upon termination of
employment and to restrictions on their resale. In general, the Trust Agreement
requires that an employee must offer to sell his or her units when he or she
retires or otherwise terminates employment and that employees sell units only to
certain eligible purchasers. For this purpose, termination occurs when one
ceases to be an employee of Journal Communications or its subsidiaries.
Employees that retire, as defined in the Trust Agreement, must offer to sell a
pro rata share of their units over ten years after their retirement from Journal
Communications. In such circumstances, the cumulative number of units that a
retired employee must offer to sell increases in equal increments of ten percent
each year for ten years beginning on the first anniversary of the employee's
retirement. Employees that are terminated because of downsizing, restructuring,
reorganization, job elimination, divestiture, outsourcing or similar event in
each case that results in the termination of a sufficient number of employees
(as determined by the trustees at their sole discretion) must offer to sell a
pro rata portion of units over a period of up to five years after such
termination, depending on the number of years the employee has owned units.
Employees that terminate their employment for reasons other than retirement or
for downsizing, restructuring, etc. are required to offer to sell all of their
units immediately.
The Trust Agreement provides that, when a unitholder offers to sell units,
certain persons have the option to purchase the units at the option price in
accordance with procedures and time periods that the Trust Agreement prescribes.
Persons who
73
have the option to purchase units include employees and employee benefit trusts
designated by the President of Journal Communications or our board of directors,
the Grant family shareholders and Journal Communications, in the order of
priority and during periods set forth in the Trust Agreement. Where the Trust
Agreement requires a unitholder to offer to sell units, our option to purchase
the units extends for five years after the date the company's option to purchase
begins. While we are not obligated to do so, we have elected in recent years to
immediately purchase units offered for sale. However, we suspended the purchase
and sale of units on October 25, 2002, while we explores potential sources of
additional permanent capital. (See "Brief Description of Recapitalization.")
There is no assurance we will elect to buy units offered for sale in the future.
Under the terms of the Trust Agreement, if units become subject to an
option event and are not purchased by employee-eligibles, employee benefit
trusts or stockholder-eligibles within twelve months of the option event (the
"Trust Expiration Date"), then the unitholder may freely transfer those units
(subject to applicable law) to any person, even though not an "eligible" under
the terms of the Trust Agreement. However, units that are transferred in this
manner are subject to our continuing right to repurchase those units at the
option price set forth in the Trust Agreement for a period of five years from
the Trust Expiration Date.
Unitholders' Rights and Restrictions
Each unit entitles its holder to the rights set forth in the Trust
Agreement, which to some extent are similar to rights associated with one share
of Journal Communications' common stock.
Unitholders do not have preemptive rights or the right to maintain a
proportionate interest in Journal Communications or the Stock Trust. Unitholders
also do not have the right to force anyone to purchase units from them, and
units are not convertible into cash or any other security. However, the Grant
family shareholders may convert their shares into a proportionate number of
units, and any units held by them into shares of common stock of Journal
Communications, at any time.
The Stock Trust, as holder of Journal Communications' common stock, is
entitled to such dividends as our board of directors may declare in its
discretion. The trustees in turn pass the dividends (other than stock dividends)
through to the unitholders as soon as practicable after receipt (stock dividends
are retained by the Stock Trust). If we deliver any shares of our common stock
to the Stock Trust through a stock dividend or stock split, then the Stock Trust
retains those shares. Upon the receipt of such shares, the trustees distribute
additional units to the unitholders so as to retain the relationship of one unit
for each share of Journal Communications' common stock. At the direction of the
trustees, we generally have paid all dividends directly to the unitholders. The
Stock Trust, as such, pays no dividends. Our board of directors determines
payment of future dividends and may reduce the dividend payment rate or
terminate the payment of dividends at any time.
The Stock Trust, as holder of Journal Communications' common stock, is
entitled to one vote per share in the election of directors and in all matters
requiring a vote of the shareholders of Journal Communications. When the
trustees receive notice of any meeting of Journal Communications' stockholders,
the Trust Agreement requires them to issue to each active employee unitholder a
proxy empowering him or her to vote the number of shares in which his or her
units represents an interest. However, active employee unitholders do not have
the power or authority to vote (i) to sell or lease all or substantially all of
the assets of Journal Communications, or (ii) to dissolve Journal
Communications, or (iii) to merge or consolidate Journal Communications with any
other corporation or corporations in which Journal Communications and/or the
stockholders of Journal Communications upon completion of such consolidation or
merger do not control directly or indirectly a majority of the voting stock,
unless the employee owners of at least two-thirds of the outstanding units owned
by employee-eligibles have authorized the trustees to offer all shares held by
the trustees for sale in accordance with the provisions of Section 24 of the
Trust Agreement and the purchase options under Section 24 have expired within
three months prior to such vote. The trustees have exclusive authority to vote
all shares represented by units owned by ex-employee-eligibles, employee benefit
trusts and employee-eligible-transferees, except that employee benefit trusts
may vote on a proposal to amend or terminate the Trust Agreement.
From time to time the Stock Trust holds meetings of its unitholders to vote
with respect to proposed amendments to the Trust Agreement. In addition, prior
to termination of the Trust Agreement by consent, there must be a meeting of
unitholders. Each active employee unitholder and employee benefit trusts may
vote the number of units the unitholder owns. Unitholders
74
may vote by proxy at these meetings. The Trust Agreement may be amended or
terminated by consent if all of the following vote to amend or terminate it:
two-thirds of the outstanding units that active employees and employee benefit
trusts hold; all of the trustees; and 80% of the shares of Journal
Communications' common stock that the Grant family shareholders hold. Journal
Communications does not vote at meetings of unitholders, and its approval is not
required to amend or terminate the Trust Agreement. The trustees may sell or
otherwise permanently dispose of any shares of Journal Communications' common
stock that the Stock Trust holds, subject to certain procedures contained in the
Trust Agreement. If active employee unitholders and employee benefit trust
owners of at least two-thirds of the units then outstanding owned by such
holders authorize a sale of Journal Communications stock, then the stock will be
offered, successively, to any employee unitholder and employee benefit trust
owner of units who did not consent to the proposed sale or other permanent
disposition (nonconsenting eligibles) and then to the Grant family shareholders.
If any such offered stock remains unsold, first the nonconsenting eligibles and
then the Grant family shareholders have a second opportunity to purchase.
Finally, if any such offered stock still remains, then we may purchase it.
If we liquidate or dissolve, then the Stock Trust, as holder of Journal
Communications' common stock, is entitled to a pro rata share of the assets
available for distribution on Journal Communications' common stock. In addition,
if we liquidate or dissolve or if the Stock Trust terminates as a result of a
sale or other disposition of all or any part of Journal Communications' common
stock that the Stock Trust holds, then the unitholders will receive a pro rata
distribution of the assets of the Stock Trust (or of the proceeds of any partial
disposition), less any amounts withheld for taxes, expenses and other charges.
75
MARKET AND DIVIDEND INFORMATION
Neither Journal Communications' common stock nor units of beneficial
interest in the Journal Employees' Stock Trust are listed on any national
securities exchange or the Nasdaq Stock Market. As of April 30, 2003, there were
3,032 unitholders.
The following table sets forth the per share cash dividends declared and
paid on Journal Communications' common stock for the periods indicated:
Year Quarter Dividend
---- ------- --------
2003 1st $0.30
2002 4th $0.30
3rd $0.30
2nd $0.30
1st $0.30
2001 4th $0.30
3rd $0.35
2nd $0.35
1st $0.35
Our board of directors' policy has been to declare dividends each quarter.
The declaration and payment of future dividends is subject to the discretion of
our board of directors in light of all relevant factors, including earnings,
general business conditions, working capital requirements and contractual
restrictions.
The following table sets forth the option price per unit for the periods
indicated, as determined by the JESTA formula:
Year Quarter Beginning Option Price Ending Option Price
- ---- ------- ---------------------- -------------------
2003 1st $38.45 $38.70
2002 4th 37.81 38.45
3rd 37.47 37.81
2nd 36.75 37.47
1st 38.14 36.75
2001 4th 37.68 38.14
3rd 36.56 37.68
2nd 35.03 36.56
1st 34.74 35.03
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the SEC are hereby incorporated in this
registration statement by reference:
(a) The Annual Reports on Form 10-K of Journal Communications and of the
Journal Employees' Stock Trust for the fiscal year ended December 31, 2002. The
Annual Reports were filed electronically with the SEC via the SEC's EDGAR
system.
(b) All reports filed by Journal Communications and the Journal Employees'
Stock Trust pursuant to Section 13 of the Securities Exchange Act of 1934, as
amended, since December 31, 2002, including the Quarterly Report on Form 10-Q of
Journal Communications for the period ended March 23, 2003 and the Quarterly
Report on Form 10-Q of the Journal Employees' Stock Trust for the period ended
March 31, 2003. These reports were filed electronically with the SEC via the
SEC's EDGAR system.
We will provide to you, upon request and without charge, a copy of any or
all of the documents referred to above which we have or may incorporate in this
prospectus by reference, other than the exhibits for those documents. You can
request copies from:
Journal Communications, Inc.
P.O. Box 661
Milwaukee, Wisconsin 53201-0661
Attention: Paul E. Kritzer, Secretary
You may also request a copy by calling Paul E. Kritzer at (414) 224-2374.
Current filings are also available on our web site at www.jc.com. Information
contained on our web site is not incorporated by reference into this prospectus
and you should not consider information on our web site as part of this
prospectus.
LEGAL MATTERS
The validity of the units of beneficial interest being registered hereunder
will be passed on for Journal Communications and the Journal Employees' Stock
Trust by Paul E. Kritzer, Vice President and Secretary of Journal
Communications. Mr. Kritzer is a full-time employee of Journal Communications
and at April 30, 2003, directly or beneficially owned 103,340 units.
EXPERTS
The consolidated financial statements of Journal Communications, Inc. and
the financial statements of Journal Employees' Stock Trust at December 31, 2001
and 2002 and for each of the three years in the period ended December 31, 2002
appearing in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Journal Communications and the Journal Employees' Stock Trust file annual,
quarterly and special reports, proxy statements and other information with the
SEC. SEC filings of Journal Communications and the Journal Employees' Stock
Trust are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may read and copy any filed document at the SEC's public
reference room in Washington, D.C. at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room.
We have filed a registration statement on Form S-2 with the SEC relating to
our rescission offer. This prospectus is part of that registration statement
and, as allowed by SEC rules, does not include all of the information you can
find in the registration statement or the exhibits to the registration
statement. Additionally, New Journal has filed with the SEC a Registration
Statement on Form S-1, File No. 333- 105210, relating to the public offering,
and a Registration Statement on Form S-4, File No. 333-105209, relating to the
share exchange.
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INDEX TO FINANCIAL STATEMENTS
Journal Communications, Inc. Audited Consolidated Financial Statements
Page
Number
------
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets at December 31, 2001 and 2002............... F-4
Consolidated Statements of Earnings for each of the three
years in the period ended December 31, 2002............................. F-5
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2002................... F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2002............................. F-7
Notes to Consolidated Financial Statements December 31, 2002............ F-8
Journal Communications, Inc. Unaudited Consolidated Condensed Financial
Statements
Consolidated Condensed Balance Sheets as of December 31, 2002
and March 23, 2003 (unaudited)......................................... F-26
Unaudited Consolidated Condensed Statements of Earnings for the
first quarters ended March 24, 2002 and March 23, 2003................. F-27
Unaudited Consolidated Condensed Statements of Cash Flows for the
first quarters ended March 24, 2002 and March 23, 2003................. F-28
Notes to Unaudited Consolidated Condensed Financial
Statements March 23, 2003.............................................. F-29
Journal Employees' Stock Trust Audited Financial Statements
Report of Independent Auditors......................................... F-33
Statements of Financial Position at December 31, 2001 and 2002......... F-34
Statements of Stock Trust Activity for Years Ended
December 31, 2002, 2001 and 2000....................................... F-35
Statements of Cash Flows for Years Ended
December 31, 2002, 2001 and 2000....................................... F-36
Notes to Financial Statements Year Ended December 31, 2002............. F-37
F-1
Journal Employees' Stock Trust Unaudited Financial Statements
Statements of Financial Position as of March 31, 2003
(Unaudited) and December 31, 2002........................................ F-39
Unaudited Statements of Stock Trust Activity First Quarter
ended March 31, 2003 and 2002............................................ F-40
Unaudited Statements of Cash Flows First Quarter
ended March 31, 2003 and 2002............................................ F-41
Notes to Unaudited Financial Statements March 31, 2003................... F-42
F-2
Report of Independent Auditors
The Board of Directors and Shareholders
Journal Communications, Inc.
We have audited the accompanying consolidated balance sheets of Journal
Communications, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Journal
Communications, Inc. at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 28, 2003
F-3
JOURNAL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31 (in thousands, except per share amounts)
2001 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 8,911 $ 8,455
Receivables, net........................................................... 92,167 89,920
Inventories, net........................................................... 19,696 16,200
Prepaid expenses........................................................... 9,455 11,786
Deferred income taxes...................................................... 5,696 8,164
Current assets of discontinued operations.................................. 4,727 --
-------------- --------------
TOTAL CURRENT ASSETS....................................................... 140,652 134,525
Property and equipment:
Land and land improvements................................................. 23,604 26,542
Buildings.................................................................. 79,357 124,808
Equipment.................................................................. 451,003 488,331
Construction in progress................................................... 85,494 30,057
-------------- --------------
639,458 669,738
Less accumulated depreciation.............................................. 319,022 345,333
-------------- --------------
Net property and equipment................................................. 320,436 324,405
Goodwill, net................................................................... 112,289 111,998
Broadcast licenses, net......................................................... 128,842 125,492
Other intangible assets, net.................................................... 20,215 12,115
Prepaid pension costs........................................................... -- 30,337
Other assets.................................................................... 6,311 5,880
Non-current assets of discontinued operations................................... 2,033 --
-------------- --------------
TOTAL ASSETS............................................................... $ 730,778 $ 744,752
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks..................................................... $ 4,420 $ 90,775
Accounts payable........................................................... 43,148 37,757
Accrued compensation....................................................... 23,794 29,712
Deferred revenue........................................................... 19,609 20,741
Accrued employee benefits.................................................. 23,882 9,576
Other current liabilities.................................................. 21,952 9,525
Current liabilities of discontinued operations............................. 3,502 --
Current portion of long-term liabilities................................... 1,909 1,645
-------------- --------------
TOTAL CURRENT LIABILITIES.................................................. 142,216 199,731
Accrued employee benefits....................................................... 19,508 16,945
Other long-term liabilities..................................................... 10,666 9,238
Deferred income taxes........................................................... 25,508 42,294
Shareholders' equity:
Common stock, authorized and issued 28,800 shares ($0.125 par value)....... 3,600 3,600
Retained earnings.......................................................... 556,139 581,361
Units of beneficial interest in treasury, at cost.......................... (23,046) (108,417)
Accumulated other comprehensive income (loss).............................. (3,813) --
-------------- --------------
TOTAL SHAREHOLDER'S EQUITY................................................. 532,880 476,544
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 730,778 $ 744,752
============== ==============
See accompanying notes.
