AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 2002
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
BLOCK COMMUNICATIONS, INC.
<Table>
OHIO 2711 34-4374555
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
SUBSIDIARY GUARANTORS LISTED ON
"TABLE OF GUARANTORS" ON FOLLOWING PAGE
----------------------
541 N. SUPERIOR STREET
P.O. BOX 921
TOLEDO, OHIO 43697-0921
(419) 724-6256
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
GARY J. BLAIR
541 N. SUPERIOR STREET
P.O. BOX 921
TOLEDO, OHIO 43697-0921
(419) 724-6256
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------------
COPIES TO:
NELSON W. WINTER, ESQ.
435 SIXTH AVENUE
PITTSBURGH, PA 15219
(412) 288-3310
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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 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 number of the earlier effective
registration number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
9 1/4% Senior Subordinated Notes due
2009..................................... $175,000,000 100% $175,000,000 $16,100
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Guarantees of the 9 1/4% Senior
Subordinated Notes due 2009.............. (2) (2) (2) (2)
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</Table>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No separate consideration will be received with respect to these guarantees
and, therefore, no registration fee is attributable to them.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT 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 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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- --------------------------------------------------------------------------------
TABLE OF GUARANTORS
<Table>
<Caption>
STATE OR I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION PSICC
NAME ORGANIZATION NUMBER NUMBER
- ---- --------------- --------------- ------
Access Toledo, Ltd.......................................... Ohio 34-1844782 4899
Buckeye TeleSystem, Inc..................................... Ohio 31-1560010 4813
CARS Holding, Inc........................................... Ohio 34-1598596 4899
Community Communication Services, Inc....................... Ohio 34-1555546 7310
Corporate Protection Services, Inc.......................... Ohio 34-1352928 4899
Erie County Cablevision, Inc................................ Ohio 34-1011990 4841
Idaho Independent Television, Inc........................... Idaho 82-0397559 4833
Independence Television Company............................. Pennsylvania 25-1026902 4833
Lima Communications Corporation............................. Ohio 34-1092062 4833
Metro Fiber & Cable Construction Company.................... Ohio 34-1763226 4899
Monroe Cablevision, Inc..................................... Michigan 34-1304304 4841
PG Publishing Company....................................... Pennsylvania 25-0724285 2711
Toledo Area Telecommunications Services, Inc................ Ohio 34-1782825 4899
WLFI-TV, Inc................................................ Indiana 34-1272339 4833
Buckeye Cablevision, Inc.................................... Ohio 34-0963631 4841
</Table>
SUBJECT TO COMPLETION, DATED JULY , 2002
<Table>
[BCI LOGO] PROSPECTUS
BCI BLOCK COMMUNICATIONS, INC.
OFFER TO EXCHANGE
9 1/4% SENIOR SUBORDINATED NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OUTSTANDING 9 1/4% SENIOR SUBORDINATED NOTES
DUE 2009
</Table>
----------------------
The notes offered by this prospectus, in an aggregate principal amount of
up to $175,000,000, will be issued in exchange for up to $175,000,000 aggregate
principal amount of notes (the "old notes") sold by us in a private placement on
April 18, 2002. The exchange notes will be governed by the same indenture as the
old notes. The exchange notes will be substantially identical to the old notes,
except that the transfer restrictions and registration rights relating to the
old notes will not apply to the exchange notes.
TERMS OF THE EXCHANGE OFFER:
- - The offer expires at 5:00 p.m., New York City time, on , 2002,
unless extended.
- - We will exchange all old notes that are validly tendered and not withdrawn for
an equal principal amount of exchange notes which are registered under the
Securities Act.
- - The offer is not subject to any conditions other than that it not violate
applicable law or any interpretation of the Staff of the SEC.
- - You may withdraw tenders of old notes at any time before the exchange offer
expires.
- - The exchange of notes will not be a taxable event for U.S. federal income tax
purposes.
- - We will not receive any proceeds from the exchange offer.
- - We can amend or terminate the exchange offer.
- - You may tender old notes only in multiples of $1,000.
TERMS OF THE EXCHANGE NOTES:
- - The exchange notes mature on April 15, 2009 and pay interest at a fixed annual
rate of 9 1/4% on April 15 and October 15 of each year.
- - The exchange notes are guaranteed on a senior subordinated basis by
substantially all of our subsidiaries.
- - The exchange notes and the guarantees are general unsecured senior
subordinated obligations. The exchange notes rank behind all of our and the
guarantor's existing and future senior debt.
- - We may redeem exchange notes on or after April 15, 2006 at the redemption
prices stated herein.
- - We may redeem up to 35% of the aggregate principal amount of the notes before
April 15, 2005 with the net proceeds of qualified equity offerings.
- - If we sell all or substantially all of our assets or experience specific kinds
of changes of control, we may be required to offer to repurchase the exchange
notes.
----------------------
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 1 OF THIS PROSPECTUS FOR A
DISCUSSION OF RISKS YOU SHOULD CONSIDER WHEN EVALUATING THIS INVESTMENT.
We are not making this exchange offer in any state or jurisdiction where it
is not permitted.
Neither the U.S. Securities and Exchange Commission nor any state
securities commission has approved or disapproved the exchange notes or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE
YOU WITH ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS.
YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR BUY ANY NOTES IN ANY JURISDICTION WHERE IT IS
UNLAWFUL.
THE INFORMATION IN THIS PROSPECTUS IS CURRENT ONLY AS OF THE DATE ON THE
COVER PAGE. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
---------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Industry and Market Data.................................... i
Forward-Looking Statements.................................. ii
Summary..................................................... iii
Risk Factors................................................ 1
The Exchange Offer.......................................... 17
Use of Proceeds............................................. 24
Capitalization.............................................. 24
Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 38
Regulation.................................................. 64
Management.................................................. 76
Principal Shareholders...................................... 79
Certain Relationships and Related Transactions.............. 80
Description of Senior Credit Facilities..................... 81
Description of Notes........................................ 83
Certain U.S. Federal Income Tax Considerations.............. 118
Plan of Distribution........................................ 119
Legal Matters............................................... 120
Experts..................................................... 120
Where You Can Find More Information......................... 120
Index to Consolidated Financial Statements.................. F-1
</Table>
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INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information regarding the cable
television, newspaper publishing and television broadcasting industries and our
market share in the sectors in which we compete. We obtained this information
from various industry publications, other publicly available information, market
research and our own internal surveys and estimates. Industry publications
generally state that the information therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of the
information has not been independently verified and is not guaranteed.
Similarly, other publicly available information, market research and our own
internal surveys and estimates, while believed to be reliable, have not been
independently verified, and we make no representation as to the accuracy or
completeness of such information.
Throughout this document, circulation data for the Pittsburgh
Post-Gazette is based on average paid circulation for the twelve months ended
March 31, 1999, 2000 and 2001, and circulation data for The Blade is based on
average paid circulation for the twelve months ended September 30, 1999, 2000
and
i
2001, in each case as set forth in the Audit Bureau of Circulations ("ABC")
Audit Report for such period.
There are 210 generally recognized television markets, known as Designated
Market Areas, or DMAs, in the United States. DMAs are ranked in size according
to various factors based upon actual or potential audience. DMA rankings in this
prospectus are from the Nielsen Media Research dated November 2001 as estimated
by the A.C. Nielsen Company as published in the BIA Financial Network-Media
Access Pro Television Database (BIA Guide).
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
are "forward-looking statements" for purposes of federal and state securities
laws, including:
- any projections of earnings, revenues or other financial items;
- any statements of our plans, strategies and objectives for our future
operations;
- any statements concerning proposed new products, services or
developments;
- any statements regarding future regulatory conditions;
- any statements regarding future economic conditions or performance;
- any statements of belief; and
- any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words "may," "will," "estimate,"
"intend," "continue," "believe," "expect," "plan" or "anticipate" and other
similar words. Such forward-looking statements may be contained in "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," among other places in this prospectus.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to inherent risks and
uncertainties, such as those disclosed in this prospectus. We do not intend, and
undertake no obligation, to update any forward-looking statement.
We urge you to review carefully "Risk Factors" in this prospectus for a
more complete discussion of the risks of an investment in the notes.
ii
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that is important to you. For a more complete
understanding of this offering, we encourage you to read this entire prospectus.
In this prospectus, unless otherwise indicated, the words the "Company," "our,"
"us" and "we" refer to Block Communications, Inc., the issuer of the notes, and
its subsidiaries; "revenues" are presented net of intercompany eliminations; and
EBITDA, when referencing the performance of one of our business segments, is
presented net of intercompany eliminations and before corporate general and
administrative expense.
OUR COMPANY
We are a privately held diversified media company with our primary
operations in cable television, newspaper publishing and television
broadcasting. We are the 23rd largest cable multiple system operator in the
United States, with approximately 153,000 subscribers at March 31, 2002. Our
primary cable system is located in the greater Toledo, Ohio metropolitan area
and serves approximately 134,000 subscribers. Excluding the subscribers acquired
in the March 29, 2002 exchange described below, this system is 100% rebuilt to
870 MHz and is served by a single headend. Our Toledo system is one of the
largest privately owned urban cable systems in the United States. We publish two
daily metropolitan newspapers, the Pittsburgh Post-Gazette in Pittsburgh,
Pennsylvania and The Blade in Toledo, each of which is the dominant publication
in its market. The combined daily and Sunday average paid circulation of our two
newspapers is approximately 381,000 and 603,000, respectively. We also own and
operate four television stations: two in Louisville, Kentucky, and one each in
Boise, Idaho and Lima, Ohio, and we are a two-thirds owner of a television
station in Decatur, Illinois. For the year ended December 31, 2001, we had
revenues and EBITDA (as defined on page [28]) of $414.6 million and $50.3
million, respectively, and experienced an operating loss of $445,000 and a net
loss of $17.9 million. For the three months ended March 31, 2002, we had
revenues and EBITDA of $102.0 million and $13.9 million, respectively, and had
operating income of $1.4 million and net income of $13.0 million.
Our shareholders, the Block family, have been in the media business for
over 100 years. In 1926, the Block family acquired the first of the Company's
current holdings, The Blade, which was first published in 1835. We expanded our
portfolio of newspapers in 1927 when we became the publisher of the Pittsburgh
Post-Gazette. In 1965, we were awarded a franchise in Toledo to develop our
cable system, which, with over 36 years of operating history, is one of the
oldest continuously owned metropolitan cable systems in the United States. In
1972, we acquired the first of our current television broadcasting stations when
we purchased WLIO in Lima.
We have an experienced management team and are focused on improving the
competitive position of our media properties as well as maximizing synergies
between our cable television and newspaper publishing segments. In particular,
we seek to capitalize upon our dominance of the cable and newspaper businesses
in Toledo -- a unique cross-ownership position for an urban market. We make
extensive use of our newspaper and cable system to cross-promote our businesses
at very low incremental costs. We can also offer advertisers multiple-media
advertising strategies including newspaper, cable and the Internet. The
knowledge of our customers and markets gained from our various businesses
enables us to identify our customers' needs and tailor solutions to meet their
business objectives.
CABLE TELEVISION
We provide cable television service to the greater Toledo metropolitan area
(Buckeye CableSystem) and the Sandusky, Ohio area (Erie County CableSystem). We
are the only significant cable operator in each of our markets. In addition to
traditional cable television service, we also provide high-speed cable modem
Internet access in both systems, and our Toledo system provides digital cable
service. Our cable television operations generated revenues, operating income
and EBITDA of $89.4 million, $4.8 million and $32.1 million, respectively, in
the year ended December 31, 2001, and $25.1 million, $2.3 million and $9.4
million, respectively, in the quarter ended March 31, 2002.
iii
In 1997, we began the rebuild of the Buckeye system from a one-way coaxial
cable plant to an 870 MHz hybrid fiber coaxial (HFC) two-way interactive system.
We have completed the rebuild of the cable system's distribution plant and have
converted to the new system over 99% of Buckeye's cable customers, excluding
those acquired in the exchange described below. The rebuild allows Buckeye to
provide advanced cable services that we believe will help us maintain our
dominant position in the greater Toledo metropolitan area. These services
currently include up to 241 analog and digital video and digital music channels,
high-speed Internet and WorldGate interactive service. Future offerings may
include video-on-demand, subscription video-on-demand and other services yet to
be developed.
On March 29, 2002, we completed an asset exchange with Comcast involving
the exchange of our cable system in Monroe, Michigan, a lower growth area
approximately 15 miles north of Toledo, for Comcast's system in Bedford,
Michigan, a Toledo suburb, plus a cash payment to us of $12.1 million. The
exchange enables us to expand our subscriber base in a contiguous high-growth
suburban area we already partially served and increase the efficiency of our
cable cluster by reducing the number of our headends from three to two. See "--
Recent Developments."
The following table sets forth certain information regarding our cable
systems and subscribers:
<Table>
<Caption>
MONTHLY
SUBSCRIBERS REVENUE PER
-------------------------- PREMIUM BASIC
CABLE SYSTEMS(1) LOCATION HOMES PASSED(2) BASIC DATA DIGITAL UNITS SUBSCRIBER(3)
---------------- ----------------- --------------- ------- ------ ------- ------- -------------
Buckeye Toledo, OH 203,221 126,184 16,115 9,239 63,143 $55.27
Buckeye Bedford, MI 13,281 7,480 952 602 2,058 52.08
------- ------- ------ ----- ------ ------
Subtotal 216,502 133,664 17,067 9,841 65,201 55.21
Erie County Sandusky, OH 28,893 19,370 361 -- 4,444 42.46
------- ------- ------ ----- ------ ------
Total 245,395 153,034 17,428 9,841 69,645 $53.54
======= ======= ====== ===== ====== ======
</Table>
- ---------------
(1) Information in the table is as of March 31, 2002, except for monthly revenue
per basic subscriber which is the average for the three months ended March
31, 2002.
(2) Represents the approximate number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(3) Represents average monthly cable revenue for three months ended March 31,
2002 divided by the number of basic subscribers at March 31, 2002, excluding
the 5,004 Bedford, Michigan subscribers acquired from Comcast on March 29,
2002.
We are pursuing the following cable television strategies:
Operate Highly Advanced and Efficient Cable Networks. Through March 31,
2002, we invested approximately $89 million to rebuild the Buckeye system to 870
MHz. Our rebuilt system allows us to offer higher margin advanced services, such
as high-speed two-way cable modem and digital television. The rebuild also
increased channel capacity to our current 241 analog and digital video and
digital music channels, which can be significantly expanded by recapturing some
of our 94 analog channels and converting them to digital channels. While most
cable system operators have chosen to upgrade their systems to 750 MHz, we
invested in the increased bandwidth, which provides additional capacity for
future services.
Upon conversion of a portion of the acquired Comcast subscribers in
Bedford, approximately 86% of our total subscribers will be served by our
advanced 870 MHz system from a single headend, which will reduce our operating
costs. In addition, our Toledo headend was designed, and includes the necessary
fiber interconnections, to serve our Erie County system when we upgrade that
system. This would enable us to serve 100% of our subscribers from a single
headend. While initially designed to support 500 homes per fiber node, our cable
system can easily be divided to an average of 125 homes per fiber node when
demand warrants. This allows us to efficiently increase subscribers and provide
additional advanced services without sacrificing system performance or
reliability.
Utilize Significant Marketing Power. Buckeye CableSystem benefits from our
dominant position as a multi-media provider in the greater Toledo metropolitan
area. We believe we are the only urban cable operator in the United States with
cross-ownership of the primary newspaper in its market. The Blade
iv
provides fill-in advertising space to market our cable services and to promote
our brand awareness at a very low incremental cost. Our cable television
business also includes our operation and ownership of WB TV5, a WB affiliate
cable channel with over 225,000 viewing households in Northwest Ohio. We
advertise our services on WB TV5 and on 33 other cable channels -- over 7,000
spots per month in 2001 -- providing us an additional low-cost advertising
source. We use these marketing resources to promote existing services, enhance
the introduction and roll-out of new services, and build a strong competitive
barrier. As evidence of our marketing power, a recent advertising campaign in
The Blade and on our cable system has helped increase subscribers to Buckeye's
high-speed two-way cable modem service by approximately 15% in the first quarter
of 2002, bringing subscribers to over 17,000 at March 31, 2002.
Roll-out Advanced Services. Our investment in Buckeye's state-of-the-art
cable network combined with our significant marketing power positions us to
successfully roll out advanced services and further increase our revenue per
subscriber. Similar to the on-going promotion of our cable modem service, we
launched in the second quarter of 2002 a marketing campaign utilizing our
advertising resources to advance the growth of our digital cable service.
Without any significant advertising, we have achieved over 9,800 digital cable
subscribers since making our digital cable service available in the fourth
quarter of 2001. In addition, we are evaluating new services such as
video-on-demand and subscription video-on-demand for possible future deployment.
Maintain Superior Customer Satisfaction. Our Service TV(R) brand embodies
our total commitment to providing superior cable television service, which has
resulted in high levels of customer satisfaction and retention. We strive to
provide exceptional programming and signal quality, and we continuously monitor
our fiber nodes and power supplies to maintain a highly reliable cable system.
We also operate a call center with customer relations representatives available
around the clock, maintain convenient customer service locations and offer next
day, two-hour appointment windows for installation or in-home repairs. We
believe our superior customer service, along with our state-of-the art cable
system, provide a significant defensive measure against direct broadcast
satellite (DBS) operators and have in part contributed to DBS's low penetration
rate in Toledo, which at approximately 9% is half the national average of
approximately 18%.
NEWSPAPER PUBLISHING
Our two daily metropolitan newspapers, the Pittsburgh Post-Gazette and The
Blade, are the dominant newspapers in their respective markets. Our newspapers
have a combined daily and Sunday average paid circulation of approximately
381,000 and 603,000, respectively. We believe the leading positions of our
newspapers result from our long standing presence, our commitment to high
standards of journalistic excellence and integrity, and our emphasis on local
news, local impacts of national and international news, and service to our
communities. Our newspapers have received many national and regional awards for
editorial excellence. Our newspaper publishing operations generated revenues,
operating income and EBITDA of $264.7 million, $1.9 million and $15.8 million,
respectively, in the year ended December 31, 2001, and $61.6 million, $44,000
and $3.1 million, respectively, in the quarter ended March 31, 2002.
The Pittsburgh Post-Gazette
Founded in 1786, the Pittsburgh Post-Gazette is the leading newspaper in
Pittsburgh and Western Pennsylvania and has a long history of service and
journalistic excellence. The Post-Gazette has more than twice the circulation of
any other newspaper in the Pittsburgh Metropolitan Statistical Area (MSA). The
Post-Gazette has a daily average paid circulation of approximately 241,800 and a
Sunday average paid circulation of approximately 412,700, resulting in
penetration of approximately 43% daily and 64% Sunday in the Pittsburgh city
zone (Pittsburgh and nearby suburbs). Our dominant market position allows us to
capture advertising revenue significantly greater than that of any other
newspaper in this market.
v
The Blade
Founded in 1835, The Blade is the leading newspaper in Northwest Ohio by
average paid circulation and has a significant influence on the civic,
political, economic and cultural life of its subscribers and the communities it
serves. The Blade is the oldest continuing business in Toledo and has no
significant newspaper competition. The Blade has a daily average paid
circulation of approximately 138,800 and a Sunday average paid circulation of
approximately 190,800, resulting in penetration in the Toledo city zone (Toledo
and nearby suburbs) of approximately 53% daily and 68% Sunday, the highest city
zone penetration rate of any newspaper in Ohio. This combination of high
circulation and penetration is central to our success in attracting advertising
and maintaining our dominant share of market revenue.
We are pursuing the following newspaper publishing strategies:
Produce the Highest Quality Newspaper in Our Markets. We believe our
reputation for producing high-quality publications is the foundation for our
publishing success. We are frequently recognized by our industry for the quality
of our journalism. Both newspapers have won numerous awards, including Pulitzer
Prizes for Photography awarded to the Post-Gazette in 1992 and 1998 and the
Investigative Reporters and Editors Medal awarded to The Blade in 2000. The
Pennsylvania Newspaper Publishers Association named the Post-Gazette as
Pennsylvania's Newspaper of the Year in 2001. We maintain a highly regarded
staff of columnists and editors committed to excellence, and we are continuously
seeking to improve our publications.
Implement Cost Rationalization Initiatives. To improve cash flow at our
newspapers, we have embarked upon a comprehensive review of our cost structure,
including labor expenses and other significant operating costs. We are currently
reviewing staffing requirements for opportunities to realize labor efficiencies.
With respect to other operating costs, our newspapers coordinate purchasing
requirements and have achieved favorable terms on newsprint purchases. In
addition, we plan to reduce the page width at both of our newspapers from 54
inches to 50 inches by the end of 2004, reducing our annual newsprint
consumption by approximately 7%. If this initiative had been completed by
January 1, 2001, we would have realized savings of approximately $2.5 million in
newsprint costs for the year ended December 31, 2001.
Strengthen our Brands by Focusing on Local News and Community Service. Each
of our newspapers is a leading local news and information source with strong
brand recognition in its market. We believe that maintaining our position as a
primary source of local news will continue to provide a powerful platform upon
which to serve the local communities and local advertisers. We intend to
continue to increase brand awareness and market penetration through local
marketing partnerships, creative subscriber campaigns, strong customer service
and the use of our two interactive online newspaper editions. These two Web
sites, post-gazette.com and toledoblade.com, are the most frequently visited
local media sites in their respective markets according to an independent
research organization. Our two leading sites increase our market presence and
provide an additional source of advertising revenue.
Pursue Circulation and Other Revenue Growth Opportunities. We are
continuously evaluating ways to expand circulation and increase revenues. We are
using new suburban zone coverage, customer service programs and targeted
marketing campaigns to increase our circulation. We believe that through the use
of zoning (news and advertising directed to a particular local area), research,
and demographic studies, our marketing programs better meet the unique needs of
individual advertisers, thus maximizing advertising revenues. Capitalizing on
our high penetration, we have also launched in Toledo a broad market coverage
program in which we deliver preprinted advertising inserts to all subscriber and
non-subscriber households in areas targeted by the advertiser. We also plan to
grow our revenue by expanding our delivery services for third-party publishers
and increasing advertising on our Web sites.
TELEVISION BROADCASTING
We acquired the first of our current television broadcasting stations in
1972 and currently own and operate four television stations. We are also a
two-thirds owner of a fifth station, which is managed by
vi
LIN Television under a management services agreement. Our television stations
are diverse in network affiliation with two Fox stations, one NBC station, one
ABC station and one UPN station. We have a duopoly in Louisville, Kentucky (the
50th largest DMA) through our ownership of the Fox and UPN stations. In the year
ended December 31, 2001 and the quarter ended March 31, 2002, our television
broadcasting operations generated revenues of $35.2 million and $9.0 million,
respectively, experienced operating losses of $1.8 million and $55,000,
respectively, and generated EBITDA of $3.1 million and $1.0 million,
respectively.
We seek to maintain a distinct identity at each of our stations by creating
quality local programming, such as local news and sports coverage, and by
actively sponsoring and promoting community events. This focus positions us to
increase our share of local advertising revenues, which are generally more
stable than national advertising revenues and which we impact directly through
our own local sales force. We currently are conducting a thorough review of our
cost structure in light of current weak advertising revenue. We have reduced
headcount at our broadcasting operations and believe that through continued cost
reduction efforts and effective local programming, we can increase operating
margins.
OTHER OPERATIONS
We own and operate a small facilities-based telephony business that serves
mid- to large-size businesses located primarily in the Toledo market serviced by
our cable system. We also own and operate a small home security and alarm
monitoring business and an alternate distribution advertising business, which
are not collectively a significant part of our consolidated operations.
RECENT DEVELOPMENTS
In November 2001, we entered into an asset exchange agreement with Comcast
to make a like-kind exchange of our Monroe, Michigan cable system for Comcast's
Bedford, Michigan cable system plus a cash payment to us of $12.1 million. As of
the date of the asset exchange agreement, Comcast's Bedford cable system had
5,004 subscribers. The transaction was consummated on March 29, 2002.
On April 18, 2002, we sold the $175 million principal of the outstanding 9
1/4% Senior Subordinated Notes due 2009 in a private placement. The net proceeds
of $169 million were used to repay senior indebtedness. The exchange offer for
the old notes is being made pursuant to a registration rights agreement entered
into in connection with the private placement.
On May 15, 2002, we entered into new senior credit facilities with a group
of lenders providing for aggregate borrowings of up to $200 million. The initial
borrowings under the new facilities of $75 million were used primarily to retire
the remaining indebtedness under our former senior credit facilities. The new
senior credit facilities are guaranteed on a senior basis by our subsidiaries
which are also the guarantors of the notes and are secured by pledges of
substantially all of our and the guarantor's assets. The new senior credit
facilities and the guarantees thereof are senior indebtedness and rank prior to
the notes and the guarantees thereof in right of payment. As a result of the
refinancing, we will realize prepayment penalties of $6.3 million and a
write-off of unamortized finance fees of $2.7 million, less tax benefits of $3.1
million during the second quarter of 2002. See "Capitalization" and "Description
of Senior Credit Facilities."
---------------------
Our principal offices are located at 541 N. Superior Street, P.O. Box 921,
Toledo, Ohio 43697-0921, and our telephone number is (419) 724-6212.
vii
THE OLD NOTE OFFERING
Old Notes..................... We sold our 9 1/4% Senior Subordinated Notes
due 2009 to Banc of America Securities LLC,
Fleet Securities, Inc., Comerica Securities,
NatCity Investments, Inc. and BMO Nesbitt Burns
on April 18, 2002 in accordance with the terms
of a purchase agreement. These initial
purchasers subsequently resold the old notes to
qualified institutional buyers in accordance
with Rule 144A and outside the United States
in accordance with Regulation S under the
Securities Act of 1933.
Registration Rights........... We and the initial purchasers entered into a
Registration Rights Agreement on April 18,
2002, which granted the initial purchasers and
any subsequent holders of the old notes certain
exchange and registration rights. This exchange
offer is intended to satisfy those exchange and
registration rights. Except in the limited
circumstances described below, after the
exchange offer is complete, you will no longer
be entitled to any exchange or registration
rights with respect to your old notes.
THE EXCHANGE OFFER
Securities Offered............ Up to $175,000,000 of 9 1/4% Senior
Subordinated Notes due 2009. The terms of the
exchange notes and the old notes are identical
in all material respects, except for certain
transfer restrictions and registration rights
relating to the old notes.
The Exchange Offer............ We are offering to exchange the old notes for a
like principal amount of exchange notes. The
exchange notes will have guarantees that are
identical to the guarantees on the old notes.
Old notes may be exchanged only in integral
principal multiples of $1,000.
Expiration Date; Withdrawal of
Tender........................ Our exchange offer will expire 5:00 p.m. New
York City time, on , 2002, or a later
time if we choose to extend the exchange offer.
You may withdraw your tender of old notes at
any time prior to the expiration date. All
outstanding old notes that are validly tendered
and not validly withdrawn will be exchanged.
Any old notes not accepted by us for exchange
for any reason will be returned to you at our
expense as promptly as possible after the
expiration or termination of the exchange
offer.
Resales....................... We believe that you can offer for resale,
resell and otherwise transfer the exchange
notes without complying with the registration
and prospectus delivery requirements of the
Securities Act if:
- you acquire the exchange notes in the
ordinary course of business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes;
and
- you are not an "affiliate" of ours, as
defined in Rule 405 of the Securities Act.
viii
If any of these conditions is not satisfied and
you transfer any exchange notes without
qualifying for a registration exemption, you
may incur liability under the Securities Act.
We do not assume or indemnify you against this
liability.
Each broker-dealer acquiring exchange notes for
its own account in exchange for old notes which
it acquired through market-making activities or
other trading activities must acknowledge that
it will deliver a proper prospectus when any
such exchange notes are transferred. After
notice to us in writing, a broker-dealer may
use this prospectus, as amended or supplemented
from time to time, for an offer to resell, a
resale or other retransfer of such exchange
notes. We have agreed that until , 2003 [180
days from effective date of S-4] we will keep
the prospectus current and make it available
for this purpose to broker-dealers who request
it in writing for such use.
Conditions to the Exchange
Offer......................... Our obligation to accept for exchange, or to
issue the exchange notes in exchange for, any
old notes is subject to certain customary
conditions relating to compliance with any
applicable law, or any applicable
interpretation by the staff of the Securities
and Exchange Commission, or any order of any
governmental agency or court of law. We
currently expect that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange
Offer -- Conditions to the Exchange Offer."
Procedures for Tendering Notes
Held in the Form of Book-Entry
Interests..................... The old notes were issued as global securities
and were deposited upon issuance with the Wells
Fargo Bank Minnesota, National Association. The
Wells Fargo Bank Minnesota, National
Association issued certificateless depositary
interests in those outstanding old notes, which
represent a 100% interest in those old notes,
to The Depository Trust Company. Beneficial
interests in the outstanding old notes, which
are held by direct or indirect participants in
The Depository Trust Company through the
certificateless depository interest, are shown
on, and transfers of the old notes can only be
made through, records maintained in book-entry
form by The Depository Trust Company.
You may tender your outstanding old notes:
- through a computer-generated message
transmitted by The Depository Trust Company's
Automated Tender Offer Program system and
received by the exchange agent and forming a
part of a confirmation of book-entry transfer
in which you acknowledge and agree to be
bound by the terms of the letter of
transmittal; or
- by sending a properly completed and signed
letter of transmittal, which accompanies this
prospectus, and other documents required by
the letter of transmittal, or a facsimile of
the letter of transmittal and other required
documents, to the exchange agent at the
address on the cover page of the letter of
transmittal;
ix
And either:
- a timely confirmation of book-entry transfer
of your outstanding old notes into the
exchange agent's account at The Depository
Trust Company, under the procedure for
book-entry transfers described in this
prospectus under the heading "The Exchange
Offer -- Book Entry Transfers" must be
received by the exchange agent on or before
the expiration date; or
- the documents necessary for compliance with
the guaranteed delivery described in "The
Exchange Offer -- Guaranteed Delivery
Procedures" must be received by the exchange
agent on or before the expiration date.
Procedures for Tendering Notes
held in the Form of Registered
Notes......................... If you hold registered old notes, you must
tender your registered old notes by sending a
properly completed and signed letter of
transmittal, together with other documents
required by it, and your certificates, to the
exchange agent, in accordance with the
procedures described in this prospectus under
the heading "The Exchange Offer -- Procedures
for Tendering Old Notes."
United Series Federal Income
Tax Considerations............ The exchange offer should not result in any
income, gain or loss to the holders of old
notes or to us for United States federal income
tax purposes. See "Certain U.S. Federal Income
Tax Considerations."
Use of Proceeds............... We will not receive any proceeds from the
issuance of the exchange notes in the exchange
offer.
The proceeds from the offering of the old notes
were used to refinance our existing
indebtedness.
Exchange Agent................ The Wells Fargo Bank Minnesota, National
Association is serving as the exchange agent
for the exchange offer.
Shelf Registration
Statement..................... In limited circumstances, holders of old notes
may require us to register their old notes
under a shelf registration statement.
x
THE EXCHANGE NOTES
The summary below describes the principal terms of the exchange notes. Some
of the terms and conditions described below are subject to important limitations
and exceptions. For a more detailed description of the terms and conditions of
the exchange notes, see "Description of Notes," beginning on page [82].
The form and terms of the exchange notes are the same as the form and terms
of the old notes, except that the exchange notes will be registered under the
Securities Act and, therefore, the exchange notes will not be subject to the
transfer restrictions, registration rights and provisions for additional
interest applicable to the old notes. The exchange notes will evidence the same
debt as the old notes, and both the exchange notes and the old notes are
governed by the same indenture.
Issuer........................ Block Communications, Inc.
Securities.................... $175 million in principal amount of 9 1/4%
senior subordinated notes due 2009.
Maturity...................... April 15, 2009.
Interest...................... Annual rate: 9 1/4%.
Payment frequency: every six months on April 15
and October 15.
First payment: October 15, 2002. The first
payment of interest on the exchange notes will
include accrued and unpaid interest to the date
of the exchange on old notes exchanged in the
exchange offer.
Ranking....................... The notes and the subsidiary guarantees are
general unsecured senior subordinated
obligations. Accordingly, they rank:
- behind all of our and the guarantors'
existing and future senior debt that does not
expressly provide that it ranks equally with
or is subordinated to the notes;
- equally with all of our and the guarantors'
future senior subordinated debt that does not
expressly provide that it is subordinated to
the notes; and
- ahead of any of our and the guarantors'
future debt that expressly provides it is
subordinated to the notes.
As of March 31, 2002, after giving effect to
the refinancing of our senior credit
facilities, the notes would have been
subordinated to approximately $78 million of
senior debt and approximately $113 million of
unused commitments would have remained under
our senior credit facilities. See
"Capitalization."
Guarantees.................... The notes are fully and unconditionally
guaranteed, jointly and severally, on a senior
subordinated basis, by substantially all of our
subsidiaries. If we cannot make payments on the
notes when they are due, the guarantors must
make them instead. As of March 31, 2002, the
subsidiary guarantees would have been
subordinated to approximately $75 million of
senior debt.