F-4
JOURNAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31 (in thousands, except per share amounts)
2000 2001 2002
------------- ------------- -------------
Continuing operations:
Operating revenue:
Publishing................................................. $ 345,321 $ 320,615 $ 311,138
Broadcasting............................................... 149,886 134,801 152,749
Telecommunications......................................... 126,586 151,992 148,674
Printing services.......................................... 107,334 114,612 97,841
Other...................................................... 90,105 86,767 90,974
------------- ------------- -------------
Total operating revenue......................................... 819,232 808,787 801,376
Operating costs and expenses:
Publishing................................................. 164,128 155,173 148,204
Broadcasting............................................... 54,672 54,804 59,674
Telecommunications......................................... 63,505 78,554 81,658
Printing services.......................................... 90,096 101,884 82,597
Other...................................................... 74,899 73,266 75,420
------------- ------------- -------------
Total operating costs and expenses......................... 447,300 463,681 447,553
Selling and administrative expenses........................ 262,741 261,002 239,750
------------- ------------- -------------
Total operating costs and expenses and selling and administrative
expenses.................................................... 710,041 724,683 687,303
------------- ------------- -------------
Operating earnings.............................................. 109,191 84,104 114,073
Other income and expense:
Interest income and dividends.............................. 1,314 1,618 984
Interest expense, net...................................... (430) (383) (645)
------------- ------------- -------------
Total other income and expense.................................. 884 1,235 339
------------- ------------- -------------
Earnings from continuing operations before income taxes and
accounting change.......................................... 110,075 85,339 114,412
Provision for income taxes...................................... 44,162 35,860 49,418
------------- ------------- -------------
Earnings from continuing operations before accounting change.... 65,913 49,479 64,994
Gain (loss) from discontinued operations, net of applicable
income tax benefit of $611, $477 and $6,624
respectively............................................... 471 (1,722) (565)
Cumulative effect of accounting change, net of applicable income
taxes of $1,161............................................ -- -- (6,509)
------------- ------------- -------------
Net earnings.................................................... $ 66,384 $ 47,757 $ 57,920
============= ============= =============
Weighted average number of shares outstanding................... 27,101 28,084 26,430
Basic and diluted earnings per share:
Continuing operations before accounting change............. $ 2.43 $ 1.76 $ 2.46
Discontinued operations.................................... 0.02 (0.06) (0.02)
Cumulative effect of accounting change..................... -- -- (0.25)
------------- ------------- -------------
Net earnings per share.......................................... $ 2.45 $ 1.70 $ 2.19
============= ============= =============
Cash dividends per share........................................ $ 1.35 $ 1.35 $ 1.20
============= ============= =============
See accompanying notes.
F-5
JOURNAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31 (in thousands, except per share amounts)
Units of Accumulated
Beneficial Other Comprehensive
Common Retained Interest in Comprehensive Income
Stock Earnings Treasury Income (Loss) Total (Loss)
------------ -------------- -------------- ---------------- -------------- ------------
Balance at December 31, 1999 $ 3,600 $ 504,683 $ (42,018) $ (568) $ 465,697
Net earnings 66,384 66,384 $ 66,384
Other comprehensive loss:
Foreign currency translation
adjustments (239) (239) (239)
------------
Comprehensive income $ 66,145
============
Cash dividends ($1.35 per share) (36,765) (36,765)
Units of beneficial interest purchased (77,145) (77,145)
Units of beneficial interest sold 8,498 82,089 90,587
------------ -------------- -------------- ---------------- --------------
Balance at December 31, 2000 3,600 542,800 (37,074) (807) 508,519
Net earnings 47,757 47,757 $ 47,757
Other comprehensive loss:
Minimum pension liability
adjustment (net of tax of
$1,906) (2,856) (2,856) (2,856)
Foreign currency translation
adjustments (150) (150) (150)
------------
Other comprehensive loss (3,006)
------------
Comprehensive income $ 44,751
============
Cash dividends ($1.35 per share) (37,866) (37,866)
Units of beneficial interest purchased (84,351) (84,351)
Units of beneficial interest sold 3,448 98,379 101,827
------------ -------------- -------------- ---------------- --------------
Balance at December 31, 2001 3,600 556,139 (23,046) (3,813) 532,880
Net earnings 57,920 57,920 $ 57,920
Other comprehensive income:
Reversal of prior year minimum
pension liability adjustment
(net of tax of $1,906) 2,856 2,856 2,856
Realization of foreign currency
translation adjustments 957 957 957
------------
Other comprehensive income 3,813
------------
Comprehensive income $ 61,733
============
Cash dividends ($1.20 per share) (31,597) (31,597)
Units of beneficial interest purchased (125,347) (125,347)
Units of beneficial interest sold (1,101) 39,976 38,875
------------ -------------- -------------- ---------------- --------------
Balance at December 31, 2002 $ 3,600 $ 581,361 $ (108,417) $ -- $ 476,544
============ ============== ============== ================ ==============
See accompanying notes.
F-6
JOURNAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)
2000 2001 2002
------------- ------------- -------------
Cash flow from operating activities:
Net earnings................................................ $ 66,384 $ 47,757 $ 57,920
Less gain (loss) from discontinued operations............... 471 (1,722) (565)
Less cumulative effect of accounting change................. -- -- (6,509)
------------- ------------- -------------
Earnings from continuing operations before accounting change 65,913 49,479 64,994
Adjustments for non-cash items:
Depreciation............................................. 38,710 40,882 44,726
Amortization............................................. 11,408 10,814 1,909
Provision for doubtful accounts.......................... 2,821 3,816 3,480
Deferred income taxes.................................... 2,562 4,533 12,413
Net loss from disposal of assets......................... 1,516 1,486 404
Impairment of long-lived assets.......................... -- 1,003 3,762
Net changes in operating assets and liabilities, excluding
effect of sales and acquisitions:
Receivables.......................................... (6,369) 3,233 (1,172)
Inventories.......................................... (916) (1,107) 3,687
Accounts payable..................................... 5,646 (10,470) (4,013)
Other assets and liabilities......................... 11,832 14,742 (44,130)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 133,123 118,411 86,060
------------- ------------- -------------
Cash flow from investing activities:
Capital expenditures for property and equipment............ (96,758) (90,172) (53,169)
Proceeds from sales of assets.............................. 3,174 5,245 1,548
Acquisition of businesses.................................. (8,018) (22,148) (49)
Redemption of investment of preferred stock................ 7,106 -- --
Other, net................................................. 466 (1,069) 261
------------- ------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES.......... (94,030) (108,144) (51,409)
------------- ------------- -------------
Cash flow from financing activities:
Net increase (decrease) in notes payable to bank........... (12,115) 4,420 86,355
Purchases of units of beneficial interest.................. (77,145) (84,351) (125,347)
Sales of units of beneficial interest...................... 90,587 101,827 38,875
Cash dividends............................................. (36,765) (37,866) (31,597)
Deferred revenue........................................... 2,403 4,052 --
------------- ------------- -------------
NET CASH USED FOR FINANCING ACTIVITIES (33,035) (11,918) (31,714)
------------- ------------- -------------
NET CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS......... (3,671) 513 (3,393)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 2,387 (1,138) (456)
Cash and cash equivalents
Beginning of year.......................................... 7,662 10,049 8,911
------------- ------------- -------------
End of year................................................ $ 10,049 $ 8,911 $ 8,455
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes...................................... $ 40,859 $ 25,788 $ 34,404
============= ============= =============
Cash paid for interest.......................................... $ 1,261 $ 554 $ 2,036
============= ============= =============
See accompanying notes.
F-7
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
1 SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation - The consolidated financial statements include the
accounts of Journal Communications, Inc. and our wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Foreign currency translation - Our foreign subsidiaries use the local currency
as their functional currency. Accordingly, assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars at year-end exchange rates while
revenue and expense items are translated at the weighted average exchange rates
for the year. The resulting translation adjustments are reflected in accumulated
other comprehensive income (loss). As of December 31, 2002, all foreign
operations have been liquidated and all translation adjustments have been
realized.
Revenue recognition - Publishing revenue is generated primarily from the sale of
newspaper advertising space and newspaper subscriptions. Broadcasting revenue is
generated primarily from the sale of television and radio advertising time.
Advertising revenue is recognized in the publishing and broadcasting industries
when the advertisement is published or aired. Circulation revenue is recognized
ratably over the newspaper subscription period. Telecommunication revenue is
generated from toll (voice), data transmission and satellite (video) services.
Toll and video service revenue is recognized at the time the service is
performed and data transmission revenue is recorded on a straight-line basis
over the term of the contract. Printing services revenue is recorded at the time
of shipment when title passes to the customer. Other revenue is generated
primarily from label printing and direct marketing services. Revenue is
recognized at the time of shipment when title passes to the customer and at the
time the service is performed, respectively.
Amounts we receive from customers in advance of revenue recognition are deferred
as liabilities. Deferred revenue to be earned more than one year from the
balance sheet date is included in other long-term liabilities in the
consolidated balance sheets.
Shipping and handling costs - Shipping and handling costs, including postage,
billed to customers are included in operating revenue and the related costs are
included in operating costs and expenses.
Advertising expense - We expense our advertising costs as incurred. Advertising
expense for the years ended December 31, 2000, 2001 and 2002 was $10,105, $8,488
and $9,292, respectively.
Interest expense - Interest expense attributable to self-constructed assets has
been capitalized as a component of the cost of the asset. The self-constructed
assets include Journal Sentinel's production facility during 2000, 2001 and 2002
and Norlight's network expansion in 2000 and 2001. Capitalized interest is as
follows:
2000 2001 2002
---------------- -------------- -------------
Total interest incurred........................ $ 1,321 $ 481 $ 1,805
Less amount capitalized........................ (891) (98) (1,160)
---------------- -------------- -------------
Interest expense............................... $ 430 $ 383 $ 645
================ ============== =============
Earnings per share - Basic and diluted earnings per share are the same because
there are no dilutive securities. The term "share" is representative of both
shares and units of beneficial interest outstanding. The denominator for our
earnings per share calculation equals shares outstanding less shares represented
by units of beneficial interest in held in treasury.
Fair values - The carrying amount of cash and cash equivalents, receivables,
accounts payable and long-term liabilities approximates fair value as of
December 31, 2001 and 2002.
F-8
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Cash equivalents - Cash equivalents are highly liquid investments with
maturities of three months or less when purchased. Cash equivalents are stated
at cost, which approximates market value.
Receivables, net - We evaluate the collectibility of our accounts receivable
based on a combination of factors. In circumstances where we are aware of a
specific customer's inability to meet its financial obligations, we record a
specific reserve to reduce the amounts recorded to what we believe will be
collected. For all other customers, we recognize allowances for bad debts based
on historical experience of bad debts as a percent of accounts receivable for
each business unit. We write off uncollectible accounts against the allowance
for doubtful accounts after collection efforts have been exhausted. The
allowance for doubtful accounts at December 31, 2001 and 2002 was $5,477 and
$6,453, respectively.
Inventories - Inventories are stated at the lower of cost (first in, first out
method) or market. Inventories at December 31 consisted of the following:
2001 2002
------------------ ---------------
Paper and supplies............................ $ 9,797 $ 7,725
Work in process............................... 2,416 3,456
Finished goods................................ 8,647 5,918
Less obsolescence reserve..................... (1,164) (899)
------------------ ---------------
Inventories, net.............................. $ 19,696 $ 16,200
================== ===============
Property and equipment - Property and equipment are recorded at cost.
Depreciation of property and equipment is provided, principally using the
straight-line method, over the estimated useful lives, which are as follows:
Years
----------
Land improvements............................................ 10-20
Buildings.................................................... 30
Newspaper printing presses................................... 20-25
Broadcasting equipment....................................... 5-20
Telecommunications and network equipment..................... 5-25
Other printing presses....................................... 7-10
Other........................................................ 3-10
Intangible assets - Upon adoption of Statement No. 142, "Goodwill and Other
Intangible Assets," goodwill and intangible assets deemed to have indefinite
lives, including broadcast licenses and network affiliation agreements, are no
longer amortized but instead are reviewed at least annually for impairment. We
continue to amortize definite-lived intangible assets on a straight-line basis
for periods up to 40 years.
Impairment of long-lived assets - Property and equipment and other
definite-lived intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If an asset is considered impaired, a loss is recognized for the
difference between the fair value and carrying value of the asset or group of
assets. Such analyses necessarily involve significant judgment. In 2002, we
recorded a $2,502 loss on impairment of certain equipment at our printing
services segment and a $1,260 loss on impairment of a customer list at our
direct marketing services business. Fair value was determined by independent
professional appraisers. These losses are recorded as an operating expense in
the accompanying consolidated statements of earnings.
Concentration of credit risk - Generally, credit is extended based upon an
evaluation of the customer's financial position, and advance payment is not
required. Credit losses are provided for in the financial statements and
consistently have been within management's expectations.
F-9
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the 2002 presentation.
Recently adopted accounting standards - Effective January 1, 2002, we adopted
Statement No. 141, "Business Combinations," and Statement No. 142. Statement No.
141 addresses financial accounting and reporting for business combinations
completed after June 30, 2001. As required by Statement No. 142, we performed
transitional impairment tests on our goodwill and indefinite-lived intangible
assets. The resulting impairment charges of $7.7 million ($6.5 million after
tax) were recorded during the first quarter ended March 24, 2002 and are
reported as the cumulative effect of accounting change in the consolidated
statements of earnings.
Effective January 1, 2002, we adopted Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, as well as broadening the accounting and
reporting of discontinued operations. Accordingly, the closures of Fox Cities
Newspapers and IPC Communication Services, S.A., as discussed in Note 10, have
been treated as discontinued operations.
New accounting standard - In June 2002, Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," was issued. Statement No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies the previous guidance on the subject. It
requires, among other things, that a liability for a cost associated with an
exit or disposal activity be recognized, at fair value, when the liability is
incurred rather than at the commitment date to the exit or disposal plan. The
provisions for Statement No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. Accordingly, Statement No. 146 may
affect when future costs associated with exit or disposal activities are
recognized.
2 NOTES PAYABLE TO BANKS
On May 31, 2002, we entered into a $120,000 bank revolving credit agreement,
expiring May 30, 2003, to support our cash requirements. Borrowings under this
credit agreement are at the Base Rate (derived from prime or Federal Fund rates)
or at the LIBOR based rate. As of December 31, 2002, we had borrowings of
$90,775 under the credit agreement, including $2,775 bearing interest at the
Base Rate of 4.25% and $88,000 bearing interest at the LIBOR based rate of
2.40%. We are required to pay a commitment fee of 0.20% of the credit agreement.
Upon signing the credit agreement, we paid fees of $255, which we are amortizing
over the life of the credit agreement.
3 EMPLOYEE BENEFIT PLANS
We have a defined benefit pension plan covering the majority of our employees.
The benefits are based on years of service and the average compensation for the
employee's last five years of employment. Plan assets consist primarily of
listed stocks and government and other bonds. In addition, we provide health
benefits to certain retirees and their eligible spouses. We have elected to
amortize the related unfunded postretirement health care obligation of $25,324
at January 1, 1993, over a period of 20 years.
We also sponsor an unfunded non-qualified pension plan for employees whose
benefits under the pension plan and the Investment Savings Plan may be
restricted due to limitations imposed by the Internal Revenue Service. The
disclosure for this plan for all years presented is combined with the pension
plan. The accrued net benefit cost related to this plan was $4,403 and $4,701 at
December 31, 2001 and 2002, respectively.
F-10
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Other
Pension Benefits Postretirement Benefits
------------------------------- -----------------------------
Years ended December 31 2001 2002 2001 2002
------------- -------------- ------------- -------------
Change in benefit obligations
Benefit obligation at beginning of year..... $ 111,549 $ 111,394 $ 28,937 $ 37,265
Service cost................................ 3,361 3,675 549 379
Plan amendments............................. 31 -- -- (6,082)
Interest cost............................... 7,552 7,808 2,069 2,261
Actuarial (gain) loss....................... (4,039) 7,403 8,682 1,591
Special termination benefits................ -- -- -- 48
Benefits paid............................... (7,060) (7,186) (2,972) (3,099)
------------- -------------- ------------- ------------
Benefit obligation at end of year........... $ 111,394 $ 123,094 $ 37,265 $ 32,363
============= ============== ============= ============
Change in plan assets
Fair value of plan assets at beginning of year $ 79,861 $ 72,756 $ -- $ --
Actual loss on plan assets.................. (3,897) (8,605) -- --
Company contributions....................... 3,852 44,494 2,972 3,099
Benefits paid............................... (7,060) (7,186) (2,972) (3,099)
------------- -------------- ------------- ------------
Fair value of plan assets at end of year.... $ 72,756 $ 101,459 $ -- $ --
============= ============== ============= ============
Other
Pension Benefits Postretirement Benefits
------------------------------- -----------------------------
Years ended December 31 2001 2002 2001 2002
------------- -------------- ------------- ------------
Funded status of the plan
Underfunded status of the plan.............. $ (38,638) $ (21,635) $ (37,265) $ (32,363)
Unrecognized net actuarial loss............. 21,740 46,016 9,856 11,018
Unrecognized prior service cost............. 1,303 1,046 -- --
Unrecognized transition obligation.......... 313 209 12,211 5,487
------------- -------------- ------------- ------------
Prepaid (accrued) net benefit cost.......... $ (15,282) $ 25,636 $ (15,198) $ (15,858)
============= ============== ============= ============
Other
Pension Benefits Postretirement Benefits
------------------------------- -----------------------------
Years ended December 31 2001 2002 2001 2002
------------- -------------- ------------- ------------
Prepaid (accrued) net benefit cost
Prepaid benefit cost........................ $ -- $ 30,337 $ -- $ --
Accrued benefit cost........................ (21,612) (4,701) (15,198) (15,858)
Intangible asset............................ 1,568 -- -- --
Deferred tax asset.......................... 1,906 -- -- --
Accumulated comprehensive loss.............. 2,856 -- -- --
------------- -------------- ------------- ------------
Prepaid (accrued) net benefit cost.......... $ (15,282) $ 25,636 $ (15,198) $ (15,858)
============= ============== ============= ============
F-11
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Pension Benefits
----------------------------------------------
Years ended December 31 2000 2001 2002
------------- ------------- ------------
Components of net periodic benefit cost
Service cost...................................................... $ 3,751 $ 3,361 $ 3,675
Interest cost..................................................... 7,759 7,552 7,809
Expected return on plan assets.................................... (7,721) (8,189) (8,262)
Amortization of:
Unrecognized prior service cost.............................. 254 254 257
Unrecognized net transition obligation (asset)............... (127) 104 (7)
Unrecognized net (gain) loss................................. -- (30) 104
------------- ------------- ------------
Net periodic benefit cost......................................... $ 3,916 $ 3,052 $ 3,576
============= ============= ============
Other Postretirement Benefits
----------------------------------------------
Years ended December 31 2000 2001 2002
------------- ------------- ------------
Components of net periodic benefit cost
Service cost...................................................... $ 523 $ 549 $ 379
Interest cost..................................................... 1,822 2,069 2,261
Special termination benefits...................................... -- -- 48
Amortization of:
Unrecognized net transition obligation....................... 1,110 1,110 642
Unrecognized net (gain) loss................................. (17) -- 429
------------- ------------- ------------
Net periodic benefit cost......................................... $ 3,438 $ 3,728 $ 3,759
============= ============= ============
The costs for our pension benefits and other postretirement benefits are
actuarially determined. Key assumptions utilized at December 31 for pension
benefits and September 30 for other postretirement benefits include the
following:
Other
Pension Benefits Postretirement Benefits
------------------------------- -----------------------------
2001 2002 2001 2002
------------- -------------- ------------- ------------
Discount rate............................... 7.25% 6.75% 7.25% 6.75%
Expected return on plan assets.............. 9.50 8.50 -- --
Rate of compensation increase............... 4.50 4.50 -- --
The assumed health care cost trend rate used in measuring the postretirement
benefit obligation for retirees for 2003 is 9.0%, grading down to 5.0% in the
year 2007 and thereafter. The assumed health care cost trend rates have a
significant effect on the amounts reported for other postretirement benefits. A
1 % point change in the assumed health care cost trend rate would have the
following effects:
1% Point Increase 1% Point Decrease
-------------------------- ------------------------
Effect on total of service and interest cost components in
2002.................................................. $104 $92
Effect on postretirement benefit obligation as of
December 31, 2002..................................... $783 $713
The Investment Savings Plan is a defined contribution benefit plan covering
substantially all employees. The plan allows employees to defer up to 50% of
their eligible wages, up to the IRS limit, on a pre-tax basis. In addition,
employees can contribute up to 50% of their eligible wages after taxes. The
maximum combined total contributed may not exceed 50%. Each employee who elects
to participate is eligible to receive company
F-12
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
matching contributions. We may contribute $0.50 for each dollar contributed by
the participant, up to 5% of eligible wages as defined by the plan. The matching
contributions, recorded as an operating expense, were $2,799, $2,672 and $2,594
in 2000, 2001 and 2002, respectively. We made additional contributions into the
Investment Savings Plan on behalf of certain employees not covered by the
defined benefit pension plan of $759, $860 and $875 in 2000, 2001 and 2002,
respectively.
4 INCOME TAXES
The components of the provision for income taxes consist of the following:
Years ended December 31 2000 2001 2002
---------------- ---------------- --------------
Current:
Federal.............................................. $ 36,016 $ 25,214 $ 31,440
State................................................ 5,584 6,113 5,565
---------------- ---------------- --------------
41,600 31,327 37,005
Deferred.................................................. 2,562 4,533 12,413
---------------- ---------------- --------------
Total..................................................... $ 44,162 $ 35,860 $ 49,418
================ ================ ==============
The significant differences between the statutory federal tax rates and the
effective tax rates are as follows:
Years ended December 31 2000 2001 2002
---------------- ---------------- --------------
Statutory federal income tax rate......................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit............ 4.2 5.6 4.6
Non-deductible litigation expenses........................ -- -- 1.8
Other..................................................... 0.9 1.4 1.8
---------------- ---------------- --------------
Actual provision.......................................... 40.1% 42.0% 43.2%
================ ================ ==============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities include:
December 31 2001 2002
--------------- --------------
Current assets
Receivables................................................................... $ 1,415 $ 2,422
Inventories................................................................... 425 424
Other assets.................................................................. 306 539
Accrued compensation.......................................................... 3,559 3,536
Accrued employee benefits..................................................... 1,117 1,243
--------------- --------------
Total current deferred tax assets............................................. 6,822 8,164
--------------- --------------
Current liabilities
Accrued state taxes........................................................... (1,126) --
--------------- --------------
Total current deferred tax liabilities.................................... (1,126) --
--------------- --------------
Total net current deferred tax asset.......................................... $ 5,696 $ 8,164
=============== ==============
F-13
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
December 31 2001 2002
--------------- --------------
Non-current assets
Accrued employee benefits..................................................... $ 7,945 $ 5,527
Litigation reserve............................................................ 3,643 --
State net operating loss carryforwards........................................ 4,262 4,708
Other assets.................................................................. 575 1,266
--------------- --------------
Total non-current deferred tax assets..................................... 16,425 11,501
--------------- --------------
Non-current liabilities
Property and equipment........................................................ (14,326) (16,758)
Intangible assets............................................................. (24,922) (26,643)
Accrued employee benefits..................................................... -- (4,458)
Other liabilities............................................................. -- (2,327)
--------------- --------------
Total non-current deferred tax liabilities................................ (39,248) (50,186)
--------------- --------------
Total net non-current deferred tax liabilities................................ $ (22,823) $ (38,685)
=============== ==============
Valuation allowances on state net operating loss carryforwards................ $ (2,685) $ (3,609)
--------------- --------------
Net deferred tax liability.................................................... $ (19,812) $ (34,130)
=============== ==============
At December 31, 2002, we had state net operating loss carryforwards of $47,727
that begin to expire in 2004 and state income tax credit carryforwards of $1,398
that begin to expire in 2004. To the extent we believe there is significant
uncertainty regarding realization of such carryforwards, valuation allowances
have been provided.
5 OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
December 31 2001 2002
--------------- --------------
Other obligations, average interest rate of 4.5% in 2002 and 8.0% in 2001..... $ 4,539 $ 3,335
Television program contracts, due in the subsequent years..................... 250 337
--------------- --------------
4,789 3,672
Less current portion.......................................................... 1,909 1,645
--------------- --------------
2,880 2,027
Deferred revenue.............................................................. 7,786 7,211
--------------- --------------
Total other long-term liabilities............................................. $ 10,666 $ 9,238
=============== ==============
We lease office space, certain broadcasting facilities, distribution centers,
printing plants and equipment under both short-term and long-term leases
accounted for as operating leases. Some of the lease agreements contain renewal
options and rental escalation clauses, as well as provisions for the payment of
utilities, maintenance and taxes. As of December 31, 2002, our future minimum
rental payments due under noncancellable operating lease agreements consist of
the following:
F-14
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
2003.................................................... $ 15,714
2004.................................................... 12,729
2005.................................................... 10,303
2006.................................................... 5,533
2007.................................................... 4,696
Thereafter.............................................. 20,096
--------------
$ 69,071
==============
Rent expense charged to operations for 2000, 2001 and 2002 was $26,630, $30,057
and $27,827, respectively. Rental income from subleases included in operations
for 2000, 2001 and 2002 was $4,147, $4,379 and $4,565, respectively. Aggregate
future minimum rentals to be received under noncancellable subleases equal
$12,821 as of December 31, 2002.
A purchase commitment for newsprint for our publishing businesses, which runs
through 2006, from a newsprint supplier as of December 31, 2002, was $104,693.
The commitment is based on market prices for quantities we determine will meet
our newsprint requirements over the term of the contract. In the unlikely event
that newsprint is no longer required in our business, our commitment would
expire without obligation. Purchase commitments related to capital expenditures
for our daily newspaper's new production facility were approximately $9,397 as
of December 31, 2002. We expect to spend up to $112,415 on this project
scheduled to be completed in early 2003. As of December 31, 2002, we have spent
$102,665 on this project. In addition, we have the right to broadcast certain
television programs during the years 2003-2008 under contracts aggregating
$8,299. We have $1,221 of standby letters of credit for business insurance
purposes.