Optional Redemption........... On or after April 15, 2006, we may redeem some
or all of the notes at any time at the
redemption prices listed under "Description of
Notes -- Optional Redemption."
xi
Prior to April 15, 2005, we may redeem up to
35% of the notes with the proceeds of qualified
equity offerings at the redemption price listed
under "Description of Notes -- Optional
Redemption."
Mandatory Offer to
Repurchase.................... If we sell certain assets or experience certain
types of changes of control, we must offer to
repurchase the notes at the price listed in the
section "Description of Notes -- Repurchase at
the Option of Holders."
Certain Covenants............. The indenture governing the notes, among other
things, restricts our and the ability of our
subsidiaries to:
- incur or guarantee additional indebtedness;
- pay dividends or distributions on, or redeem
or repurchase, capital stock;
- make investments;
- engage in transactions with affiliates;
- incur liens;
- transfer or sell assets; and
- consolidate, merge or transfer all or
substantially all of our assets.
For more details, see "Description of Notes."
Use of Proceeds............... We will not receive any cash proceeds from the
exchange offer. The proceeds from the issuance
of the old notes were used to refinance
outstanding indebtedness.
You should refer to the section entitled "Risk Factors" for an explanation
of certain risks of investing in the notes.
xii
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our financial data and other operating
information. The financial data was derived from our consolidated financial
statements. The financial data and other operating information that follows is
qualified in its entirety by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and related notes included elsewhere
in this prospectus.
<Table>
<Caption>
(UNAUDITED)
-------------------
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
INCOME STATEMENT DATA:
Revenues
Cable(1).................................... $ 67,277 $ 71,846 $ 75,414 $ 82,110 $ 89,420 $ 21,148 $ 25,097
Publishing.................................. 260,878 272,107 275,827 286,717 264,679 61,854 61,563
Broadcasting(2)............................. 33,422 36,686 36,293 42,531 35,184 8,727 9,000
Other communications(3)..................... 2,771 3,023 8,682 14,299 25,282 5,149 6,353
-------- -------- -------- -------- -------- -------- --------
Total revenues................................ 364,348 383,662 396,216 425,657 414,565 96,878 102,013
Total expenses................................ 337,793 359,286 375,276 411,543 415,010 99,816 100,583
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)......................... 26,555 24,376 20,940 14,114 (445) (2,938) 1,430
Interest expense, net........................... 9,953 10,316 11,043 14,069 19,439 4,670 4,739
(Gain) on disposition of WLFI-TV, Inc........... -- -- -- (22,339) -- -- --
(Gain) on disposition of Monroe Cablevision..... -- -- -- -- -- -- (21,600)
Change in fair value of interest rate swaps..... -- -- -- -- 5,340 1,580 (1,462)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest...................................... 16,602 14,060 9,897 22,384 (25,224) (9,188) 19,753
Provision (credit) for income taxes............. 7,495 6,240 4,556 9,176 (7,132) (2,602) 6,793
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority interest.......... 9,107 7,820 5,341 13,208 (18,092) (6,586) 12,960
Minority interest............................... -- -- -- (427) 235 54 (7)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................... $ 9,107 $ 7,820 $ 5,341 $ 12,781 $(17,857) $ (6,532) $ 12,953
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Cable cash flow (unaudited)(4)................ $ 26,179 $ 27,833 $ 28,200 $ 30,063 $ 32,130 $ 7,709 $ 9,375
Publishing cash flow (unaudited)(4)........... 19,290 18,016 25,787 23,851 15,785 84 3,115
Broadcasting cash flow (unaudited)(4)......... 6,576 7,839 5,578 8,009 3,092 462 986
EBITDA (unaudited)(5)......................... 48,575 49,251 56,369 56,873 50,276 7,825 13,918
Depreciation and amortization................. 24,865 28,164 40,551 48,662 55,533 12,089 13,270
Capital expenditures.......................... 30,932 47,234 66,702 80,340 62,154 17,108 5,862
Ratio of earnings to fixed charges(6)......... 2.4x 2.1x 1.7x 2.2x -- -- 4.8x
Pro forma as adjusted ratio of total debt to EBITDA (unaudited)(7)....................... 5.0 -- 4.5
Pro forma as adjusted ratio of EBITDA to interest expense, net (unaudited)(7)............ 2.3 -- 2.5
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 5,031 $ 2,053 $ 5,715 $ 4,213 $ 5,883 $ 3,638 $ 3,569
Total assets.................................. 313,030 346,848 388,302 464,190 483,887 464,506 472,887
Total funded debt............................. 110,185 127,706 166,109 213,357 237,264 228,991 219,669
Stockholders' equity.......................... 43,892 48,993 51,198 61,390 37,583 53,622 50,649
</Table>
xiii
<Table>
<Caption>
(UNAUDITED)
-------------------
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
CABLE OPERATING DATA (UNAUDITED):
Homes passed.................................. 249,394 249,668 250,893 253,903 255,852 254,412 245,395
Basic subscribers............................. 157,356 157,467 159,294 158,537 157,341 158,251 153,034
Basic penetration............................. 63.1% 63.1% 63.5% 62.4% 61.5% 62.2% 62.4%
Premium units................................. 62,270 60,827 62,362 69,649 70,909 69,986 69,645
Premium penetration........................... 39.6% 38.6% 39.1% 43.9% 45.1% 44.3% 45.5%
Cable modem subscribers....................... -- -- 1,484 7,022 15,221 9,130 17,428
Digital subscribers........................... -- -- -- -- 7,846 -- 9,841
Average monthly revenue per basic
subscriber(8)............................... $ 35.63 $ 38.02 $ 39.45 $ 43.16 $ 47.36 $ 44.55 $ 52.89
PUBLISHING OPERATING DATA (UNAUDITED)(9):
Daily circulation............................. 387,315 390,171 389,737 381,643 380,646
Sunday circulation............................ 629,814 631,740 631,711 611,005 603,485
</Table>
- ---------------
(1) Includes the results of Monroe CableSystem, the assets of which were
disposed of on March 29, 2002 in a like-kind exchange for cable assets in
Bedford, Michigan plus a cash payment to us of $12.1 million. See "-- Recent
Developments." The revenues of Monroe CableSystem for 1997, 1998, 1999, 2000
and 2001 were $4.5 million, $4.6 million, $5.0 million, $5.6 million and
$5.4 million, respectively, and for the three months ended March 31, 2001
and March 29, 2002 were $1.3 million and $1.3 million, respectively.
(2) Effective April 1, 2000, we acquired a two-thirds interest in WAND
Television, Inc. in exchange for the assets of WLFI-TV, Inc. On March 30,
2001, we purchased WFTE TV. Results of the acquired stations are included
from the date of acquisition.
(3) Includes the results of Corporate Protection Services, Inc. from its date of
acquisition in December 1998 and the results of Access Toledo Ltd. from its
date of acquisition in January 2001. Revenues of CPS for 1999, 2000 and 2001
were $4.1 million, $5.7 million and $8.6 million, respectively. Revenues of
Access Toledo for 2001 were $2.0 million.
(4) Cable, publishing and broadcasting cash flow represents each segment's
EBITDA before the effect of corporate general and administrative expenses.
(5) EBITDA is defined as net income before provision for income taxes, interest
expense, depreciation and amortization (including amortization of broadcast
rights), other noncash charges, gains or losses on disposition of assets,
and extraordinary items and after payments for broadcast rights. EBITDA is
not, and should not be used as, an indicator or alternative to operating
income, net income or cash flow as reflected in our financial statements, is
not intended to represent funds available for debt service, dividends or
other discretionary uses, is not a measure of financial performance under
accounting principles generally accepted in the United States and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with accounting principles generally accepted in the
United States. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- EBITDA."
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before taxes and minority interest, plus fixed
charges, less interest capitalized during the year, plus current year
amortization of capitalized interest. Fixed charges consist of interest
expense, capitalized interest, the interest portion of rent expense and
amortization of debt issuance costs. In 2001 and for the three months ended
March 31, 2001, our earnings were insufficient to cover fixed charges by
$25.8 million and $9.1 million, respectively.
(7) The pro forma as adjusted information gives effect, as of the beginning of
the period presented, to the issuance of the notes, the closing of the our
new senior credit facilities and the application of the net proceeds
therefrom. See "Capitalization" and "Description of Senior Credit
Facilities." For purposes of calculating the pro forma ratios, interest
expense, net has been determined after giving effect to interest rate swap
agreements entered into with respect to our senior credit facilities and the
notes. Pro forma interest expense is $22.3 million for 2001 and $5.6 million
for the three months ended March 31, 2002.
(8) Average monthly revenue per basic subscriber for the three months ended
March 31, 2002 excludes the 5,004 Bedford, Michigan subscribers acquired
from Comcast in the March 29, 2002 exchange and includes the 10,129
subscribers of Monroe CableSystem disposed of in the exchange.
(9) Circulation numbers are based on the average paid circulation for the 12
months ended March 31 of each year for the Post-Gazette and for the 12
months ended September 30 of each year for The Blade, in each case as set
forth in the ABC Audit Report for such period. The ABC Audit Report for the
12 months ended March 31, 2002 is not yet available.
xiv
RISK FACTORS
In evaluating an investment in the notes, you should carefully consider the
following risk factors in addition to the other information contained in this
prospectus. The risks described below are not the only risks facing us.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially and adversely affect our
business operations. Any of these risks could materially adversely affect our
business, financial condition or results of operations. In such case, you may
lose all or part of your investment.
The risk factors discussed below are generally applicable to the old notes
as well as to the exchange notes.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We now have, and after the exchange offer will continue to have, a
significant amount of indebtedness. At March 31, 2002, after giving pro forma
effect to the sale of the old notes and the refinancing of our senior credit
facilities, we would have had total indebtedness of $253.0 million (of which
$175.0 million would have consisted of the notes and the balance would have
consisted of senior debt). In 2001, our earnings were insufficient to cover
fixed charges by $25.8 million.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate;
- place us at a disadvantage compared to competitors that have less debt;
and
- limit our ability to borrow additional funds.
In addition, the indenture and the agreements relating to our senior credit
facilities contain, financial and other restrictive covenants that will limit
our ability to engage in activities that may be in our long-term best interests.
Our failure to comply with those covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
debts.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture and the agreements
relating to our senior credit facilities do not fully prohibit us or our
subsidiaries from doing so. As of March 31, 2002, after giving pro forma effect
to the sale of the old notes and the refinancing of our senior credit
facilities, approximately $113 million of unused commitments would have remained
under our senior revolving credit facilities, and our senior credit facilities
would permit additional borrowing. All borrowings under our senior credit
facilities are secured by substantially all of our existing assets and rank
senior to the notes and the subsidiary guarantees. If new debt is added to our
and our subsidiaries' current debt levels, the leverage-related risks described
above could intensify. See "Description of Senior Credit Facilities."
1
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including the notes, and to fund planned capital expenditures will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. A portion of the indebtedness under our
senior credit facilities bears variable rates of interest, and we have entered
into interest rate swap agreements that have the effect of causing us to bear
variable interest rate risk with respect to a portion of the notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quantitative and Qualitative Disclosure about Market Risk."
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our senior credit facilities in an amount sufficient to
enable us to pay our indebtedness, including the notes, or to fund our other
liquidity needs. The ability to borrow funds in the future under our senior
credit facilities will depend on our meeting the financial covenants in the
agreement governing those facilities. We may need to refinance all or a portion
of our indebtedness, including the notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness, including
our senior credit facilities and the notes, on commercially reasonable terms or
at all.
THE INDENTURE FOR THE NOTES AND THE CREDIT AGREEMENT GOVERNING OUR SENIOR CREDIT
FACILITIES CONTAIN VARIOUS COVENANTS THAT LIMIT OUR MANAGEMENT'S DISCRETION IN
THE OPERATION OF OUR BUSINESSES.
The indenture governing the notes and the credit agreement governing our
senior credit facilities contain various provisions that limit our management's
discretion by restricting our ability to:
- incur additional debt and issue preferred stock;
- pay dividends and make other distributions;
- make investments and other restricted payments;
- create liens;
- sell assets; and
- enter into certain transactions with affiliates.
These restrictions on our management's ability to operate our businesses in
accordance with its discretion could have a material adverse effect on our
business. In addition, our senior credit facilities require us to meet certain
financial ratios in order to draw funds.
If we default under any financing agreements, our lenders could:
- elect to declare all amounts borrowed to be immediately due and payable,
together with accrued and unpaid interest; and/or
- terminate their commitments, if any, to make further extensions of
credit.
If we are unable to pay our obligations to our senior secured lenders, they
could proceed against any or all of the collateral securing our indebtedness to
them. The collateral under our senior credit facilities consists of
substantially all of our existing assets. In addition, a breach of certain of
these restrictions or covenants, or an acceleration by our senior lenders of our
obligations to them, would cause a default under the notes. We may not have, or
be able to obtain, sufficient funds to make accelerated payments, including
payments on the notes, or to repay the notes in full after we pay our senior
lenders. See "Description of Senior Credit Facilities," and "Description of
Notes."
2
RISKS RELATING TO THE NOTES
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS JUNIOR TO ALL OF OUR OTHER
EXISTING INDEBTEDNESS AND POSSIBLY ALL OF OUR FUTURE BORROWINGS. FURTHER, THE
SUBSIDIARY GUARANTEES OF THE NOTES ARE JUNIOR TO ALL OF OUR GUARANTORS' EXISTING
INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS.
The notes and the subsidiary guarantees rank behind all of our and the
guarantors' other existing indebtedness (other than trade payables) and all of
our and their future borrowings (other than trade payables), except any future
indebtedness that expressly provides that it ranks equal with, or subordinated
in right of payment to, the notes and the subsidiary guarantees. As a result,
upon any distribution to our creditors or the creditors of the guarantors in a
bankruptcy, liquidation or reorganization or similar proceeding relating to us
or the guarantors or our or their property, the holders of our and the
guarantors' senior debt will be entitled to be paid in full in cash or cash
equivalents before any payment may be made with respect to the notes or the
subsidiary guarantees.
In addition, all payments on the notes and the subsidiary guarantees will
be blocked in the event of a payment default on senior debt and may be blocked
for up to 179 of 360 consecutive days in the event of certain non-payment
defaults on senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the notes will
participate with trade creditors and all other holders of our and the
guarantors' subordinated indebtedness in the assets remaining after we and the
guarantors have paid all of our senior debt. However, because the indenture
requires that amounts otherwise payable to holders of the notes in a bankruptcy,
liquidation or reorganization or similar proceeding be paid to holders of senior
debt instead, holders of the notes may receive less, ratably, than general
unsecured creditors in any such proceeding. In any of these cases, we and the
guarantors may not have sufficient funds to pay all of our creditors, including
the holders of notes.
Assuming we had completed the sale of the old notes and the refinancing of
our senior credit facilities on March 31, 2002, the notes would have been
subordinated to $78 million of senior debt, the subsidiary guarantees would have
been subordinated to $75 million of senior debt, and $113 million would have
been available for borrowing as additional senior debt under our senior credit
facilities. We will be permitted to borrow substantial additional indebtedness,
including senior debt, in the future under the terms of the indenture.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTE HOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a subsidiary guarantee could be voided, or claims in
respect of a subsidiary guarantee could be subordinated to all other debts of
that guarantor if, among other things, the guarantor, at the time it incurred
the indebtedness evidenced by its subsidiary guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such subsidiary guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its subsidiary
guarantee could be voided and required to be returned to the guarantor or paid
into a fund for the benefit of the creditors of the guarantor.
3
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets; or
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that each guarantor, after giving effect to its
subsidiary guarantee of the notes, was not insolvent, did not have unreasonably
small capital for the business in which it was engaged and had not incurred
debts beyond its ability to pay such debts as they mature. We cannot assure you,
however, as to what standard a court would apply in making these determinations
or that a court would agree with our conclusions in this regard.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes at 101% of the
principal amount thereof plus accrued and unpaid interest and additional
interest, if any, to the date of repurchase. However, it is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase of notes or that restrictions in our senior credit
facilities will not allow such repurchases. In addition, certain important
corporate events, such as leveraged recapitalizations, that would increase the
level of our indebtedness, would not constitute a "Change of Control" under the
indenture. See "Description of Notes -- Repurchase at the Option of Holders --
Change of Control."
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE EXCHANGE NOTES, YOU MAY NOT
BE ABLE TO RESELL THEM.
Although the old notes are, and the exchange notes are expected to be,
eligible for trading in PORTAL(TM), we cannot assure you that an active trading
market for the exchange notes will develop. If no active trading market
develops, you may not be able to resell your exchange notes at their fair market
value or at all. Future trading prices of the exchange notes will depend on many
factors, including, among other things, prevailing interest rates, our operating
results and the market for similar securities. We have been informed by the
initial purchasers of the old notes that they intend to make a market in the
exchange notes after the exchange offer is completed. However, the initial
purchasers may cease their market-making at any time. We do not intend to apply
for listing the exchange notes on any securities exchange.
THE TRADING PRICE OF THE EXCHANGE NOTES MAY BE VOLATILE.
The trading price of the exchange notes could be subject to significant
fluctuation in response to, among other factors, variations in operating
results, developments in industries in which we do business, general economic
conditions, changes in research analysts' recommendations regarding the exchange
notes and changes in the market for noninvestment grade securities generally.
This volatility may adversely affect the market price of the exchange notes.
4
RISKS RELATING TO OUR BUSINESSES
REDUCTIONS IN ADVERTISING COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Substantially all of our revenues in our newspaper publishing and
television broadcasting businesses are derived from advertisers in many
different industries. We rarely obtain long-term commitments from advertisers,
and advertisers may cancel, reduce or postpone orders without penalty.
Reductions or delays in purchases of advertising could, and often do, occur as a
result of a general economic downturn, an economic downturn in one or more
industries or one or more geographic areas, or a failure to agree on contractual
terms. Since the fourth quarter of 2000, there has been a general slowdown in
the advertising industry. If these trends continue, our results of operations
will continue to be adversely affected.
Additionally, we believe that advertising is a discretionary business
expense, meaning that spending on advertising tends to decline
disproportionately during an economic recession or downturn as compared to other
types of business spending. Consequently, a recession or downturn in the United
States economy or the economy of an individual geographic market in which we
operate would likely adversely affect our advertising revenues and, therefore,
our results of operations.
Even in the absence of a general recession or downturn in the economy, an
individual business sector that tends to spend more on advertising than other
sectors might be forced to reduce its advertising expenditures if that sector
experiences a downturn. If that sector's spending represents a significant
portion of our advertising revenues, any reduction in its expenditures may
affect our revenues. For example, a significant portion of our revenues are
derived from retail advertisers, which have historically been sensitive to
general economic cycles. Our business, financial condition and results of
operations could be materially adversely affected by a downturn in the retail
sector.
Finally, our newspapers and television stations compete for advertising
revenues not only with other newspapers and television stations but also with an
expanding variety of other communications media. If a significant amount of
newspaper or television advertising were to shift to other communications media
as a result of changes in technology, changes in consumer preferences, cost
differentials or for other reasons, our businesses could be adversely affected.
OUR NEWSPAPER AND TELEVISION CONTENT MAY ATTRACT FEWER READERS AND VIEWERS,
LIMITING OUR ABILITY TO GENERATE ADVERTISING AND CIRCULATION REVENUES.
In the competitive newspaper publishing and television broadcasting
industries, the success of each of our newspapers and television stations is
primarily dependent upon its share of the overall advertising revenues within
its market. The ability of newspapers and television stations to generate
advertising revenues depends to a significant degree upon audience acceptance.
Audience acceptance is influenced by many factors, including the content
offered, shifts in population, demographics, general economic conditions, public
tastes generally, reviews by critics, promotions, the quality and acceptance of
other competing content in the marketplace at or near the same time, the
availability of alternative forms of entertainment and other intangible factors.
All of these factors could change rapidly, and many are beyond our control.
In our television broadcasting business, technological innovation and the
resulting proliferation of programming alternatives, such as independent
broadcast stations, cable television and other multi-channel competitors,
pay-per-view, VCRs, DVDs and the Internet, have fragmented television viewing
audiences and subjected television broadcasting stations to new types of
competition. During the past decade, cable television and independent stations
have captured an increasing market share and overall viewership of broadcast
network television has declined.
Our advertising revenues will suffer if any of our newspapers or stations
cannot maintain its audience ratings or market share or cannot continue to
command the advertising rates that we anticipate. We cannot assure you that any
of our newspaper or television content will be successful or that we can
maintain or increase audience ratings, market share or advertising rates. Lack
of audience acceptance of
5
our content or a decrease in our market share or advertising rates could have a
material adverse effect on our business, financial condition or results of
operations.
OUR BUSINESSES OPERATE IN HIGHLY COMPETITIVE INDUSTRIES.
Our businesses operate in a very competitive environment and are subject to
actual and potential competition from various sources. Our ability to compete
successfully depends on a number of factors, including our ability to secure
high quality editorial content, our ability to achieve high distribution levels
and subscriptions and our ability to generate advertising revenues. We cannot
assure you that we will be able to compete successfully in the future against
existing or potential competitors, or that increased competition will not have
material adverse effect on our business, financial condition or results of
operations.
Cable Television
Our cable television systems face competition from:
- alternative methods of receiving and distributing video programming,
including:
-- over-the-air television broadcast stations;
-- direct broadcast satellite (DBS);
-- satellite master antenna television systems, which use one central
antenna to receive and deliver television programming to a
concentrated group of viewers, such as in apartments, hotels or
hospitals;
-- multichannel multipoint distribution systems, which use low power
microwave frequencies with increased channel capacity to transmit
video programming over the air to customers;
- data transmission and Internet service providers; and
- other sources of news, information and entertainment such as newspapers,
movie theaters, live sporting events, other entertainment events and home
video products, including VCRs and DVDs.
In the future, our cable systems may face additional competition from new
sources, including regional Bell operating companies, other telephone companies,
public utility companies and other entities that are in the process of entering
the cable television business in other parts of the country; and broadcast
digital television, which can deliver high definition television pictures,
digital-quality programs and CD-quality audio programming.
Since our cable systems are operated under non-exclusive franchises,
competing operators of cable systems and other potential competitors, such as
municipalities and municipal utility providers, may be granted franchises to
build cable systems in markets where we hold franchises. Competition in
geographic areas where a secondary franchise is obtained and a cable network is
constructed is called "overbuilding." As of March 31, 2002, after giving effect
to the Monroe-Bedford exchange, less than 3% of the homes passed by our cable
systems were overbuilt.
To date, the impact of competition from DBS providers has been more
significant than overbuilding by competing cable operators. DBS service consists
of television programming transmitted via high-powered satellites to individual
homes, each served by a small satellite dish. The channel selection and signal
quality of DBS service is comparable to that of our digital cable service.
Because DBS signals are delivered via satellite, DBS operators do not face the
high initial entry costs that may inhibit overbuilding by a competing cable
operator. Legislation permitting DBS operators to transmit local broadcast
signals was enacted in November 1999. This eliminated a significant competitive
advantage that cable system operators had over DBS operators. DBS operators have
begun delivering local broadcast signals in the largest markets, and there are
plans to expand such carriage to many more markets over the next few years. DBS
operators are currently offering local channels in our Erie County service area,
but only upon payment of an additional subscriber fee. We do not know when DBS
operators may begin delivering local
6
broadcast channels in the Toledo market. As of March 31, 2002, the penetration
rate of DBS in the Toledo market was approximately 9%, compared to an average
penetration rate of 18% nationally. If the penetration of DBS in our markets
were to increase, our business could be adversely affected.
Newspaper Publishing
The newspaper publishing industry depends primarily upon the sale of
advertising and paid subscriptions to generate revenues. Competition for
advertising, subscribers, readers and distribution is intense and comes from
local, regional and national newspapers; television broadcasting stations and
networks and cable channels; radio; the Internet; direct mail; and other
information and advertising media that operate in our newspaper publishing
markets.
Television Broadcasting
Our television stations face competition for audience and advertising
revenues from other television broadcasters. Our competitors also include cable
television operators, wireless cable systems, direct broadcast satellite
systems, telephone company video systems, radio broadcasters and other media,
including newspapers, magazines, computer on-line services, movies, direct mail,
compact discs, VCRs, DVDs, music videos, the Internet, outdoor advertising and
other forms of entertainment and advertising.
WE MAY NOT REMAIN COMPETITIVE IF WE DO NOT RESPOND TO THE RAPID CHANGES IN
TECHNOLOGY, STANDARDS AND SERVICES THAT CHARACTERIZE THE MEDIA INDUSTRY AND
WHICH MAY REQUIRE US TO INVEST A SIGNIFICANT AMOUNT OF CAPITAL TO ADDRESS
CONTINUED TECHNOLOGICAL DEVELOPMENT.
The media industry is experiencing rapid and significant technological
changes, which may result in alternative means of program and content
transmission and which could have a material effect on our business, financial
condition and results of operations. The continued growth of the Internet has
presented alternative content distribution options that compete with traditional
media. Advances in technology may increase competition for household audiences
and advertisers, and we may be unable to compete for advertising revenues. In
recent years, the FCC has adopted rules and policies providing for authorization
of new technologies and a more favorable operating environment for certain
existing technologies that have the potential to provide additional competition
for television stations. For example, the video compression techniques now under
development for use with current cable television channels or direct broadcast
satellites are expected to reduce the bandwidth which is required for television
signal transmission. Further advances in technology, such as video compression,
direct broadcast satellites and programming delivered through fiber-optic
telephone lines, 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 a very defined audience may alter the competitive dynamics for advertising
expenditures. We are unable to predict the effect that technological changes
will have on the cable, newspaper publishing or television broadcasting
industries or the future results of our operations. We may not be able to
compete with existing or newly developed alternative technologies or may be
required to acquire, develop or integrate new technologies ourselves. The cost
of acquisition, development or implementation of new technologies could be
significant, and our ability to fund such implementation may be limited and
could have a material adverse effect on our ability to successfully compete in
the future.
OUR NEED TO COMPLY WITH COMPREHENSIVE, COMPLEX AND SOMETIMES UNPREDICTABLE
FEDERAL, STATE AND/OR LOCAL REGULATIONS COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESSES.
The cable and television broadcasting industries are subject to extensive
legislation and regulation at the federal, state and local levels. The rules and
regulations governing our businesses have at times had a material adverse effect
on our businesses. Federal, state and local regulations have increased the
administrative and operational expenses of our businesses. In addition, Congress
and the FCC may in the future adopt new laws or modify existing laws and
regulations and policies regarding a wide variety of matters. Compliance with
these regulations and policies could increase costs. As we continue to introduce
7
additional communications services, we may be required to obtain federal, state
and local licenses or other authorizations to offer such services. We may not be
able to obtain and retain all necessary governmental authorizations and permits
in a timely manner, or at all, or conditions could be imposed upon such
authorizations and permits that may not be favorable to us or with which we may
not be able to comply. Failure to do so could negatively affect our existing
operations and could delay or prevent our proposed operations. We may be
required to modify our business plans or operations as new regulations arise. We
cannot assure you that we will be able to do so in a cost-effective manner, or
at all. The adoption of various measures or the elimination of various existing
restrictions could accelerate the existing trend toward vertical integration in
the media and home entertainment industries and could cause us to face more
formidable competition in the future.
Cable Television
The federal Telecommunications Act of 1996 substantially changed federal,
state and local laws and regulations governing our cable television and
telecommunications businesses. There are numerous rulemakings that have been and
continue to be undertaken by the FCC to implement the provisions of this law.
Furthermore, portions of this law and its interpretations by the FCC have been,
and likely will continue to be, challenged in the courts. We cannot predict the
outcome of such rulemakings or lawsuits or the short- and long-term effects on
us, financial or otherwise, of this law, FCC rulemakings and resulting market
developments.
FCC regulations limit our ability to set and increase rates for our basic
cable television service package and for the provision of cable
television-related equipment. The law permits certified local franchising
authorities to order refunds of rates paid in the previous 12-month period
determined to be in excess of the permitted reasonable rates. Only one of our 32
cable franchising authorities with 59 cable subscribers has been certified for
this purpose. The FCC and Congress continue to be concerned that rates for
programming services are rising at a rate exceeding inflation. It is therefore
possible that notwithstanding the recent elimination of cable programming
service tiers rate regulation, Congress may enact legislation in the future to
reimpose additional rate controls on cable systems.
In addition, the FCC has recently adopted rules which will require cable
operators to carry the digital signals of television broadcasting stations.
However, the FCC has tentatively decided that cable operators should not be
required to carry both the analog and digital services of television
broadcasting stations while broadcasters are transitioning from analog to
digital transmission. Carrying both the analog and digital services of
television broadcasting stations would consume additional cable capacity. As a
result, a requirement to carry both analog and digital services of television
broadcasting stations could require the removal of popular programming services,
which may have materially adverse results for our cable systems.
Television Broadcasting
The television broadcasting industry is subject to extensive and changing
regulation. Among other things, the Communications Act of 1934 and FCC rules and
policies require that each television broadcaster must operate in compliance
with a license issued by the FCC. Each of our television stations operates
pursuant to one or more licenses issued by the FCC that expire at different
times. We must file an application with the FCC to renew these licenses, and
third parties may challenge those applications. Although we have no reason to
believe that our licenses will not be renewed in the ordinary course, there can
be no assurance that our licenses will be renewed. In addition, a number of
federal rules governing broadcasting have changed significantly in recent years,
and additional changes may occur, particularly with respect to the rules
governing digital television, multiple ownership and attribution. We cannot
predict the effect that these regulatory changes may ultimately have on our
operations.
Recent and prospective actions by the FCC could cause us to face increased
competition. These include:
- relaxation of restrictions on the participation by regional telephone
operating companies in cable television and other direct-to-home audio
and video technologies;
8
- the establishment of a Class A television service for certain low power
stations that gives such stations primary status and certain interference
protections against full-power stations; and
- permission for direct broadcast satellite television to provide the
programming of traditional over-the-air stations, including local and
out-of-market network stations.
OUR ADVERTISING REVENUES ARE SUBJECT TO CYCLICAL AND SEASONAL VARIATIONS.
Our business is cyclical in nature. Because we depend upon the sale of
advertising for a significant portion of our revenues, our operating results are
sensitive to prevailing economic conditions, including changes in local,
regional and national economic conditions, particularly as they may affect
advertising expenditures. In addition, newspaper publishing is labor intensive
and, as a result, newspapers have a relatively high fixed cost structure. During
periods of economic contraction, revenues may decrease while some of our costs
remain fixed, resulting in decreased earnings.
Our business has experienced and is expected to continue to experience
significant seasonality due to, among other things, seasonal advertising
patterns and seasonal influences on people's viewing and reading habits.
Typically, our revenues are lowest during the first quarter, and highest during
the fourth quarter, of each calendar year.
The revenue of our television broadcasting operations tends to be higher in
election years, when national, state and local political advertising is a
significant element of advertising revenue for this segment. In non-election
years, little if any revenue is obtained from political advertising.
A TERRORIST ATTACK COULD HAVE A SEVERE ADVERSE EFFECT ON OUR FINANCIAL POSITION.
Because of their public visibility, the facilities of our cable systems,
newspapers and television broadcasting stations may be a potential target for a
terrorist attack. In the wake of the terrorist attacks of September 11, 2001,
when insurance policies are renewed, insurance companies have been unwilling to
renew coverage against terrorist attacks or have been willing to provide such
coverage only at rates that make the cost of such coverage prohibitive. In
addition, insurance costs are expected to rise generally as a result of the
events of September 11, 2001. If the facilities of one of our cable systems,
newspapers or television broadcasting stations were to suffer significant
uninsured damage as a result of a terrorist attack, our financial position and
cash flow could be severely adversely affected.
IF WE DO NOT RETAIN OUR KEY PERSONNEL AND ATTRACT AND RETAIN OTHER HIGHLY
SKILLED EMPLOYEES, OUR BUSINESS WILL SUFFER.
We believe that our success will continue to be dependent upon our ability
to attract and retain skilled managers and other personnel, including our senior
management, senior editors and cable system and station managers. The loss of
the services of any key personnel may have a material adverse effect on our
results of operations or financial condition. We generally do not have
employment agreements with members of our senior management team and other key
personnel.
We continually need to hire, integrate and retain personnel for customer
relations and field operations positions that require a higher level of
technical expertise and the ability to communicate technical concepts to our
customers. There is no guarantee that we will be able to recruit or retain these
skilled workers. Failure to do so could impair our ability to operate
efficiently and maintain our reputation for high quality service. This could
impair our ability to retain current customers and attract new customers, which
could cause our financial performance to decline.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY NOT BE ALIGNED WITH THE
INTERESTS OF THE HOLDERS OF THE NOTES.
The Block family owns 100% of our outstanding capital stock. As a result,
the Block family controls most of the decisions involving us, including
transactions involving a change of control such as a sale or merger. The Block
family may also have an interest in pursuing acquisitions, divestitures or other
9
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to holders of the notes.