6 SHAREHOLDERS' EQUITY
Units of beneficial interest
Employee-owners of Journal Communications, Inc. do not own shares of stock
directly. Instead, they own "units of beneficial interest" (units), representing
beneficial interests in the Journal Employees' Stock Trust (the Stock Trust)
established under the Journal Employees' Stock Trust Agreement, dated May 15,
1937, as amended (JESTA). The Stock Trust, in turn, owns the shares of stock.
Each unit is represented by one share of stock held by the Stock Trust. In the
years covered, we have purchased units under the terms of JESTA and resold them
to active employees. Employees owning units are referred to as unitholders. On
October 25, 2002, the
Board of Directors determined to indefinitely suspend the purchase and sale of
units while we explore potential sources for additional permanent capital. Unit
activity is as follows:
Years ended December 31 2000 2001 2002
---------------- ---------------- --------------
Beginning balance in treasury............................. 1,529 1,140 613
Purchases................................................. 2,458 2,333 3,329
Sales..................................................... (2,847) (2,860) (1,058)
---------------- ---------------- --------------
Ending balance in treasury........................... 1,140 613 2,884
================ ================ ==============
As of December 31, 2002, our treasury, our employees and former employees owned
units representing beneficial ownership of 90% of our stock. As of the end of
2002, we believe that employees and former employees had outstanding balances
under demand notes secured by pledges of units to various financial institutions
totaling approximately $433,097.
F-15
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) consists of the following as of
December 31:
2000 2001 2002
---------------- ---------------- --------------
Cumulative foreign currency translation adjustments....... $ (807) $ (957) $ --
Minimum pension liability, net of tax..................... -- (2,856) --
---------------- ---------------- --------------
Accumulated other comprehensive income (loss)............. $ (807) $ (3,813) $ --
================ ================ ==============
7 GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reconciles the reported earnings from continuing operations
before accounting change, net earnings, earnings per share from continuing
operations before accounting change and earnings per share to that which would
have resulted for the years ended December 31, 2000 and 2001, if Statement No.
142 had been effective:
2000 2001 2002
---------------- ---------------- --------------
Reported earnings from continuing operations before
accounting change..................................... $ 65,913 $ 49,479 $ 64,994
Goodwill amortization, net of tax.................. 2,365 2,340 --
Broadcast licenses amortization, net of tax........ 3,082 3,113 --
Network affiliation agreements amortization, net of
tax.............................................. 76 76 --
---------------- ---------------- --------------
Adjusted earnings from continuing operations before
accounting change..................................... $ 71,436 $ 55,008 $ 64,994
================ ================ ==============
Reported net earnings..................................... $ 66,384 $ 47,757 $ 57,920
Goodwill amortization, net of tax.................. 2,365 2,340 --
Broadcast licenses amortization, net of tax........ 3,082 3,113 --
Network affiliation agreements amortization, net of
tax.............................................. 76 76 --
---------------- ---------------- --------------
Adjusted net earnings..................................... $ 71,907 $ 53,286 $ 57,920
================ ================ ==============
Basic and diluted earnings per share:
Reported earnings from continuing operations before
accounting change................................ $ 2.43 $ 1.76 $ 2.46
Goodwill amortization, net of tax.................. 0.09 0.09 --
Broadcast licenses amortization, net of tax........ 0.11 0.11 --
Network affiliation agreements amortization, net of
tax.............................................. -- -- --
---------------- ---------------- --------------
Adjusted earnings from continuing operations before
accounting change..................................... $ 2.63 $ 1.96 $ 2.46
================ ================ ==============
F-16
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
2000 2001 2002
---------------- ---------------- --------------
Basic and diluted earnings per share:
Reported net earnings.............................. $ 2.45 $ 1.70 $ 2.19
Goodwill amortization, net of tax.................. 0.09 0.09 --
Broadcast licenses amortization, net of tax........ 0.11 0.11 --
Network affiliation agreements amortization, net of
tax.............................................. -- -- --
---------------- ---------------- --------------
Adjusted net earnings..................................... $ 2.65 $ 1.90 $ 2.19
================ ================ ==============
Amortization expense was $1,909 for the year ended December 31, 2002. Estimated
amortization expense for each of the next five years is as follows:
Year Amount
- -------------------------------- --------------
2003.................................................... $ 1,636
2004.................................................... 1,028
2005.................................................... 455
2006.................................................... 445
2007.................................................... 410
Definite-lived Intangibles
Our definite-lived intangible assets consist primarily of customer lists and
non-compete agreements. We amortize the customer lists over the period of time
we expect the assets to contribute to our cash flows and we amortize the
non-compete agreements over the terms of the contracts. As a result of
impairment tests, we wrote off $1,260 ($773 after tax) for a customer list at
our direct marketing services business, which is reported as a component of the
selling and administrative expenses on the consolidated statements of earnings.
The gross carrying amount, accumulated amortization and net carrying amount of
the major classes of definite-lived intangible assets as of December 31, 2001
and 2002 is as follows:
Gross Carrying Accumulated Net Carrying
December 31, 2001 Amount Amortization Amount
---------------- ---------------- --------------
Definite-lived intangible assets:
Customer lists............................................ $ 23,057 $ (17,935) $ 5,122
Non-compete agreements.................................... 24,712 (21,818) 2,894
Other..................................................... 4,193 (3,629) 564
---------------- ---------------- --------------
Total..................................................... $ 51,962 $ (43,382) $ 8,580
================ ================ ==============
December 31, 2002 Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
---------------- ---------------- --------------
Definite-lived intangible assets:
Customer lists............................................ $ 17,771 $ (14,830) $ 2,941
Non-compete agreements.................................... 24,813 (23,169) 1,644
Other..................................................... 3,080 (3,045) 35
---------------- ---------------- --------------
Total..................................................... $ 45,664 $ (41,044) $ 4,620
================ ================ ==============
F-17
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
The decrease in the net carrying amount of definite-lived intangible assets from
December 31, 2001 is due to amortization expense of $1,909, the write off a
customer list in the amount of $1,260, and reclassification to goodwill of $891
of intangible assets that did not meet the new criteria for recognition separate
from goodwill offset by the renewal of a non-compete agreement for $100.
Indefinite-lived Intangibles
Broadcast licenses and network affiliation agreements are deemed to have
indefinite useful lives because we have renewed these agreements without issue
in the past and we intend to renew them indefinitely in the future.
Consequently, we expect the cash flows from both our broadcast licenses and our
network affiliation agreements to continue indefinitely. We performed
transitional impairment tests on our broadcast licenses and network affiliation
agreements at the level of separate identifiable assets and recorded a
transitional broadcast license impairment charge of $722 ($458 after tax) at our
broadcasting business, which is reported as a component of the cumulative effect
of accounting change in the consolidated statements of earnings. No impairment
resulted from our 2002 annual impairment test.
The net carrying amount of the major classes of indefinite-lived intangible
assets as of December 31, 2001 and 2002 is as follows:
December 31 2001 2002
--------------- --------------
Indefinite lived intangible assets:
Broadcast licenses.......................... $ 128,842 $ 125,492
Network affiliation agreements.............. 10,067 7,495
Other....................................... 1,568 --
--------------- --------------
Total....................................... $ 140,477 $ 132,987
=============== ==============
The decrease in the net carrying amount of indefinite-lived intangible assets
from December 31, 2001 is primarily attributed to the adjustment made to the
preliminary purchase price of the Idaho television stations acquired on December
31, 2001.
Goodwill
We performed transitional impairment tests on the goodwill of six of our
reporting units with goodwill. As a result, we recorded a transitional goodwill
impairment charge of $6,948 ($6,051 after tax) at our direct marketing services
business, which is reported as a component of the cumulative effect of
accounting change in the consolidated statement of earnings. For goodwill
amortization that was nondeductible for income tax purposes, the transitional
goodwill impairment charge is also nondeductible. No impairment resulted from
our 2002 annual impairment test.
The changes in the net carrying amount of goodwill for the year ended December
31, 2001 are as follows:
F-18
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Reclassifi- Goodwill
Goodwill at Goodwill Goodwill cation of at
January 1, related to related to intangible Impairment December
Reporting Unit 2001 acquisitions divestitures assets losses 31, 2001
- --------------------- ------------ ------------ ------------ ----------- ------------ -----------
Daily newspaper $ 2,090 $ -- $ -- $ (6) $ -- $ 2,084
Community
newspapers &
shoppers 24,411 -- -- (698) -- 23,713
Broadcasting 76,352 1,601 -- (2,145) 776 76,584
Telecommuni-cations 202 -- -- (14) -- 188
Label printing 2,736 -- (296) (78) -- 2,362
Direct marketing
services 7,581 -- -- (223) -- 7,358
------------ ------------ ------------ ----------- ------------ -----------
Total $ 113,372 $ 1,601 $ (296) $ (3,164) $ 776 $ 112,289
============ ============ ============ =========== ============ ===========
The changes in the net carrying amount of goodwill for the year ended December
31, 2002 are as follows:
Reclassifi- Goodwill
Goodwill at Goodwill Goodwill cation of at
January 1, related to related to intangible Impairment December
Reporting Unit 2001 acquisitions divestitures assets losses 31, 2001
- --------------------- ------------ ------------ ------------ ----------- ------------ -----------
Daily newspaper $ 2,084 $ -- $ -- $ -- $ -- $ 2,084
Community
newspapers &
shoppers 23,713 -- 398 724 -- 24,835
Broadcasting 76,584 5,368 -- 167 -- 82,119
Telecommuni-cations 188 -- -- -- -- 188
Label printing 2,362 -- -- -- -- 2,362
Direct marketing
services 7,358 -- -- -- (6,948) 410
------------ ------------ ------------ ----------- ------------ -----------
Total $ 112,289 $ 5,368 $ 398 $ 891 $ (6,948) $ 111,998
============ ============ ============ =========== ============ ===========
According to Statement No. 142, when a portion of a reporting unit that
constitutes a business is disposed of, goodwill associated with that business is
included in the carrying amount of the business based on the relative fair
values of the business disposed of and the portion of the reporting unit that is
retained. As discussed in Note 10 below, we announced the closure of Fox Cities
Newspapers, a part of our community newspapers and shoppers reporting unit, in
January 2002. The book value of its goodwill equaled $398 as of December 31,
2001 and was classified as part of non-current assets of discontinued
operations. Based upon the valuations of Fox Cities Newspapers and our community
newspapers and shoppers, the relative value of Fox Cities Newspapers' goodwill
now equals zero. Therefore, upon adoption of Statement No. 142, Fox Cities
Newspapers' goodwill that was classified in non-current assets of discontinued
operations in the December 31, 2001 consolidated balance sheet has been
reclassified to our community newspapers and shoppers reporting unit goodwill in
the December 31, 2002 consolidated balance sheet.
Other
We perform impairment tests each year on goodwill and indefinite-lived
intangible assets, or more frequently in certain circumstances. We cannot be
certain that future impairment tests will not result in a charge to earnings.
With the assistance of independent, professional appraisers, we performed the
2002 annual impairment tests as of the beginning of the fourth quarter and, as
noted above, there was no resulting impairment.
F-19
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Statement No. 142 does not change the requirements for recognition of deferred
taxes related to differences in the financial reporting and tax basis of
broadcast licenses and tax-deductible goodwill. We will recognize a deferred tax
liability for the difference between financial reporting and tax amortization on
our broadcast licenses and tax-deductible goodwill because we are no longer
amortizing these intangible assets for financial reporting purposes. As the
majority of our deferred tax liability recorded on the balance sheet relates to
the difference between financial reporting and tax basis on broadcast licenses,
the deferred tax liability will not reverse over time unless future impairment
charges are recognized on the broadcast licenses or they are sold.
8 LITIGATION
We are subject to various legal actions, administrative proceedings and claims
arising out of the ordinary course of business. We believe that such unresolved
legal actions and claims will not materially adversely affect our consolidated
results of operations, financial condition or cash flows.
Newspaper Merger Class Action Suit. On May 4, 1999, five former employees filed
a lawsuit in connection with the 1995 merger of the Milwaukee Journal and
Milwaukee Sentinel. This lawsuit was granted class action status to include
other unitholders who separated from us as part of the merger. The plaintiffs
alleged that an internal memorandum created a contract permitting members of the
plaintiff class to offer to sell units at any time over a period of up to 10
years, depending on their retirement status or years of unit ownership. On May
7, 2002, the parties reached an out-of-court settlement. On July 1, 2002, the
judge approved the settlement. We agreed to pay the plaintiffs $8.9 million in
cash in settlement of all claims. We also agreed to allow certain members of the
plaintiff class to retain certain rights, for a period of time, as to units of
beneficial interest in JESTA. Plaintiffs and their counsel value these rights at
approximately $0.6 million. We reduced our litigation reserve by $4.1 million
that reduced selling and administrative expenses in the second quarter of 2002
to reflect the settlement amount, net of insurance proceeds.
Conley Publishing Group, Ltd. et al. v. Journal Communications, Inc. In August
2000, the publisher of the Waukesha Freeman, West Bend Daily News and several
other publications in southeastern Wisconsin filed an amended antitrust
complaint in state court against us. The plaintiff alleged we attempted to
monopolize by the use of predatory pricing on subscriptions, secret rebates to
advertisers, exclusionary discounts in advertising and contracts in restraint of
trade. The plaintiff alleged damages of $5.4 million, and asked that damages be
trebled. On October 2, 2001, the Waukesha County Circuit Court granted summary
judgment to us and dismissed all of the plaintiff's claims. The court held that
there was no issue of material fact regarding predatory pricing, that the
plaintiff cannot show that our conduct caused the financial losses of the
Waukesha Freeman, and that plaintiff cannot adequately disaggregate or show
which of its losses, if any, were caused by us. The plaintiff appealed on the
issue of predatory pricing, and the Wisconsin Court of Appeals certified the
case for direct appeal to the Wisconsin Supreme Court. The Wisconsin Supreme
Court heard the case on February 11, 2003. A decision is expected in 2003.
9 ACQUISITION AND SALE
On December 31, 2001, we acquired the business and certain assets of a
television station, KIVI-TV, in Boise, Idaho and a low-power television station,
KSAW-LP, in Twin Falls, Idaho. The cash purchase price for the stations was
approximately $22,114. The preliminary purchase price, the adjustments, and the
final purchase price allocation are as follows:
F-20
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Preliminary
Purchase Price Purchase Price Final Purchase
Allocation Adjustments Price Allocation
--------------------- ---------------------- ------------------
Property and equipment..................... $ 4,485 $ 35 $ 4,520
Goodwill................................... 1,601 5,368 6,969
Broadcast licenses......................... 10,000 (2,628) 7,372
Network affiliation agreement.............. 5,979 (2,571) 3,408
Accrued liabilities........................ -- (155) (155)
--------------------- ---------------------- ------------------
Total purchase price....................... $ 22,065 $ 49 $ 22,114
===================== ====================== ==================
Goodwill, broadcast licenses and the network affiliation agreement are not
subject to amortization under the provisions of Statement No. 142. These
intangible assets are, however, deductible for income tax purposes.
The above-mentioned completed acquisition was accounted for using the purchase
method. Accordingly, the operating results and cash flows of the acquired
business are included in our consolidated financial statements from the
respective date of acquisition. Had the transaction occurred on January 1 of the
year acquired, the effect of the acquisition on consolidated results of
operations, for each respective year, would not have been material.
On March 2, 2001, we completed the sale of certain assets of the Milwaukee
operation of our label printing business. The cash sale price was approximately
$4.4 million.
10 DISCONTINUED OPERATIONS
In January 2002, we announced the closure of Fox Cities Newspapers, which
consisted of six weekly newspapers from the publishing segment located in
Appleton, Wisconsin.
On April 29, 2002, we decided to liquidate IPC Communications Services, S.A., a
business in our printing services segment located in Roncq, France.
The following table summarizes the results of operations of Fox Cities
Newspapers and IPC Communication Services, S.A., which are included in the gain
(loss) from discontinued operations in the consolidated condensed statements of
earnings:
2000 2001 2002
----------------- ---------------- --------------
Revenue................................................. $ 19,348 $ 15,172 $ 3,253
Income (loss) before income tax expense (benefit)....... (140) (2,199) (7,189)
At December 31, 2001, the assets and liabilities of Fox Cities Newspapers and
IPC Communication Services, S.A. in the consolidated balance sheets consisted of
the following
2001
---------------------
Cash............................................... $ 1,176
Receivables........................................ 2,103
Inventories........................................ 1,111
Other current assets............................... 337
---------------------
Total current assets............................... $ 4,727
=====================
F-21
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
Property and equipment......................... $ 1,365
Goodwill and intangible assets................. 543
Other non-current assets....................... 125
---------------------
Total non-current assets....................... $ 2,033
=====================
Accounts payable............................... $ (2,273)
Other current liabilities...................... (1,229)
---------------------
Total current liabilities...................... $ (3,502)
=====================
11 WORKFORCE REDUCTION AND BUSINESS TRANSITION CHARGES
During 2002, we recorded a pretax charge of $1,966 for workforce reductions. The
charge consisted primarily of $1,905 in termination benefits for approximately
74 employees. In addition, we recorded $61 for shutdown costs of our printing
services operations in Ireland.
During 2001, we recorded $6,055 for workforce reductions and business transition
costs. The charge consisted primarily of $4,345 in termination benefits for
approximately 300 employees. In addition, we recorded $1,710 for shutdown costs
of our printing services operation in Ireland and in transitioning our printing
services' eastern and western regions into one U. S. operational unit.
The remaining costs associated with these actions are expected to be paid in
2003. Activity associated with the workforce reduction and transition charges
during the year ended December 31, 2002 was as follows:
Balance at
December 31, Payments/ Balance at
2001 Additions Reductions December 31, 2002
---------------- --------------- ---------------- ------------------
Severance........................ $ 2,531 $ 1,905 $ (2,059) $ 2,377
Lease costs...................... 1,022 -- (1,022) --
Other............................ 126 61 (187) --
---------------- --------------- ---------------- ------------------
$ 3,679 $ 1,966 $ (3,268) $ 2,377
================ =============== ================ ==================
Related expenses and accruals were recorded in selling and administrative
expenses and other current liabilities in the consolidated statements of
earnings and consolidated balance sheets, respectively.
12 SEGMENT ANALYSIS
We conduct our operations through four reportable segments: publishing,
broadcasting, telecommunications and printing services. In addition, our label
printing business, our direct marketing services business and certain
administrative activities are aggregated and reported as "other." All operations
primarily conduct their business in the United States. We publish the Milwaukee
Journal Sentinel and more than 90 weekly shopper and community newspapers in
eight states. We also own and operate 36 radio stations and six television
stations in 11 states. Our telecommunications business serves the wholesale
carrier market and provides integrated data communications solutions for small
and mid-size businesses. Our printing services business serves the publishing,
software, entertainment and government markets by providing printing, assembly
and complete fulfillment.
In the fourth quarter of 2002, we evaluated our segment disclosures and
determined it appropriate under Statement No. 131, "Disclosures About Segments
of an Enterprise and Related Information," to aggregate certain previously
reported operating segments and identify the new segments by type of business
rather than
F-22
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
by names of the individual operating entities. The following table provides the
aggregated former operating segments shown parenthetically next to the new
reportable segments:
Publishing (Journal Sentinel and Add Inc.)
Broadcasting (Journal Broadcast Group)
Telecommunications (Norlight Telecommunications)
Printing services (IPC Communication Services)
Other (NorthStar Print Group, PrimeNet Marketing Services
and Corporate and eliminations)
The accounting basis for transactions between reportable segments is the same as
that described in the "Significant Accounting Policies" outlined in Note 1.
During 2002, we changed our method of evaluating segment performance by
excluding segment interest income and interest expense from the segment's profit
performance. The following tables summarize operating revenue, operating
earnings (loss), depreciation and amortization and capital expenditures from
continuing operations for the years ended December 31 and identifiable total
assets of continuing operations at December 31:
2000 2001 2002
---------------- ---------------- ---------------
Operating revenue
Publishing.............................................. $ 345,321 $ 320,615 $ 311,138
Broadcasting............................................ 149,886 134,801 152,749
Telecommunications...................................... 126,586 151,992 148,674
Printing services....................................... 107,334 114,612 97,841
Other................................................... 90,105 86,767 90,974
---------------- ---------------- ---------------
$ 819,232 $ 808,787 $ 801,376
================ ================ ===============
Operating earnings (loss)
Publishing.............................................. $ 39,265 $ 24,898 $ 30,315
Broadcasting............................................ 30,435 15,453 33,384
Telecommunications...................................... 40,114 48,007 40,956
Printing services....................................... 3,336 (756) 2,131
Other................................................... (3,959) (3,498) 7,287
---------------- ---------------- ---------------
$ 109,191 $ 84,104 $ 114,073
================ ================ ===============
Depreciation and amortization
Publishing.............................................. $ 14,277 $ 13,893 $ 14,157
Broadcasting............................................ 13,584 13,287 7,310
Telecommunications...................................... 11,376 14,735 17,192
Printing services....................................... 6,628 6,168 5,218
Other................................................... 4,253 3,613 2,758
---------------- ---------------- ---------------
$ 50,118 $ 51,696 $ 46,635
================ ================ ===============
Capital expenditures
Publishing.............................................. $ 50,530 $ 49,701 $ 30,291
Broadcasting............................................ 7,674 10,260 8,788
Telecommunications...................................... 28,779 27,509 10,132
Printing services....................................... 7,946 1,654 2,555
Other................................................... 1,829 1,048 1,403
---------------- ---------------- ---------------
$ 96,758 $ 90,172 $ 53,169
================ ================ ===============
F-23
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
2000 2001 2002
---------------- ---------------- ---------------
Identifiable total assets
Publishing.............................................. $ 180,517 $ 208,141 $ 224,290
Broadcasting............................................ 279,055 296,723 298,426
Telecommunications...................................... 109,807 121,111 114,545
Printing services....................................... 57,611 50,494 31,005
Other................................................... 60,045 54,309 76,486
---------------- ---------------- ---------------
$ 687,035 $ 730,778 $ 744,752
================ ================ ===============
13 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 Quarters
------------------------------------------------------------------------------
First Second Third Fourth Total
------------ ------------- ------------ ------------- ------------
Operating revenue.................. $182,250 $190,791 $246,980 $188,766 $808,787
Gross profit....................... 76,856 85,194 102,989 80,067 345,106
Earnings from continuing operations
before accounting change....... 9,180 13,194 15,484 11,621 49,479
Net earnings....................... 8,854 12,571 15,431 10,901 47,757
Basic and diluted earnings per share:
Earnings from continuing
operations before accounting
change........................ 0.34 0.47 0.54 0.41 1.76
Net earnings.................... 0.32 0.45 0.54 0.39 1.70
2002 Quarters
------------------------------------------------------------------------------
First Second Third Fourth Total
------------ ------------- ------------ ------------- ------------
Operating revenue.................. $180,206 $185,880 $245,317 $189,973 $801,376
Gross profit....................... 76,328 84,530 108,814 84,151 353,823
Earnings from continuing operations
before accounting change....... 12,352 18,492 19,588 14,562 64,994
Net earnings....................... 7,338 16,658 19,589 14,335 57,920
Basic and diluted earnings per share:
Earnings from continuing
operations before accounting
change........................ 0.46 0.69 0.74 0.57 2.46
Net earnings.................... 0.27 0.63 0.74 0.55 2.19
The reported amounts for the first quarter of 2002 differ from the amounts
previously reported in our Quarterly Report on Form 10-Q. They include the
reclassification of the results of discontinued operations and the
reclassification of the impairment of $1,260 for a customer list at our direct
marketing services business from cumulative effect of accounting change to
operating costs and expenses.
F-24
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (in thousands, except per share amounts)
The results for the first quarter of 2002 include $7,670 pre-tax transitional
impairment charges for the write-off of goodwill at our direct marketing
services business and the write down of certain broadcast licenses at our
broadcasting business.
The results for the fourth quarter of 2002 include an $2,502 pre-tax impairment
charge for certain equipment at our printing services business.
The results for the fourth quarter of 2001 include an $1,003 pre-tax impairment
charge for certain property at our broadcast business and certain equipment at
our printing services business.
The results for 2001 include approximately $1,990 pre-tax amortization expense
per quarter for goodwill and indefinite-lived intangible assets that are no
longer amortized under Statement No. 142.
We divide our calendar year into 13 four-week accounting periods, except that
the first and thirteenth periods may be longer or shorter to the extent
necessary to make each accounting year end on December 31. We follow a practice
of reporting our quarterly information at the end of the third accounting period
(our first quarter), at the end of the sixth accounting period (our second
quarter), and at the end of the tenth accounting period (our third quarter).
F-25
JOURNAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, 2002 March 23, 2003
--------------------- ------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents.................................................. $ 8,455 $ 6,599
Receivables, less allowance for doubtful accounts of $6,453 and $6,522..... 89,920 85,533
Inventories, lower of cost (first-in-first-out) or market:
Paper and supplies...................................................... 7,725 8,357
Work in process......................................................... 3,456 1,773
Finished goods.......................................................... 5,019 6,418
--------------------- ------------------
16,200 16,548
Prepaid expenses........................................................... 11,786 8,594
Deferred income taxes...................................................... 8,164 8,164
--------------------- ------------------
TOTAL CURRENT ASSETS....................................................... 134,525 125,438
Property and equipment, at cost, less accumulated depreciation of
$345,333 and $353,636....................................................... 324,405 330,661
Goodwill....................................................................... 111,998 111,998
Broadcast licenses............................................................. 125,492 125,492
Other intangible assets, net................................................... 12,115 11,719
Prepaid pension costs.......................................................... 30,337 29,749
Other assets................................................................... 5,880 5,781
--------------------- ------------------
TOTAL ASSETS............................................................... $ 744,752 $ 740,838
===================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks..................................................... $ 90,775 $ 75,870
Accounts payable........................................................... 37,757 50,759
Accrued compensation....................................................... 29,712 20,812
Deferred revenue........................................................... 20,741 20,859
Accrued employee benefits.................................................. 9,576 7,452370
Other current liabilities.................................................. 9,525 14,933
Current portion of long-term liabilities................................... 1,645 1,574
--------------------- ------------------
TOTAL CURRENT LIABILITIES.................................................. 199,731 192,259
Accrued employee benefits...................................................... 16,945 17,070
Other long-term liabilities.................................................... 9,238 9,142
Deferred income taxes.......................................................... 42,294 42,294
Shareholders' equity:
Common stock, authorized and issued 28,800 shares ($0.125 par value)....... 3,600 3,600
Retained earnings.......................................................... 581,361 584,888
Units of beneficial interest in treasury, at cost.......................... (108,417) (108,417)
Accumulated other comprehensive income..................................... -- 2
--------------------- ------------------
TOTAL SHAREHOLDERS' EQUITY................................................. 476,544 480,073
--------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 744,752 $ 740,838
===================== ==================
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by generally accepted accounting principles in the United
States for complete financial statements.
See accompanying notes.