Circumstances may occur in which the interests of the Block family could be in
conflict with the interests of holders of the notes. In addition, the Block
family as a whole may be unable to agree on certain business decisions affecting
us, which could prevent or delay transactions that are beneficial to our
business or results of operations.
WE ARE OBLIGATED TO REDEEM STOCK FROM THE ESTATES OF OUR PRINCIPAL SHAREHOLDERS
TO THE EXTENT REQUIRED TO PAY DEATH TAXES. IN CERTAIN CIRCUMSTANCES, THESE
OBLIGATIONS COULD HAVE SIGNIFICANT ADVERSE EFFECTS ON OUR LIQUIDITY AND
FINANCIAL POSITION.
The Company and the members of the Block family are parties to an agreement
which requires the Company to redeem shares of our non-voting common stock from
the estate of a deceased shareholder to the extent such redemption qualifies for
sale treatment, rather than dividend treatment, under Section 303 of the
Internal Revenue Code (the "Code"). In general, Section 303 allows sale
treatment where (1) the value for Federal estate tax purposes of all stock of
the Company included in determining the value of the decedent's gross estate
exceeds 35% of the excess of the value of the gross estate over certain
allowable deductions and (2) the amount paid to redeem the stock does not exceed
the sum of all federal and state death taxes (including generation-skipping
taxes), plus funeral and administration expenses allowable as deductions for
federal estate tax purposes. The initial redemption price under the agreement is
the value of the shares for federal estate-tax purposes in the deceased
shareholder's estate. In order to qualify for redemption of stock under the
agreement, the estate of the deceased shareholder must elect under Section 6166
of the Code to pay the federal estate tax in deferred installments over a period
of up to 15 years. In return, the estate is given an option to purchase for $1
per share a number of shares equal to any additional shares required to be
redeemed as a result of the deferral election. The Company is also required to
pay cash to cover the income tax consequences resulting from the redemption and
the option.
The amounts the Company might be required to pay under the agreement and
the timing of such payments will depend upon the year of death of the
shareholders and the value of the stock and the estate tax laws in effect at
that time. To satisfy part of its obligation under the agreement, the Company
has purchased life insurance on lives of certain shareholders who own
significant amounts of our non-voting common stock. The vast majority of the
life insurance in force is on the lives of William Block (our major shareholder)
and his wife. Net of current policy loans, the amount of the death benefit for
Mr. and Mrs. Block is $31.2 million, of which $7.4 million is on the life of
William Block, $10.1 million on the life of Mrs. Block and $13.7 million on
their joint lives.
Although we are unable to determine with any certainty the amounts we may
be required to pay under the agreement, we believe that based on the amount of
life insurance in force for our major shareholders, combined with our ability to
defer redemptions over a 15-year period, the amounts the Company will be
required to pay under the agreement will not have a material adverse effect on
the Company's liquidity or financial position. In certain circumstances,
however, the making of these payments might result in a violation of the fixed
charge coverage requirements of our new senior credit facilities. If this were
to occur, the effect on the Company's liquidity could be material.
RISKS RELATING TO OUR CABLE TELEVISION BUSINESS
IF OUR PROGRAMMING COSTS CONTINUE TO INCREASE AND WE CANNOT PASS THEM ALONG TO
OUR CUSTOMERS, OUR CASH FLOW WILL DECREASE.
Our cable programming costs are increasing. Programming has been and is
expected to continue to be our cable operations' largest single cash expense
item and accounted for approximately 29% of our total cable operating costs for
the year ended December 31, 2001. In recent years, the cable industry has
experienced a rapid escalation in the cost of programming, particularly sports
programming. This escalation may continue. Because of our size, we are unable to
negotiate the more favorable rates that are granted to large national multiple
system operators. For 2001, the negative impact on our margins due to higher
programming costs was estimated to be 400 to 500 basis points. For competitive
reasons, we may not be
10
able to pass programming cost increases on to our subscribers. In addition, as
we add programming to our limited basic and expanded basic tiers, we may face
additional market constraints on our ability to pass these costs on to our
subscribers. We may also find that, as is currently the case with the National
Football League's Sunday Ticket (a subscription service which makes
out-of-market NFL games available to digital subscribers), exclusive
arrangements negotiated by other larger programming outlets may prevent us from
offering certain desirable programming.
We purchase the majority of our cable programming through the National
Cable Television Cooperative. This organization of small- and mid-sized cable
companies aggregates more than 10 million cable subscribers for the purpose of
obtaining programming at reduced volume-based discounts. We achieve significant
savings through participation in this cooperative, as compared to programming
rates we could negotiate on our own, thereby lowering our costs of program
acquisition. If for any reason we were unable to continue to obtain programming
though such buying cooperatives, and we were unable to pass the increase in
programming costs on to our subscribers, our results of operations and cash flow
would be adversely affected.
COPYRIGHT LAW CHANGES COULD INCREASE THE COSTS OF THE LICENSES WE NEED TO
OPERATE OUR CABLE SYSTEMS.
Cable systems must obtain copyright licenses for the programming they
carry. The licensing process is somewhat different for each type of programming
we carry on our systems. For non-broadcast cable channels, we typically obtain
copyright authorizations as part of the programming contracts we sign with these
channels. When we produce or originate our own local programming, we obtain
copyright authorizations directly from the copyright holders. Finally, for
over-the-air broadcast channels we carry on our systems, we obtain copyrights
under a system established by the Copyright Act of 1976. That Act provides a
blanket license for copyrighted material on television stations whose signals a
cable system retransmits. Cable operators can obtain this license by filing
semi-annual reports and paying a percentage of their revenues as a royalty fee
to the U.S. Copyright Office, which then distributes the royalty pool to the
copyright holders. For larger cable systems, these payments vary with the number
and type of distant television stations the system carries. From time to time,
Congress considers proposals to alter the blanket copyright license system, some
of which could make the license more costly.
WE WILL FACE COMPETITION FROM PROVIDERS OF ALTERNATIVES TO OUR HIGH-SPEED
INTERNET SERVICES.
Competitors, including telephone companies, have introduced digital
subscriber line technology (also known as DSL), which allows Internet access
over traditional phone lines at data transmission speeds greater than those
available by a standard telephone modem. Although these transmission speeds are
not as great as the transmission speeds of a cable modem, we believe that the
transmission speeds of DSL technology are sufficiently high that such technology
will compete with cable modem technology. Competition from wireless broadband
Internet services is also being introduced in our service areas. We cannot
predict the impact these competing broadband technologies will have on our
Internet access services or on our operations. Our high-speed Internet services
will also continue to face competition from traditional lower speed dial-up
Internet service providers, which have the advantage of lower price and in some
cases proprietary content and nationwide marketing.
WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS, WHICH COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT OUR ABILITY TO PROVIDE NEW SERVICES.
Cable modem services have been subject to only light regulation by the FCC.
The FCC recently issued a declaratory ruling affirming that "broadband services
should exist in a minimal regulatory environment." Congress and the FCC have
been asked to require cable operators to provide "open access" over their cable
systems to other Internet service providers. To date, Congress and the FCC have
declined to impose these requirements, although the FCC has recently initiated a
new rulemaking proceeding on this matter. This same open access issue is also
being considered by some local franchising authorities and is being actively
litigated in the courts. If we are required to provide open access or face other
forms of
11
increased regulation, it could adversely impact our anticipated revenues from
high-speed Internet access services and complicate marketing and technical
issues associated with the introduction of these services.
IF WE ARE UNABLE TO PROCURE THE NECESSARY SOFTWARE AND EQUIPMENT, OUR ABILITY TO
OFFER OUR SERVICES COULD BE IMPAIRED.
We depend on vendors to supply our cable electronic equipment, such as the
set-top converter boxes, fiber and other equipment, as well as the enabling
software for analog and digital cable services. This equipment is available from
a limited number of suppliers. We typically purchase equipment under purchase
orders placed from time to time and do not carry significant inventories of
equipment. If there are delays in obtaining software or if demand for equipment
exceeds our inventories and we are unable to obtain required software and
equipment on a timely basis and at an acceptable cost, our ability to recognize
additional revenues and to add additional subscribers from these services could
be delayed or impaired. In addition, if there are no suppliers who are able to
provide converter devices that comply with evolving Internet and
telecommunications standards or that are compatible with other products or
components we use, our business may be materially impaired.
The computer system and software used by our cable systems for billing and
customer service are outdated. While we have budgeted for and scheduled the
replacement of this system, in the event of delays or difficulties in procuring
or converting to the new computer system, our ability to launch and track new
cable services could be adversely affected.
AS WE INTRODUCE NEW CABLE SERVICES, A FAILURE TO PREDICT AND REACT TO CONSUMER
DEMAND OR SUCCESSFULLY INTEGRATE NEW TECHNOLOGY COULD ADVERSELY AFFECT OUR
BUSINESS.
Our cable systems are in the early stages of introduction of new cable
services such as digital cable and high-speed Internet. Our newly rebuilt Toledo
cable system provides the capability to launch other new services in the future.
The inability to effectively introduce, market and sell these new services, to
anticipate consumer demand for such services or to successfully integrate new
technology could have a material adverse effect on our business and results of
operations.
WE MAY BE ADVERSELY AFFECTED BY STRIKES AND OTHER LABOR PROTESTS.
The employees of our Toledo cable system include two collective bargaining
units represented by the Brotherhood of Teamsters. One of these includes the
technicians responsible for cable service installation and repair and for
ongoing maintenance of our cable plant; the other comprises the employees who
program our cable converter boxes. The current collective bargaining agreements
for these employees expire in 2003 and 2004, respectively. If we were to
experience a strike or work stoppage, it would be difficult for us to find a
sufficient number of employees with the necessary skills to replace these
employees in handling outages and service calls. Any resulting disruptions in
service could cause us to lose revenues and customers and might have permanent
adverse effects on our business.
The employees of our cable construction subsidiary are also represented by
the Brotherhood of Teamsters under a collective bargaining agreement which
expires in 2003.
WE MAY BE ADVERSELY AFFECTED BY CHANGES IN THE LAW OR ECONOMICS RELATING TO OUR
PHYSICAL PLANT.
Our cable systems depend on physical facilities, including transmission
equipment and miles of fiber and coaxial cable. Significant portions of those
physical facilities occupy public rights-of-way according to terms of local
ordinances. And many miles of the cable are attached to utility poles according
to terms of pole-attachment agreements we have with the utilities that own the
pole. All of this is subject to governmental regulation. No assurances can be
given that we will be able to maintain our facilities in their current locations
at the current costs. Changes in governmental regulation of these matters, or
changes in the economics of the relationships, could have a material adverse
effect on our business and our results of operations.
12
OUR CABLE SYSTEMS MAY EXPERIENCE DISRUPTIONS AS A RESULT OF TECHNICAL FAILURES,
STORMS OR NATURAL DISASTERS.
The operations of our cable systems involve the receipt of video and other
signals at our headends and the distribution of these signals to our customers
via cable wires. Programming signals are transmitted to our headends via
satellite and fiber interconnect. The transmission of programming signals to our
headends, our receipt of these signals at our headends and our distribution of
the signals to our customers via our cable networks are each exposed to
potential disruptions due to technical failures, storms, fires or other natural
disasters. Any disruption in our receipt or distribution of programming can
cause loss of revenues and increases in operating expenses and have an adverse
effect on customer satisfaction. A significant and extended disruption could
materially and adversely affect our business, financial condition or results of
operations.
RISKS RELATED TO OUR NEWSPAPER PUBLISHING BUSINESS
WE MAY BE ADVERSELY AFFECTED BY VARIATIONS IN THE COST OF NEWSPRINT.
Newsprint and ink expense represents our largest raw material expenses and,
after labor costs, is the most significant operating cost of our newspaper
publishing operations. Although we have a long-term contract to supply newsprint
for our publishing operations, pricing under the contract varies with market
prices. Newsprint costs vary widely from time to time, and price changes in
newsprint can significantly affect the overall earnings of our newspaper
publishing operations. During 2001, we experienced an approximately 10% increase
in the price per ton of newsprint. We cannot assure you that our publishing
operations will not be exposed in the future to volatile or increased newsprint
costs, which could have a material adverse effect on our business and results of
operations.
WE MAY BE ADVERSELY AFFECTED BY STRIKES AND OTHER LABOR PROTESTS.
Substantially all non-management employees of our newspaper publishing
operations are represented by various unions. Collective bargaining agreements
with the unions representing our Toledo publishing operations expire in March
2003. The labor agreements with the 10 unions representing our Pittsburgh
newspaper employees expired December 31, 2001. On June 27, 2002, we reached
tentative agreements with representatives of the 10 Pittsburgh unions on the
terms of collective bargaining agreements that would run through December 31,
2006. Those tentative agreements are subject to ratification by union members;
the bargaining representatives have pledged their full support in the
ratification process and are optimistic, as are we, that the tentative
agreements will be ratified. But we cannot assure you that the tentative
agreements will be ratified. And we cannot assure you that we will reach
successor agreements in Toledo or Pittsburgh when existing agreements expire. If
we were to experience a strike or work stoppage at one or both of our papers,
any resulting disruptions in operations could cause us to lose subscribers and
advertisers and might have permanent adverse effects on our business.
13
REPORTING OF OR THE TAKING OF EDITORIAL POSITIONS ON CONTROVERSIAL ISSUES COULD
ADVERSELY AFFECT OUR BUSINESS.
Our newspapers report and take editorial positions on issues that are
sometimes controversial and that may arouse passions in affected individuals or
segments of our communities. This can involve risks of offending advertisers or
subscribers, which can result in loss of advertising and subscription revenues,
or can on occasion lead to demonstrations and protests, adverse community
reaction, boycotts or lawsuits.
THE ROLE OF NEWSPAPERS IS THREATENED BY COMPETING COMMUNICATIONS TECHNOLOGIES.
For the past several decades, the introduction of new communications
technologies has eroded the once dominant position of newspapers as a source of
news and information. With the introduction of radio and then television
broadcasting, succeeding generations have become accustomed to alternate
information sources, and the percentage of the population which regularly
subscribe to and read newspapers has declined. Young people, even those with
post-secondary education, are reading newspapers less than in previous
generations. We expect that the future growth of the Internet and other new
communications technologies may cause this trend to continue. Already the
Internet has become a significant alternate source of news and information, as
well as a competitor to newspapers for classified advertising revenues. While we
are making use of the Internet and exploring other strategies to adapt to the
future growth of alternate communications technologies, we are unable to predict
the extent to which these technologies may adversely affect our newspaper
publishing business.
RISKS RELATED TO OUR TELEVISION BROADCASTING BUSINESS
OUR TELEVISION BROADCASTING OPERATIONS COULD BE ADVERSELY AFFECTED IF WE FAIL TO
RENEW OR CONTINUE ON FAVORABLE TERMS, IF AT ALL, OUR NETWORK AFFILIATIONS.
We have one affiliation agreement with NBC, one with ABC and one with UPN.
The affiliation agreements governing the relationship between Fox and our two
Fox-affiliated stations are unsigned. NBC and ABC generally provide our stations
affiliated with them from 60 to 90 or more hours of prime time programming per
week, while UPN and Fox provide from 11 to 24 hours of prime time programming
per week. Our NBC- and ABC-affiliated stations broadcast network-inserted
commercials during the programming and receive cash network compensation.
Although network affiliates generally have achieved higher ratings than
unaffiliated independent stations in the same market, we cannot assure you of
the future success of each network's programming or the continuation of that
programming. Our network affiliation agreements are subject to termination by
the networks under certain circumstances. We believe that we enjoy a good
relationship with each of NBC, ABC, Fox and UPN. However, we cannot assure you
that our affiliation agreements will be renewed, that Fox will continue its
relationship with us or that each network will continue to provide programming
or compensation to affiliates on the same basis as it currently provides
programming or compensation. The non-renewal or termination of a network
affiliation could adversely affect our business. For information about when we
must renew our network affiliation agreements, see "Business -- Television
Broadcasting -- Network Affiliations."
THE SUCCESS OF OUR TELEVISION STATIONS DEPENDS ON THE SUCCESS OF THE NETWORK
EACH STATION CARRIES.
The ratings of each of the television networks, which are based in large
part on their programming, vary from year to year, and this variation can
significantly impact a station's revenues. There can be no assurance as to the
future success of any network or its programming.
THE PLANNED INDUSTRY CONVERSION TO DIGITAL TELEVISION COULD ADVERSELY AFFECT OUR
BROADCAST BUSINESS.
In April 1998, the FCC assigned each licensed television station a second
broadcast channel on which to provide digital television, or DTV service. By May
1, 2002, all commercial television station licensees were required to complete
construction and commence operating DTV facilities except to the extent that the
FCC extended the deadline in certain cases. Under current FCC guidelines,
stations must abandon the
14
present analog format by December 31, 2006, provided that 85% of households
within the relevant DMA have the capability to receive a digital signal.
WAND met the May 1, 2002 deadline. WFTE has until May 13, 2003 to construct
because of FCC delays in issuing the construction permit. KTRV is not required
to construct digital facilities until the FCC determines which digital channel
KTRV will ultimately utilize. Our remaining stations -- WDRB and
WLIO -- requested waivers of the May 1, 2002 deadline. On June 14, 2002, the FCC
denied those requests and ordered WDRB and WLIO to construct digital television
transmission systems no later than December 1, 2002. The FCC also directed the
stations to submit to the FCC, by July 15, 2002, reports setting forth
construction plans and a proposed timetable for construction that would meet the
December 1, 2002 deadline. Finally, the FCC directed the stations to file by
September 13, 2002 interim progress reports regarding their digital construction
efforts.
In compliance with the FCC's order, the two stations have submitted to the
FCC their construction plans and proposed timetable for construction of digital
transmission systems. Both stations' plans call for the construction of
lower-power digital transmission systems sufficient to provide digital
television coverage for the station's city of license -- Lima, Ohio for WLIO,
Louisville, Kentucky for WDRB. The timetables call for construction to be
completed, and the facilities fully operational, by December 1, 2002.
The lower-power construction plans comply with FCC rules and policies
regarding digital television transmission, which expressly permit lower-power
facilities. We anticipate that, at some point in the future, the FCC will
establish a deadline by which such lower-power systems must be upgraded to full
power systems that provide coverage to a broader geographic area. When such a
deadline is established, we will comply with it by upgrading our facilities. We
estimate that approximately $12 million of capital expenditures after March 31,
2002 will be necessary to meet the DTV requirements for all of our stations.
The implementation of these regulations will expose our business to the
following additional risks:
- The digital technology may allow us and our competitors to broadcast
multiple channels, compared to only one today. We do not know what impact
this will have on the competitive landscape or on our results of
operations. We cannot predict whether or at what cost we will be able to
obtain programming for the additional channels. Increased revenues from
the additional channels may not make up for the conversion cost and
additional programming expenses. Also, multiple channels programmed by
other stations could increase competition in our markets.
- The FCC sought to replicate the coverage area of existing stations'
analog signals when it assigned stations' digital channels. Because
existing stations operating on very high frequency, or VHF, channels
generally have larger geographic service areas than stations operating on
ultra high frequency, or UHF, channels, the FCC generally made available
to VHF stations digital channel allocations that allow higher power
operation in order to replicate those stations' current analog coverage
areas. In addition, to achieve a certain level of comparable geographic
signal coverage, a station operating on a UHF channel must operate with
considerably higher power than a station operating on a VHF channel. Four
of our stations presently operate on UHF channels. One of our stations
now operates on a VHF channel. One of our stations which currently
operates on UHF was allocated a VHF digital channel, and our station
which currently operates on VHF was allocated a UHF digital channel. The
geographic coverage and power disparities could put us at a disadvantage
to at least some of our competitors in certain markets. Furthermore, the
higher power required to operate our analog VHF channel that was assigned
a UHF digital channel with comparable geographic signal coverage may
translate into higher electricity costs for this station.
- In some cases, when we convert a station to digital television, the
signal may not be received in as large a coverage area, or it may suffer
from additional interference. Also, the digital signal may be subject to
reception problems to a greater degree than current analog transmissions.
As a result, viewers using antennas located inside their homes, as
opposed to outdoor, roof-top antennas, may not receive reliable signals.
If viewers do not receive high-quality, reliable signals from our
stations,
15
our audience viewership may suffer, and in turn, our ability to sell time
to advertisers could be impaired.
- While the FCC ruled that cable companies are required to carry the
signals of digital-only television stations, the agency has tentatively
concluded, subject to additional inquiry, that cable companies should not
be required to carry both the analog and digital signals of stations
during the transition period when stations will be broadcasting in both
modes. If the FCC does not require this, cable customers in our broadcast
markets may not receive our digital signal, which could negatively impact
our stations.
WE MAY BE ADVERSELY AFFECTED BY DISRUPTIONS IN OUR ABILITY TO RECEIVE OR
TRANSMIT PROGRAMMING.
Our stations receive network broadcast feeds by satellite. Satellites are
subject to significant risks that may prevent or impair proper commercial
operations, including satellite defects, launch failure, destruction and damage
and incorrect orbital placement. There can be no assurance that disruptions of
transmissions will not occur in the future or that other comparable satellites
will be available, or if available, whether a lease agreement with respect to
such other satellites could be obtained on favorable terms. The operation of the
satellite is outside our control and a disruption of the transmissions could
prevent us from receiving our programming content. The transmission of
programming is also subject to other risks of equipment failure, including
natural disasters, power losses, software errors or telecommunications errors.
We own or lease antenna and transmitter space for each of our owned and
operated stations. If we were to lose any of our antenna tower leases, we cannot
assure you that we would be able to secure replacement leases on commercially
reasonable terms, or at all, which could also prevent us from transmitting our
programs. Disruptions in our ability to receive or transmit our programming
broadcasts could have a material adverse effect on our audience levels,
advertising revenues and future results of operations.
PROGRAMMING COSTS MAY NEGATIVELY IMPACT OUR OPERATING RESULTS.
One of the most significant operating cost components of our television
broadcasting operations is programming. There can be no assurance that we will
not be exposed in the future to increased programming costs which may adversely
affect our operating results. Acquisitions of program rights are usually made
two or three years in advance and may require multi-year commitments, making it
difficult to accurately predict 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.
16
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OUTSTANDING EXCHANGE NOTES
On April 18, 2002, we sold the old notes to Banc of America Securities LLC,
Fleet Securities, Inc., Comerica Securities, NatCity Investments, Inc. and BMO
Nesbitt Burns. These initial purchasers subsequently resold the old notes to
qualified institutional buyers in accordance with Rule 144A under the Securities
Act and outside the United States in accordance with Regulation S under the
Securities Act. When we sold the old notes, we entered into a registration
rights agreement with the initial purchasers. The registration rights agreement
requires that we register the exchange notes with the Securities and Exchange
Commission and offer to exchange the registered exchange notes for the
outstanding old notes sold on April 18, 2002.
We will accept any old notes that you validly tender and do not withdraw
before 5:00 p.m., New York City time, on the expiration date. We will issue
$1,000 of principal amount of exchange notes in exchange for each $1,000
principal amount of your outstanding old notes. You may tender some or all of
your old notes in the exchange offer, but only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the outstanding old notes except that:
(1) the exchange notes being issued in the exchange offer will be
registered under the Securities Act and will not have legends restricting
their transfer,
(2) the exchange notes being issued in the exchange offer will not
have the registration rights and liquidated damages provisions applicable
to the old notes, and
(3) interest on the exchange notes will accrue from the last interest
date to which interest was paid on your old notes or, if none, from the
date of issuance of your old notes.
Outstanding old notes that we accept for exchange will not accrue interest
after we complete the exchange offer. The exchange offer will expire at 5:00
p.m., New York City time, on , 2002, unless we extend it. In the
case of any extension, we will notify the exchange agent orally (promptly
confirmed in writing) or in writing. We will also notify the registered holders
of old notes of the extension no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
If we extend the exchange offer, old notes that you have previously
tendered will still be subject to the exchange offer, and we may accept them.
To the extent we are legally permitted to do so, we reserve the right, in
our sole discretion:
(1) to delay accepting your old notes,
(2) to terminate the exchange offer and not accept any old notes for
exchange if any of the conditions have not been satisfied, or
(3) to amend the exchange offer in any manner.
Any such delay in acceptance, termination or amendment will be followed as
promptly as practicable by oral or written notice to the registered holders of
old notes.
Without limiting the manner by which we may choose to give notice of any
extension, delay in acceptance, amendment or termination of the exchange offer,
we will have no obligation to publish, advertise or otherwise communicate any
public announcement, other than by making a timely release to a financial news
service.
We will promptly return your old notes without expense to you after the
exchange offer expires or terminates if we do not accept them for exchange for
any reason.
PROCEDURES FOR TENDERING OLD NOTES
In general, old notes may be tendered in the exchange offer by you only if
you are a registered holder of the old notes, a beneficial owner which has a
properly completed bond power from the registered holder, or a Depository Trust
Company participant listed on the Depository Trust Company securities position
listing with respect to the old notes. If you are a beneficial owner of old
notes with respect to which a broker, dealer, commercial bank, trust company or
other nominee is listed on the securities position listing of the Depository
Trust Company and you wish to tender your old notes, you should contact such
Depository Trust Company participant promptly and instruct them to tender on
your behalf. Only you may tender your old notes in the exchange offer. To tender
your old notes in the exchange offer, you must:
(1) complete, sign and date the letter of transmittal which
accompanied this prospectus, or a copy of it;
(2) have the signature on the letter of transmittal guaranteed if
required by the letter of transmittal; and
17
(3) mail, fax or otherwise deliver the letter of transmittal or copy
to the exchange agent;
OR
if the tender of the old notes will be under The Depository Trust Company's
book-entry transfer procedures, arrange for DTC to transmit an agent's message
to the exchange agent on or before the expiration date.
In addition, either:
(1) the exchange agent must receive certificates for outstanding old
notes and the letter of transmittal; or
(2) the exchange agent must receive a timely confirmation of a
book-entry transfer of your old notes into the exchange agent's account at
The Depository Trust Company, along with the agent's message; or
(3) you must comply with the guaranteed delivery procedures described
below.
An agent's message is a computer-generated message transmitted to the
exchange agent by The Depository Trust Company through its Automated Tender
Offer Program. To tender old notes effectively, a tendering party must make sure
that the exchange agent receives a letter of transmittal and other required
documents or an agent's message before the expiration date. When you tender your
outstanding old notes and we accept them, the tender will be a binding agreement
between you and us in accordance with the terms and conditions in this
prospectus and in the letter of transmittal.
The method of delivery to the exchange agent of old notes, letters of
transmittal and all other required documents is at your election and risk. We
recommend that you use an overnight or hand delivery service instead of mail. If
you do deliver by mail, we recommend that you use registered mail, properly
insured, with return receipt requested. In all cases, you should allow enough
time to make sure your documents reach the exchange agent before the expiration
date. Do not send a letter of transmittal or notes directly to us. You may
request your brokers, dealers, commercial banks, trust companies, or nominees to
make the exchange on your behalf.
Unless you are a registered holder who requests that the exchange notes to
be mailed to you and issued in your name, or unless you are an eligible
institution, you must have your signature on a letter of transmittal or a notice
of withdrawal guaranteed by an eligible institution. An eligible institution is
a firm which is a financial institution that is a member of a registered
national securities exchange or a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchanges Medallion Program.
If the person who signs the letter of transmittal and tenders the old notes
is not the registered holder of the old notes, the registered holders must
endorse the old notes or sign a written instrument of transfer or exchange that
is included with the old notes, with the registered holder's signature
guaranteed by an eligible institution. We will decide whether the endorsement or
transfer instrument is satisfactory.
We will decide all questions about the validity, form, eligibility,
acceptance and withdrawal of tendered old notes, and our determination will be
final and binding on you. We reserve the absolute right to:
(1) reject any and all tenders of any particular note not properly
tendered;
(2) refuse to accept any old note if, in our judgment or the judgment
of our counsel, the acceptance would be unlawful; and
(3) waive any defects or irregularities or conditions of the exchange
offer as to any particular old note either before or after the expiration
date. This includes the right to waive the ineligibility of any holder who
seeks to tender old notes in the exchange offer.
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. You must cure any defects or irregularities in
18
connection with tenders of old notes as we will determine. Neither we, the
exchange agent nor any other person will incur any liability for failure to
notify you of any defect or irregularity with respect to your tender of old
notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any notes or power of attorney on
your behalf, those persons must indicate their capacity when signing, and submit
to us with the letter of transmittal satisfactory evidence demonstrating their
authority to act on your behalf.
To participate in the exchange offer, we require that you represent to us
that:
(1) you or any other person acquiring exchange notes for your old
notes in the exchange offer is acquiring them in the ordinary course of
business;
(2) neither you nor any other person acquiring exchange notes in
exchange for your old notes is engaging in or intends to engage in a
distribution of the exchange notes issued in the exchange offer;
(3) neither you nor any other person acquiring exchange notes in
exchange for your old notes has an arrangement or understanding with any
person to participate in the distribution of exchange notes issued in the
exchange offer;
(4) neither you nor any other person acquiring exchange notes in
exchange for your old notes is our "affiliate" as defined under Rule 405 of
the Securities Act; and
(5) if you or another person acquiring exchange notes for your old
notes is a broker-dealer, you will receive exchange notes for your own
account, you acquired exchange notes as a result of market-making
activities or other trading activities, and you acknowledge that you will
deliver a prospectus in connection with any resale of your exchange notes.
The delivery of an agent's message to the exchange agent on your behalf
will be deemed a representation by you to the effects stated above.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer agrees to notify us in writing
before using the prospectus in connection with the resale or transfer of
exchange notes. The broker-dealer further acknowledges and agrees that, upon
receipt of notice from us of the happening of any event which makes any
statement in the prospectus untrue in any material respect or which requires the
making of any changes in the prospectus to make the statements in the prospectus
not misleading or which may impose upon us disclosure obligations that may have
a material adverse effect on us, which notice we agree to deliver promptly to
the broker-dealer, the broker-dealer will suspend use of the prospectus until we
have notified the broker-dealer that delivery of the prospectus may resume and
have furnished to the broker-dealer copies of any amendment or supplement to the
prospectus. We have agreed in the registration rights agreement that for a
period of 180 days after the effective date of the registration statement of
which this prospectus is a part we will make this prospectus, as amended or
supplemented, available to any broker-dealer who requests it in writing for use
in connection with any such resale.
If you are our "affiliate," as defined under Rule 405 of the Securities
Act, you are a broker-dealer who acquired your old notes in the initial offering
and not as a result of market-making or trading activities, or if you are
engaged in or intend to engage in or have an arrangement or understanding with
any person to participate in a distribution of exchange notes acquired in the
exchange offer, you or that person:
(1) may not rely on the applicable interpretations of the staff of the
Commission; and
(2) must comply with the registration and prospectus delivery
requirements of the Securities Act when reselling the exchange notes.
Broker-dealers who cannot make the representations in item (5) of the
paragraph above cannot use this exchange offer prospectus in connection with
resales of exchange notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES ISSUED IN THE
EXCHANGE OFFER
We will accept validly tendered old notes when the conditions to the
exchange offer have been satisfied or we have waived them. We will have accepted
your validly tendered old notes when we have given oral or written notice to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purpose of receiving the exchange notes from us. If we do not accept any
tendered old notes for exchange because of an invalid tender or other valid
reason, the exchange agent will return the certificates, without expense, to the
tendering holder. If a holder has tendered old notes by book-entry transfer, we
will credit the notes to an account maintained with The Depository Trust
Company. We will return certificates or credit the account at The Depository
Trust Company as promptly as practicable after the exchange offer terminates or
expires.
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BOOK-ENTRY TRANSFERS
The exchange agent will make a request to establish an account at The
Depository Trust Company for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in The Depository Trust Company's systems must make book-entry
delivery of outstanding old notes by causing The Depository Trust Company to
transfer those outstanding old notes into the exchange agent's account at The
Depository Trust Company in accordance with The Depository Trust Company's
Automated Tender Offer Procedures. The participant should transmit its
acceptance to The Depository Trust Company on or before the expiration date or
comply with the guaranteed delivery procedures described below. The Depository
Trust Company will verify acceptance, execute a book-entry transfer of the
tendered outstanding old notes into the exchange agent's account at The
Depository Trust Company and then send to the exchange agent confirmation of the
book-entry transfer. The confirmation of the book-entry transfer will include an
agent's message confirming that The Depository Trust Company has received an
express acknowledgment from the participant that the participant has received
and agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against the participant. Delivery of exchange notes issued
in the exchange offer may be effected through book-entry transfer at The
Depository Trust Company. However, the letter of transmittal or facsimile of it
or an agent's message, with any required signature guarantees and any other
required documents, must:
(1) be transmitted to and received by the exchange agent at the
address listed below under "Exchange Agent" on or before the expiration
date; or
(2) the guaranteed delivery procedures described below must be
complied with.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of outstanding old notes who desires to
tender old notes but your old notes are not immediately available, or time will
not permit your old notes or other required documents to reach the exchange
agent before the expiration date, or the procedure for book-entry transfer
cannot be completed on a timely basis, you may effect a tender if:
(1) you tender the old notes through an eligible institution;
(2) before the expiration date, the exchange agent receives from the
eligible institution a notice of guaranteed delivery in the form we have
provided. The notice of guaranteed delivery will state the name and address
of the holder of the old notes being tendered and the amount of old notes
being tendered, that the tender is being made and guarantee that within
three New York Stock Exchange trading days after the expiration date, the
certificates for all physically tendered old notes, in proper form for
transfer, or a book-entry confirmation, together with a properly completed
and signed letter of transmittal with any required signature guarantees and
any other documents required by the letter of transmittal will be deposited
by the eligible institution with the exchange agent; and
(3) the certificates for all physically tendered outstanding old
notes, in proper form for transfer, or a book-entry confirmation, together
with a properly completed and signed letter of transmittal with any
required signature guarantees and all other documents required by the
letter of transmittal, are received by the exchange agent within three New
York Stock Exchange trading days after the expiration date.