F-26
JOURNAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
First Quarter Ended
--------------------------------------------
March 24, 2002 March 23, 2003
-------------------- -------------------
Continuing operations:
Operating revenue:
Publishing..................................................................... $ 69,517 $ 68,337
Broadcasting................................................................... 30,680 29,462
Telecommunications............................................................. 34,905 33,750
Printing services.............................................................. 25,028 21,025
Other.......................................................................... 19,925 21,893
-------------------- -------------------
Total operating revenue............................................................ 180,055 174,467
Operating costs and expenses:
Publishing..................................................................... 33,880 34,728
Broadcasting................................................................... 13,083 13,840
Telecommunications............................................................. 18,223 18,562
Printing services.............................................................. 21,496 17,034
Other.......................................................................... 17,149 18,395
-------------------- -------------------
Total operating costs and expenses............................................. 103,831 102,559
Selling and administrative expenses............................................ 55,744 52,656
-------------------- -------------------
Total operating costs and expenses and selling and administrative expenses......... 159,575 155,215
Operating earnings................................................................. 20,480 19,252
Other income and expense:
Interest income and dividends.................................................. 631 77
Interest expense, net.......................................................... (145) (491)
-------------------- -------------------
Total other income and expense..................................................... 486 (414)
Earnings from continuing operations before income taxes and accounting change...... 20,966 18,838
Provision for income taxes......................................................... 8,714 7,536
-------------------- -------------------
Earnings from continuing operations before accounting change....................... 12,252 11,302
Income from discontinued operations, net of applicable income tax benefit of $2,667 1,595 --
Cumulative effect of accounting change, net of applicable income taxes of $1,161... (6,509) --
-------------------- -------------------
Net earnings ...................................................................... $ 7,338 $ 11,302
==================== ===================
Weighted average number of shares outstanding...................................... 26,775 25,916
Basic and diluted earnings per share:
Continuing operations before accounting change................................. $ 0.46 $ 0.44
Discontinued operations........................................................ 0.06 --
Cumulative effect of accounting change......................................... (0.25) --
-------------------- -------------------
Net earnings per share............................................................. $ 0.27 $ 0.44
==================== ===================
Cash dividends per share........................................................... $ 0.30 $ 0.30
==================== ===================
See accompanying notes.
F-27
JOURNAL COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
First Quarter Ended
-----------------------------------------
March 24, 2002 March 23, 2003
------------------ ------------------
Cash flow from operating activities:
Net earnings ................................................................... $ 7,338 $ 11,302
Less income from discontinued operations........................................ 1,595 --
Less cumulative effect of accounting change..................................... (6,509) --
------------------ ------------------
Earnings from continuing operations before accounting change.................... 12,252 11,302
Adjustments for non-cash items:
Depreciation................................................................. 9,977 10,433
Amortization................................................................. 352 396
Provision for doubtful accounts.............................................. 875 607
Net (gain) loss from disposal of assets...................................... (18) 3
Impairment of long-lived assets.............................................. 1,260 --
Net changes in operating assets and liabilities, excluding effects of sales and
acquisitions:
Receivables............................................................... 4,194 3,815
Inventories............................................................... 2,764 (348)
Accounts payable.......................................................... (7,283) 11,481
Other assets and liabilities.............................................. 157 (110)
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 24,530 37,579
Cash flow from investing activities:
Capital expenditures for property and equipment................................. (16,323) (16,784)
Proceeds from sales of assets................................................... 29 92
Other, net...................................................................... 37 (63)
------------------ ------------------
NET CASH USED FOR INVESTING ACTIVITIES................................ (16,257) (16,755)
Cash flow from financing activities:
Net increase (decrease) in notes payable to bank............................. 64,975 (14,905)
Purchases of units of beneficial interest.................................... (79,934) --
Sales of units of beneficial interest........................................ 13,972 --
Cash dividends............................................................... (7,942) (7,775)
Deferred revenue............................................................. (75) --
------------------ ------------------
NET CASH USED FOR FINANCING ACTIVITIES................................ (9,004) (22,680)
NET CASH USED FOR DISCONTINUED OPERATIONS........................................... (377) --
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................... (1,108) (1,856)
Cash and cash equivalents
Beginning of year............................................................ 8,911 8,455
------------------ ------------------
At March 23, 2003 and March 24, 2002......................................... $ 7,803 $ 6,599
================== ==================
See accompanying notes.
F-28
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED UNAUIDTED FINANCIAL STATEMENTS
March 23, 2003 (in thousands, except per share amounts)
1 BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by Journal Communications, Inc. and its wholly owned subsidiaries in
accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect normal and recurring
adjustments, which we believe to be necessary for a fair presentation. As
permitted by these regulations, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
in the United States for annual financial statements. However, we believe that
the disclosures are adequate to make the information presented not misleading.
The operating results for the first quarter ended March 23, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003. You should read these unaudited consolidated condensed
financial statements in conjunction with the consolidated financial statements
and the notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2002.
We reclassified certain prior year amounts to conform to the 2003 presentation.
2 ACCOUNTING PERIODS
We divide our calendar year into 13 four-week accounting periods, except that
the first and thirteenth periods may be longer or shorter to the extent
necessary to make each accounting year end on December 31. We follow a practice
of publishing our interim financial statements at the end of the third
accounting period (the first quarter), at the end of the sixth accounting period
(the second quarter), and at the end of the tenth accounting period (the third
quarter).
3 SEGMENT INFORMATION
First Quarter Ended
--------------------------------------------
March 24, 2002 March 23, 2003
------------------- --------------------
Operating revenue
Publishing.......................................................... $ 69,517 $ 68,337
Broadcasting........................................................ 30,680 29,462
Telecommunications.................................................. 34,905 33,750
Printing services................................................... 25,028 21,025
Other............................................................... 19,925 21,893
------------------- --------------------
$ 180,055 $ 174,467
=================== ====================
Operating earnings (loss)
Publishing.......................................................... $ 5,235 $ 3,582
Broadcasting........................................................ 4,703 3,406
Telecommunications.................................................. 10,316 9,212
Printing services................................................... 750 1,122
Other............................................................... (524) 1,930
------------------- --------------------
$ 20,480 $ 19,252
=================== ====================
F-29
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED UNAUIDTED FINANCIAL STATEMENTS
December 31, 2002 March 23, 2003
------------------- --------------------
(Audited)
Identifiable total assets
Publishing.......................................................... $ 224,290 $ 231,146
Broadcasting........................................................ 298,426 294,238
Telecommunications.................................................. 114,545 111,002
Printing services................................................... 31,005 29,615
Other............................................................... 76,486 74,837
------------------- --------------------
$ 744,752 $ 740,838
=================== ====================
4 COMPREHENSIVE INCOME
First Quarter Ended
--------------------------------------------
March 24, 2002 March 23, 2003
------------------- --------------------
Net earnings........................................................ $ 7,338 $ 11,302
Foreign currency translation adjustments............................ 173 2
------------------- --------------------
Comprehensive Income................................................ $ 7,511 $ 11,304
=================== ====================
5 GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived Intangibles
Our definite-lived intangible assets consist primarily of customer lists and
non-compete agreements. We amortize the customer lists over the period of time
we expect the assets to contribute to our cash flows and we amortize the
non-compete agreements over the terms of the contracts.
The gross carrying amount, accumulated amortization and net carrying amount of
the major classes of definite-lived intangible assets as of December 31, 2002
and March 23, 2003 is as follows:
As of December 31, 2002 Accumulated
Gross Carrying Amount Amortization Net Carrying Amount
---------------------- ----------------- ---------------------
Definite-lived intangible assets:
Customer lists.......................... $ 17,771 $ (14,830) $ 2,941
Non-compete agreements.................. 24,813 (23,169) 1,644
Other................................... 3,080 (3,045) 35
---------------------- ----------------- ---------------------
Total................................... $ 45,664 $ (41,044) $ 4,620
====================== ================= =====================
Accumulated
As of March 23, 2003 Gross Carrying Amount Amortization Net Carrying Amount
---------------------- ----------------- ---------------------
Definite-lived intangible assets:
Customer lists.......................... $ 17,771 $ (14,951) $ 2,820
Non-compete agreements.................. 24,813 (23,437) 1,376
Other................................... 3,080 (3,052) 28
---------------------- ----------------- ---------------------
Total................................... $ 45,664 $ (41,440) $ 4,224
====================== ================= =====================
F-30
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED UNAUIDTED FINANCIAL STATEMENTS
Amortization expense was $396 for the first quarter ended March 23, 2003.
Estimated amortization expense for each of the next five years ending December
31 is as follows:
Year Amount
---- --------------
2003...................................... $ 1,636
2004...................................... 1,028
2005...................................... 455
2006...................................... 445
2007...................................... 410
Indefinite-lived Intangibles
Broadcast licenses and network affiliation agreements are deemed to have
indefinite useful lives because we have renewed these agreements without issue
in the past and we intend to renew them indefinitely in the future.
Consequently, we expect the cash flows from both our broadcast licenses and our
network affiliation agreements to continue indefinitely. We performed
transitional impairment tests on our broadcast licenses and network affiliation
agreements at the level of separate identifiable assets and recorded a
transitional broadcast license impairment charge of $722 ($458 after tax) at our
broadcasting business during the first quarter ended March 24, 2002, which is
reported as a component of the cumulative effect of accounting change in the
consolidated statements of earnings. No impairment resulted from our 2002 annual
impairment test.
There were no changes in the carrying amount of the major classes of
indefinite-lived intangible assets in the first quarter ended March 23, 2003.
Goodwill
In 2002, we performed transitional impairment tests on the goodwill of six of
our reporting units with goodwill. As a result, we recorded a transitional
goodwill impairment charge of $6,948 ($6,051 after tax) at our direct marketing
services business during the first quarter ended March 24, 2002, which is
reported as a component of the cumulative effect of accounting change in the
consolidated statements of earnings. For goodwill amortization that was
nondeductible for income tax purposes, the transitional goodwill impairment
charge is also nondeductible. No impairment resulted from our 2002 annual
impairment test.
There were no changes in the carrying amount of goodwill in the first quarter
ended March 23, 2003.
6 NOTES PAYABLE TO BANKS
We have a $120,000 bank revolving credit agreement, expiring April 30, 2004, to
support our cash requirements. Borrowings under this credit agreement are at the
Base Rate (derived from prime or Federal Fund rates) or at the LIBOR based rate.
As of March 23, 2003, we had borrowings of $75,870 under the credit agreement,
including $4,870 bearing interest at the Base Rate of 4.25% and $71,000 bearing
interest at the LIBOR based rate of 2.21%.
7 DISCONTINUED OPERATIONS
In January 2002, we announced the closure of Fox Cities Newspapers, a business
in our publishing segment located in Appleton, Wisconsin. On April 29, 2002, we
decided to liquidate IPC Communications Services, S.A., a business in our
printing services segment located in Roncq, France.
The following table summarizes the results of operations of Fox Cities
Newspapers and IPC Communication Services, S.A., during the first quarter ended
March 24, 2002 and March 23, 2003:
F-31
JOURNAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED UNAUIDTED FINANCIAL STATEMENTS
First Quarter Ended
-------------------------------------------
March 24, 2002 March 23, 2003
-------------------- -------------------
Revenue...................................................... $ 1,610 $ --
Loss before income tax benefit of $2,667..................... $ (1,072) $ --
There were no assets or liabilities of Fox Cities Newspapers or IPC
Communication Services, S.A. included in the consolidated balance sheet at
December 31, 2002 and the unaudited consolidated condensed balance sheet at
March 23, 2003.
8 EXIT ACTIVITY
Effective January 1, 2003, we adopted Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Statement No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies the previous guidance on the subject. It requires,
among other things, that a liability for a cost associated with an exit or
disposal activity initiated after December 31, 2002 be recognized, at fair
value, when the liability is incurred rather than at the commitment date to the
exit or disposal plan.
In February 2003, we announced the closure of our CD-ROM mastering and
replication facility, a business in our printing services segment, in Foothill
Ranch, California. These functions will be performed by third parties,
eliminating the need for all 33 employees, and will allow us to focus on our
core printing services business. This action is expected to be completed in May
2003. We expect to incur expenses of $517. These costs are reported as selling
and administrative expenses in the unaudited consolidated condensed statement of
earnings. The liability is reported as accrued employee benefits in the
unaudited consolidated condensed balance sheets.
Liability Liability
Expected at January Charges/ Payments/ at March
Costs 1, 2003 Additions Reductions 23, 2003
---------- ------------ ----------- ------------- -------------
Employee severance and benefits.... $ 231 $ - $ 214 $ (132) $ 82
Facility costs..................... 261 - 78 (78) -
Other.............................. 25 - 25 (25) -
---------- ------------ ----------- ------------- -------------
Total.............................. $ 517 $ - $ 317 $ (235) $ 82
========== ============ =========== ============= =============
F-32
REPORT OF INDEPENDENT AUDITORS
The Trustees
Journal Employees' Stock Trust
We have audited the accompanying statements of financial position of
Journal Employees' Stock Trust (the Stock Trust) as of December 31, 2002 and
2001, and the related statements of Stock Trust activity and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the trustees of the Stock Trust. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the trustees, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Stock Trust at
December 31, 2002 and 2001, and Stock Trust activity and cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 28, 2003
F-33
JOURNAL EMPLOYEES' STOCK TRUST
STATEMENTS OF FINANCIAL POSITION
December 31,
----------------------------
2002 2001
------------ -- ------------
Assets $ - $ -
============ ============
Liabilities $ - $ -
============ ============
See accompanying notes.
F-34
JOURNAL EMPLOYEES' STOCK TRUST
STATEMENTS OF STOCK TRUST ACTIVITY
(in thousands, except for per share amounts)
Year ended December 31,
2002 2001 2000
--------------------------------------------------------
Dividends on common stock of Journal Communications, Inc.
held by the Stock Trust $28,142 $33,978 $32,877
================ ================ ================
Dividends to holders of units of beneficial
Interest $28,074 $33,978 $32,877
68 - -
Distributions in lieu of dividends to holders of units of
beneficial interest
---------------- ---------------- ----------------
$28,142 $33,978 $32,877
================ ================ ================
Dividends per share $ 1.20 $ 1.35 $ 1.35
See accompanying notes.