WITHDRAWAL RIGHTS
You may withdraw your tender of old notes at any time before 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal to be effective, you must make sure that, before 5:00
p.m., New York City time, on the expiration date, the exchange agent receives a
written notice of withdrawal at one of the addresses below or, if you are a
participant of The Depository Trust Company, an electronic message using The
Depository Trust Company's Automated Tender Offer Program.
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A notice of withdrawal must:
(1) specify the name of the person that tendered the old notes to be
withdrawn;
(2) identify the old notes to be withdrawn, including the principal
amount of the old notes;
(3) be signed by the holder in the same manner as the original
signature on the letter of transmittal by which the old notes were tendered
or be accompanied by documents of transfer; and
(4) if you have transmitted certificates for outstanding old notes,
specify the name in which the old notes are registered, if different from
that of the withdrawing holder, and identify the serial numbers of the
certificates.
If you have tendered old notes under the book-entry transfer procedure,
your notice of withdrawal must also specify the name and number of an account at
The Depository Trust Company to which your withdrawn old notes can be credited.
We will decide all questions as to the validity, form and eligibility of
the notices and our determination will be final and binding on all parties. Any
tendered old notes that you withdraw will be not be considered to have been
validly tendered. We will return any outstanding old notes that have been
tendered but not exchanged, or credit them to The Depository Trust Company
account, as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. You may retender properly withdrawn old notes
before the expiration date by following one of the procedures described above.
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange, or to issue exchange notes in
exchange for, any outstanding old notes, and we may terminate the exchange
offer, if at any time before the acceptance of old notes:
(1) any law, statute, rule or regulation has been adopted or enacted,
or any order of any governmental agency or court of law has been issued,
which, in our judgment, would reasonably be expected to impair our ability
to proceed with the exchange offer;
(2) if any stop order is threatened or in effect with respect to the
registration statement of which this prospectus is a part or the
qualification of the indenture under the Trust Indenture Act of 1939; or
(3) there is a change in the current interpretation by the staff of
the Commission which permits holders who have made the required
representations to us to resell, offer for resale, or otherwise transfer
exchange notes issued in the exchange offer without registration of the
exchange notes and delivery of a prospectus, as discussed above.
These conditions are for our sole benefit and we may assert or waive them
at any time and for any reason. Our failure to exercise any of the foregoing
rights will not be a waiver of our rights.
21
EXCHANGE AGENT
You should direct all signed letters of transmittal to the exchange agent,
Wells Fargo Bank Minnesota, National Association. You should direct questions,
requests for assistance, and requests for additional copies of this prospectus,
the letter of transmittal and the notice of guaranteed delivery to the exchange
agent addressed as follows:
<Table>
<Caption>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY: BY OVERNIGHT COURIER:
Wells Fargo Bank Minnesota, N.A. Wells Fargo Bank Minnesota, N.A. Wells Fargo Bank Minnesota, N.A.
213 Court Street, Suite 703 213 Court Street, Suite 703 213 Court Street, Suite 703
Middletown, Connecticut 06457 Middletown, Connecticut 06457 Middletown, Connecticut 06457
Attention: Corporate Trust Attention: Corporate Trust Attention: Corporate Trust
Services Services Services
BY FACSIMILE:
(860) 704-6219
Attention: Corporate Trust
Services
Confirmed by Telephone:
(860) 704-6217
</Table>
Delivery or fax of the letter of transmittal to an address or number other
than those above is not a valid delivery of the letter of transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer except for reimbursement of mailing expenses.
We will pay the estimated cash expenses connected with the exchange offer.
We estimate that these expenses will be approximately $235,000.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
existing old notes, as reflected in our accounting records on the date of
exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer will be expensed over the term of
the exchange notes.
TRANSFER TAXES
If you tender outstanding old notes for exchange you will not be obligated
to pay any transfer taxes. However, if you instruct us to register exchange
notes in the name of, or request that your old notes not tendered or not
accepted in the exchange offer be returned to, a person other than you, you will
be responsible for paying any transfer tax owed.
YOU MAY SUFFER ADVERSE CONSEQUENCES IF YOU FAIL TO EXCHANGE OUTSTANDING EXCHANGE
NOTES
If you do not tender your outstanding old notes, you will not have any
further registration rights, except for the rights described in the registration
rights agreement and described below, and your old notes will continue to be
subject to restrictions on transfer when we complete the exchange offer.
Accordingly, if you do not tender your notes in the exchange offer, your ability
to sell your old notes could be adversely affected. Once we have completed the
exchange offer, holders who have not tendered notes will not continue to be
entitled to any increase in interest rate that the indenture provides for if we
do not complete the exchange offer.
Holders of the exchange notes issued in the exchange offer and old notes
that are not tendered in the exchange offer will vote together as a single class
under the indenture.
22
CONSEQUENCES OF EXCHANGING OUTSTANDING OLD NOTES
If you make the representations that we discuss above, we believe that you
may offer, sell or otherwise transfer the exchange notes to another party
without registration of your notes or delivery of a prospectus.
We base our belief on interpretations by the staff of the Commission in
no-action letters issued to third parties. If you cannot make these
representations, you cannot rely on this interpretation by the Commission's
staff and you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale of the old notes.
A broker-dealer that receives exchange notes for its own account in exchange for
its outstanding old notes must acknowledge that it acquired the old notes as a
result of market making activities or other trading activities and that it will
deliver a prospectus in connection with any resale of the exchange notes.
Broker-dealers who can make these representations may use this exchange offer
prospectus, as supplemented or amended, in connection with resales of exchange
notes issued in the exchange offer. We have agreed in the registration rights
agreement that for a period of 180 days after the effective date of the
registration statement of which this prospectus is a part we will make this
prospectus, as amended or supplemented, available to any broker-dealer who
requests it in the letter of transmittal for use in connection with any such
resale.
However, because the Commission has not issued a no-action letter in
connection with this exchange offer, we cannot be sure that the staff of the
Commission would make a similar determination regarding the exchange offer as it
has made in similar circumstances.
SHELF REGISTRATION
The registration rights agreement also requires that we file a shelf
registration statement if:
(1) we cannot file a registration statement for the exchange offer
because the exchange offer is not permitted by law; or
(2) a holder notifies us prior to the 20th day following consummation
of the exchange offer that:
- law or Commission policy prohibits the holder from participating
in the exchange offer;
- the holder cannot resell the exchange notes it acquires in the
exchange offer without delivering a prospectus and this prospectus is
not appropriate or available for resales by the holder; or
- the holder is a broker-dealer and holds notes acquired directly
from us or one of our affiliates.
Old notes will be subject to restrictions on transfer until:
(1) a person other than a broker-dealer has exchanged the old notes in
the exchange offer;
(2) a broker-dealer has exchanged the old notes in the exchange offer
and sells them to a purchaser that receives a prospectus from the broker,
dealer on or before the sale;
(3) the old notes are sold under an effective shelf registration
statement that we have filed; or
(4) the old notes are sold to the public under Rule 144 of the
Securities Act.
23
USE OF PROCEEDS
We are making the exchange offer to satisfy our obligation under the
registration rights agreement we entered into with the initial purchasers when
we issued the old notes. We will not receive any cash proceeds from the issuance
of the exchange notes. In consideration for issuing the exchange notes, we will
receive an equal principal amount of old notes. The old notes surrendered in
exchange for the exchange notes will be retired and cancelled.
The proceeds from the issuance and sale of the old notes were $169 million
after deducting fees and expenses. The proceeds of offering of the old notes,
together with borrowings under our new senior credit facilities, were used to
repay in full our former senior credit facilities. See "Capitalization."
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002 on
an actual basis and on a pro forma basis after giving effect to the issuance of
the old notes, the closing of our new senior credit facilities and the
application of the proceeds therefrom. You should read this table in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus.
<Table>
<Caption>
AS OF MARCH 31, 2002
(UNAUDITED)
----------------------
ACTUAL PRO FORMA
--------- ----------
(DOLLARS IN THOUSANDS)
Debt (includes current maturities):
Old revolving credit facility............................. $ 74,139 $ --
Old term loan facility.................................... 75,000 --
Old senior notes.......................................... 67,499 --
New revolving credit facility............................. -- --(1)
New delayed-draw term loan A.............................. -- --(1)
New term loan B........................................... -- 75,000
Capital leases............................................ 3,031 3,031
-------- --------
Total senior debt....................................... 219,669 78,031
-------- --------
9 1/4% Senior Subordinated Notes due 2009................. -- 175,000
-------- --------
Total debt.............................................. 219,669 253,031
Total shareholders' equity(2)........................... 50,649 44,718
-------- --------
Total capitalization.................................... $270,318 $297,749
======== ========
</Table>
- ---------------
(1) As of March 31, 2002, after giving effect to the issuance and sale of the
old notes and the closing of the new senior credit facilities, the unused
commitments under our senior credit facilities would have been $113.1
million.
(2) Reflects the write-off of debt prepayment penalties of $6.3 million and
unamortized finance fees of $2.7 million, less tax benefits of $3.1 million.
24
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our financial data and other operating data.
The financial data was derived from our consolidated financial statements. The
financial data and other operating information is qualified in its entirety by
reference to, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operation" which follows and
the financial statements and related notes included elsewhere in this
prospectus.
<Table>
<Caption>
(UNAUDITED)
-------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
INCOME STATEMENT DATA:
Revenues
Cable(1)................................... $ 67,277 $ 71,846 $ 75,414 $ 82,110 $ 89,420 $ 21,148 $ 25,097
Publishing(2).............................. 260,878 272,107 275,827 286,717 264,679 61,854 61,563
Broadcasting(3)............................ 33,422 36,686 36,293 42,531 35,184 8,727 9,000
Other communications(4).................... 2,771 3,023 8,682 14,299 25,282 5,149 6,353
-------- -------- -------- -------- -------- -------- --------
Total revenues............................... $364,348 $383,662 $396,216 $425,657 $414,565 96,878 102,013
Expenses
Cable...................................... 47,795 52,765 62,846 74,535 84,578 18,444 22,814
Publishing................................. 254,396 267,489 263,951 277,312 262,799 65,487 61,519
Broadcasting(2)............................ 28,416 30,502 34,221 37,099 36,973 9,179 9,055
Other communications(3).................... 4,867 6,602 12,734 18,445 27,955 6,356 6,244
Corporate general and administrative....... 2,319 1,928 1,524 4,152 2,705 350 951
-------- -------- -------- -------- -------- -------- --------
Total expenses............................... 337,793 359,286 375,276 411,543 415,010 99,816 100,583
Operating income (loss)........................ 26,555 24,376 20,940 14,114 (445) (2,938) 1,430
Interest expense, net.......................... 9,953 10,316 11,043 14,069 19,439 4,670 4,739
(Gain) on disposition of WLFI-TV, Inc.......... -- -- -- (22,339) -- -- --
(Gain) on disposition of Monroe Cablevision.... -- -- -- -- -- -- (21,600)
Change in fair value of interest rate swaps.... -- -- -- -- 5,340 1,580 (1,462)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest..................................... 16,602 14,060 9,897 22,384 (25,224) (9,188) 19,753
Provision (credit) for income taxes............ 7,495 6,240 4,556 9,176 (7,132) (2,602) 6,793
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority interest......... 9,107 7,820 5,341 13,208 (18,092) (6,586) 12,960
Minority interest.............................. -- -- -- (427) 235 54 (7)
-------- -------- -------- -------- -------- -------- --------
Net income (loss).............................. $ 9,107 $ 7,820 $ 5,341 $ 12,781 $(17,857) $ (6,532) $ 12,953
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Cable cash flow (unaudited)(4)............... $ 26,179 $ 27,833 $ 28,200 $ 30,063 $ 32,130 $ 7,709 $ 9,375
Publishing cash flow (unaudited)(4).......... 19,290 18,016 25,787 23,851 15,785 84 3,115
Broadcasting cash flow (unaudited)(4)........ 6,576 7,839 5,578 8,009 3,092 462 986
EBITDA (unaudited)(5)........................ 48,575 49,251 56,369 56,873 50,276 7,825 13,918
Depreciation and amortization................ 24,865 28,164 40,551 48,662 55,533 12,089 13,270
Capital expenditures......................... 30,932 47,234 66,702 80,340 62,154 17,108 5,862
Ratio of earnings to fixed charges(6)........ 2.4x 2.1x 1.7x 2.2x -- -- 4.8x
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 5,031 $ 2,053 $ 5,715 $ 4,213 $ 5,883 $ 3,638 $ 3,569
Total assets................................. 313,030 346,848 388,302 464,190 483,887 464,506 472,887
Total funded debt............................ 110,185 127,706 166,109 213,356 237,264 228,991 219,669
Stockholders' equity......................... 43,892 48,993 51,198 61,390 37,583 53,622 50,649
</Table>
25
<Table>
<Caption>
(UNAUDITED)
-------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT OPERATING DATA)
CABLE OPERATING DATA (UNAUDITED):
Homes passed................................. 249,394 249,668 250,893 253,903 255,852 254,412 245,395
Basic subscribers............................ 157,356 157,467 159,294 158,537 157,341 158,251 153,034
Basic penetration............................ 63.1% 63.1% 63.5% 62.4% 61.5% 62.2% 62.4%
Premium units................................ 62,270 60,827 62,362 69,649 70,909 69,986 69,645
Premium penetration.......................... 39.6% 38.6% 39.1% 43.9% 45.1% 44.3% 45.5%
Cable modem subscribers...................... -- -- 1,484 7,022 15,221 9,130 17,428
Digital subscribers.......................... -- -- -- -- 7,846 -- 9,841
Average monthly revenue per basic
subscriber(7).............................. $ 35.63 $ 38.02 $ 39.45 $ 43.16 $ 47.36 $ 44.55 $ 52.89
PUBLISHING OPERATING DATA (UNAUDITED)(8):
Daily circulation............................ 387,315 390,171 389,737 381,643 380,646
Sunday circulation........................... 629,814 631,740 631,711 611,005 603,485
</Table>
- ---------------
(1) Includes the results of Monroe CableSystem, the assets of which were
disposed of on March 29, 2002 in a like-kind exchange for cable assets in
Bedford, Michigan plus a cash payment to us of $12.1 million. See
"Summary --Recent Developments." The revenues of Monroe Cablevision for
1997, 1998, 1999, 2000 and 2001 were $4.5 million, $4.6 million, $5.0
million, $5.6 million and $5.4 million, respectively, and for the three
months ended March 31, 2001 and March 29, 2002 were $1.3 million and $1.3
million, respectively.
(2) Effective April 1, 2000, we acquired a two-thirds interest in WAND
Television, Inc. in exchange for the assets of WLFI-TV, Inc. On March 30,
2001, we purchased WFTE TV. Results of the acquired stations are included
from the date of acquisition.
(3) Includes the results of Corporate Protection Services, Inc. from its date of
acquisition in December 1998 and the results of Access Toledo Ltd. from its
date of acquisition in January 2001. Revenues of CPS for 1999, 2000 and 2001
were $4.1 million, $5.7 million and $8.6 million, respectively. Revenues of
Access Toledo for 2001 were $2.0 million.
(4) Cable, publishing and broadcasting cash flow represents each segment's
EBITDA before the effect of corporate general and administrative expenses.
(5) EBITDA is defined as net income before provision for income taxes, interest
expense, depreciation and amortization (including amortization of broadcast
rights), other noncash charges, gains or losses on disposition of assets,
and extraordinary items and after payments for broadcast rights. EBITDA is
not, and should not be used as, an indicator or alternative to operating
income, net income or cash flow as reflected in our financial statements, is
not intended to represent funds available for debt service, dividends or
other discretionary uses, is not a measure of financial performance under
accounting principles generally accepted in the United States and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with accounting principles generally accepted in the
United States. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- EBITDA."
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income (loss) before taxes and minority interest, plus fixed
charges, less interest capitalized during the year, plus current year
amortization of capitalized interest. Fixed charges consist of interest
expense, capitalized interest, the interest portion of rent expense and
amortization of debt issuance costs. In 2001 and for the three months ended
March 31, 2001, our earnings were insufficient to cover fixed charges by
$25.8 million and $9.1 million, respectively.
(7) Average monthly revenue per basic subscriber for the three months ended
March 31, 2002 excludes the 5,004 Bedford, Michigan subscribers acquired
from Comcast in the March 29, 2002 exchange and includes the 10,129
subscribers of Monroe CableSystem disposed of in the exchange.
(8) Circulation numbers are based on the average paid circulation for the 12
months ended March 31 of each year for the Post-Gazette and for the 12
months ended September 30 of each year for The Blade, in each case as set
forth in the ABC Audit Report for such period. The ABC Audit Report for the
12 months ended March 31, 2002 is not yet available.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and the notes thereto
included elsewhere herein.
Significant accounting policies are stated in the applicable footnotes to
the audited annual consolidated financial statements.
OVERVIEW
We are a privately held diversified media company with our primary
operations in cable television, newspaper publishing and television
broadcasting. We are the 23rd largest cable system operator in the United
States, with systems in Toledo, Ohio and nearby areas that had approximately
153,000 subscribers at March 31, 2002. We publish two daily metropolitan
newspapers, the Pittsburgh Post-Gazette in Pittsburgh, Pennsylvania, and The
Blade in Toledo, Ohio, each of which is the leading publication in its market.
The aggregate average daily and Sunday paid circulation of our two newspapers is
approximately 381,000 and 603,000, respectively. We own and operate four
television stations: two in Louisville, Kentucky, and one each in Boise, Idaho
and Lima, Ohio, and we are a two-thirds owner of a television station in
Decatur, Illinois. We also have other communication operations including a small
telephony business, a home security business and an alternative distribution
advertising business.
For the year ended December 31, 2001, we had revenues and EBITDA of $414.6
million and $50.3 million, respectively, and experienced an operating loss of
$445,000 and a net loss of $17.9 million. Approximately 61% of our EBITDA was
generated by our cable television operations, 30% by our newspaper publishing
operations, 6% by our television broadcasting business and 3% by our other
communications operations, excluding in each case the effect of $2.7 million in
corporate general and administrative expenses.
Revenues
Most cable revenue is derived from monthly subscription fees for our cable
services, including basic and digital cable and high-speed data services,
installation and equipment rental charges, pay-per-view programming charges, and
the sale of available advertising spots on advertiser-supported programming.
Cable revenue is affected by the timing of subscriber rate increases, the amount
of pay-per-view programming available to us and the demand for that programming,
and the demand for advertising spots.
The majority of publishing revenue is derived from the sale of advertising
space and from subscription and single copy sales of our newspapers. Advertising
revenue was 80.7%, 81.6% and 80.1% of newspaper revenue for 1999, 2000 and 2001,
respectively, and 79.6% and 79.0% of newspaper revenue for the three months
ended March 31, 2001 and 2002, respectively. Publishing revenue fluctuates with
the general condition of the local and national economy. Seasonal revenue
fluctuations are also common in the newspaper industry, due primarily to
fluctuations in expenditure levels by local and national advertisers.
The principal source of television broadcasting revenue is the sale of
broadcasting time on our stations for advertising. Broadcasting revenue
fluctuates with the general condition of the local and national economy.
Broadcasting revenue also fluctuates from year to year due to political
advertising. Seasonal revenue fluctuations are common in the broadcasting
industry, due primarily to fluctuations in expenditure levels by local and
national advertisers.
Other communication revenue consists of sales in our non-reportable
segments, including our telephony, home security and alarm monitoring,
conventional dial-up Internet service provider, cable plant construction and
alternative distribution advertising businesses.
27
Operating Expenses
Cable expenses include programming expenses, salaries and benefits of
technical personnel, depreciation and amortization, and selling, general and
administrative expenses for customer service functions, accounting and billing
services, office administration expenses, property taxes and corporate charges.
Programming expenses were 25.1%, 26.9% and 28.0% of cable revenue for 1999, 2000
and 2001, respectively, and 27.5% and 29.0% of cable revenue for the three
months ended March 31, 2002 and 2001, respectively. Depreciation and
amortization expense relates primarily to the capital expenditures associated
with the rebuild and expansion of our cable systems.
Publishing expenses include employee salaries and benefits, newsprint and
ink expense, depreciation and amortization, and selling, general and
administrative expenses. Selling, general and administrative expenses include
corporate charges for support functions. Salaries and benefits are the largest
operating expense of our newspaper publishing segment. Newsprint, ink and
related costs are our second largest operating expense for this segment and
accounted for 15.2%, 15.6% and 16.2% of newspaper operating expenses for 1999,
2000 and 2001, respectively, and 12.4% and 14.3% of newspaper operating expenses
for the three months ended March 31, 2002 and 2001, respectively. Newsprint
prices fluctuate with the market based on the supply and demand for newsprint.
Television operating expenses are comprised of employee salaries and
commissions, depreciation and amortization, programming expenses, advertising
and promotion expenses, and selling, general and administrative expenses.
Depreciation and amortization primarily relates to the amortization of broadcast
rights. Selling, general and administrative expenses include office
administration and charges for corporate support functions.
Depreciation and Amortization
Depreciation and amortization relates primarily to the capital expenditures
associated with the rebuild and expansion of our cable systems, publishing
facilities and telephony facilities. As a result of our plan to continue to
invest in our cable systems, publishing properties and telephony facilities and
to convert our television stations to digital-capable broadcasting, we expect to
report higher levels of depreciation and amortization than are reflected in our
historical consolidated financial statements.
EBITDA
We define EBITDA as net income before provision for income taxes, interest
expense, depreciation and amortization (including amortization of broadcast
rights), other noncash charges, gains or losses on disposition of assets, and
extraordinary items and after payments for broadcast rights. When we present
EBITDA for our business segments, we exclude certain expenses consisting
primarily of corporate general and administrative expenses that have not been
allocated to individual segments. Corporate general and administrative expenses
were $1.5 million, $4.2 million and $2.7 million for 1999, 2000 and 2001,
respectively, and $350,000 and $951,000 for the three months ended March 31,
2001 and 2002, respectively.
Other media companies may measure EBITDA in a different manner. We have
included EBITDA data because such data is commonly used as a measure of
performance for media companies and is also used by investors to measure a
company's ability to service debt. EBITDA is not, and should not be used as, an
indicator or alternative to operating income, net income or cash flow as
reflected in our consolidated financial statements, is not intended to represent
funds available for debt service, dividends or other discretionary uses, is not
a measure of financial performance under accounting principles generally
accepted in the United States and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with accounting
principles generally accepted in the United States. For a reconciliation of
EBITDA to net income, see "-- Results of Operations" below.
28
RESULTS OF OPERATIONS
The following table summarizes our consolidated historical results of
operations and consolidated historical results of operations as a percentage of
revenues for the years ended December 31, 1999, 2000 and 2001 and the three
months ended March 31, 2001 and 2002. It also provides a reconciliation of net
income to EBITDA.
<Table>
<Caption>
(UNAUDITED)
-----------------------------------
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------ -----------------------------------
1999 2000 2001 2001 2002
---------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Revenues:
Cable....................... $ 75,414 19.0% $ 82,110 19.3% $ 89,420 21.6% $ 21,148 21.8% $ 25,097 24.6%
Publishing.................. 275,827 69.6 286,717 67.4 264,679 63.4 61,854 63.8 61,563 60.3
Broadcasting................ 36,293 9.2 42,531 10.0 35,184 8.5 8,727 9.0 9,000 8.8
Other communications........ 8,682 2.2 14,299 3.4 25,282 6.1 5,149 5.3 6,353 6.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
$396,216 100.0 $425,657 100.0 $414,565 100.0 96,878 100.0 102,013 100.0
Expenses:
Cable....................... 62,846 15.9 74,535 17.5 84,578 20.4 18,444 19.0 22,814 22.4
Publishing.................. 263,951 66.6 277,312 65.2 262,799 63.4 65,487 67.6 61,519 60.3
Broadcasting................ 34,221 8.6 37,099 8.7 36,973 8.9 9,179 9.5 9,055 8.9
Other communications........ 12,734 3.2 18,445 4.3 27,955 6.7 6,356 6.6 6,244 6.1
Corporate general and
administrative............ 1,524 0.4 4,152 1.0 2,705 0.7 350 0.4 951 0.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
375,276 94.7 411,543 96.7 415,010 100.1 99,816 103.0 100,583 98.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Operating income (loss)....... 20,940 5.3% 14,114 3.3% (445) (0.1%) (2,938) -3.0% 1,430 1.4%
Nonoperating income
(expense):
Interest expense............ (11,243) (14,175) (19,486) (4,676) (4,748)
Gain on disposition of WLFI-
TV........................ -- 22,339 -- -- --
Gain on disposition of
Monroe Cablevision........ -- -- -- -- 21,600
Change in fair value of
interest rate swaps....... -- -- (5,340) (1,580) 1,462
Interest income............. 200 106 47 6 9
-------- -------- -------- -------- --------
(11,043) 8,270 (24,779) (6,250) 18,323
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... 9,897 22,384 (25,224) (9,188) 19,753
Provision (credit) for income
taxes....................... 4,556 9,176 (7,132) (2,602) 6,793
Minority interest............. -- (427) 235 54 (7)
-------- -------- -------- -------- --------
Net income (loss)............. $ 5,341 $ 12,781 $(17,857) $ (6,532) $ 12,953
======== ======== ======== ======== ========
</Table>
29
<Table>
<Caption>
(UNAUDITED)
-----------------------------------
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------ -----------------------------------
1999 2000 2001 2001 2002
---------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Add:
Provision for income taxes.... 4,556 9,176 (7,132) (2,602) 6,793
Change in fair value of
interest rate swaps......... -- -- 5,340 1,580 (1,462)
(Gain) on disposition of WLFI-
TV.......................... -- (22,339) -- -- --
(Gain) on disposition of
Monroe Cablevision.......... -- -- -- -- (21,600)
(Gain) loss on disposal of
assets...................... 230 303 23 -- 397
Interest expense.............. 11,243 14,175 19,486 4,676 4,748
Depreciation.................. 30,352 38,865 44,601 9,765 11,323
Amortization of intangibles
and deferred charges........ 2,897 3,478 4,422 884 372
Amortization of broadcast
rights...................... 7,302 6,319 6,510 1,440 1,574
Less:
Payments for broadcast
rights...................... (5,552) (5,885) (5,117) (1,386) (1,180)
-------- -------- -------- -------- --------
EBITDA (unaudited)............ $ 56,369 $ 56,873 $ 50,276 $ 7,825 $ 13,918
======== ======== ======== ======== ========
</Table>
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues
Revenues decreased $11.1 million, or 2.6%, from 2000 to 2001. The decrease
in revenues was largely due to decreased advertising revenues in both our
publishing and broadcasting operations attributable to a soft advertising
market, which was primarily the result of a weak overall economic environment.
The decrease was partially offset by increased revenues in our cable and other
communications operations.
Cable Television. Cable revenue increased $7.3 million, or 8.9%, from 2000
to 2001. The increase in cable revenue was principally a result of an increase
of $4.29, or 9.8%, in the average monthly revenue per basic subscriber,
partially offset by a slight decrease in basic subscribers. The increase in the
average monthly revenue per basic subscriber was primarily a result of an
increase in the basic cable service rate charged to subscribers and growth in
high-speed cable modem subscribers, as well as an increase in digital cable and
pay-per-view services.
Newspaper Publishing. Publishing revenue decreased $22.0 million, or 7.7%,
from 2000 to 2001. The decrease in publishing revenue was comprised of a $22.2
million, or 9.5%, decrease in advertising revenue to $211.9 million in 2001.
This was due to reduced advertising sales, primarily in classified advertising
as a result of a decrease in placement of help wanted advertising due to the
general economic slowdown, partially offset by advertising rate increases for
all categories of advertising. Circulation revenue decreased $693,000, or 1.4%,
to $50.0 million in 2001 due to decreased circulation sales. Other revenue,
which is comprised of third-party and total market delivery and niche
publications, increased $1.4 million, or 101.9%, to $2.8 million.
Television Broadcasting. Broadcasting revenue decreased $7.3 million, or
17.3%, from 2000 to 2001. The decrease in broadcasting revenue was primarily a
result of lower local and national advertising as a result of the general
economic slowdown and greatly reduced political advertising demand due to the
lack of political races during 2001.
Other Communications. Other communications revenue increased $11.0
million, or 76.8%, from 2000 to 2001. The increase in other communications
revenue was primarily a result of a $6.3 million, or 85.2%, increase in
telephony services to $13.6 million in 2001, primarily due to increased
telephony subscribers and sales of additional services to existing customers.
30
Operating Expenses
Operating expenses increased $3.5 million, or 0.8%, from 2000 to 2001. The
increase in operating expenses was largely attributable to increased cable and
telephony expenses and partially offset by decreased publishing expenses.
Cable Television. Cable operating expenses increased $10.0 million, or
13.5%, from 2000 to 2001. The increase was primarily due to a $5.0 million, or
22.7%, increase in depreciation and amortization to $27.2 million in 2001
attributable to capital expenditures associated with the rebuild and expansion
of our cable systems. We also recognized an increase of $3.0 million, or 13.7%,
in programming costs to $25.1 million, resulting from price increases from
programming suppliers and the purchase of additional programming for new cable
channels offered on our cable systems.
Newspaper Publishing. Publishing operating expenses decreased $14.5
million, or 5.2%, from 2000 to 2001. The decrease in publishing operating
expenses was comprised of a $7.3 million decrease in general and administrative
expense to $19.8 million in 2001 primarily due to decreases in workers'
compensation expense, LIFO inventory reserve, and legal and professional fees.
Sales and marketing expenses decreased by $6.9 million to $18.3 million due to
overall reduction of promotion and advertising campaigns.
Television Broadcasting. Broadcasting operating expenses were
substantially the same in 2000 and 2001.
Other Communications. Other communications operating expenses increased
$9.5 million, or 51.6%, from 2000 to 2001. The largest increase in other
communications operating expenses was an increase of $5.2 million, or 53.0%, in
telephony expenses resulting from providing telephony services to an expanded
customer base.
Operating Income
Operating income decreased $14.6 million, or 103.2%, from 2000 to 2001.
Cable operating income decreased $2.7 million, or 36.1%, from 2000 to 2001. The
decrease in cable operating income was primarily due to increased depreciation
expense as a result of our rebuilt cable system in Toledo, offset by revenue
growth generated by rate increases and the addition of new services. Publishing
operating income decreased $7.5 million, or 80.0%, from 2000 to 2001. The
decrease in publishing operating income was primarily due to reduced advertising
sales, primarily in classified advertising, and partially offset by advertising
rate increases. Broadcasting operating income decreased $7.2 million, or 133.0%,
from 2000 to 2001. The decrease in broadcasting operating income was primarily
due to lower local, national and political advertising demand in our markets.
Depreciation and Amortization
Depreciation and amortization increased $6.9 million, or 14.1%, from 2000
to 2001. The increase in depreciation and amortization was primarily due to our
rebuilt cable system in Toledo and other capital expenditures to maintain our
operating assets.
EBITDA
EBITDA decreased $6.6 million, or 11.6%, from 2000 to 2001. EBITDA as a
percent of revenues decreased from 13.3% in 2000 to 12.1% in 2001. The decrease
in EBITDA and EBITDA margin from 2000 to 2001 was primarily due to lower total
revenues and higher operating costs as described above.
Net Interest Expense
Net interest expense increased $5.4 million, or 38.2%, from 2000 to 2001.
The increase in net interest expense was due to the incurrence of additional
debt, primarily to fund cable system capital expenditures.
31
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
Revenues increased $29.4 million, or 7.4%, from 1999 to 2001. The increase
in revenues was largely attributable to increased advertising revenues in both
our publishing and broadcasting operations and increased cable revenues.
Revenues were also increased by the like-kind exchange of WLFI-TV, Inc. for a
two-thirds interest in WAND (TV) Partnership effective April 1, 2000, because of
the higher revenues of the acquired station.
Cable Television. Cable revenue increased $6.7 million, or 8.9%, from 1999
to 2000. The increase in cable revenue was principally a result of an increase
of $3.80, or 9.5%, in the average monthly revenue per basic subscriber primarily
due to an increase in the basic cable service rate charged to subscribers and in
advertising sales revenue, as well as an increase in high-speed cable modem
subscribers and pay-per-view services.
Newspaper Publishing. Publishing revenue increased $10.9 million, or 3.9%,
from 1999 to 2000. The increase in publishing revenue was comprised of a $11.4
million, or 5.1%, increase in advertising revenue to $234.1 million in 2000 due
to increased advertising sales and advertising rate increases. Circulation
revenue decreased $779,000, or 1.5%, to $50.7 million in 2000 due to decreased
circulation sales.
Television Broadcasting. Broadcasting revenue increased $6.2 million, or
17.2%, from 1999 to 2000. The increase in broadcasting revenue was primarily as
a result of increased advertising demand, including political advertising, at
our television stations.
Other Communications. Other communications revenue increased $5.6 million,
or 64.7%, from 1999 to 2000. The increase in other communications revenue was
primarily a result of a $4.3 million, or 140.3%, increase in telephony services
to $7.4 million in 2000 primarily due to increased telephony customers and sale
of additional services to existing customers.
Operating Expenses
Operating expenses increased $36.3 million, or 9.7%, from 1999 to 2000. The
increase in operating expense was largely attributable to increased cable and
publishing expenses.
Cable Television. Cable operating expenses increased $11.7 million, or
18.6%, from 1999 to 2000. The increase was primarily due to a $6.8 million, or
44.6%, increase in depreciation and amortization to $22.2 million in 2000
attributable to capital expenditures associated with the rebuild and expansion
of our cable systems and to a $3.1 million, or 16.5%, increase in programming
costs to $22.0 million because of increased carriage fees.
Newspaper Publishing. Publishing operating expenses increased $13.4
million, or 5.1%, from 1999 to 2000. The increase in publishing operating
expenses was due primarily to a $3.1 million, or 7.8%, increase in newsprint
cost, ink and storage expenses, a $2.4 million, or 5.9%, increase in editorial
expenses due to political coverage during the year, and a $3.2 million, or
14.5%, increase in sales and marketing expenses.
Television Broadcasting. Broadcasting operating expenses increased $2.9
million, or 8.4%, from 1999 to 2000. The increase in broadcasting operating
expenses was due primarily to approximately $2.0 million of incremental expense
resulting from the higher operating expenses of WAND, the station acquired in
exchange for WLFI.
Other Communications. Other communications operating expenses increased
$5.7 million, or 44.8%, from 1999 to 2000. The increase in other communications
operating expenses was primarily due to an increase of $3.7 million, or 60.2%,
in telephony expenses resulting from the costs of providing telephony service to
an expanded customer base.
32
Operating Income
Operating income decreased $6.8 million, or 32.6%, from 1999 to 2000. Cable
operating income decreased $5.0 million, or 39.7%, from 1999 to 2000. The
decrease in cable operating income was primarily due to increased depreciation
expense as a result of rebuilding of our cable system in Toledo, offset by
revenue growth generated by rate increases and the addition of new services.
Publishing operating income decreased $2.5 million, or 20.8%, from 1999 to 2000.
The decrease in publishing income was primarily due to increased newsprint and
other costs. Broadcasting operating income increased $3.4 million, or 162.2%,
from 1999 to 2000 primarily due to $2.2 million of election-year political
advertising revenues.
Depreciation and Amortization
Depreciation and amortization increased $8.1 million, or 20.0%, from 1999
to 2000. The increase in depreciation and amortization was primarily due to the
rebuilding of our cable system in Toledo and other capital expenditures to
maintain our operating assets.
EBITDA
As a result of the foregoing, EBITDA increased $508,000, or 0.9%, from 1999
to 2000. EBITDA as a percent of revenues decreased from 14.2% in 1999 to 13.3%
in 2000. The decrease in EBITDA margin from 1999 to 2000 was primarily due to
the higher increase in operating costs than in revenues as described above.
Net Interest Expense
Net interest expense increased $3.0 million, or 27.4%, from 1999 to 2000.
The increase in net interest expense was due to the incurrence of additional
debt, primarily to fund cable system capital expenditures.
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
Revenues
Total revenues for the quarter ended March 31, 2002 increased $5.1 million,
or 5.3%, over the same period of the prior year, to $102.0 million from $96.9
million. This increase was primarily attributable to cable and telephony
operations discussed below.
Cable Television. Cable revenue increased $3.9 million, or 18.7%, over the
same period of the prior year, to $25.1 million. The increase in cable revenue
was principally a result of an increase of $7.86, or 17.4%, in the average
monthly revenue per basic subscriber. The increase in the average monthly
revenue per basic subscriber was primarily the result of an increase in the
monthly basic cable service rate charged to subscribers and growth in high-speed
cable modem and digital cable subscribers.
Newspaper Publishing. Publishing revenue decreased $292,000, or 0.5%, over
the same period of the prior year, to $61.6 million from $61.9 million. The
decrease was comprised of a $633,000, or 1.3%, decrease in advertising revenue
due primarily to a decrease in classified advertising of $1.3 million, or 6.5%,
resulting from continued softness in help-wanted advertising. Circulation
revenue increased $407,000, or 3.4%, to $12.5 million due to a slight increase
in Daily circulation. Other revenue, which is comprised of third party and total
market delivery and Internet revenues, was consistent with same period of the
prior year.
Television Broadcasting. Broadcasting revenue increased $273,000, or 3.1%,
over the same period of the prior year to $9.0 million. The increase in
broadcasting revenue was due primarily to an increase in national and regional
advertising revenue of $51,000, or 2.0%, and $56,000, or 4.0%, respectively.
Political advertising revenue increased $459,000 and local advertising revenue
decreased $267,000, or 4.5%, from the same period of the prior year.
33
Other Communications. Other communications revenue increased $1.2 million,
or 23.4%, over the same period of the prior year to $6.4 million. The increase
was primarily a result of a $1.5 million, or 59.1%, increase in telephony
services to $4.1 million, primarily due to increased telephony customers and
sales of additional services to the existing customer base.
Operating Expenses
Operating expenses increased $767,000, or 0.8%, over the same period of the
prior year to $100.6 million. The increase in operating expense was largely
attributable to increased cable expenses, which are partially offset by
decreased publishing expenses.
Cable Television. Cable operating expenses increased $4.4 million, or
23.7%, over the same period of the prior year, to $22.8 million. The increase
was primarily due to a $1.7 million, or 34.0%, increase in depreciation to $6.7
million attributable to the capital expenditures associated with the rebuild of
our Toledo cable system and continued roll-out of cable modems and digital cable
service. Basic cable programming expenses increased $774,000, or 15.9%, to $5.6
million, due to price increases from programming suppliers.
Newspaper Publishing. Publishing operating expenses decreased $4.0
million, or 6.1%, from the same period of the prior year, to $61.5 million. The
decrease was principally due to a $1.8 million, or 19.0%, decrease in newsprint
and ink, resulting from a weighted-average price per ton decrease of $107.03, or
18.5%, and a 2.2% decrease in consumption from the same period of the prior
year. Additional savings resulted from overall cost controls and headcount
reductions.
Television Broadcasting. Broadcasting operating expenses decreased
$124,000, or 1.4%, over the same period of the prior year, to $9.1 million.
Operating expenses were held essentially flat due to general cost controls
implemented to offset salary and inflationary costs.
Other Communications. Other communications operating expenses decreased
$112,000, or 1.8%, over the same period of the prior year, to $6.3 million.
Operating expenses were flat due to overall cost controls implemented to offset
salary and inflationary costs.
Operating Income
Operating income increased $4.4 million over the same period of the prior
year. Cable operating income decreased $421,000 primarily due to increases in
depreciation and basic cable programming expenses, partially offset by revenue
growth generated from rate increases and roll-out of new services. Publishing
operating income increased $3.7 million, primarily due to newsprint savings and
the implementation of an overall expense reduction program. Broadcasting
operating income increased $398,000 due to revenue growth primarily from
political advertising and an overall expense reduction program. Other
communications operating income increased $1.3 million due to revenue growth
from increased telephony sales. Corporate general and administrative expenses
increased $601,000 from prior year due primarily to increases in salary and
legal and professional fees.
Depreciation and Amortization
Depreciation and amortization increased $1.2 million, or 9.8%, over the
same period of the prior year. The increase was primarily due to asset additions
resulting from the rebuild of our cable system in Toledo and other capital
expenditures to maintain operating assets.
EBITDA
As a result of the foregoing, EBITDA increased $6.1 million, or 77.9%, over
the same period of the prior year. EBITDA as a percentage of revenue increased
to 13.6% in the first three months of 2002 from 8.1% in the same period of the
prior year. The increase in EBITDA margin was primarily due to the continued
roll-out of high margin advanced cable products, lower newsprint prices and the
implementation of overall expense reduction programs.
34
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity have been cash flow from
operations and borrowings under our senior credit facilities. The need for
liquidity arises primarily from capital expenditures and interest payable on the
notes and our senior credit facilities.
Net cash provided by operating activities was $40.0 million in 1999, $38.7
million in 2000 and $37.8 million in 2001. For the three months ended March 31,
2002 and March 31, 2001, net cash provided by operating activities was $10.4
million and $1.4 million, respectively. Our net cash provided by operating
activities is determined by adding back depreciation and amortization to net
income or loss and adjusting for other non cash items. These included a $5.3
million loss resulting from the change in fair value of interest rate swaps in
2001 and a $22.3 million gain attributable to our sale of WLFI-TV in 2000. For
the three months ended March 31, 2002, other noncash items included a $1.5
million gain resulting from the change in fair value of interest rate swaps and
a $21.6 million gain attributable to the exchange of Monroe Cablevision.
The cash provided by investing activities was $5.8 million for the three
months ended March 31, 2002, compared to cash used by investing activities of
$17.6 million from the same period of the prior year. Included in the net cash
provided from investing activities in the three months ended March 31, 2002 was
$12.1 million of proceeds received from Comcast in the Monroe Cablevision
exchange.
Our capital expenditures have historically been financed with cash flow
from operations and borrowings under our senior credit facilities. Capital
expenditures were $62.2 million, $80.3 million and $66.7 million in 1999, 2000
and 2001, respectively. We made capital expenditures of $17.1 million and $6.7
million, including capital leases, for the three months ended March 31, 2001 and
2002, respectively. Capital expenditures through 2001 were primarily used to
rebuild our cable system in Toledo and maintain our other operating assets. We
expect to make capital expenditures of approximately $31.2 million in the last
three quarters of 2002 and $80.1 million in 2003, primarily to complete the
upgrade of our cable systems in Erie County, Ohio and Bedford, Michigan,
continue the roll-out of new cable services, maintain and upgrade operating
assets at our newspapers and convert our television stations to FCC-required
digital format. We have historically paid dividends on our capital stock.
Dividends paid for 1999, 2000, and 2001 were $1.4 million, $1.4 million and
$583,000, respectively. The indenture contains covenants which restrict our
ability to pay dividends on our capital stock. See "Description of
Notes -- Certain Covenants -- Restricted Payments." Covenants restricting
dividends are also contained in the agreement for our new senior credit
facilities. If these restrictive covenants had been in effect during the three
years ended December 31, 2001, they would not have prevented the payment of
dividends in the amounts paid in those years.
Financing activities used $18.5 million of cash for the three months ended
March 31, 2002, compared to cash provided by financing activities of $15.6
million from the same period of the prior year. During the first three months of
2002, we made $19.0 million in optional pre-payments on our long-term revolving
credit agreements. At March 31, 2002, the balances outstanding and available
under our existing senior credit facility and senior notes were $216.6 million
and $57.0 million, respectively, and the interest rate on the balance
outstanding was 9.0%. At March 31, 2001, the balances outstanding and available
under our existing senior credit facility and senior notes were $226.5 million
and $42.2 million, respectively, and the interest rate on the balance
outstanding was 7.5%. The increase in the effective interest rate offset by the
decrease in the balance outstanding generated an increase in interest expense of
$73,000, or 1.6%. The change in availability reflects a $25 million increase to
the revolving credit agreement in December 2001.
Subsequent to March 31, 2002, we issued $175.0 million of 9 1/4% senior
subordinated notes. The proceeds were used to repay our existing senior term
loan and senior notes and prepay a portion of our old senior revolving credit
facility. In May 2002, we entered into new senior credit facilities totaling
$200.0 million. The new senior credit facilities are guaranteed by substantially
all of our present and future domestic subsidiaries and collateralized by a
pledge of substantially all of our and the guarantor subsidiaries' material
assets. The proceeds from the new senior credit facilities were used to repay
the outstanding balance of the old senior revolving credit facility and will be
used to fund future capital
35
expenditures. On completion of the refinancing of our senior credit facilities,
we had $75.0 million outstanding under the term loan B facility and $113.1
million of availability under a new delayed-draw term loan A and a new revolving
credit facility. As a result of the refinancing, we will realize prepayment
penalties of $6.3 million and a write-off of unamortized finance fees of $2.7
million, less tax benefits of $3.1 million during the second quarter of 2002.
We believe that funds generated from operations and the borrowing
availability under our senior credit facilities will be sufficient to finance
our current operations, our cash obligations in connection with the planned
capital expenditures, and our current and future financial obligations.
The credit agreement governing the new senior credit facilities will
require us to maintain certain financial leverage and interest coverage ratios.
See "Description of Senior Credit Facilities."
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our revolving credit and term loan agreements bear interest at floating
rates. Accordingly, we are exposed to potential losses related to changes in
interest rates. We do not enter into derivatives or other financial instruments
for trading or speculative purposes; however, in order to manage our exposure to
interest rate risk, we have entered into interest rate swaps. As of March 31,
2002, our interest rate swap agreements expire in varying amounts through April
2009.
Upon issuance of the notes and after giving effect to the refinancing of
our senior credit facilities, the fair market value of $75.0 million of our
long-term debt approximates its carrying value as it bears interest at floating
rates. As of March 31, 2002, the estimated fair value of our interest rate swap
agreements was $5.1 million, which amount represents the amount required to
enter into offsetting contracts with similar remaining maturities based on
quoted market prices.
As of March 31, 2002, interest rate swaps were in place for $121.0 million,
or 81.5%, of the outstanding amounts on our revolving credit and term loan
agreements. Subsequently, we entered into an interest rate swap agreement that
has the economic effect of substantially offsetting $55.0 million notional
amount of the $121.0 million notional amount of swap agreements relating to our
revolving credit and term loan agreements. In addition, we entered into an
interest rate swap agreement with respect to $100.0 million principal amount of
the notes. Accordingly, as of March 31, 2002, after giving effect to the new
interest rate swap agreements, the issuance of the $175.0 million principal
amount of the notes and the closing of the new senior credit facilities, a
hypothetical 100 basis point increase in interest rates along the entire
interest rate yield curve would have increased our annual interest expense by
approximately $1.1 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosures. We base our estimates and judgments on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. We evaluate these estimates and judgments
on a continual basis. Actual results may differ from these estimates and
judgments.
We believe the following critical accounting policies affect our
significant estimates and judgments used in the preparation of the consolidated
financial statements. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to change, resulting in an
impairment of their ability to make payments, additional allowances could be
required. We maintain various employment related liabilities, such as workers'
compensation and medical reserves, based on historical performance and current
trends. Actual results could differ from estimates resulting in adjustments to
the recorded liability. Actuarial
36
assumptions have a significant impact on the determination of net periodic
pension costs and credits and other post-employment benefits. If actual
experience differs from these assumptions, future periodic pension and
post-employment costs could be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by Statement Nos. 137 and 138, which requires us to
record all derivatives on the balance sheet at fair value. We have three
interest rate swap agreements and have not elected to implement hedge
accounting. As of January 1, 2001, we recorded a transition adjustment liability
of $2.1 million with an offset to other comprehensive loss, net of $758,000 of
deferred income taxes. The change in derivative fair values and the amortization
of the transition adjustment are recognized in earnings as a change in fair
value of interest rate swaps. These items resulted in a non-cash derivative
valuation loss of $5.3 million in 2001, a loss of $1.5 million in the quarter
ended March 31, 2001 and a gain of $1.6 million in the quarter ended March 31,
2002. The fair value of the derivatives recorded on our balance sheet equaled a
$6.7 million liability as of December 31, 2001 and a $5.1 million liability as
of March 31, 2002.
Effective January 1, 2002, we adopted SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased goodwill and
indefinite lived intangible assets are no longer amortized but reviewed annually
for impairment, or more frequently if impairment indicators arise. Intangible
assets with lives restricted by contractual, legal or other means will continue
to be amortized over their useful lives. For fiscal years 2001, 2000 and 1999,
the Company recognized amortization expense relating to goodwill and other
indefinite-lived intangibles of $3,347,486, $3,022,615 and $2,497,615,
respectively. Adjustment for the non-amortization provisions of SFAS 142 results
in net income (loss) of $(14,509,377), $15,803,111 and $7,838,714 for 2001, 2000
and 1999, respectively. During the three month period ended March 31, 2001, we
recognized $837,035 of amortization expense related to goodwill, resulting in
net loss of $5,695,109 when adjusted for the non-amortization provisions of SFAS
No. 142. We have completed our initial impairment analysis of existing goodwill.
No impairment charges will be recognized as a result of this testing.
Effective January 1, 2002, we adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of. The adoption of this standard has had no effect on our
consolidated results of operations or financial position for the three months
ended March 31, 2002.
Subsequent to March 31, 2002, the Financial Accounting Standards Board
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, under which a gain or loss
related to the extinguishment of debt will no longer be recorded as an
extraordinary item. The Company has elected early adoption as encouraged by SFAS
No. 145, which would not otherwise require adoption until fiscal year 2003. As a
result, second quarter losses related to the refinancing of our senior credit
facilities will be included in income from continuing operations.
37
BUSINESS
We are a privately held diversified media company with our primary
operations in cable television, newspaper publishing and television
broadcasting. We are the 23rd largest cable multiple system operator in the
United States, with approximately 153,000 subscribers at March 31, 2002. Our
primary cable system is located in the greater Toledo, Ohio metropolitan area
and serves approximately 134,000 subscribers. Excluding the subscribers acquired
in the March 29, 2002 exchange described below, this system is 100% rebuilt to
870 MHz and is served by a single headend. Our Toledo system is one of the
largest privately owned urban cable systems in the United States. We publish two
daily metropolitan newspapers, the Pittsburgh Post-Gazette in Pittsburgh,
Pennsylvania and The Blade in Toledo, each of which is the dominant publication
in its market. The combined daily and Sunday average paid circulation of our two
newspapers is approximately 381,000 and 603,000, respectively. We also own and
operate four television stations: two in Louisville, Kentucky, and one each in
Boise, Idaho and Lima, Ohio, and we are a two-thirds owner of a television
station in Decatur, Illinois. For the year ended December 31, 2001, we had
revenues and EBITDA (as defined on page [28]) of $414.6 million and $50.3
million, respectively, and experienced an operating loss of $445,000 and a net
loss of $17.9 million. For the three months ended March 31, 2002, we had
revenues and EBITDA of $102.0 million and $13.9 million, respectively, and had
operating income of $1.4 million and net income of $13.0 million.
Our shareholders, the Block family, have been in the media business for
over 100 years. In 1926, the Block family acquired the first of the Company's
current holdings, The Blade, which was first published in 1835. We expanded our
portfolio of newspapers in 1927 when we became the publisher of the Pittsburgh
Post-Gazette. In 1965, we were awarded a franchise in Toledo to develop our
cable system, which, with over 36 years of operating history, is one of the
oldest continuously owned metropolitan cable systems in the United States. In
1972, we acquired the first of our current television broadcasting stations when
we purchased WLIO in Lima.
We have an experienced management team and are focused on improving the
competitive position of our media properties as well as maximizing synergies
between our cable television and newspaper publishing segments. In particular,
we seek to capitalize upon our dominance of the cable and newspaper businesses
in Toledo -- a unique cross-ownership position for an urban market. We make
extensive use of our newspaper and cable system to cross-promote our businesses
at very low incremental costs. We can also offer advertisers multiple-media
advertising strategies including newspaper, cable and the Internet. The
knowledge of our customers and markets gained from our various businesses
enables us to identify our customers' needs and tailor solutions to meet their
business objectives.
CABLE TELEVISION
We provide cable television service to the greater Toledo metropolitan area
(Buckeye CableSystem) and the Sandusky, Ohio area (Erie County CableSystem). We
are the only significant cable operator in each of our markets. In addition to
traditional cable television service, we also provide high-speed cable modem
Internet access in both systems, and our Toledo system provides digital cable
service. Our cable television operations generated revenues, operating income
and EBITDA of $89.4 million, $4.8 million and $32.1 million, respectively, in
the year ended December 31, 2001, and $25.1 million, $2.3 million and $9.4
million, respectively, in the quarter ended March 31, 2002.
In 1997, we began the rebuild of the Buckeye system from a one-way coaxial
cable plant to an 870 MHz hybrid fiber coaxial (HFC) two-way interactive system.
We have completed the rebuild of the cable system's distribution plant and have
converted to the new system over 99% of Buckeye's cable customers, excluding
those acquired in the exchange described below. The rebuild allows Buckeye to
provide advanced cable services that we believe will help us maintain our
dominant position in the greater Toledo metropolitan area. These services
currently include up to 241 analog and digital video and digital music channels,
high-speed Internet and WorldGate interactive service. Future offerings may
include video-on-demand, subscription video-on-demand and other services yet to
be developed.
38
On March 29, 2002, we completed an asset exchange with Comcast involving
the exchange of our cable system in Monroe, Michigan, a lower growth area
approximately 15 miles north of Toledo, for Comcast's system in Bedford,
Michigan, a Toledo suburb, plus a cash payment to us of $12.1 million. The
exchange enables us to expand our subscriber base in a contiguous high-growth
suburban area we already partially served and increase the efficiency of our
cable cluster by reducing the number of our headends from three to two. See
"Summary -- Recent Developments."
CABLE TELEVISION BUSINESS STRATEGY
We are pursuing the following cable television strategies:
Operate Highly Advanced and Efficient Cable Networks. Through March 31,
2002, we invested approximately $89 million to rebuild the Buckeye system to 870
MHz. Our rebuilt system allows us to offer higher margin advanced services, such
as high-speed two-way cable modem and digital television. The rebuild also
increased channel capacity to our current 241 analog and digital video and
digital music channels, which can be significantly expanded by recapturing some
of our 94 analog channels and converting them to digital channels. While most
cable system operators have chosen to upgrade their systems to 750 MHz, we
invested in the increased bandwidth, which provides additional capacity for
future services.
Upon conversion of a portion of the acquired Comcast subscribers in
Bedford, approximately 86% of our total subscribers will be served by our
advanced 870 MHz system from a single headend, which will reduce our operating
costs. In addition, our Toledo headend was designed, and includes the necessary
fiber interconnections, to serve our Erie County system when we upgrade that
system. This would enable us to serve 100% of our subscribers from a single
headend. While initially designed to support 500 homes per fiber node, our cable
system can easily be divided to an average of 125 homes per fiber node when
demand warrants. This allows us to efficiently increase subscribers and provide
additional advanced services without sacrificing system performance or
reliability.
Utilize Significant Marketing Power. Buckeye CableSystem benefits from our
dominant position as a multi-media provider in the greater Toledo metropolitan
area. We believe we are the only urban cable operator in the United States with
cross-ownership of the primary newspaper in its market. The Blade provides
fill-in advertising space to market our cable services and to promote our brand
awareness at a very low incremental cost. Our cable television business also
includes our operation and ownership of WB TV5, a WB affiliate cable channel
with over 225,000 viewing households in Northwest Ohio. We advertise our
services on WB TV5 and on 33 other cable channels -- over 7,000 spots per month
in 2001 -- providing us an additional low-cost advertising source. We use these
marketing resources to promote existing services, enhance the introduction and
roll-out of new services, and build a strong competitive barrier. As evidence of
our marketing power, a recent advertising campaign in The Blade and on our cable
system has helped increase subscribers to Buckeye's high-speed two-way cable
modem service by approximately 15% in the first quarter of 2002, bringing
subscribers to over 17,000 at March 31, 2002.
Roll-out Advanced Services. Our investment in Buckeye's state-of-the-art
cable network combined with our significant marketing power positions us to
successfully roll out advanced services and further increase our revenue per
subscriber. Similar to the on-going promotion of our cable modem service, we
launched in the second quarter of 2002 a marketing campaign utilizing our
advertising resources to advance the growth of our digital cable service.
Without any significant advertising, we have achieved over 9,800 digital cable
subscribers since making our digital cable service available in the fourth
quarter of 2001. In addition, we are evaluating new services such as
video-on-demand and subscription video-on-demand for possible future deployment.
Maintain Superior Customer Satisfaction. Our Service TV(R) brand embodies
our total commitment to providing superior cable television service, which has
resulted in high levels of customer satisfaction and retention. We strive to
provide exceptional programming and signal quality, and we continuously monitor
our fiber nodes and power supplies to maintain a highly reliable cable system.
We also operate a call center with customer relations representatives available
around the clock, maintain convenient customer
39
service locations and offer next day, two-hour appointment windows for
installation or in-home repairs. We believe our superior customer service, along
with our state-of-the art cable system, provide a significant defensive measure
against direct broadcast satellite (DBS) operators and have in part contributed
to DBS's low penetration rate in Toledo, which at approximately 9% is half the
national average of approximately 18%.
CABLE TELEVISION SERVICES
We offer our customers traditional cable television services and
programming as well as new and advanced high bandwidth services currently
consisting of high-speed Internet access and, in our Toledo system, digital
cable service. We plan to continue to enhance these services by adding new
programming and other advanced services as they are developed.
Core Cable Television Services
Our basic channel line-up and additional channel offerings for each system
are designed according to demographics, programming preferences, channel
capacity, competition and price sensitivity. Our core cable television service
offerings include the following:
Limited Basic Service. Our limited basic service includes, for a monthly
fee, local broadcast channels, including network and independent stations,
limited satellite-delivered programming, and local public, government,
home-shopping and leased access channels.
Expanded Basic Service. Our expanded basic service includes, for an
additional monthly fee, various satellite-delivered networks such as CNN, MTV,
USA Network, ESPN, Lifetime, Nickelodeon and TNT.
Premium Service. Our premium services are satellite-delivered channels
consisting principally of feature films, original programming, live sports
events, concerts and other special entertainment features, usually presented
without commercial interruption. HBO, Cinemax, Showtime and The Movie Channel
are typical examples. Such premium programming services are offered both on a
per-channel basis and as part of premium service packages designed to enhance
customer value.
The significant expansion of bandwidth capacity resulting from the rebuild
of our Buckeye system will allow us to expand the use of multichannel packaging
strategies for marketing and promoting premium and niche programming services.
We believe that these packaging strategies will increase basic and premium
penetration as well as revenue per subscriber.
Pay-Per-View Service. Our pay-per-view services allow customers to pay to
view a single showing of a feature film, live sporting event, concert or other
special event, on an unedited, commercial-free basis.
Advanced Analog Services
Buckeye CableSystem offers advanced analog cable services to customers who
do not subscribe to the higher priced digital cable service. This service
utilizes a converter box that is substantially less expensive than a digital
box. Buckeye's advanced analog services include:
- up to 94 analog video channels including 10 multiplexed premium channels
and eight pay-per-view channels;
- four additional video channels that can be purchased a la carte or as a
bundled package;
- a new product tier consisting of eight basic-type video channels and 32
digital music channels; and
- an interactive on-screen program guide to help customers navigate the
program choices and receive information about the programming.
40
Digital Cable Services
Digital video technology offers significant advantages. Most importantly,
this technology allows us to greatly increase our channel offerings through the
use of compression, which converts one analog channel into six to 12 digital
channels. The implementation of digital technology has significantly enhanced
and expanded the video and other service offerings we provide to our customers.
Buckeye's customers currently have available digital cable programming
services that include:
- 73 analog video channels;
- up to 29 bundled digital basic channels;
- up to 32 multiplexed premium channels;
- up to 62 pay-per-view movie and sports channels;
- up to 45 digital music channels; and
- an interactive on-screen program guide to help customers navigate the new
digital choices and receive information about the programming.
Digital cable services are available on 100% of Buckeye's system,
representing approximately 86% of our total subscribers excluding those acquired
in the Monroe-Bedford exchange. When we upgrade our Erie County system and
complete the rebuild of the portion of the acquired Bedford system not currently
passed by Buckeye's system, planned to be completed in 2003, 100% of our systems
will have full-featured digital offerings, creating an opportunity to increase
monthly revenue per subscriber.
HIGH-SPEED INTERNET ACCESS
Our broadband cable networks enable data to be transmitted up to 35 times
faster than traditional telephone modem technologies. This high-speed capability
allows cable modem customers to receive and transmit large files from the
Internet in a fraction of the time required when using the traditional telephone
modem. It also allows much quicker response times when surfing the Internet,
providing a richer experience for the customer. In addition, the two-way cable
modem service offered by Buckeye's system eliminates the need for a telephone
line for Internet service, is always activated and does not require a customer
to dial into the Internet service provider and await authorization.
Two-way cable modem service is available on 100% of Buckeye's system,
representing approximately 86% of our total subscribers excluding those acquired
in the Monroe-Bedford exchange. Our Erie County system employs a one-way
telco-return cable modem. When we upgrade the Erie County system, we will offer
two-way cable modem service on that system.
TELEVISION BASED INTERNET ACCESS
Buckeye offers residential customers Internet access and email over the
television using a set-top box and a wireless keyboard. Buckeye offers Internet
over the television through WorldGate.
ADVERTISING
We receive revenue from the sale of local advertising on
satellite-delivered channels such as CNN, MTV, USA Network, ESPN, Lifetime,
Nickelodeon and TNT. We have an in-house production facility and a sales force
covering our markets. Advertising sales accounted for 7.7% of our combined cable
revenue for the year ended December 31, 2001 and 6.7% of our combined cable
revenue for the quarter ended March 31, 2002.
41
FUTURE SERVICES
Interactive Services. Buckeye's rebuilt cable network has the capacity to
deliver various interactive television services, such as the following:
- Video-on-demand and subscription video-on-demand which provide movies,
programs, or special events on demand with the ability to fast forward,
pause and rewind a program at will. Companies providing video-on-demand
services include Concurrent Computer Corporation, DIVA Systems,
Intertainer, N-Cube, Sea Change International and others.
- Interactive viewing services enabled by middleware vendors such as Open
TV and Liberate that provide viewers options such as various camera
angles on sports broadcasts, access to ancillary programming, access to
customer account information on the television, and the ability to play
interactive games individually or against other subscribers.
- Personal video recording that provides subscribers VCR-like capabilities
to one touch record programs, pause and replay live television, and fast
forward through commercials on recorded programs. This service also
permits a subscriber to search for and record programming that matches
the subscriber's preferences.
- Walled garden Internet access that provides restricted Internet access to
sites created for television delivery that may feature local weather,
news, or community events.
- Cable modem Internet protocol second line telephone service that provides
subscribers a non-lifeline phone line.
- Tailored advertising that could allow cable networks to transmit
advertisements tailored to several target audiences simultaneously during
a single program transmission.
- Enhanced programming information, interactive advertising and impulse
sales enabled by application providers such as Wink Communications and
Gemstar that allow subscribers to click on-screen icons for ancillary
program information and e-commerce transactions.
High Definition Television. In addition to interactive services, Buckeye
is also testing high definition television services. The availability of this
new programming format will keep us competitive with DBS. We intend to offer a
package of both local and satellite-derived high definition television channels
for our high-end customers.
PRICING OF OUR SERVICES
Our cable revenues are derived primarily from the monthly fees our
customers pay for cable services. Our rates vary by the market served and by the
type of service selected and are usually adjusted annually. As of December 31,
2001, our monthly fees for expanded basic cable service were $30.99 for Buckeye
and $30.15 for Erie County. Effective January 1, 2002, we increased our average
monthly fees for expanded basic service to $34.24 for Buckeye and $33.15 for
Erie County. A one-time installation fee is charged to new customers, but may be
waived during certain promotions. We believe our rate practices are in
accordance with the FCC guidelines and are consistent with industry practices.
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Our service offerings vary by market because of differences in the
bandwidth of our cable networks and franchise requirements. The current monthly
price ranges for our cable services on a stand-alone basis are as follows:
<Table>
<Caption>
SERVICE PRICE RANGE
- ------- ---------------
Limited basic cable service................................. $10.00 - $11.65
Expanded basic cable service................................ $33.15 - $34.24
Premium services............................................ $ 8.95 - $12.95
Pay-Per-View (per event).................................... $ 3.95 - $49.95
Digital cable packages...................................... $41.19 - $83.24
High-speed cable modem:
Residential (cable subscriber)....................... $39.99 - $44.99
Residential (cable nonsubscriber -- Buckeye only).... $54.99
Commercial........................................... $79.99
WorldGate Internet service.................................. $12.95
</Table>
We also offer packages of cable services at discounts from the stand-alone
rates for each individual service.