F-35
JOURNAL EMPLOYEES' STOCK TRUST
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2002 2001 2000
-----------------------------------------------------------
Sources of cash:
Receipts from purchasers of units of beneficial
interest $ 164,218 $ 186,178 $ 167,952
Dividends received from Journal Communications,
Inc. 28,142 33,978 32,877
-----------------------------------------------------------
192,360 220,156 200,829
Uses of cash:
Disbursements to sellers of units of beneficial
interest (164,218) (186,178) (167,952)
Dividends paid to holders of units of beneficial
interest (28,074) (33,978) (32,877)
Distributions in lieu of dividends to holders of
units of beneficial interest (68) - -
-----------------------------------------------------------
(192,360) (220,156) (200,829)
Net change in cash - - -
Cash at beginning of year - - -
-----------------------------------------------------------
Cash at end of year $ - $ - $ -
===========================================================
See accompanying notes.
F-36
JOURNAL EMPLOYEES' STOCK TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
1. Organization
The primary business of Journal Employees' Stock Trust (the Stock Trust) is
being the holder of record of certain shares of common stock of Journal
Communications, Inc. (the Company), the issuance of, record keeping and
transactions in units of beneficial interest (units) that represent shares of
common stock of the Company owned by the Stock Trust, voting (including issuance
and tabulation of unitholder proxies) of the common stock of the Company owned
by the Stock Trust, and such other matters as are specified in the Journal
Employees Stock Trust Agreement, dated May 15, 1937, as amended (the Trust
Agreement). The Stock Trust is administered by five trustees who are currently
officers and directors of the Company and receive no remuneration for services
performed for the Stock Trust. The trustees are required to distribute all Stock
Trust income (consisting solely of dividends paid by the Company), less such
amounts as the trustees deem necessary for payment of administrative expenses,
as soon as practicable after receipt. Since its origination, substantially all
expenses of the Stock Trust have been paid by the Company, and cash dividends
payable to the Stock Trust have been paid by the Company directly to the
employees and former employees who own units (unitholders).
2. Common Stock of the Company
The Stock Trust is the holder of record of 90% of the Company's common
stock. The Stock Trust has issued one unit for each share of common stock which
the Stock Trust holds.
3. Suspension of Purchase and Sale of Units
On October 25, 2002, the Company's board of directors directed management
and the Company's financial adviser to explore potential sources for additional
permanent capital for the Company. The Company indicated at that time that it
expected the process could take from six to nine months. As a result, the
Company suspended the purchase and sale of units under the Trust Agreement while
the Company explores additional permanent capital.
F-37
JOURNAL EMPLOYEES' STOCK TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
4. Unitholders' Sales of Units of Beneficial Interest
Unitholders may offer to sell their units only in accordance with the terms
and conditions of the Trust Agreement, which provides four classes of optionees
the right to elect to purchase units offered for sale. Units sold to the Company
are sold at the option price in effect on the date of the sale.
The Company, as one of the optionees under the Trust Agreement, is not
obligated to purchase units, though in recent years for the convenience of
unitholders, it has elected to do so. There is no assurance the Company will
elect to buy units offered for sale in the future. For the past few years until
the October 25, 2002 suspension of purchasing and selling of units, the Company
has elected to offer units owned by the Company for sale to eligible Company
employees through a rotation system.
5. Distributions in Lieu of Dividends During Suspension of Trading
The Trust Agreement provides that a unitholder will receive the unit price
for units subject to an option event when they are sold, plus either (i)
interest at the rate set by the trustees if other unitholders or the Grant
family shareholders ultimately buy the units subject to the option event, or
(ii) the dividends declared by the Company's Board of Directors if the Company
ultimately buys the units subject to the option event. The Company suspended the
purchase and sales of units on October 25, 2002; however, option events still
occur pursuant to the terms of the Trust Agreement (for example, when a
unitholder leaves employment of the Company). As a result, it cannot be
determined who will purchase units subject to option events during the
suspension period (and, similarly, it cannot be determined whether the
unitholder whose units are subject to an option event during the suspension
period will eventually receive interest or dividends). In order to avoid
inconvenience to unitholders that may result from the delay in paying either
interest or dividends during the suspension period, the trustees have determined
that the Stock Trust will make payments to unitholders whose units become
subject to option events during the suspension period in an amount equal to the
dividends paid by the Company during this period. When the units are eventually
sold, the unitholder will receive the sale proceeds calculated in accordance
with the terms of the Trust Agreement, less the amount of these payments. These
payments in fiscal 2002 totaled $68,325.
6. Common Stock Held and Units Outstanding
At December 31, 2002 and 2001, the Stock Trust held 25,920,000 shares of
the Company's common stock and has issued a like number of units of beneficial
interest.
F-38
JOURNAL EMPLOYEES' STOCK TRUST
STATEMENTS OF FINANCIAL POSITION
March 31, 2003 December 31, 2002
-------------------------- -------------------------
(Unaudited)
Assets $ -- $ --
-------------------------- -------------------------
Liabilities and Stock Trust Equity $ -- $ --
-------------------------- -------------------------
See accompanying notes.
F-39
JOURNAL EMPLOYEES' STOCK TRUST
UNAUDITED STATEMENTS OF STOCK TRUST ACTIVITY
(in thousands, except per share amounts)
First Quarter Ended March 31
--------------------------------------------
2003 2002
------------------ ------------------
Dividends on common stock of Journal Communications, Inc.
held by the Stock Trust $ 6,911 $ 7,079
================== ==================
Dividends to holders of units
of beneficial interest $ 6,636 $ 7,079
Distributions in lieu of dividends to holders of
units of beneficial interest 275 --
----------------- ------------------
$ 6,911 $ 7,079
================= ==================
Dividends per share $ 0.30 $ 0.30
See accompanying notes.
F-40
JOURNAL EMPLOYEES' STOCK TRUST
UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
First Quarter Ended March 31
---------------------------------------------------
2003 2002
------------------ ----------------
Sources of cash:
Receipts from purchasers of units
of beneficial interest $ -- $ 94,854
Dividends received from
Journal Communications, Inc. 6,911 7,079
6,911 101,933
------------------ ----------------
Uses of cash:
Disbursements to sellers of
units of beneficial interest -- (94,854)
Dividends paid to holders of
units of beneficial interest (6,636) (7,079)
Distributions in lieu of dividends to
holders of units of beneficial interest (275) --
------------------ ----------------
(6,911) (101,933)
Net change in cash -- --
Cash at beginning of year -- --
------------------ ----------------
Cash at March 31, 2003 and 2002 $ -- $ --
================== =================
See accompanying notes.
F-41
JOURNAL EMPLOYEES' STOCK TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 2003
1. Organization
The primary business of Journal Employees' Stock Trust (the Stock Trust) is
being the holder of record of certain shares of common stock of Journal
Communications, Inc. (the Company), the issuance of, record keeping and
transactions in units of beneficial interest (units) that represent shares of
common stock of the Company owned by the Stock Trust, voting (including issuance
and tabulation of unitholder proxies) of the common stock of the Company owned
by the Stock Trust, and such other matters as are specified in the Journal
Employees Stock Trust Agreement, dated May 15, 1937, as amended (the Trust
Agreement). The Stock Trust is administered by five trustees who are currently
officers and directors of the Company and receive no remuneration for services
performed for the Stock Trust. The trustees are required to distribute all Stock
Trust income (consisting solely of dividends paid by the Company), less such
amounts as the trustees deem necessary for payment of administrative expenses,
as soon as practicable after receipt. Since its origination, substantially all
expenses of the Stock Trust have been paid by the Company, and cash dividends
payable to the Stock Trust have been paid by the Company directly to the
employees and former employees who own units (unitholders).
2. Common Stock of the Company
The Stock Trust is the holder of record of 90% of the Company's common
stock. The Stock Trust has issued one unit for each share of common stock which
the Stock Trust holds.
3. Suspension of Purchase and Sale of Units
On October 25, 2002, the Company's board of directors directed management
and the Company's financial adviser to explore potential sources for additional
permanent capital for the Company. The Company indicated at that time that it
expected the process could take from six to nine months. As a result, the
Company suspended the purchase and sale of units under the Trust Agreement while
the Company explores additional permanent capital.
4. Unitholders' Sales of Units of Beneficial Interest
Unitholders may offer to sell their units only in accordance with the terms
and conditions of the Trust Agreement, which provides four classes of optionees
the right to elect to purchase units offered for sale. Units sold to the Company
are sold at the option price in effect on the date of the sale.
The Company, as one of the optionees under the Trust Agreement, is not
obligated to purchase units, though in recent years for the convenience of
unitholders, it has elected to do so. There is no assurance the Company will
elect to buy units offered for sale in the future. For the past few years until
the October 25, 2002 suspension of purchasing and selling of units, the Company
had elected to offer units owned by the Company for sale to eligible Company
employees through a rotation system.
F-42
JOURNAL EMPLOYEES' STOCK TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
5. Distributions in Lieu of Dividends During Suspension of Trading
The Trust Agreement provides that a unitholder will receive the unit price
for units subject to an option event when they are sold, plus either (i)
interest at the rate set by the trustees if other unitholders or the Grant
family shareholders ultimately buy the units subject to the option event, or
(ii) the dividends declared by the Company's Board of Directors if the Company
ultimately buys the units subject to the option event. The Company suspended the
purchase and sales of units on October 25, 2002; however, option events still
occur pursuant to the terms of the Trust Agreement (for example, when a
unitholder leaves employment of the Company). As a result, it cannot be
determined who will purchase units subject to option events during the
suspension period (and, similarly, it cannot be determined whether the
unitholder whose units are subject to an option event during the suspension
period will eventually receive interest or dividends). In order to avoid
inconvenience to unitholders that may result from the delay in paying either
interest or dividends during the suspension period, the trustees have determined
that the Stock Trust will make payments to unitholders whose units become
subject to option events during the suspension period in an amount equal to the
dividends paid by the Company during this period. When the units are eventually
sold, the unitholder will receive the sale proceeds calculated in accordance
with the terms of the Trust Agreement, less the amount of these payments. These
payments in the first quarter ended March 31, 2003 totaled $275,409.
6. Common Stock Held and Units Outstanding
At March 31, 2003 and December 31, 2002, the Stock Trust held 25,920,000
shares of the Company's common stock and has issued a like number of units of
beneficial interest.
F-43
APPENDIX A
JOURNAL COMMUNICATIONS, INC.
THE JOURNAL EMPLOYEES' STOCK TRUST
_______ ___, 2003
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
____________________________________
____________________________________
____________________________________
Re: Rescission Offer
Dear ____________________:
Our records indicate that you purchased the following ___ units of
beneficial interest (the "Units") in the Journal Employees' Stock Trust during
the last ____ ( ) years from the date of this letter:
________________________________________________________________________________
We are delivering to you a Prospectus, dated _______ ___, 2003, in which we
are offering to rescind our sale of Units to you. For federal securities law
purposes, we registered the offer and sale of the Units on one or more
Registration Statements on Form S-8. We did not register the Units under the
state securities law of the state in which you purchased the Units (the "State
Securities Law"). Instead, we relied on exemptions from the securities
registration requirements for the offer and sale of the Units. Now it appears
that the offer and sale of these Units may not have qualified for any exemption
from registration under the State Securities Law.
Our failure to comply with the securities registration provisions under the
State Securities Law in the sale of Units to you would give you a cause of
action under the State Securities Law for the amount you paid for the Units
together with interest on that amount at your state's current statutory rate of
interest (__%) per annum from the date of your purchase payment, less the amount
of any income you received on the Units, upon the tender of the Units, or for
"damages" if you no longer own the Units. Damages are the amount that would be
recoverable upon a tender less the value of the Units when you disposed of them
and interest at the statutory rate from the date of disposition.
This rescission offer expires at 5:00 p.m., Central Daylight Time, on
_______, 2003 or the date that is 30 calendar days after an employee's receipt
of this rescission offer, whichever date is later (the "Expiration Date"). You
may accept this rescission offer by signing and returning the enclosed copy of
the Election Form for Rescission, indicating on the Election Form your election
to accept by checking the appropriate box. The Election Form must be postmarked
on or before the Expiration Date.
However, if you desire to remain a unitholder of the Journal Employees'
Stock Trust and retain your Units, you may reject this rescission offer by
signing and returning the enclosed Election Form for Rescission, indicating on
the Election Form your election to reject by checking the appropriate box, which
must be postmarked on or before the Expiration Date. If we do not receive a
timely response from you, then you will be deemed to have rejected the
rescission offer. Should you reject this rescission offer, following the
Expiration Date, the civil liability (if any) of the Journal Employees' Stock
Trust to you under the State Securities Law arising from any failure to register
the Units will be extinguished.
A-1
In deciding whether to participate in the rescission offer or retain your
Units, you should understand that concurrently with this rescission offer we are
seeking unitholder and shareholder approval of a transaction, including a share
exchange with a wholly-owned subsidiary, pursuant to which we will change the
current capital structure of Journal Communications by exchanging shares of our
common stock for new shares of class B common stock of New Journal (which is how
we refer to our company after the share exchange), which shares will be
distributed to unitholders upon termination of JESTA following the share
exchange. After the share exchange, we intend to conduct an initial public
offering and offer to purchase some of our class B shares pursuant to a tender
offer (we do not expect that you would be able to tender all of your class B
shares in the tender offer). Assuming the recapitalization transaction takes
place, acceptance of this rescission offer will eliminate your ability to
participate in the recapitalization with respect to the rescinded Units.
Further, you should be aware that the offering price in the tender offer, should
it occur, may be higher than the rescission offer price.
The enclosed copy of the Prospectus should be reviewed carefully before
deciding whether to accept or reject this rescission offer.
If you have questions or comments regarding this offer, or wish to request
a copy of the Prospectus, please feel free to contact Paul E. Kritzer of Journal
Communications, Inc. at (414) 224-2374.
Sincerely,
JOURNAL COMMUNICATIONS, INC.
THE JOURNAL EMPLOYEES' STOCK TRUST
A-2
APPENDIX B
ELECTION FORM FOR RESCISSiON
Journal Communications, Inc.
P.O. Box 661
Milwaukee, Wisconsin 53201-0661
Attention: Paul E. Kritzer, Secretary
[Please check the appropriate response below.]