43
CABLE SYSTEMS
The following table sets forth selected financial, operating and technical
information regarding our cable systems:
<Table>
<Caption>
BUCKEYE BUCKEYE BUCKEYE
CABLESYSTEM, CABLESYSTEM, CABLESYSTEM ERIE COUNTY MONROE
TOLEDO, OH BEDFORD, MI(1) SUBTOTAL CABLESYSTEM CABLESYSTEM(1) TOTALS
------------ -------------- ----------- ----------- --------------- --------
FINANCIAL DATA:
Revenue (in thousands)
Year ended December 31,
2001....................... $ 73,922 $ 449 $ 74,371 $ 9,635 $ 5,414 $ 89,420
3 months ended March 31,
2002....................... $ 20,923 $ 387 $ 21,310 $ 2,467 $ 1,320 $ 25,097
Average monthly revenue per
basic subscriber(2):
Year ended December 31,
2001....................... $ 49.02 N/A $ 48.55 $ 41.11 $ 44.39 $ 47.36
3 months ended March 31,
2002....................... $ 55.27 $ 52.08 $ 55.21 $ 42.46 $ 43.42 $ 52.89
CABLE OPERATING DATA
(AS OF MARCH 31, 2002):
BASIC:
Homes passed(3).............. 203,221 13,281 216,502 28,893 -- 245,395
Subscribers.................. 126,184 7,480 133,664 19,370 -- 153,034
Penetration(4)............... 62.1% 56.3% 61.7% 67.0% -- 62.4%
PREMIUM:
Units(5)..................... 63,143 2,058 65,201 4,444 -- 69,645
Penetration(6)............... 50.0% 27.5% 48.8% 22.9% -- 45.5%
DIGITAL:
Digital-ready basic
subscribers(7)............. 126,184 5,476 131,660 -- -- 131,660
Subscribers.................. 9,239 602 9,841 -- -- 9,841
Penetration(8)............... 7.3% 11.0% 7.5% -- -- 7.5%
CABLE MODEM:
Homes passed(3).............. 203,221 7,686 210,907 28,893 -- 239,800
Subscribers.................. 16,115 952 17,067 361 -- 17,428
Penetration(4)............... 7.9% 12.4% 8.1% 1.2% -- 7.3%
CABLE NETWORK DATA(9):
Miles of plant............... 1,981 248 2,229 370 -- 2,599
Density...................... 103 54 97 78 -- 94
Plant bandwidth
870 MHz.................... 100.0% 58.5% 95.4% -- -- 81.8%
450 MHz.................... -- 41.5% 4.6% -- -- 4.0%
430 MHz.................... -- -- -- 100.0% -- 14.2%
</Table>
- ---------------
(1) On March 29, 2002, we completed the exchange of the assets of Monroe
CableSystem for the assets of Comcast's Bedford, Michigan cable system. The
Bedford, Michigan cable operating data for Buckeye CableSystem includes the
pre-existing Bedford subscribers serviced by Buckeye CableSystem and the
5,004 new subscribers acquired from Comcast. The revenue information
includes only the pre-exchange Bedford, Michigan subscribers. The
information for Monroe CableSystem relates to the system disposed of in the
exchange.
(2) Represents average monthly revenues for the period divided by the number of
basic subscribers at the end of the period.
(3) Represents the number of living units, such as single residence homes,
apartments and condominiums, passed by the cable television distribution
network in a given cable system service area to which we offer the named
service.
(4) Represents subscribers to the named service as a percentage of homes passed.
(5) Represents the number of subscriptions to premium services. A subscriber may
purchase more than one premium service, each of which is counted as a
separate premium service unit.
(6) Represents premium service units as a percentage of basic subscribers. This
ratio may be greater than 100% if the average basic subscriber subscribes to
more than one premium service unit.
(7) Represents basic subscribers to whom digital service is available.
(8) Represents digital subscribers as a percentage of digital-ready basic
subscribers.
44
(9) Density represents homes passed divided by miles of plant. Plant bandwidth
represents the percentage of plant mileage within a system served by the
indicated plant bandwidth.
MARKETS SERVED
Greater Toledo Metropolitan Area. As of March 31, 2002, Buckeye's system
passed approximately 217,000 homes and served approximately 134,000 basic
subscribers. The 25 franchises served by Buckeye have a combined population of
approximately 554,000. With a population of 618,203, the three-county Toledo
Metropolitan Statistical Area is the 69th largest MSA in the country. Toledo's
major non-governmental employers include ProMedica Health Systems, Mercy Health
Partners, Daimler-Chrysler, Bowling Green State University, The University of
Toledo, Seaway FoodTown, Inc., General Motors, Sauder Woodworking and the
Medical College of Ohio. Other significant Toledo-based companies include Dana
Corporation, Owens-Illinois and Pilkington Glass.
Sandusky, Ohio. As of March 31, 2002, our Erie County system passed
approximately 29,000 homes and served approximately 19,000 basic subscribers.
The 10 franchises served by our Erie County system have a combined population of
approximately 73,000. Sandusky's major non-governmental employers include Cedar
Fair/Cedar Point, Delphi Automotive System, Visteon Automotive Systems and
Firelands Community Hospital.
SYSTEM DESIGN
The architecture of Buckeye's recently completed 870 MHz HFC system
consists of approximately 2,475 route miles, including 2,127 route miles of
fiber-optic cable, passing approximately 217,000 households and serving
approximately 134,000 customers. The system includes a single headend serving
all pre-existing Buckeye subscribers who have been converted to the new system
and which will serve the acquired Bedford subscribers when converted. We have
substantially completed conversion of the acquired Bedford system subscribers
who are currently passed by our Buckeye system. Conversion of the remaining
subscribers will require extension of the rebuilt Buckeye system. The new
headend was completed at the beginning of 1997 to coincide with the beginning of
the system rebuild. Thirteen hubs located throughout the greater Toledo
metropolitan area are connected by redundant fiber-optic cable rings back to the
master headend, thereby reducing the frequency and size of service outages. From
each of these thirteen hubs, fiber-optic cable extends to nodes, each serving on
average 500 homes. Coaxial cable connects the node to each customer's home or
building.
The system was also designed to provide a clean migration path to future
system needs by allowing additional spectrum to be allocated to interactive
services as conditions require. The system provides for 12 strands of fiber to
each node with two strands activated and 10 strands reserved for future
services. Moreover, the 500-home fiber nodes can easily be divided to an average
of 125 homes per fiber node when demand warrants. As more individualized
services are offered, this additional bandwidth will reduce the need for future
construction and will provide great flexibility in our provision of services to
our customers.
The rebuilt system currently offers 94 analog video channels on our
advanced analog service and approximately 241 analog and digital video and
digital music channels on our digital cable service. The system offers the
ability to significantly increase channel capacity by recapturing some of the
analog channels and converting them to digital channels.
We believe our HFC architecture provides higher capacity, superior signal
quality, greater network reliability, certain operating cost savings and more
reserve capacity for the addition of future services than the traditional
coaxial network design. This will permit our customers to send and receive
signals over the cable network so that interactive services, such as video on
demand and subscription video on demand, will be accessible.
We monitor all of the fiber nodes and power supplies in Buckeye's cable
network 24 hours per day, seven days per week, providing reliable service and
high customer satisfaction. The cost of this monitoring is shared by our cable
and telephone operations. In addition, we have a supporting power system that
was
45
built to provide battery backup for four to six hours in the event of a local
power outage. For more extended power outages, generators can be used to provide
power indefinitely. This is critical as "always on" services such as cable
modems and other two-way telecommunications services become more prevalent.
Our Erie County system currently operates on a 430 MHz one-way coaxial
cable plant with approximately 370 route miles, including 33 route miles of
fiber-optic cable. We plan to upgrade our Erie County system to a 750 MHz
two-way interactive system. When this occurs, our Erie County system, which
currently operates primarily through its own headend, will receive most of its
programming and services through the Toledo headend, thereby reducing operating
costs.
SALES AND MARKETING
Buckeye markets its cable services through the use of our dominant
advertising resources in the greater Toledo metropolitan area. Because of our
advertising strength, most of Buckeye's cable television service sales result
from customer and potential customer inquiries. We invest a significant amount
of time, effort and financial resources in the training and evaluation of our
marketing professionals and customer relations representatives. Our customer
sales representatives use their frequent contact with our customers as
opportunities to sell our new services. As a result, we can accelerate the
introduction of new services to our customers and achieve high success rates in
attracting and retaining customers. Buckeye also has its own telemarketing staff
for outbound sales calls and a door-to-door sales team utilizing in-house and
outsourced personnel. Erie County markets its cable services through use of its
advertising availability rights on its cable channels for spot advertising, as
well as through bill inserts, direct mail and radio and print media advertising.
PROGRAMMING
We believe that providing a large selection of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. To appeal to both existing and
potential customers, we devote considerable resources to obtaining access to a
wide range of programming. We determine channel offerings in each of our markets
by reviewing market research and examining customer demographics and local
programming preferences. We have various contracts to obtain programming for our
systems, payment for which is typically based on a fixed fee per customer per
month. These contracts are typically for a fixed period of time and are subject
to negotiated renewal. We purchase the majority of our cable programming through
the National Cable Television Cooperative ("NCTC"). This organization aggregates
more than 10 million cable subscribers for the purpose of obtaining programming
at volume-based discounts. We also purchase programming directly from suppliers
who do not have agreements with the NCTC or if they can provide better terms
than through the NCTC.
Along with the rest of the cable industry, we have felt the impact of
increasing programming costs. Programming is our cable systems' largest cash
operating expense. Our programming costs increased by 16.5% in 2000 and by 13.7%
in 2001. This is primarily due to increasing costs for sports programming and
our need for new channels to match satellite competition. Because of our size,
we are unable to negotiate the more favorable rates that are granted to large
national multiple system operators. For 2001, the negative impact on our cable
margins due to higher programming costs was estimated to be 400 to 500 basis
points.
In 1989, Buckeye launched TV5, a locally programmed channel that is run in
the same manner as a broadcast station -- obtaining its own programming through
syndicators, arranging for coverage of local and regional sports contests and
doing its own independent marketing. TV5 was conceived to provide us with a
competitive advantage should an overbuilder become active in our service area.
In 1995, TV5 became the exclusive market affiliate for the WB network, the first
cable channel in the country to be so designated. Its popularity continues to
increase. Buckeye has contracted to provide WB TV5 to cable operators in other
cities in the Toledo DMA, which adds to its popularity and provides more viewers
for advertising. WB TV5 is currently distributed to more than 225,000 cable
households.
46
Buckeye also operates a Community Channel on which locally produced
programming is shown free of charge if it is deemed of sufficient interest. In
addition to programming provided by outsiders, Buckeye provides live coverage of
Toledo City Council meetings and produces about 24 high school football and
basketball games each year. These are shown once on the Community Channel and
once on WB TV5. We have also offered to cablecast a select number of council and
trustees meetings from other franchise areas.
The Communications Act authorizes franchising authorities to require cable
operators to set aside channel capacity for public, educational and government
(PEG) use. Rather than provide a PEG channel for each of the franchise areas in
which we operate, all of our franchise agreements contain language permitting
each governmental entity to join the Northwest Ohio Distance Learning Consortium
(NODLC), a network of public schools, the local university, and the Public
Broadcasting Foundation. The NODLC operates a two-way interactive distance
learning network via our Buckeye TeleSystem, Inc. subsidiary. Buckeye
CableSystem has offered the NODLC access to a cable channel of its own for
programming it would like to show beyond the bounds of its own network.
FRANCHISES
Cable television systems are constructed and operated under fixed-term,
non-exclusive franchises or other types of operating permits granted by local
governmental authorities. Franchises typically contain many conditions, such as:
- time limitations on commencement and completion of system construction;
- conditions of service, including mix of programming required to meet the
needs and interests of the community;
- the provision of free service to schools and certain other public
institutions;
- the maintenance of insurance and indemnity bonds; and
- the payment of fees to communities.
Certain provisions of these local franchises are subject to limits imposed
by federal law.
We hold a total of 35 franchises, including three acquired in the
Monroe-Bedford exchange. These franchises require the payment of fees to the
issuing authorities ranging from 3% to 5% of gross revenues (as defined by each
franchise agreement) from the related cable system. The Cable Communications
Policy Act of 1984 ("1984 Cable Act") prohibits franchising authorities from
imposing annual franchise fees in excess of 5% of gross annual revenues and
permits the cable television system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances
that render performance commercially impracticable.
All of Buckeye's 22 pre-exchange franchises were renewed during the period
1997-2000, 21 of them, including the City of Toledo, for terms of 20 years and
the remaining one for 15 years. The three franchises acquired in the exchange
expire in 2012, 2019 and 2022. The largest of Erie CableSystem's 10 franchises,
the City of Sandusky, and two other franchises which collectively cover 52% of
Erie CableSystem's subscribers, expire in 2011. Negotiations are substantially
complete with respect to other franchises covering an additional 41% of Erie
CableSystem's subscribers. When finalized, these are subject to ratification by
the applicable governing body. The remaining franchises, which cover 7% of Erie
CableSystem's subscribers, expire in 2003 and 2004 and are in the process of
being renegotiated.
The 1984 Cable Act and the Cable Television Consumer Protection and
Competition Act of 1992 ("1992 Cable Act") provide, among other things, for an
orderly franchise renewal process, which limits a franchising authority's
ability to deny a franchise renewal if the incumbent operator follows prescribed
renewal procedures. In addition, the 1984 and 1992 Cable Acts establish
comprehensive renewal procedures, which require, when properly elected by an
operator, that an incumbent franchisee's renewal application be assessed on its
own merits and not as part of a comparative process with competing applications.
Upon a franchise renewal request, however, a franchise authority may seek to add
new and
47
more onerous requirements upon the cable operator, such as significant upgrades
in facilities and services or increased franchise fees, as a condition of
renewal. We believe that our relationships with local franchise authorities are
excellent.
COMPETITION -- CABLE TELEVISION SERVICES
Cable television systems face competition from alternative methods of
distributing video programming and from other sources of news, information and
entertainment. These include off-air television broadcast programming, direct
broadcast satellite, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including VCRs and
DVDs. The extent to which a cable television system is competitive depends, in
part, upon that system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
available off-air or through alternative delivery sources and upon superior
technical performance and customer service.
Off-Air Broadcast Television. Viewers who do not wish to pay for
television programming have the option of receiving broadcast signals directly
from local television broadcasting stations. The extent to which a cable system
competes with over-the-air broadcasting depends upon the quality and quantity of
the broadcast signals available by direct antenna reception compared to the
quality and quantity of such signals and alternative services offered by the
cable system. Viewers in the service area of Buckeye's system are able to
receive over-the-air signals of varying quality from up to 14 broadcast
stations, and viewers in the service area of our Erie County system are able to
receive such signals from up to 11 broadcast stations.
Direct Broadcast Satellites. The fastest growing method of satellite
distribution is by high-powered direct broadcast satellites utilizing video
compression technology, which provides programming comparable to our digital
cable service. Direct broadcast satellite service can be received virtually
anywhere in the United States through small rooftop or side-mounted dish
antennae that are generally not subject to local restrictions on location and
use. Direct broadcast satellite service is presently being heavily marketed on a
nationwide basis by DirecTV and EchoStar. Both of these providers offer service
in the Toledo and Erie County markets. Direct broadcast satellite systems offer
multichannel video programming packages which are similar to our packages of
video services. However, they do not currently offer local channels in the
Toledo area and offer them in Erie County only at an additional monthly cost. At
March 31, 2002, the rate of penetration of direct broadcast satellite nationally
was 18%. At the same date, the penetration rate was approximately 9% in the zip
codes in which Buckeye operates and approximately 12% in the zip codes in which
Erie County operates.
Competing Franchises. Cable television systems generally operate pursuant
to franchises granted on a non-exclusive basis. Franchising authorities may not
unreasonably deny requests for additional franchises and may operate cable
television systems themselves. Well-financed businesses from outside the cable
television industry (such as the public utilities that own the poles to which
cable is attached) may become competitors for franchises or providers of
competing services. In the Toledo market, Buckeye faces cable competition from
Adelphia in a few outlying areas where the two systems have overbuilt plant
passing approximately 6,600 homes, or less than 3% of the total homes passed by
our cable systems. We believe that the capital costs of matching Buckeye's
rebuilt system, together with our advertising dominance and our customer service
reputation, pose a formidable competitive barrier. In its market, Erie County
does not currently face competition from competing cable operators.
Satellite Master Antenna Television Systems. Cable television operators
also face competition from private satellite master antenna television systems
that serve condominiums, apartment and office complexes and private residential
developments. As long as they do not use public rights-of-way, satellite master
antenna television systems can interconnect non-commonly owned buildings without
having to comply with many of the local, state and federal regulations that are
imposed on cable television systems. We are aware of one SMATV operator, which
has approximately 125 subscribers, in the Toledo area. We are not aware of any
SMATV operators in our Erie County service area.
48
Local Multipoint Distribution Service. Local multipoint distribution
service, a new wireless service, can deliver over 100 channels of programming
directly to consumers' homes. It is uncertain whether this spectrum will be used
to compete with franchised cable television systems.
Multichannel Multipoint Distribution Systems. Multichannel multipoint
distribution systems use low power microwave frequencies to transmit video
programming over the air to customers. Wireless distribution services provide
many of the same programming services as cable television systems, and digital
compression technology is likely to increase significantly the channel capacity
of their systems. We are aware of only one competitor offering this service at
this time.
Local Exchange Carriers. The Telecommunications Act of 1996 ("1996 Telecom
Act") allows local exchange carriers and others to compete with cable television
systems and other video services in their telephone service territory, subject
to certain regulatory requirements. Unlike cable television systems, local
exchange carriers are not required, under certain circumstances, to obtain local
franchises to deliver video services and are not subject to certain obligations
imposed under such franchises. Local exchange carriers use a variety of
distribution methods, including both broadband wire facilities and wireless
transmission facilities within and outside of their telephone service areas.
Local exchange carriers and other telephone companies have an existing
relationship with the households in their service areas and have substantial
financial resources. Local exchange carriers do not currently offer television
cable service in any of our markets, and we are not aware of any plans for such
service to be provided.
Other New Technologies. Other new technologies may compete with cable
television systems. Advances in communications technology, as well as changes in
the marketplace and the regulatory and legislative environments, are constantly
occurring. We are not, therefore, able to predict the effect that current or
future developments might have on the cable industry or on our operations. See
"Forward-Looking Statements."
COMPETITION -- INTERNET SERVICES
We first began to offer broadband Internet access in mid-1999. At the end
of March 2002, we had approximately 17,500 broadband Internet subscribers,
primarily in the Toledo area. Competition for broadband Internet services in our
markets includes digital subscriber line services provided by or through local
telephone exchange carriers and wireless broadband Internet services provided by
wireless communications companies. Digital subscriber line technology, known as
DSL, allows Internet access to subscribers over conventional telephone lines at
data transmission speeds comparable to those of cable modems, putting it in
direct competition with cable modem service.
Numerous companies, including telephone companies, have introduced DSL
service, and certain telephone companies are seeking to provide high-speed
broadband services, including interactive online services, without regard to
present service boundaries and other regulatory restrictions. DSL and wireless
broadband services have only recently begun to be offered in limited portions of
our service area. We are unable to predict the likelihood of success of these
competing broadband Internet services. However, we believe that our technology,
local customer service reputation and ability to package bundled video and
Internet services will provide us with competitive advantages.
Our broadband Internet services also compete for customers with traditional
slower-speed dial-up Internet service providers, commonly known as ISPs.
Traditional dial-up ISP services have the advantages of lower price, earlier
market entry, and in some cases nationwide marketing and proprietary content. We
believe that over time the rapid development of rich broadband content will
persuade more and more customers of the advantages of a broadband connection.
Recently, a number of ISPs have asked local authorities and the FCC to give
them rights of access to cable systems' broadband infrastructure so that they
can deliver their services directly to cable systems' customers. Many local
franchising authorities have been examining the issue, and a few in other parts
of the country have required cable operators to provide such access. Several
Federal courts have ruled that localities are not authorized to require such
access.
49
The FCC has initiated a rulemaking proceeding into the appropriate
regulatory treatment of Internet offered on cable systems. We are unable to
predict the outcome of this proceeding or its effects upon our business.
NEWSPAPER PUBLISHING
Our two daily metropolitan newspapers, the Pittsburgh Post-Gazette and The
Blade, are the dominant newspapers in their respective markets. Our newspapers
have a combined daily and Sunday average paid circulation of approximately
381,000 and 603,000, respectively. We believe the leading positions of our
newspapers result from our long standing presence, our commitment to high
standards of journalistic excellence and integrity, and our emphasis on local
news, local impacts of national and international news, and service to our
communities. Our newspapers have received many national and regional awards for
editorial excellence. Our newspaper publishing operations generated revenues,
operating income and EBITDA of $264.7 million, $1.9 million and $15.8 million,
respectively, in the year ended December 31, 2001, and $61.6 million, $44,000
and $3.1 million, respectively, in the quarter ended March 31, 2002.
We are pursuing the following newspaper publishing strategies:
Produce the Highest Quality Newspaper in Our Markets. We believe our
reputation for producing high-quality publications is the foundation for our
publishing success. We are frequently recognized by our industry for the quality
of our journalism. Both newspapers have won numerous awards, including Pulitzer
Prizes for Photography awarded to the Post-Gazette in 1992 and 1998 and the
Investigative Reporters and Editors Medal awarded to The Blade in 2000. The
Pennsylvania Newspaper Publishers Association named the Post-Gazette as
Pennsylvania's Newspaper of the Year in 2001. We maintain a highly regarded
staff of columnists and editors committed to excellence, and we are continuously
seeking to improve our publications.
Implement Cost Rationalization Initiatives. To improve cash flow at our
newspapers, we have embarked upon a comprehensive review of our cost structure,
including labor expenses and other significant operating costs. We are currently
reviewing staffing requirements for opportunities to realize labor efficiencies.
With respect to other operating costs, our newspapers coordinate purchasing
requirements and have achieved favorable terms on newsprint purchases. In
addition, we plan to reduce the page width at both of our newspapers from 54
inches to 50 inches by the end of 2004, reducing our annual newsprint
consumption by approximately 7%. If this initiative had been completed by
January 1, 2001, we would have realized savings of approximately $2.5 million in
newsprint costs for the year ended December 31, 2001.
Strengthen our Brands by Focusing on Local News and Community
Service. Each of our newspapers is a leading local news and information source
with strong brand recognition in its market. We believe that maintaining our
position as a primary source of local news will continue to provide a powerful
platform upon which to serve the local communities and local advertisers. We
intend to continue to increase brand awareness and market penetration through
local marketing partnerships, creative subscriber campaigns, strong customer
service and the use of our two interactive online newspaper editions. These two
Web sites, post-gazette.com and toledoblade.com, are the most frequently visited
local media sites in their respective markets according to an independent
research organization. Our two leading sites increase our market presence and
provide an additional source of advertising revenue.
Pursue Circulation and Other Revenue Growth Opportunities. We are
continuously evaluating ways to expand circulation and increase revenues. We are
using new suburban zone coverage, customer service programs and targeted
marketing campaigns to increase our circulation. We believe that through the use
of zoning (news and advertising directed to a particular local area), research,
and demographic studies, our marketing programs better meet the unique needs of
individual advertisers, thus maximizing advertising revenues. Capitalizing on
our high penetration, we have also launched in Toledo a broad market coverage
program in which we deliver preprinted advertising inserts to all subscriber and
non-subscriber households in areas targeted by the advertiser. We also plan to
grow our revenue by expanding our delivery services for third-party publishers
and increasing advertising on our Web sites.
50
THE PITTSBURGH POST-GAZETTE
Founded in 1786, the Pittsburgh Post-Gazette is the leading newspaper in
Pittsburgh and Western Pennsylvania and has a long history of service and
journalistic excellence. The Post-Gazette has more than twice the circulation of
any other newspaper in the Pittsburgh Metropolitan Statistical Area (MSA). The
Post-Gazette has a daily average paid circulation of approximately 241,800 and a
Sunday average paid circulation of approximately 412,700, resulting in
penetration of approximately 43% daily and 64% Sunday in the Pittsburgh city
zone (Pittsburgh and nearby suburbs). Our dominant market position allows us to
capture advertising revenue significantly greater than that of any other
newspaper in this market.
The Post-Gazette is a morning daily and Sunday newspaper covering 16
counties in Western Pennsylvania, Northern West Virginia and Western Maryland,
including the greater Pittsburgh metropolitan area. With a population of 2.4
million, the six-county Pittsburgh MSA is currently the 22nd largest MSA in the
United States. The population of the 16-county area served by the Post-Gazette
is approximately 2.9 million. Pittsburgh's major non-governmental employers
include UPMC Health System, US Airways, West Penn Allegheny Health System, the
University of Pittsburgh, Mellon Financial Corporation, PNC Financial Services
Group and United States Steel Corporation. Other significant Pittsburgh-based
companies include H.J. Heinz Company, PPG Industries, Federated Investors, Alcoa
and FreeMarkets.
The following table sets forth certain circulation, advertising lineage and
operating revenue information for the Post-Gazette for the past three years:
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Circulation(1):
Daily (excluding Saturday).............................. 244,310 241,524 241,827
Sunday.................................................. 431,172 417,815 412,691
Advertising lineage (in thousands of inches):
Retail.................................................. 722 670 613
General................................................. 136 144 143
Classified.............................................. 770 787 671
-------- -------- --------
Total................................................... 1,628 1,601 1,427
Part run................................................ 217 208 204
-------- -------- --------
Total inches....................................... 1,845 1,809 1,631
======== ======== ========
Operating revenues (in thousands):
Third-party advertising................................. $153,377 $160,611 $147,735
Circulation............................................. 34,252 33,800 32,663
Other................................................... 805 1,076 1,518
-------- -------- --------
Total revenues..................................... $188,434 $195,487 $181,916
======== ======== ========
</Table>
- ---------------
(1) From the ABC Audit Reports as of March 31 of each year.
The Post-Gazette concentrates on local and regional news of Pittsburgh and
Western Pennsylvania and has 248 full-time and 31 part-time editors, reporters
and photographers on its staff. It draws upon the news reporting facilities of
the major wire services and, with The Blade, maintains a four-person bureau in
Washington, D.C. The Post-Gazette also maintains a news bureau in Harrisburg,
Pennsylvania, the state capital, and five local news bureaus in the Pittsburgh
metropolitan area.
The Post-Gazette publishes and distributes all of its newspapers from its
printing facilities in downtown Pittsburgh to 19 distribution centers located
throughout the greater Pittsburgh area. Sophisticated computer systems are used
for writing, editing, composing and producing the printing plates used in each
edition. The Post-Gazette has seven letterpress presses with new color flexo
units on each press. The flexo units provide state-of-the-art color to the
fronts and backs of most sections. Daily inserts
51
are assembled at our downtown facility. Sunday inserts are assembled at a
separate plant, five miles from our downtown plant, and transported directly to
our distribution centers. Our five-year capital plan includes a reconfiguration
and renovation of our press lines and mailroom in 2003 and 2004.
The Post-Gazette is distributed primarily through independent home delivery
carriers and single-copy dealers. Home delivery accounted for approximately 76%
of circulation for the daily editions and approximately 59% of circulation for
the Sunday edition during 2001. The newsstand price is $0.50 for the daily paper
and $1.50 for the Sunday edition. Annual rates for direct payment subscriptions
are $140.92 for daily and Sunday, $96.20 for Saturday and Sunday, $78.00 for
Sunday only and $78.00 for Monday through Friday.
THE BLADE
Founded in 1835, The Blade is the leading newspaper in Northwest Ohio by
average paid circulation and has a significant influence on the civic,
political, economic and cultural life of its subscribers and the communities it
serves. The Blade is the oldest continuing business in Toledo and has no
significant newspaper competition. The Blade has a daily average paid
circulation of approximately 138,800 and a Sunday average paid circulation of
approximately 190,800, resulting in penetration in the Toledo city zone (Toledo
and nearby suburbs) of approximately 53% daily and 68% Sunday, the highest city
zone penetration rate of any newspaper in Ohio. This combination of high
circulation and penetration is central to our success in attracting advertising
and maintaining our dominant share of market revenue.
The Blade is a morning daily and Sunday newspaper covering 14 counties in
northwest Ohio and southeast Michigan, including the greater Toledo metropolitan
area. With a population of 618,203, the three-county Toledo MSA is currently the
69th largest MSA in the United States. The combined population of the 14-county
area served by The Blade is approximately 1,261,000. Toledo's major non-
governmental employers include ProMedica Health Systems, Mercy Health Partners,
Daimler-Chrysler, Bowling Green State University, The University of Toledo,
Seaway FoodTown, General Motors, Sauder Woodworking and the Medical College of
Ohio. Other significant Toledo-based companies include Dana Corporation,
Owens-Illinois, HCR ManorCare and Pilkington Glass.
The following table sets forth certain circulation, advertising lineage and
operating revenue information for The Blade for the past three years:
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Circulation(1):
Daily (including Saturday).............................. 145,427 140,119 138,819
Sunday.................................................. 200,539 193,190 190,794
Advertising lineage (in thousands of inches):
Retail.................................................. 622 563 484
General................................................. 75 80 79
Classified.............................................. 437 460 395
-------- -------- --------
Total inches....................................... 1,134 1,103 958
======== ======== ========
Operating revenues (in thousands):
Advertising............................................. $ 74,461 $ 80,362 $ 69,431
Intercompany advertising................................ (5,198) (6,913) (5,262)
Circulation............................................. 17,200 16,873 17,317
Other................................................... 930 908 1,277
-------- -------- --------
Total revenues..................................... $ 87,393 $ 91,230 $ 82,763
======== ======== ========
</Table>
- ---------------
(1) From the ABC Audit Reports as of September 30 of each year.
52
The Blade concentrates on local and regional news of northwest Ohio, and
extensive coverage of state government. It has 148 full-time and 21 part-time
editors, reporters and photographers on its staff. It draws upon the news
reporting facilities of the major wire services and, with the Post-Gazette,
maintains a four-person bureau in Washington, D.C. The Blade also maintains a
news bureau in Columbus, Ohio, the state capital, and three local news offices
in the Toledo metropolitan area.
The Blade publishes and distributes all of its newspapers from its printing
facility in downtown Toledo to eight distribution centers throughout the
metropolitan Toledo area. Sophisticated computer systems are used for writing,
editing, composing and producing each edition. The Blade has three color flexo
presses, each with nine press units, which produce state-of-the-art color, and
clean, clear images. Daily and Sunday inserts are assembled at a downtown
facility near The Blade's main production plant.
The Blade is distributed primarily through independent home delivery
carriers and single-copy dealers. Home delivery accounted for approximately 80%
of circulation for the daily editions and approximately 73% of circulation for
the Sunday edition during 2001. The newsstand price is $0.50 for the daily paper
and $1.50 for the Sunday edition. Annual subscription rates are $135.20 for
daily and Sunday, $78.00 for Sunday only and $70.20 for daily only.
ADVERTISING
Substantially all of our advertising revenues are derived from local and
national retailers and classified advertisers. Advertising rates and rate
structures vary between our newspapers and are based, among other things, on
advertising effectiveness, local market conditions, circulation, readership and
type of advertising (whether classified, national or retail). Our advertising
revenues are not reliant upon any one company or industry, but rather are
supported by a variety of companies and industries, including realtors, car
dealerships, grocery stores and other local businesses. Our largest single
advertiser accounted for 4.2% of our publishing segment's total net advertising
revenues in 2001.
The contributions of retail, classified and national advertising to
third-party advertising revenues for the past three years were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
Advertising revenues:
Retail....................... $110,813 $116,504 $108,694 $ 22,850 $ 23,231
Classified................... 91,195 94,943 78,944 20,464 19,490
National..................... 25,830 29,526 29,528 7,612 6,586
-------- -------- -------- -------- --------
Total................... 227,838 240,973 217,166 50,926 49,307
Intercompany advertising..... (5,198) (6,913) (5,262) (1,677) (691)
-------- -------- -------- -------- --------
Total net advertising... $222,640 $234,060 $211,904 $ 49,249 $ 48,616
======== ======== ======== ======== ========
</Table>
ONLINE EDITIONS
The Post-Gazette's Internet Web site, post-gazette.com, reaches over a
million unique users per month with over 15 million page views. The Blade's
Internet Web site, toledoblade.com, reaches over 175,000 unique users per month
with over 2.7 million page views. Each site contains breaking news, summaries of
articles from the print editions, information produced specifically for the Web
site and portions of the classified advertising from the print editions. The Web
sites contribute to our revenues by expanding our classified marketplace and
providing new partnership and advertising opportunities for retailers. An
independent study conducted by Belden Research in the spring of 2001 found that
people who visit the Post-Gazette Web site are more likely to increase rather
than to decrease their readership of the print edition.
53
COMPETITION
We face competition for advertising revenue from television, radio, the
Internet and direct-mail programs, as well as competition for both advertising
and circulation from suburban neighborhood, local and national newspapers and
other publications. Competition for advertising is based on circulation levels,
readership demographics, advertising rates and advertiser results. Competition
for circulation is generally based upon content, journalistic quality and price.
The following table shows the average daily and Sunday paid circulation of
the Post-Gazette as compared to average paid circulations of other newspapers in
the Pittsburgh MSA:
<Table>
<Caption>
PITTSBURGH MSA
------------------------------
AUDIT
DAILY SUNDAY PERIOD(1)
------- ------- ----------
Pittsburgh Post-Gazette..................................... 229,717 371,404 3/2001
Greensburg Tribune Review................................... 82,624 168,272 3/2001
Beaver County Times......................................... 41,943 48,304 6/2001
Observer Reporter........................................... 30,716 34,783 12/2001
Butler Eagle................................................ 27,818 29,119 6/2001
Uniontown Herald Standard................................... 26,649 28,787 6/2001
Valley News Dispatch........................................ 24,324 24,215 3/2001
USA Today................................................... 24,069 -- 12/2000
McKeesport Daily News....................................... 20,756 -- 3/2001
The Wall Street Journal..................................... 16,552 -- 3/2001
The New York Times.......................................... 5,015 7,901 9/2000
</Table>
- ---------------
(1) Based on average paid circulation as set forth in the ABC Audit Report for
each newspaper for the indicated audit period.
The following table shows the average daily and Sunday paid circulation of
The Blade as compared to average paid circulations of other newspapers in the
Toledo MSA:
<Table>
<Caption>
TOLEDO MSA
------------------------------
AUDIT
DAILY SUNDAY PERIOD(1)
------- ------- ----------
The Blade................................................... 111,777 145,987 9/2001
Bowling Green Sentinel-Tribune.............................. 11,590 -- 9/2001
USA Today................................................... 9,098 -- 12/2000
The Wall Street Journal..................................... 4,362 -- 3/2001
The Detroit News/Free Press................................. 1,910 1,812 3/2001
Findlay Courier............................................. 901 -- 6/2001
Defiance Crescent-News...................................... 894 924 6/2001
The New York Times.......................................... 419 588 9/2000
</Table>
- ---------------
(1) Based on average paid circulation as set forth in the ABC Audit Report for
each newspaper for the indicated audit period.
RAW MATERIALS
Newsprint and ink are our newspaper publishing segment's largest expense
after labor costs and accounted for $42.5 million, or 16.2%, of the segment's
operating expenses in 2001. During 2001, we used approximately 65,000 metric
tons of newsprint in our production processes at an estimated total cost for
newsprint of approximately $37 million. In the last three years, our weighted
average cost per ton of newsprint has varied from a low of $499 per metric ton
in 1999 to a high of $572 per metric ton in 2001.
All of our newsprint is supplied under a long-term sole-supplier contract
expiring at the end of 2004. Pricing under the contract varies with market
prices. The contract provides for a discount as long as we use the contract
vendor as our sole supplier of newsprint.
54
In addition to maximizing layout efficiency and minimizing waste, we plan
to reduce our page width by the end of 2004, reducing our annual newsprint
consumption by approximately 7%. If this initiative had been completed by
January 1, 2001, we would have realized savings of approximately $2.5 million in
newsprint costs for the year ended December 31, 2001.
SEASONALITY
Newspaper companies tend to follow a distinct and recurring seasonal
pattern, with higher advertising revenues generally occurring in the second and
fourth quarters of each year as a result of increased advertising activity
during the Easter holiday and spring advertising season and during the
Thanksgiving and Christmas periods. The first quarter is historically the
weakest quarter for advertising revenues.
TELEVISION BROADCASTING
We acquired the first of our current television broadcasting stations in
1972, when we purchased WLIO in Lima, and currently own and operate four
television stations. We are also a two-thirds owner of a fifth station, which is
managed by LIN Television under a management services agreement. Our television
stations are diverse in network affiliation with two Fox stations, one NBC
station, one ABC station and one UPN station. We have a duopoly in Louisville,
Kentucky (the 50th largest DMA) through our ownership of the Fox and UPN
stations. In the year ended December 31, 2001 and the quarter ended March 31,
2002, our television broadcasting operations generated revenues of $35.2 million
and $9.0 million, respectively, experienced operating losses of $1.8 million and
$55,000, respectively, and generated EBITDA of $3.1 million and $1.0 million,
respectively.
We own the following broadcast properties:
<Table>
<Caption>
COMMERCIAL
CHANNEL DMA STATIONS IN
STATION NUMBER MARKET RANK(1) AFFILIATION DMA(2)
- ------- ------- ------ ------- ----------- -----------
WDRB 41 Louisville, KY 50 Fox 7
WFTE 58 Louisville, KY(3) 50 UPN 7
WAND(4) 17 Champaign-Springfield and Decatur, IL 82 ABC 5
KTRV 12 Boise, ID(5) 121 Fox 5
WLIO 35 Lima, OH 191 NBC 2
</Table>
- ---------------
(1) Ranking of DMA served by a station among all DMAs is measured by the number
of television households based within the DMA in the November 2001 Nielsen
estimates.
(2) The term "commercial station" means a television broadcasting station and
does not include non-commercial television stations, cable program services
or networks, or stations that do not meet the minimum Nielsen reporting
standards.
(3) Licensed to Salem, Indiana.
(4) We have a two-thirds ownership interest in WAND, which is managed by LIN
Television.
(5) Licensed to Nampa, Idaho.
We seek to maintain a distinct identity at each of our stations by creating
quality local programming, such as local news and sports coverage, and by
actively sponsoring and promoting community events. This focus positions us to
increase our share of local advertising revenues, which are generally more
stable than national advertising revenues and which we impact directly through
our own local sales force. We currently are conducting a thorough review of our
cost structure in light of current weak advertising revenue. We have reduced
headcount at our broadcasting operations and believe that through continued cost
reduction efforts and effective local programming, we can increase operating
margins.
MARKETS SERVED
The following is a description of each of our stations and their markets.
In the description, information concerning estimates of population, total market
revenues and average household income has been derived from the BIA Guide, which
is a leading compilation of demographic and broadcast industry data. In the
description, the term "commercial station" means a television broadcasting
station and does
55
not include non-commercial television stations, cable program services or
networks, or stations that do not meet the minimum Nielsen reporting standards
and the term "audience share" means the audience share from 8:00 a.m. to
midnight as reported in the BIA Guide.
Louisville, Kentucky is the 50th-largest DMA in the United States, with a
population of approximately 1.5 million and approximately 599,000 television
households. The average household income in the Louisville DMA is approximately
$43,500. Total Market Revenues in the Louisville DMA in 2001 were approximately
$109 million. Cable penetration in the market is estimated to be 64%. In March
2001, we acquired from Kentuckiana Broadcasting, the assets of WFTE, which we
had previously operated under a joint-sales agreement. For the November 2001
ratings period, WDRB ranked fourth in the Louisville DMA with an audience share
of 8%, and WFTE ranked fifth, tying with one other station, in the Louisville
DMA with an audience share of 4%. There are five other commercial television
stations, owned by Cosmos Broadcasting, Cascade Broadcasting, Word Broadcasting,
Belo Corp. and Hearst-Argyle TV, and three public television stations licensed
within the Louisville DMA.
Champaign-Springfield and Decatur, Illinois is the 82nd-largest DMA in the
United States, with a population of approximately 900,000 and approximately
362,000 television households. The average household income in this DMA is
approximately $45,000. Total Market Revenues for television in this DMA in 2001
were approximately $44 million. Cable penetration in the market is estimated to
be 75%. In March 2000, we acquired a two-thirds interest in WAND from LIN
Television. LIN continues to own a one-third interest in WAND and provides
management services. For the November 2001 ratings period, WAND ranked third in
its market with an audience share of 12%. There are four other commercial
television stations, owned by Nexstar Broadcasting Group, Sinclair Broadcast
Group, Acme Television and Bahakel Communications, and four public television
stations licensed within the Champaign-Springfield and Decatur DMA.
Boise, Idaho is the 121st-largest DMA in the United States, with a
population of approximately 550,000 and approximately 220,000 television
households. The average household income in the Boise DMA is approximately
$44,500. Total Market Revenues in the Boise DMA in 2001 were approximately $37
million. Cable penetration in the market is estimated to be 46%. For the
November 2001 ratings period, KTRV ranked second in its market, tying with two
other stations, with an audience share of 11%. There are four other commercial
television stations, owned by Fisher Broadcasting, Journal Broadcasting Group,
Banks Broadcasting and Belo Corp., and one public television station licensed
within the Boise DMA.
Lima, Ohio is the 191st-largest DMA in the United States, with a population
of approximately 107,000 and approximately 57,000 television households. The
average household income in the Lima DMA is approximately $39,700. Total Market
Revenues in the Lima DMA in 2001 were approximately $4.6 million. Cable
penetration in the market is estimated to be 82%. For the November 2001 ratings
period, WLIO ranked first in its market with an audience share of 24%. There is
one other commercial television station, owned by Greg Phipps, and one public
television station licensed within the Lima DMA.
INDUSTRY
Television station revenues are primarily derived from local, regional and
national advertising and, to a lesser extent, from network compensation and
revenues from commercial production activities. Advertising rates are based upon
a variety of factors, including a program's popularity among the viewers an
advertiser wishes to attract, the number of advertisers competing for the
available time, the size and demographic makeup of the market served by the
station, the availability of alternative advertising media in the market area
and the effectiveness of the station's sales force. Rates are also determined by
a station's overall ratings and share in its market, as well as the station's
ratings and share among particular demographic groups which an advertiser may be
targeting. Advertising revenues are positively affected by strong local
economies, national and regional political election campaigns, and certain
events such as the Olympic Games or the Super Bowl. Because television stations
rely on advertising revenues, declines in advertising budgets, particularly in
recessionary periods, adversely affect the revenues of television stations.
56
ADVERTISING SALES
All network-affiliated stations are required to carry spot advertising sold
by their networks, which reduces the amount of advertising spots available for
sale by our stations. Our stations sell all of the remaining advertising to be
inserted in network programming and all of the advertising in non-network
programming, retaining the revenues received from these sales. In 2001,
approximately 99% of our broadcasting revenues came from the sale of time to
national and local advertisers. Approximately 65% of our broadcast revenues came
from local advertising, 34% came from national advertising, none came from
political advertising and our remaining revenues came from network compensation
payments under our network affiliate agreements and miscellaneous sources. A
national syndicated program distributor will often retain a portion of the
available advertising time for programming it supplies in exchange for no fees
or reduced fees charged to the stations for such programming. These arrangements
are called barter programming.
Local Sales. Local advertising time is sold by each station's local sales
staff who call upon advertising agencies and local businesses, which typically
include car dealerships, retail stores and restaurants. Compared to revenues
from national advertising accounts, revenues from local advertising are
generally more stable and more controllable. We seek to attract new advertisers
to television, and to increase the amount of advertising time sold to existing
local advertisers, by relying on experienced local sales forces with strong
community ties, producing news and other programming with local advertising
appeal and sponsoring or co-promoting local events and activities.
National Sales. National advertising time is sold through national sales
representative firms which call upon advertising agencies, whose clients
typically include automobile manufacturers and dealer groups, telecommunications
companies, fast food franchisers and national retailers (some of which may
advertise locally).
NETWORK AFFILIATIONS
Whether or not a station is affiliated with one of the four major networks
(NBC, ABC, CBS or Fox) has a significant impact on the composition of the
station's revenues, expenses and operations. Except for Fox, a major network
affiliate receives the majority of its programming each day from the network.
Our stations are affiliated with their networks pursuant to an affiliation
agreement, with the exception of our Fox stations that are governed by
affiliation agreements that remain unsigned. WDRB and KTRV are affiliated with
Fox; WAND is affiliated with ABC; WLIO is affiliated with NBC; and WFTE is
affiliated with UPN.
Our affiliation agreements provide the affiliated station with the right to
broadcast all programs transmitted by the network with which it is affiliated.
In exchange, the network has the right to sell a substantial majority of the
advertising time during these broadcasts. In addition, for each hour that the
station elects to broadcast network programming, the network pays the station a
fee (with the exception of Fox and UPN), specified in the affiliation agreement,
which varies with the time of day. Typically, "prime-time" programming generates
the highest hourly rates.
Our ABC affiliation agreement for WAND expires on September 4, 2005. The
NBC affiliation agreement for WLIO expires on December 31, 2010. Our UPN
affiliation agreement for WFTE expires on January 12, 2003.
DIGITAL TELEVISION
The digital television, or DTV, transmission system delivers video and
audio signals of higher quality (including high definition television) than the
existing analog transmission system. DTV also has substantial capabilities for
multiplexing (the broadcast of several programs concurrently) and data
transmission. Digital television will require consumers to purchase new
televisions that are capable of receiving and displaying DTV signals or adapters
to receive DTV signals and convert them into analog signals for display on
existing receivers.
57
In April 1998, the FCC assigned each licensed television station a second
broadcast channel on which to provide DTV service. In general, the DTV channels
assigned to television stations are intended to allow stations to have their DTV
coverage area replicate their analog coverage area, although a number of
variables will ultimately determine the extent to which a station's DTV
operation will provide such replication.
By May 1, 2002, all commercial television station licensees were required
to complete construction and commence operating DTV facilities except to the
extent that the FCC extended the deadline in certain cases. WAND met the May 1,
2002 deadline. WFTE has until May 13, 2003 to construct because of FCC delays in
issuing the construction permit. KTRV is not required to construct digital
facilities until the FCC determines which digital channel KTRV will ultimately
utilize. Our remaining stations -- WDRB and WLIO -- requested waivers of the May
1, 2002 deadline. On June 14, 2002, the FCC denied those requests and ordered
WDRB and WLIO to construct digital television transmission systems no later than
December 1, 2002. The FCC also directed the stations to submit to the FCC, by
July 15, 2002, reports setting forth construction plans and a proposed timetable
for construction that would meet the December 1, 2002 deadline. Finally, the FCC
directed the stations to file by September 13, 2002 interim progress reports
regarding their digital construction efforts.
In compliance with the FCC's order, the two stations have submitted to the
FCC their construction plans and proposed timetable for construction of digital
transmission systems. Both stations' plans call for the construction of
lower-power digital transmission systems sufficient to provide digital
television coverage for the station's city of license -- Lima, Ohio for WLIO,
Louisville, Kentucky for WDRB. The timetables call for construction to be
completed, and the facilities fully operational, by December 1, 2002.
The lower-power construction plans comply with FCC rules and policies
regarding digital television transmission, which expressly permit lower-power
facilities. We anticipate that, at some point in the future, the FCC will
establish a deadline by which such lower-power systems must be upgraded to full
power systems that provide coverage to a broader geographic area. When such a
deadline is established, we will comply with it by upgrading our facilities. We
estimate that approximately $12 million of capital expenditures after March 31,
2002 will be necessary to meet the DTV requirements for all of our stations.
Once a station begins broadcasting its DTV signal, it may broadcast both
its analog and DTV signals until December 31, 2006, after which, subject to
certain conditions described below, the FCC expects to reclaim one of the
channels and broadcasters will operate a single DTV channel allocation. Starting
April 1, 2003, commercial station operators must simulcast at least 50 percent
of the video programming broadcast on their analog channel on their DTV channel.
The required simulcast percentage increases annually until April 1, 2005, when
an operator must simulcast 100 percent of its programming on its analog and DTV
channels.
COMPETITION
Television broadcasting stations face competition for advertising revenue,
audience share and programming. Our competitive position depends, in part, on
our signal coverage and assigned frequency and is materially affected by new and
changing technologies, regulations passed by federal agencies, including the FCC
and the Federal Trade Commission, and other entertainment and communication
industries.
Our stations compete for advertising revenues with other television
broadcasting stations in their respective markets and, to a lesser extent, with
other advertising media such as newspapers, radio stations, magazines, outdoor
advertising, yellow page directories, direct mail, and local cable systems
serving the same market. Competition for advertising dollars in the television
broadcasting industry occurs primarily within individual markets.
Stations compete for viewership generally against other leisure activities
in which one could choose to engage rather than watch television. Broadcast
stations compete for audience share specifically on the basis of program
popularity, which has a direct effect on advertising rates. A portion of our
broadcast
58
programming is supplied by the network affiliated with our station and during
that time period, our ability to attract viewers is dependent on the performance
of the network programming. During non-network time periods, we broadcast a
combination of self-produced news, public affairs and other entertainment
programming including syndicated programs. The development of new methods of
video transmission, and in particular the growth of cable television and
increases in the transmission range of over-the-air television broadcasting
signals, has significantly altered competition for audience share in the
television industry by increasing the number of stations available to viewers.
Home entertainment systems such as VCRs, DVDs and television game devices also
compete for audience share. Future sources of competition include the
transmission of video programming over broadband Internet and specialized
"niche" programming targeted at very narrowly defined audiences.
In acquiring programming to supplement network programming, network
affiliates compete with other broadcasting stations in their markets.
Competition for programming involves negotiating with national program
distributors or syndicators that sell first-run and rerun packages of
programming. Our stations compete for exclusive access to off-network reruns
(such as "Friends") and first-run products (such as "Jeopardy") in their
respective markets. AOL/Time Warner, Viacom and News Corp., each of which has a
television network or cable broadcast stations, also own or control major
production studios, which are the primary source of programming for the
networks. It is uncertain whether in the future such programming, which is
generally subject to short-term agreements between the studios and the networks,
will be made available to broadcast stations not affiliated with the studio.
Television broadcasters also compete for non-network programming unique to the
markets they serve. As such, stations strive to provide exclusive news stories,
unique features such as investigative reporting and coverage of community
events, and to secure broadcast rights for regional and local sporting events.
OTHER OPERATIONS
Buckeye TeleSystem, Inc. is a competitive local exchange carrier which
provides facilities-based business telephony primarily in the Toledo market
serviced by Buckeye CableSystem. Our telephony system offers services ranging
from business voice lines to high bandwidth data lines to mid- to large-size
businesses. Buckeye TeleSystem generated revenues and EBITDA of $13.6 million
and $1.5 million, respectively, for the year ended December 31, 2001 and $4.2
million and $1.2 million, respectively, for the three months ended March 31,
2002.
Corporate Protection Services, based in Toledo, designs and installs
residential and light commercial security and fire alarm systems primarily in
Toledo but also in other locations throughout the country. From its Toledo
monitoring facility, CPS provides 24-hour monitoring services for security
systems in Toledo and elsewhere. For the year ended December 31, 2001, CPS
generated revenues of $8.6 million and negative EBITDA of $166,000. For the
three months ended March 31, 2002, CPS generated revenues of $2.1 million and
EBITDA of $34,000.
Access Toledo provides conventional dial-up Internet access over telephone
lines. It has approximately 6,600 subscribers in the greater Toledo metropolitan
area. Access Toledo generated revenues and EBITDA of $2.0 million and $963,000,
respectively, for the year ended December 31, 2001. In 2002, Access Toledo's
operations were absorbed into Buckeye CableSystem and Buckeye TeleSystem.
Community Communication Services, Inc. provides printing and door-to-door
delivery of advertising circulars in the greater Toledo metropolitan area. For
the year ended December 31, 2001, CCS generated revenues of $839,000 and
negative EBITDA of $921,000. For the three months ended March 31, 2002, CCS
generated revenues of $122,000 and negative EBITDA of $159,000.
EMPLOYEES
As of March 31, 2002, we had approximately 3,020 full- and part-time
employees. Of these, approximately 400 were employed in cable television, 2,117
in newspaper publishing, 243 in television broadcasting and 260 in other
operations and general corporate.
59
Substantially all non-management employees of our both newspapers are
represented by various labor unions. The labor agreements with the 10 unions
representing the employees of the Post-Gazette expired December 31, 2001. On
June 27, 2002, we reached tentative agreements with representatives of the 10
Pittsburgh unions on the terms of collective bargaining agreements that would
run through December 31, 2006. Those tentative agreements are subject to
ratification by union members; the bargaining representatives have pledged their
full support in the ratification process and are optimistic, as are we, that the
tentative agreements will be ratified. However, there can be no assurances that
ratification will occur. The employees of The Blade are represented by eight
unions under labor agreements that expire in March 2003. We believe that our
relations with our newspaper employees are good.
In addition to our newspaper employees, as of March 31, 2002 we had
approximately 150 employees in cable television and related services who were
represented by the Brotherhood of Teamsters under collective bargaining
agreements which expire in 2003 and 2004. We believe that overall our employee
relations are good.
LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in a number of
lawsuits and administrative proceedings. While uncertainties are inherent in the
final outcome of these matters, management believes, after consultation with
legal counsel, that the disposition of these proceedings should not have a
material adverse effect on our financial position, results of operations or
liquidity.
PROPERTIES
Our principal executive offices are located at 541 N. Superior Street,
Toledo, Ohio.
The types of properties required to support cable television operations
include offices, operations centers and hub sites where signals are received and
distributed, and related warehouse space. The types of properties required to
support newspaper publishing include offices, facilities for printing presses
and production and storage, and depots for distribution. The types of properties
required to support television broadcasting stations include offices, studios,
transmitter sites and antennas sites. A station's studios are generally housed
with its offices. The transmitter sites and antenna are generally located in
elevated areas to provide optimal signal strength and coverage.
60
The following table sets forth certain information regarding our
significant properties:
CABLE TELEVISION
<Table>
<Caption>
OWNED OR APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE LEASED SIZE OF LEASE
- ------------------------- --- -------- ----------- --------------
Buckeye CableSystem
Toledo, OH................ Office space Leased 1,430 sf September 2005
Toledo, OH................ Office space Leased 1,600 sf July 2005
Toledo, OH................ Office space Owned 35,690 sf --
Toledo, OH................ Operations center (headend) Owned 36,000 sf --
Toledo, OH................ Operations center warehouse Owned 9,200 sf --
Toledo, OH................ Warehouse Leased 31,080 sf December 2002
Toledo, OH................ Hub site Owned 800 sf --
Toledo, OH................ Hub site Owned 720 sf --
Toledo, OH................ Hub site Owned 300 sf --
Toledo, OH................ Hub site Owned 160 sf --
Toledo, OH................ Hub site Leased 60 sf February 2023
Toledo, OH................ Hub site Leased 60 sf November 2023
Toledo, OH................ Hub site Leased 60 sf August 2022
Toledo, OH................ Hub site Leased 60 sf August 2022
Toledo, OH................ Hub site Leased 60 sf October 2022
Toledo, OH................ Hub site Leased 60 sf April 2023
Toledo, OH................ Hub site Leased 160 sf September 2022
Toledo, OH................ Hub site Leased 160 sf November 2022
Toledo, OH................ Hub site Leased 160 sf February 2023
Toledo, OH................ Hub site Leased 160 sf June 2022
Toledo, OH................ Hub site Leased 120 sf June 2003
Toledo, OH................ Hub site Owned 240 sf --
Erie County CableSystem
Sandusky, OH.............. Office space Leased 16,750 sf June 2015
Erie Co., OH.............. Headend Owned 2,823 sf --
Sandusky, OH.............. Warehouse Owned 1,536 sf --
Sandusky, OH.............. Warehouse Leased 17,000 sf April 2003
</Table>
61
PUBLISHING
<Table>
<Caption>
OWNED OR APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE LEASED SIZE OF LEASE
- ------------------------- --- -------- -------------- ----------
Pittsburgh Post-Gazette:
Pittsburgh, PA............ Printing plant/office Owned 230,400 sf --
Pittsburgh, PA............ Office space Leased 360 sf March 2004
Greensburg, PA............ Office space Leased 450 sf June 2003
Pittsburgh, PA............ Inserting facility Owned 33,565 sf --
Pittsburgh, PA............ Garage Owned 19,655 sf --
Bethel Park, PA........... Distribution center Leased 10,000 sf July 2005
Carnegie, PA.............. Distribution center Leased 10,300 sf May 2003
Coraopolis, PA............ Distribution center Leased 8,800 sf February 2004
Cranberry, PA............. Distribution center Leased 9,000 sf April 2004
Donora, PA................ Distribution center Leased 10,000 sf December 2002
Gibsonia, PA.............. Distribution center Leased 10,000 sf February 2006
Houston, PA............... Distribution center Leased 10,000 sf June 2003
Lawrence, PA.............. Distribution center Leased 10,200 sf September 2004
McKeesport, PA............ Distribution center Leased 10,000 sf May 2004
Monaca, PA................ Distribution center Leased 7,500 sf August 2003
Monroeville, PA........... Distribution center Leased 10,600 sf July 2003
Pittsburgh, PA............ Distribution center Leased 14,700 sf March 2007
Pittsburgh, PA............ Distribution center Leased 12,000 sf Month to month
Pittsburgh, PA............ Distribution center Leased 13,500 sf April 2003
Pittsburgh, PA............ Distribution center Leased 10,000 sf December 2003
Sharpsburg, PA............ Distribution center Leased 10,200 sf March 2006
Tarentum, PA.............. Distribution center Leased 7,500 sf September 2003
West Mifflin, PA.......... Distribution center Leased 10,100 sf November 2002
Wilkinsburg, PA........... Distribution center Leased 17,000 sf May 2005
The Blade:
Toledo, OH................ Main building and printing plant Owned 160,000 sf --
Toledo, OH................ Inserting facility Leased 20,000 sf June 2009
Holland, OH............... Distribution center Leased 10,900 sf March 2012
Holland, OH............... Distribution center Leased 9,600 sf Month to month
Northwood, OH............. Distribution center Leased 9,800 sf January 2010
Perrysburg, OH............ Distribution center Leased 10,000 sf August 2002
Sylvania Twp., OH......... Distribution center Leased 10,000 sf March 2008
Toledo, OH................ Distribution center Leased 10,800 sf August 2002
Toledo, OH................ Distribution center Leased 12,500 sf September 2005
Toledo, OH................ Distribution center Leased 10,000 sf June 2009
Toledo, OH................ Distribution center Leased 9,800 sf April 2012
Toledo, OH................ Circulation department Owned 1,300 sf --
Toledo, OH................ Office space Owned 35,000 sf --
</Table>
TELEVISION BROADCASTING
<Table>
<Caption>
OWNED OR APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE LEASED SIZE OF LEASE
- ------------------------- --- -------- -------------- ----------
Independence Television Co.
Louisville, KY............ Office space Owned 35,000 sf --
Floyd County, IN.......... Tower Owned 72 acres --
Floyd County, IN.......... Satellite dish site Leased 1 acre 2015
Idaho Independent Television
Boise County, ID.......... Tower site Leased 200 sf July 2006
Nampa, ID................. Site for satellite dishes Leased 10,000 sf October 2005
Nampa, ID................. Office space and tower Owned 10,000 sf --
Lima Communications Corp.
Lima, OH.................. Office space and tower Owned 10,890 sf --
WLFI-TV, Inc. (WAND)
Decator, IL............... Office space, entertainment and tower Owned 18,500 sf --
Argenta, IL............... Tower Owned 2,200 sf --
Danville, IL.............. Equipment Leased 240 sf March 2003
</Table>
62
MISCELLANEOUS
<Table>
<Caption>
OWNED OR APPROXIMATE EXPIRATION
COMPANY/PROPERTY LOCATION USE LEASED SIZE OF LEASE
- ------------------------- --- -------- -------------- ----------
Block Communications, Inc.
Toledo, OH................ Condominiums Owned 3,000 sf --
Corporate Protection Service
Toledo, OH................ Office space Leased 12,000 sf March 2003
Toledo, OH................ Office and warehouse space Leased 20,000 sf June 2006
Community Comm. Services
Holland, OH............... Office and warehouse space Leased 22,000 sf June 2004
</Table>
Many of these properties are subject to liens securing our senior credit
facilities.
63
REGULATION
REGULATION OF CABLE TELEVISION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect us and the cable television industry. The following is
a summary of federal laws and regulations materially affecting the growth and
operation of the cable television industry and a description of certain state
and local laws. We believe that the regulation of the cable television industry
remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on us.
FEDERAL LEGISLATION
The principal federal statute governing the cable television industry is
the Communications Act of 1934, as amended. As it affects the cable television
industry, the Communications Act has been significantly amended on three
occasions: by the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act.
The 1996 Telecom Act altered the regulatory structure governing the nation's
telecommunications providers. It removed barriers to competition in both the
cable television market and the local telephone market. Among other things, it
also reduced the scope of cable rate regulation.
FEDERAL REGULATION
The FCC is the principal federal regulatory agency with jurisdiction over
cable television. It has adopted regulations covering such areas as
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, cable rates, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, political
programming and advertising, advertising during children's programming, signal
leakage and frequency use, maintenance of various records, and antenna structure
notification, marking and lighting. The FCC has the authority to enforce these
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. A brief summary of
certain of these federal regulations as adopted to date follows.
Rate Regulation. Where a cable television system is not subject to
effective competition, the rates for the basic service tier (the lowest level of
cable programming service which must include local broadcast channels and public
access channels) may be regulated by the local franchising authority at its
option. Rates for cable programming service tiers, which generally include
programming other than the channels carried on the basic service tier, and for
programming offered on a per-channel or per-program basis, are not subject to
governmental regulations. If local franchising authorities choose to regulate
basic service rates, they may order reductions and, in certain circumstances,
refunds of existing monthly rates and charges for associated equipment. In
carrying out their rate regulatory authority, however, local officials are
subject to certain FCC standards such as the obligation to evaluate rates in
accordance with FCC approved benchmark formulas or cost-of-service showings.
Future rates of regulated cable systems may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates also can be made in the event a cable
television operator adds or deletes channels. There is also a streamlined
cost-of-service methodology available to justify a rate increase for
"significant" system rebuilds or upgrades. With the exception of one franchise
covering 59 cable subscribers, we are currently not being regulated for basic
services, installation and equipment rates in any of our franchise areas.
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In June 2002, the FCC initiated a new rulemaking proceeding that examines
many issues related to its cable rate regulation rules and will consider whether
any existing regulations should be eliminated or revised in an attempt to
streamline the regulatory process while still providing protection to consumers.
We are unable to predict the outcome of this proceeding or its effects upon our
business.
Existing regulations require cable television systems to permit customers
to purchase video programming on a per channel or a per program basis without
the necessity of subscribing to any tier of service, other than the basic
service tier, unless the cable television system is technically incapable of
doing so. Generally, this exemption from compliance with the statute for cable
television systems that do not have such technical capability is available until
a cable television system obtains the capability, but not later than December
2002. Our cable systems have this capability.
Carriage of Television Broadcasting Signals. The 1992 Cable Act contains
signal carriage requirements which allow full-power commercial television
broadcasting stations that are "local" to a cable television system (i.e., the
system is located in the station's designated market area) to elect every three
years whether to require the cable television system to carry the station,
subject to certain exceptions, or whether the cable television system will have
to negotiate for "retransmission consent" to carry the station. The next
election between must-carry and retransmission consent will be October 1, 2002.
A cable television system is generally required to devote up to one-third of its
activated channel capacity for the carriage of local commercial television
stations whether pursuant to the mandatory carriage requirements or
retransmission consent requirements of the 1992 Cable Act. Local non-commercial
television stations are also given mandatory carriage rights, subject to certain
exceptions, on cable systems with the principal head-end located within the
larger of: (i) a 50-mile radius from the station's city of license or (ii) the
station's Grade B contour (a measure of signal strength). Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
television systems have to obtain retransmission consent for the carriage of all
"distant" commercial broadcast stations, except for certain "superstations"
(i.e., commercial satellite-delivered independent stations such as WGN). To
date, compliance with the "retransmission consent" and "must carry" provisions
of the 1992 Cable Act has not had a material effect on us, although this result
may change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
has initiated a rulemaking proceeding on the carriage of television signals in
high definition and digital formats. The outcome of this proceeding could have a
material effect on the number of services that a cable operator will be required
to carry.
Renewal of Franchises and Franchise Fees. The 1984 Cable Act established
renewal procedures and criteria designed to protect incumbent franchisees
against arbitrary denials of renewal. While these formal procedures are not
mandatory unless timely invoked by either the cable television operator or the
franchising authority, they can provide substantial protection to incumbent
franchisees. Even after the formal renewal procedures are invoked, franchising
authorities and cable television operators remain free to negotiate a renewal
outside the formal process. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading cable-related facilities and equipment and complying with
voluntary commitments, although the municipality must take into account the cost
of meeting such requirements. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations. Franchises have generally been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. Franchising authorities may also consider
the "level" of programming service provided by a cable television operator in
deciding whether to renew. For alleged franchise violations occurring after
December 29, 1984, franchising authorities have the right to deny renewal
because of an operator's failure to substantially comply with the material terms
of the franchise even if the franchising authority has "effectively acquiesced"
to such past violations. The franchising authority is, however, precluded from
denying renewal unless the franchising authority has provided the
65
cable operator with notice and the opportunity to cure, or in any case in which
it is documented that the franchising authority has waived its right to object,
or in which the cable operator gives written notice of a failure or inability to
cure and the franchising authority fails to object within a reasonable time.
Courts may not reverse a denial of renewal based on procedural violations found
to be "harmless error." Historically, we have not experienced any material
problems renewing our franchises for our cable television systems. We are not
aware of any current or past material failure on our part to comply with our
franchise agreements. We believe that we have generally complied with the terms
of our franchises and have provided quality levels of service.
Franchising authorities may generally impose franchise fees of up to 5% of
a cable television system's annual gross revenues, excluding revenues derived
from telecommunications services. In addition, state and local governments may
also be able to exact some compensation for the use of public rights-of-way. In
March 2002, the FCC ruled that cable modem service, which provides high-speed
access to the Internet, is not a cable television service. Subsequently, several
large cable operators around the nation have taken the position that, in view of
the FCC's order, franchise fees are inapplicable to the cable operator's charges
for cable modem service. Because the FCC's ruling expresses only tentative
conclusions regarding the collection of franchise fees on cable modem services,
and is subject to further FCC rulemaking, we have not suspended our collection
of such franchise fees. We are in discussion with the various municipalities
with whom we have franchises in an effort to address this issue as forthrightly
as possible The FCC's order is currently under appeal before the U.S. Circuit
Court for the Ninth Circuit in California. A ruling on the appeal may occur in
late 2002 or early 2003.