The undersigned acknowledges receipt of a final prospectus ("Prospectus")
from Journal Communications, Inc. and the Journal Employees' Stock Trust, in
which we have offered certain unitholders of units of beneficial interest the
right to rescind or continue their investment (the "Offer"). Depending on the
state in which the undersigned acquired the units, the undersigned acknowledges
that the we will pay interest at the following annual rate:
10.0% in Maryland and Tennessee;
8.0% in Missouri;
7.0% in California;
6.0% in Idaho, Minnesota and Nebraska; and
4.5% in Louisiana.
The undersigned certifies that the undersigned purchased the units of
beneficial interest subject to the Offer in one of the states listed above. This
Offer expires at 5:00 p.m., Central Daylight Time, on _______, 2003 or the date
that is 30 calendar days after an employee's receipt of this rescission offer,
whichever date is later (the "Expiration Date"). Failure to respond to this
rescission offer by completing, signing, dating and returning this election
form, postmarked on or before the Expiration Date, will be treated by us as a
rejection of this Offer, and you will be deemed to have elected to retain your
units.
ACCEPTANCE OF REPURCHASE OFFER
To the extent you accept this Offer, you agree that you will cease to have
any further right, title or interest in the rescinded units and any subsequent
appreciation in the value of the shares of Journal Communications' common stock
underlying those units.
Purchased and Currently Held Units
[ ] All purchased units: Respecting units currently held by the
undersigned, the undersigned hereby accepts our offer to rescind the sale of all
of the units of beneficial interest acquired by the undersigned during the
period indicated in the prospectus and pay to the undersigned the purchase price
paid for those units, less any dividends due or paid on the units. The
undersigned acknowledges that we will pay interest to the undersigned from the
purchase date of the units through the expiration date of the Offer at the rate
described above.
-OR-
B-1
[ ] Certain of the purchased units: Respecting units currently held by the
undersigned, the undersigned hereby accepts our offer to rescind the sale of
certain of the units of beneficial interest acquired by the undersigned during
the period indicated in the prospectus and pay to the undersigned the purchase
price paid for those units, less any dividends due or paid on the units. Please
complete the following information:
Date Units Purchased Purchase Price per Unit Number of Units to be Repurchased
-------------------- ----------------------- ---------------------------------
Purchased Units Subsequently Sold
[ ] The undersigned hereby accepts our offer to refund the purchase price
of the units of beneficial interest acquired by the undersigned during the
period indicated in the prospectus, and subsequently sold by the undersigned.
The undersigned acknowledges that he or she is entitled to receive the amount of
his or her "damages," if any. Damages are the amount that would be recoverable
upon this Offer, less the value of the units when the undersigned disposed of
them and less the value of interest at the applicable annual state interest rate
from the date of disposition. However, if the undersigned has already received
more for those units than the undersigned would otherwise be entitled to under
this Offer, then the undersigned will not receive anything under this Offer. The
undersigned has completed and initialed the Affidavit of Sold Units below.
Please complete the following information:
Date Units Purchase Price per Number of Units
Purchased Unit Date Units Sold Sale Price per Unit to be Repurchased
--------- ---- --------------- ------------------- -----------------
REJECTION OF RESCISSION OFFER
[ ] The undersigned acknowledges receipt of this Offer but expressly
rejects this Offer. Assuming this rejection of the rescission offer is not
revoked by a subsequent timely submitted acceptance of the Offer, this rejection
is irrevocable.
AFFIDAVIT OF SOLD UNITS
By his or her initials below, the undersigned hereby represents, warrants,
and covenants that he or she previously owned units of beneficial interest (the
"Units"). On , 200__, the undersigned sold the Units. The undersigned agrees, in
consideration of the refund received from the Journal Communications, Inc.'s and
the Journal Employees' Stock Trust Agreement's rescission offer, to indemnify
and hold harmless Journal
B-2
Communications and the Journal Employees' Stock Trust Agreement, their officers,
directors, trustees, employees and agents, and the successors and assigns of any
such persons or entities, from and against any and all claims, actions, and
suits, whether groundless or otherwise, and any and all liabilities, loss,
damage, costs, charges, attorney's fees, and other expenses of every nature and
character arising from, or incurred in connection with, said sold Units.
Please initial here: _______
Dated: ____________________
___________________________________
Signature of Employee
___________________________________
Signature of Employee's Spouse
Address of Employee:
___________________________________
___________________________________
___________________________________
B-3
[Logo]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is a list of estimated expenses in connection with the
rescission offer:
Registration fee........................................... $ 909
Printing costs............................................. $ 6,700
Legal fees and expenses.................................... $ *
Accounting fees and expenses............................... $ *
Blue sky fees and expenses................................. $ *
Miscellaneous.............................................. $ *
Total............................................... $ *
*To be filed by amendment.
All of the above expenses are estimates, except the registration fee. All
of the above expenses will be borne by Journal Communications.
Item 15. Indemnification of Directors and Officers.
The By-laws of Journal Communications provide that the directors and
officers of Journal Communications, any trustee of the Journal Employees' Stock
Trust or of any employee benefit plan of Journal Communications and any person
serving at the request of Journal Communications as a director, officer,
employee or agent of another corporation, partnership, joint venture or trust
are entitled to mandatory indemnification from Journal Communications against
certain liabilities (which may include liabilities under the Securities Act of
1933) and expenses (i) to the extent such persons are successful in the defense
of a proceeding and (ii) in proceedings in which the person is not successful in
defense thereof, unless (in the latter case only) it is determined that such
person breached or failed to perform his or her duties to Journal Communications
and such breach or failure constituted: (a) a willful failure to deal fairly
with Journal Communications or its shareholders in connection with a matter in
which the person had a material conflict of interest; (b) a violation of the
criminal law, unless the person had reasonable cause to believe his or her
conduct was lawful or had no reasonable cause to believe his or her conduct was
unlawful; (c) a transaction from which the person derived an improper personal
profit; or (d) willful misconduct. It should be noted that the Wisconsin
Business Corporation Law specifically states that it is the public policy of
Wisconsin to require or permit indemnification in connection with a proceeding
involving securities regulation, as described therein, to the extent required or
permitted as described above. In addition, the Wisconsin Business Corporation
Law would require mandatory indemnification of directors and officers of Journal
Communications under certain circumstances, as more fully described in Sections
180.0850 through 180.0859 thereof. Additionally, under the Wisconsin Business
Corporation Law, directors of Journal Communications are not subject to personal
liability to Journal Communications, its shareholders or any person asserting
rights on behalf thereof, for certain breaches or failures to perform any duty
resulting solely from their status as directors, except in circumstances
paralleling those outlined in (a) through (d) above.
Expenses for the defense of any action for which indemnification may be
available are required to be advanced by Journal Communications under certain
circumstances.
The indemnification provided by the Wisconsin Business Corporation Law and
Journal Communications' By-laws is not exclusive of any other rights to which a
director, officer or other person may be entitled. The general effect of the
foregoing provisions may be to reduce the circumstances under which an
officer, director or other person may be required to bear the economic burden of
the foregoing liabilities and expense.
Journal Communications also maintains director and officer liability
insurance against certain claims and liabilities which may be made against
Journal Communications' former, current or future directors or officers or
persons serving at the request of Journal Communications or positions with other
entities as described above
The Journal Employees' Stock Trust Agreement provides that the trustees
shall not incur any liability for any error of judgment or mistake of law, or
for any action or omission in the administration of the Trust, except for
individual willful misconduct, and that they shall be entitled to exoneration
from all liabilities incurred by them in the bona fide discharge of their duties
as trustees.
Item 16. Exhibits.
The exhibits listed in the accompanying Exhibit Index are filed (except
where otherwise indicated) as part of this Registration Statement.
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, trustees, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, trustee, officer or
controlling person of the Registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, trustee, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by the Registrants is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of a
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-2 and have duly caused this registration
statement to be signed on their behalf by the undersigned, thereunto duly
authorized, in the City of Milwaukee, State of Wisconsin, on May 19, 2003.
JOURNAL COMMUNICATIONS, INC.
By: /s/ Steven J. Smith
-------------------------------------
Steven J. Smith
Chairman and Chief Executive Officer
JOURNAL EMPLOYEES' STOCK TRUST
By: /s/ Steven J. Smith
-------------------------------------
Steven J. Smith
Trustee
By: /s/ Paul M. Bonaiuto
-------------------------------------
Paul M. Bonaiuto
Trustee
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Steven J. Smith and Paul M. Bonaiuto, and each of them
individually, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and any
additional registration statement to be filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Signature Title Date
--------- ----- ----
Journal Communications, Inc.
/s/ Steven J. Smith Chairman of the Board and Chief Executive Officer May 19, 2003
- ------------------------------------ (Principal Executive Officer)
Steven J. Smith
/s/ Paul M. Bonaiuto Executive Vice President and Chief Financial May 19, 2003
- ------------------------------------ Officer (Principal Financial Officer)
Paul M. Bonaiuto
S-1
Signature Title Date
--------- ----- ----
/s/ Anne M. Bauer Vice President and Controller (Principal May 19, 2003
- ------------------------------------ Accounting Officer)
Anne M. Bauer
/s/ Douglas G. Kiel Director May 19, 2003
- ------------------------------------
Douglas G. Kiel
/s/ James J. Ditter Director May 19, 2003
- ------------------------------------
James J. Ditter
/s/ David J. Drury Director May 19, 2003
- ------------------------------------
David J. Drury
/s/ James L. Forbes Director May 19, 2003
- ------------------------------------
James L. Forbes
/s/ Cynthia L. Gault Director May 19, 2003
- ------------------------------------
Cynthia L. Gault
/s/ Mary Hill Leahy Director May 19, 2003
- ------------------------------------
Mary Hill Leahy
Director May __, 2003
- ------------------------------------
Ulice Payne, Jr.
/s/ Roger D. Peirce Director May 19, 2003
- ------------------------------------
Roger D. Peirce
/s/ David D. Reszel Director May 19, 2003
- ------------------------------------
David D. Reszel
/s/ Keith K. Spore Director May 19, 2003
- ------------------------------------
Keith K. Spore
Director May __, 2003
- ------------------------------------
Mary Ellen Stanek
/s/ Karen O. Trickle Director May 19, 2003
- ------------------------------------
Karen O. Trickle
S-2
Signature Title Date
--------- ----- ----
Journal Employees' Stock Trust May 19, 2003
/s/ Steven J. Smith Trustee May 19, 2003
- ------------------------------------
Steven J. Smith
/s/ Douglas G. Kiel Trustee May 19, 2003
- ------------------------------------
Douglas G. Kiel
/s/ Paul M. Bonaiuto Trustee May 19, 2003
- ------------------------------------
Paul M. Bonaiuto
/s/ Keith K. Spore Trustee May 19, 2003
- ------------------------------------
Keith K. Spore
/s/ James J. Ditter Trustee May 19, 2003
- ------------------------------------
James J. Ditter
S-3
EXHIBIT INDEX
Exhibit
Number Document Description
- ------ --------------------
(4.1) Articles of Association of Journal Communications, Inc., as
amended (incorporated by reference to the Quarterly Report on
Form 10-Q of Journal Communications, Inc. for the quarter ended
June 16, 2002 [Commission File No. 0-7831]).
(4.2) By-Laws of Journal Communications, Inc. (incorporated by
reference to the Quarterly Report on Form 10-Q of Journal
Communications, Inc. for the quarter ended June 16, 2002
[Commission File No. 0-7831]).
(4.4) The Journal Employees' Stock Trust Agreement, dated May 15, 1937,
as amended (incorporated by reference to Exhibit 4.1 of the
Quarterly Report on Form 10-Q of Journal Employees' Stock Trust
for the quarter ended June 30, 2001 [Commission File No.
0-7832]).
(4.5) Shareholders Agreement, by and among Journal Communications,
Inc., The Journal Company, Matex Inc. and Abert Family Journal
Stock Trust, dated as of May 12, 2003.*
(5) Opinion of Counsel.*
(10.1) Credit Agreement, dated May 31, 2002, among Journal
Communications and certain of its subsidiaries parties thereto,
several lenders parties thereto and U.S. Bank National
Association, as lead arranger and administrative agent
(incorporated by reference to Exhibit 10 to Journal
Communications, Inc.'s Quarterly Report on Form 10Q for quarterly
period ended June 16, 2002 [Commission File No. 0-7831]).
(10.2) First Amendment to Credit Agreement, dated May 2, 2003, among
Journal Communications, Inc. and certain of its subsidiaries
parties thereto, several lenders parties thereto and U.S. Bank
National Association, as lead arranger and administrative agent
(incorporated by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q of Journal Communications, Inc. for the quarter ended
March 23, 2003 [Commission File No. 0-7831]).
(10.3) Journal Communications, Inc. Management Long Term Incentive Plan
(incorporated by reference to Exhibit 10.2 of the Annual Report
on Form 10-K of Journal Communications, Inc. for the year ended
December 31, 2002 [Commission File No. 0-7831]).
(10.4) Journal Communications, Inc. Management Annual Incentive Plan
(incorporated by reference to Exhibit 10.3 of the Annual Report
on Form 10-K of Journal Communications, Inc. for the year ended
December 31, 2002 [Commission File No. 0-7831]).
(10.5) Journal Communications, Inc. Non-Qualified Deferred Compensation
Plan (incorporated by reference to Exhibit 10.4 of the Annual
Report on Form 10-K of Journal Communications, Inc. for the year
ended December 31, 2002 [Commission File No. 0-7831]).
(10.6) Journal Communications, Inc. Supplemental Benefit Plan
(incorporated by reference to Exhibit 10.5 of the Annual Report
on Form 10-K of Journal Communications, Inc. for the year ended
December 31, 2002 [Commission File No. 0-7831]).
(23.1) Consent of Independent Auditors.
(23.2) Consent of Counsel (contained in Exhibit 5).*
(24) Powers of Attorney (contained on the signature page hereto).
------------------
*To be filed by amendment.
E-1