Channel Set-Asides. The 1984 Cable Act permits local franchising
authorities to require cable television operators to set aside certain
television channels for public, educational and governmental access programming.
The 1984 Cable Act further requires cable television systems with thirty-six or
more activated channels to designate a portion of their channel capacity for
commercial leased access by unaffiliated third parties to provide programming
that may compete with services offered by the cable television operator. The
1992 Cable Act requires leased access rates to be set according to a formula
determined by the FCC.
Copyright Matters. Cable systems must obtain copyright licenses for
programming and television signals they carry. Copyright authority for
programming on non-broadcast networks typically is obtained from the networks in
question, and copyright authority for programming originated locally by the
cable system must be obtained directly from copyright holders. The Copyright Act
provides a blanket license for copyrighted material on television stations whose
signals a cable system retransmits. Cable operators can obtain this license by
filing semi-annual reports and paying a percentage of their revenues as a
royalty fee to the U.S. Copyright Office, which then distributes the royalty
pool to copyright holders. For larger cable systems, these payments vary with
the numbers and type of distant television stations the system carries. From
time to time, Congress considers proposals to alter the blanket copyright
license, some of which could make the license more costly.
Pole Attachments. The Communications Act requires the FCC to regulate the
rates, terms and conditions imposed by public utilities for use of utility poles
and conduit space unless state authorities have certified to the FCC that they
adequately regulate pole attachment rates, as is the case in Ohio and Michigan
where the Company's cable systems operate. In the absence of state
certification, the FCC regulates pole attachment rates, terms and conditions
only in response to a formal complaint. Where states such as Ohio and Michigan
regulate pole attachments, they generally do so by following the FCC's
substantive rules. The Communications Act also requires that a utility provide
cable systems and telecommunications carriers with nondiscriminatory access to
any pole, conduit or right-of-way controlled by the utility.
The FCC's pole attachment rate formulas govern the maximum rate certain
utilities may charge cable operators and telecommunications carriers for
attachments to the utility's poles and conduits. Effective February 2001, a
formula now governs the maximum attachment rate for companies providing
telecommunications services, including cable operators, which results in a
higher maximum attachment
66
rate for telecommunications services compared to cable services. The increase in
attachment rates applicable to telecommunications services resulting from the
FCC's new rate formula will be phased in over a five-year period.
In early 2002, the U.S. Supreme Court affirmed that the FCC's authority to
regulate rates for attachments to utility poles extended to attachments by cable
operators and telecommunications carriers that are used to provide Internet
service or wireless telecommunication service. This development protects cable
television operators that also provide Internet access services from facing more
onerous rates, terms and conditions imposed by utilities for pole attachments.
In June 2002, a federal court of appeals struck down two FCC rules that
related to pole attachments. The court held that the Federal Pole Attachment Act
did not extend to electric transmission facilities and, therefore, struck the
FCC's rule that required electric utilities to provide access to that type of
facilities. The court also rejected an FCC rule that would require electric
utilities to expand facility capacity to meet the needs of attaching entities.
We do not believe that the court's ruling would have a material negative impact
on our business operations.
Local Television/Cable Cross-Ownership Rule. An FCC rule prohibits any
cable television system (including all parties under common control) from
carrying the signal of any television broadcasting station that has a predicted
service area that overlaps, in whole or in part, the cable system's service
area, if the cable system (or any of its attributable principals) has an
attributable interest in the television station. But in February 2002, the Court
of Appeals for the District of Columbia Circuit held that the FCC's decision to
retain this rule was unlawful and, therefore, vacated the rule. In June 2002,
the Court generally refused to reconsider its earlier ruling overturning the
FCC's rule, but did agree to modify the standard by which the FCC must use
should it attempt to re-justify the rule. The Company cannot predict what steps,
if any, the FCC will take in response to these court decisions.
Local Exchange Carriers/Cable Television Cross-Ownership. The 1996 Act
generally restricts local exchange carriers and cable operators from holding
more than a 10% financial interest or any management interest in the other's
operations within their service area or from entering joint ventures or
partnerships with cable operators in the same market. These "buy-out"
restrictions are subject to four general exceptions, which include population
density and competitive market tests. The FCC may waive the buyout restrictions
if it determines that:
- the cable operator or LEC would be subject to undue economic distress by
enforcement of the restrictions;
- the cable system or LEC facilities would not be economically viable if
the provisions were enforced;
- the anti-competitive effects of the proposed transaction clearly would be
outweighed by the public interest in serving the community; and
- the local franchising authority approves the waiver.
General Ownership Limitations. The Communications Act generally prohibits
the Company from owning and/or operating a Satellite Master Antenna Television
System (SMATV) or a wireless cable system in any area where the Company provides
franchised cable service. However, the cable/SMATV and the cable/wireless cable
cross-ownership rules are inapplicable in any franchise area where the operator
faces "effective competition," or where the cable operator owned the SMATV
system prior to the 1992 Cable Act. In addition, the FCC's rules permit a cable
operator to offer service through SMATV systems in the operator's existing
franchise area so long as the service is offered according to the terms and
conditions of the cable operator's local franchise agreement.
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Other Statutory Provisions. One of the underlying competitive policy goals
of the 1992 Cable Act is to limit the ability of vertically integrated program
suppliers to favor affiliated cable operators over unaffiliated program
distributors. Consequently, with certain limitations, federal law generally:
- precludes any satellite video programmer affiliated with a cable company,
or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors;
- requires such programmers to sell their programming to other multichannel
video distributors; and
- limits the ability of such programmers to offer exclusive programming
arrangements to their affiliates.
The Communications Act requires cable operators, upon the request of a
subscriber, to scramble or otherwise fully block any adult channel the
subscriber does not wish to receive. The Communications Act also contains
restrictions on the transmission by cable operators of obscene or indecent
programming. A three-judge federal district court determined that certain
statutory restrictions regarding channels primarily dedicated to sexually
oriented programming were unconstitutional, and the United States Supreme Court
recently affirmed the lower court's ruling.
The Communications Act and the FCC's rules also include provisions
concerning, among other things:
- customer service;
- subscriber privacy;
- marketing practices;
- equal employment opportunity; and
- the regulation of technical standards and equipment compatibility.
Inside Wiring Regulations. The FCC adopted cable inside wiring rules to
provide specific procedures for the disposition of residential home wiring and
internal building wiring where a subscriber terminates service or where an
incumbent cable operator is forced by a building owner to terminate service in a
multiple dwelling unit (MDU) building. The FCC is also considering additional
rules relating to inside wiring that, if adopted, may disadvantage incumbent
cable operators. Unless operators retain rights under state statutory or common
law to maintain ownership rights in the wiring, MDU owners could use these new
rules to pressure cable operators without MDU service contracts to either sell,
abandon or remove internal wiring carrying voice as well as video communications
and to terminate service to MDU subscribers.
Consumer Equipment. The FCC adopted regulations to implement provisions of
the 1992 Cable Act regarding compatibility between cable systems and consumer
electronics equipment. The 1996 Act directed the FCC to establish only minimal
standards regarding compatibility between television sets, video cassette
recorders and cable systems. Pursuant to this statutory mandate, the FCC adopted
rules to assure the competitive availability of customer premises equipment,
such as set-top converters or other navigation devices, which are used to access
services offered by cable systems and other multichannel video programming
distributors. The FCC's rules allow consumers to attach compatible equipment to
the Company's cable facilities, so long as the equipment does not harm the
Company's network, does not interfere with the services purchased by other
subscribers and is not used to receive unauthorized services. Effective July 1,
2000, cable operators were required to separate security from non-security
functions in subscriber premises equipment by making available modular security
components that would function in set-top units purchased or leased from retail
outlets. The requirement to separate security and non-security functions is
inapplicable to equipment that uses only an analog conditional access mechanism
and that is incapable of providing access to any digital transmission or other
digital service. Effective January 1, 2005, the Company will be prohibited from
selling or leasing new navigation devices or converter boxes that integrate both
security and non-security functions. The Company, however, will not be required
to
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discontinue the leasing of older converters that include integrated security
functions if those converters were provided to subscribers before January 1,
2005.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction. Franchises generally contain provisions
governing fees to be paid to the franchising authority, length of the franchise
term, renewal, sale or transfer of the franchise, territory of the franchise,
design and technical performance of the system, use and occupancy of public
streets and number and types of cable television services provided. The 1992
Cable Act prohibits exclusive franchises and allows franchising authorities to
regulate customer service and rates. States and local franchising authorities
may adopt certain restrictions on cable television systems ownership.
Franchising authorities in Michigan may operate their own multichannel
video distribution system without a franchise. Ohio recently enacted legislation
placing many of the same restrictions on municipalities that private cable
systems operate under. The Ohio law includes provisions outlining equal
franchise agreements, restrictions on selling cable TV outside the municipality,
advance notice of building a municipal cable system, full cost accounting
language and establishment of an arbitration process for private
sector/governmental cable disputes.
The foregoing summarizes the material cable television industry regulations
with which we must comply. However, it does not purport to describe all present
and proposed federal, state and local regulations and legislation relating to
the cable television industry, some of which are subject to judicial and
legislative review and change, and their impact on the cable television industry
or us cannot be predicted at this time.
FEDERAL REGULATION OF TELEVISION BROADCASTING
The following is a brief discussion of certain provisions of the
Communications Act of 1934, as amended, and the FCC's regulations and policies
that affect the business operations of television broadcasting stations. For
more information about the nature and extent of FCC regulation of television
broadcasting stations you should refer to the Communications Act of 1934 and the
FCC's rules, public notices, and rulings. Over the years Congress and the FCC
have added, amended and deleted statutory and regulatory requirements to which
station owners are subject. Some of these changes have a minimal business
impact, whereas others may significantly affect the business or operation of
individual stations or the broadcast industry as a whole. The following
discussion summarizes certain federal requirements concerning the television
broadcast industry that currently are in effect.
License Grant and Renewal. Television broadcasting licenses are granted
for a maximum term of eight years and are subject to renewal upon application to
the FCC. The FCC is required to grant an application for license renewal if
during the preceding term the station served the public interest, the licensee
did not commit any serious violations of the Communications Act or the FCC's
rules, and the licensee committed no other violations of the Communications Act
or the FCC's rules which, taken together, would constitute a pattern of abuse.
The vast majority of renewal applications are routinely renewed under this
standard. If a licensee fails to meet this standard, the FCC may still grant
renewal on terms and conditions that it deems appropriate, including a monetary
forfeiture or renewal for a term less than the normal eight-year period.
During certain limited periods after a renewal application is filed,
interested parties, including members of the public, may file petitions to deny
a renewal application, to which the licensee/renewal applicant is entitled to
respond. After reviewing the pleadings, if the FCC determines that there is a
substantial and material question of fact whether grant of the renewal
application would serve the public interest, the FCC is required to hold a
trial-type hearing on the issues presented. If, after the hearing, the FCC
determines that the renewal applicant has met the renewal standard, the FCC must
grant the
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renewal application. If the licensee/renewal applicant fails to meet the renewal
standard or show that there are mitigating factors entitling it to renewal
subject to appropriate sanctions, the FCC can deny the renewal application. In
the vast majority of cases where a petition to deny is filed against a renewal,
the FCC ultimately grants the renewal without a hearing.
No competing application for authority to operate a station and replace the
incumbent licensee may be filed against a renewal application unless the FCC
first determines that the incumbent licensee is not entitled to license renewal.
In addition to considering rule violations in connection with a license
renewal application, the FCC may sanction a station licensee at any time during
the license term for failing to observe FCC rules and policies, including the
imposition of a monetary forfeiture.
The FCC prohibits the assignment or the transfer of control of a
broadcasting licensee without prior FCC approval.
Ownership Matters. FCC rules establish limits on the ownership of
broadcast stations. The ownership limits apply only to attributable interests in
a station licensee that are held by an individual, corporation, partnership or
other entity. In the case of corporations, officers, directors and voting stock
interests of five percent or more (twenty percent or more in the case of
qualified investment companies, such as insurance companies and bank trust
departments) are considered attributable interests. For partnerships, all
general partners and non-insulated limited partners are attributable. Limited
liability companies are treated the same as partnerships. Under its "equity/debt
plus" rule, the FCC attributes otherwise non-attributable interests held by a
party who also provides over fifteen percent of a station's total weekly
broadcast programming or who has an attributable interest in a radio station,
television station, or daily newspaper in the same market. Subject to the
equity/debt plus rule, a minority voting interest in a media property is not
cognizable if there is a single holder of more than 50 percent of that media
property's outstanding voting stock. Finally, the FCC attributes (i.e., counts
towards the local ownership limits) another in-market broadcast station to the
licensee of a broadcast station who provides more than 15 percent of the other
station's weekly broadcast programming pursuant to a local marketing agreement
or a time brokerage agreement.
Local Ownership (Duopoly Rule). Prior to August 1999, no party could have
attributable interests in two television stations if those stations had
overlapping service areas (which generally meant one station per market),
although the FCC did not attribute local marketing agreements involving a second
station with an overlapping service area. In August 1999, the FCC adopted new
rules which allowed the ownership of two stations in a single market (defined
using Nielsen Media Research's DMAs) if (1) the two stations do not have
overlapping service areas, or (2) after the combination there are at least eight
independently owned and operating full-power television stations and one of the
commonly owned stations is not ranked among the top four stations in the DMA.
The FCC will consider waivers of the rule to permit the ownership of a second
market station in cases where the second station is failed, failing or unbuilt.
Absent these circumstances, ownership of only one television station in a market
is permitted. "Satellite" stations were an exception to the prior FCC local
ownership/duopoly rules and remain an exception under the new rules.
None of the markets in which we currently operate stations have the eight
or more independently owned television stations that allow a person to own two
stations in the market. We own two stations in the Louisville market under a
permanent waiver granted by the FCC.
In April 2002, the U.S. Court of Appeals for the District of Columbia
Circuit remanded the television local ownership rule to the FCC for further
consideration. The court held that the FCC had not adequately explained its
decision to consider as "voices" only television broadcast stations, while
excluding other media outlets such as newspapers and cable television. The court
currently is considering a petition for rehearing. On remand, the FCC may change
its local television ownership rule to permit consideration of other media
outlets in addition to television stations for purposes of a "voices" test,
and/or it may change the number of independently owned "voices" that must remain
in a market after consolidation.
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Depending upon the outcome of the pending rehearing petition, the FCC has
announced that it expects to adopt an order addressing this and other broadcast
ownership rules in the Spring of 2003.
National Ownership. There is no nationwide limit on the number of
television stations which a party may own. However, no party may have an
attributable interest in television stations which, in the aggregate, reach more
than 35% of all U.S. television households. In calculating the national audience
reach, ownership of a VHF station is counted as reaching 100% of the households
in such station's market, and ownership of a UHF station is counted as 50% of
the households in such station's market. The stations we own have a combined
national audience reach of approximately 1% of television households. In
February 2002, the U.S. Court of Appeals for the District of Columbia Circuit
determined that the FCC's statutorily required biennial review of its national
ownership rule had been arbitrary and capricious, and it, therefore, remanded
the rule to the FCC for its further review and consideration. The court
currently is considering a petition for rehearing of its decision. Depending
upon the outcome of the pending rehearing petition, the FCC has announced that
it expects to adopt an order addressing this and other broadcast ownership rules
in the Spring of 2003.
Radio Television Cross-Ownership Rule. The "one-to-a-market" rule limits
the common ownership or control of radio and television stations in the same
market. In August 1999, the FCC amended its rules to increase the number of
stations that may be commonly owned, subject to standards based on the number of
independently owned media voices that would remain in the market after the
combination. In markets with at least twenty independently owned media outlets,
ownership of one television station and up to seven radio stations, or two
television stations (if allowed under the television duopoly rule) and six radio
stations is permitted. If the number of independently owned media outlets is
fewer than twenty but greater than or equal to ten, ownership of one television
station (or two if allowed) and four radio stations is permitted. In markets
with fewer than ten independent media voices, ownership of one television
station (or two if allowed) and one radio station is permitted. In calculating
the number of independent media voices, the FCC includes all radio and
television stations, independently owned cable systems (counted as one voice if
cable is generally available in the market), and independently owned daily
newspapers which have circulation that exceeds five percent of the households in
the market.
Local Television/Cable Cross-Ownership Rule. An FCC rule prohibits a cable
television system (including all parties under common control) from carrying the
signal of a television station that has a predicted Grade B service area that
overlaps, in whole or in part, the cable system's service area, if the cable
system (or any of its attributable principals) has an attributable interest in
the television station. But in February 2002, the U.S. Court of Appeals for the
District of Columbia Circuit held that the FCC's decision to retain this rule
was unlawful. The court vacated the rule because it concluded that the FCC was
unlikely to be able to justify the rule under any circumstances.
Local Television/Newspaper Cross-Ownership Rule. The FCC prohibits any
party from having an attributable interest in a television station and a daily
newspaper if the television station's Grade A signal contour encompasses the
entire community in which the newspaper is published. A similar rule applies to
radio/newspaper combinations. In September 2001, the FCC launched a formal
proceeding examining whether to retain, modify or eliminate the
television/newspaper and radio/newspaper cross-interest rules. The FCC is
expected to complete this proceeding in the Spring of 2003.
Foreign Ownership Restrictions. The Communications Act restricts the
ability of foreign entities or individuals to own or hold certain interests in
broadcast licenses. As a holder of several broadcast licenses, we are restricted
from having more than one-fourth of our stock owned or voted directly or
indirectly by non-U.S. citizens or their representatives, foreign governments,
representatives of foreign governments, or foreign corporations.
Cable "Must-Carry" or Retransmission Consent Rights. Every three years,
television broadcasters are required to make an election whether they choose to
exercise their "must-carry" or retransmission consent rights in connection with
the carriage of their analog signal on cable television systems within their
DMA. The most recent election was made by October 1, 1999, and is effective for
the three-year period
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beginning January 1, 2000. The next election date is October 1, 2002, for the
three-year period beginning January 1, 2003.
If a broadcaster chooses to exercise its must-carry rights, it may request
cable system carriage on its over-the-air channel or another channel on which it
was carried on the cable system as of a specified date. A cable system generally
must carry the station's signal in compliance with the station's carriage
request, and in a manner that makes the signal available to all cable
subscribers. However, must-carry rights are not absolute, and whether a cable
system is required to carry the station on its system, or in the specific manner
requested, depends on a number of variables such as the number of activated
channels of the cable system, the number of subscribers served by the cable
system, the strength of the station's signal at the cable system's headend, the
extent to which the station's programming duplicates the programming of another
station carried on the system, and other factors.
If a broadcaster chooses to exercise its retransmission consent rights, a
cable television system which is subject to that election may not carry the
station's signal without the broadcaster's written consent. This generally
requires the cable system and television station operator to negotiate the terms
under which the television station will consent to the cable system's carriage
of the station. There is, however, a risk associated with a station electing to
exercise its retransmission consent rights in that a cable operator may lawfully
refuse to carry the broadcaster's station on its cable system if the parties
cannot agree to the terms of such carriage. Our stations generally have elected
to exercise their retransmission consent status and have entered into
retransmission consent agreements with local cable operators.
Direct-to-Home Satellite Services and Must-Carry. In November 1999,
Congress enacted the Satellite Home Viewer Improvement Act of 1999, or SHVIA.
This statute authorizes providers of direct broadcast satellite services such as
Direct TV and EchoStar to carry the signals of local television stations within
such stations' local markets ("local-into-local" service). In addition, SHVIA
imposes must-carry requirements on satellite providers with respect to the
markets in which they provide local-into-local service. Television stations in
such markets may elect between must-carry and retransmission consent in a manner
similar to that applicable in the cable context. At this time, DirecTV and
EchoStar are not providing local-into-local service in our stations' markets,
and we cannot predict when or if such service will be provided in the future.
Under federal copyright law, satellite providers may retransmit the signal
of an out-of-market broadcast network affiliate to "unserved" households. An
"unserved" household is one that cannot receive, using a conventional outdoor
rooftop antenna, a "Grade B" or better signal of a local television station
affiliated with the same network as the out-of-market television station.
Satellite providers generally are not permitted to import distant network
signals to any subscribers other than those that qualify as "unserved"
residential households.
Network Affiliate Issues. FCC rules impose restrictions on network
affiliation agreements. Among other things, such rules prohibit a television
station from entering into any affiliation agreement that:
- requires the station to clear time for network programming that the
station had previously scheduled for other use; or
- precludes the preemption of any network programs that the station
believes to be unsuitable for its audience or that precludes the
substitution of network programming with programming that the station
believes to be of greater local or national importance (this is the
"right to reject rule").
The FCC is currently reviewing its rules governing the relationship between
television broadcasting networks and their affiliates under a long-pending
formal inquiry and a more recent petition filed by trade associations
representing affiliates of some of the broadcast networks. We are unable to
predict when and how the FCC will resolve these issues.
Other Regulations Affecting Broadcast Stations. General. The
Communications Act of 1934 requires broadcasters to serve "the public interest."
Since the late 1970s, the FCC gradually has relaxed or eliminated many of the
more formalized procedures it had developed to promote the broadcast of certain
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types of programming responsive to the needs of a station's community of
license. However, television station licensees are still required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. The FCC may consider
complaints from viewers concerning programming when it evaluates a station's
license renewal application, although viewer complaints also may be filed and
considered by the FCC at any time. There are other FCC rules and policies, and
rules and policies of other federal agencies, that regulate matters such as the
ability of stations to obtain exclusive rights to air syndicated programming,
cable and satellite systems' carriage of syndicated and network programming on
distant stations, political advertising practices, application procedures and
other areas affecting the business or operations of broadcast stations.
Public Interest Programming. Broadcasters are required to air programming
addressing the needs and interests of their communities of license, and to place
quarterly "issues/programs lists" in their public inspection files reporting
such programming.
Children's Television Programming. The Children's Television Act of 1990
limits the permissible amount of commercial matter that may be broadcast during
children's programming, and it requires each television station to present
"educational and informational" children's programming. The FCC has adopted
license renewal processing guidelines effectively requiring television stations
to broadcast an average of three hours per week of children's educational
programming.
Closed Captioning/Video Description. The FCC has adopted rules requiring
closed captioning of broadcast television programming. By January 1, 2006,
subject to certain exceptions, television broadcasters must provide closed
captioning for 100% of their programming.
Television Violence. Under the 1996 Telecommunications Act, the television
industry developed a voluntary program ratings system that the FCC subsequently
approved. In addition, the 1996 Telecommunications Act requires that all
television license renewal applications contain summaries of written comments
and suggestions concerning violent programming that were received by the station
during the license term.
Equal Employment Opportunity. In April 1998, the U.S. Court of Appeals for
the D.C. Circuit concluded that certain affirmative action requirements of the
FCC's Equal Employment Opportunity ("EEO") regulations were unconstitutional.
The FCC responded to the court's ruling in September 1998 by suspending certain
reporting requirements and commencing a proceeding to consider new rules that
would not be subject to the court's constitutional objections. The FCC did not
suspend its general prohibition on employment discrimination based on race,
color, religion, national origin or sex. In January 2000, the FCC adopted new
EEO rules, but the same court struck down these rules in January 2001. The FCC
thereafter suspended its new rules. The FCC has opened a new proceeding to
develop new EEO rules that would meet the requirements of the court. We cannot
predict the results or timing of the outcome of this proceeding.
Restrictions on Broadcast Advertising. The advertising of cigarettes on
broadcast stations has been banned for many years. The broadcast advertising of
smokeless tobacco products has more recently been banned by Congress. Certain
Congressional committees have examined legislative proposals to prohibit or
severely restrict the advertising of beer, wine, and liquor. We cannot predict
whether any proposal will be enacted into law and, if so, what the final form of
such law might be. The elimination or restriction of advertisements for beer and
wine could have an adverse effect on our stations' revenues and operating
profits.
Digital Television. The digital television, or DTV, transmission system
delivers video and audio signals of higher quality (including high definition
television) than the existing analog transmission system. DTV also has
substantial capabilities for multiplexing (the broadcast of several programs
concurrently) and data transmission. Digital television will require consumers
to purchase new televisions that are capable of receiving and displaying DTV
signals or adapters to receive DTV signals and convert them into analog signals
for display on existing receivers.
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In April 1998, the FCC assigned each licensed television station a second
broadcast channel on which to provide DTV service. In general, the DTV channels
assigned to television stations are intended to allow stations to have their DTV
coverage area replicate their analog coverage area, although a number of
variables will ultimately determine the extent to which a station's DTV
operation will provide such replication.
By May 1, 2002, all commercial television station licensees were required
to complete construction and commence operating DTV facilities except to the
extent that the FCC extended the deadline in certain cases. WAND met the May 1,
2002 deadline. WFTE has until May 13, 2003 to construct because of FCC delays in
issuing the construction permit. KTRV is not required to construct digital
facilities until the FCC determines which digital channel KTRV will ultimately
utilize. Our remaining stations -- WDRB and WLIO -- requested waivers of the May
1, 2002 deadline. On June 14, 2002, the FCC denied those requests and ordered
WDRB and WLIO to construct digital television transmission systems no later than
December 1, 2002. The FCC also directed the stations to submit to the FCC, by
July 15, 2002, reports setting forth construction plans and a proposed timetable
for construction that would meet the December 1, 2002 deadline. Finally, the FCC
directed the stations to file by September 13, 2002 interim progress reports
regarding their digital construction efforts.
In compliance with the FCC's order, the two stations have submitted to the
FCC their construction plans and proposed timetable for construction of digital
transmission systems. Both stations' plans call for the construction of
lower-power digital transmission systems sufficient to provide digital
television coverage for the station's city of license -- Lima, Ohio for WLIO,
Louisville, Kentucky for WDRB. The timetables call for construction to be
completed, and the facilities fully operational, by December 1, 2002.
The lower-power construction plans comply with FCC rules and policies
regarding digital television transmission, which expressly permit lower-power
facilities. We anticipate that, at some point in the future, the FCC will
establish a deadline by which such lower-power systems must be upgraded to full
power systems that provide coverage to a broader geographic area. When such a
deadline is established, we will comply with it by upgrading our facilities. We
estimate that approximately $12 million of capital expenditures after March 31,
2002 will be necessary to meet the DTV requirements for all of our stations.
Once a station begins broadcasting its DTV signal, it may broadcast both
its analog and DTV signals until December 31, 2006, after which, subject to
certain conditions described below, the FCC expects to reclaim one of the
channels and broadcasters will operate a single DTV channel. Starting April 1,
2003, commercial station operators must simulcast at least 50 percent of the
video programming broadcast on their analog channel on their DTV channel. The
required simulcast percentage increases annually until April 1, 2005, when an
operator must simulcast 100 percent of its programming on its analog and DTV
channels.
Channels now used for analog broadcasts range from 2 through 69. The FCC
designated Channels 2 through 51 as the "core" Channels which will be used for
DTV broadcasts. However, because of the limited number of core DTV channels
currently available, the FCC assigned many stations DTV Channels above Channel
51 (Channels 52 through 69) for use during the transition period from
simultaneous digital and analog transmission to DTV only operation. At the end
of the transition period these stations will have to change their DTV operation
to one of the DTV core channels. This has created three categories of television
stations with respect to their analog and DTV channel assignments: (1) stations
with both their analog and DTV Channels within the "core" channels; (2) stations
with either an analog or DTV channel inside the core and the other outside the
core; and (3) stations with both their analog and DTV Channels outside the core.
All of our stations currently fall within the first or second group; none of our
stations have both analog and DTV Channels outside the core. Stations with both
their analog and DTV Channels inside the core will be required to select which
of the two Channels they will use for permanent DTV operation at the end of the
transition period. The FCC has not yet established the permanent DTV channel
selection process for stations (including one of our stations) that fall into
the second group.
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The Communications Act provides that under certain conditions the DTV
transition period may be extended beyond December 31, 2006. The transition is to
be extended in any market in which one of the following conditions is met: (1) a
station licensed to one of the four largest networks (ABC, CBS, NBC and Fox) is
not broadcasting a digital signal and that station has qualified for an
extension of the FCC's DTV construction deadline; (2) digital-to-analog
converter technology is not generally available in the market; or (3) fifteen
percent or more of the television households in the market do not subscribe to a
multichannel video programming distributor (cable, direct broadcast satellite)
that carries the digital channel of each of the television stations in the
market broadcasting a DTV channel, and do not have at least one television
receiver capable of receiving DTV broadcasts or an analog television receiver
equipped with a digital-to-analog converter capable of receiving DTV broadcasts.
We cannot predict whether the DTV transition period will be extended in any of
our markets.
Television stations that are broadcasting both analog and DTV signals may
continue to elect either must-carry status or retransmission consent for their
analog signals, but they may only choose retransmission consent for their
digital signals. A television station may assert must-carry rights for its DTV
signal if it only operates a DTV signal or if it returns its analog channel to
the FCC and converts to DTV operations only.
The exercise of must-carry rights by a television station for its DTV
signal applies only to a single programming stream and other program-related
content. If a television station is concurrently broadcasting more than one
program stream on its DTV signal, it may select which program stream is subject
to its must-carry election. Cable systems are not required to carry Internet,
e-commerce or other ancillary services provided over DTV signals if those
services are not related to the station's primary video programming carried on
the cable system. The same DTV carriage rules are generally applicable to
satellite providers with respect to markets in which they provide
local-into-local service.
Television station operators may use their DTV signals to provide ancillary
services, such as computer software distribution, Internet, interactive
materials, e-commerce, paging services, audio signals, subscription video, or
data transmission services. To the extent a station provides such ancillary
services, it is subject to the same regulations as are applicable to other
analogous services under the FCC's rules and policies. Commercial television
stations also are required to pay the FCC five percent of the gross revenue
derived from all ancillary services provided over their DTV signal for which the
station received a fee in exchange for the service or received compensation from
a third party in exchange for transmission of material from that third party,
not including commercial advertisements used to support broadcasting.
Proposed Legislation and Regulations. Congress and the FCC currently have
under consideration, and may in the future adopt, new laws, regulations and
policies regarding a wide variety of matters that could affect, directly or
indirectly, the operation and ownership of our stations. In addition to the
changes proposed and noted above, other matters that could affect our broadcast
properties include technological innovations affecting the mass communications
industry such as spectrum allocation matters (including assignment by the FCC of
Channels for additional television stations), low power television stations, and
multichannel video program service providers (including cable television, direct
broadcast satellite and wireless cable systems).
The foregoing summarizes the material television broadcasting industry
regulations with which we must comply. However, it does not purport to describe
all present and proposed federal, state and local regulations and legislation
relating to the television broadcast industry, some of which are subject to
judicial and legislative review and change. The impact of any such development
on the television broadcast industry or on us cannot be predicted at this time.
75
MANAGEMENT
The table below sets forth information about our executive officers and
Board of Directors:
<Table>
<Caption>
DIRECTOR
NAME AGE SINCE POSITIONS WITH THE COMPANY
- ---- --- -------- --------------------------
William Block, Jr.*... 57 1985 Chairman of the Board of Directors
Allan J. Block*....... 47 1985 Managing Director of the Company; Director
John R. Block*........ 47 1985 Vice Chairman, Editorial Director; Director
Diana E. Block*....... 29 2002 Systems and Technology Director, Pittsburgh Post-Gazette;
Director
William Block......... 86 1940 Retired Chairman of the Company; Director
David G. Huey......... 54 2002 President; Director
Gary J. Blair......... 56 1999 Vice President and Chief Financial Officer; Director
Jodi L. Miehls........ 30 -- Treasurer; Principal Accounting Officer
Fritz Byers........... 47 1999 Secretary; General Counsel; Director
Karen D. Johnese...... 55 1991 Director of Public Affairs, Pittsburgh Post-Gazette;
Director
Donald G. Block....... 48 1985 Director
Mary G. Block......... 70 1987 Director
Cyrus P. Block........ 56 1991 Director
</Table>
- ---------------
* Denotes members of the Executive Committee
William Block, Jr., is a Director and member of the Executive Committee and
was appointed Chairman of the Board and Chairman of the Executive Committee
effective January 1, 2002. He served as President of the Company from 1987
through 2001. Mr. Block holds a B.A. degree from Trinity College and a J.D. from
Washington and Lee University.
Allan J. Block is a Director and member of the Executive Committee and was
appointed Managing Director effective January 1, 2002. Prior to becoming
Managing Director, he directed our cable and broadcast divisions from 1989
through 2001. Mr. Block holds a B.A. degree from the University of Pennsylvania.
John R. Block is a Director and member of the Executive Committee and was
appointed Vice Chairman of the Board and publisher of our two newspapers
effective January 1, 2002. Prior to that he directed the news and editorial
functions of our two newspapers from 1989 through 2001. Mr. Block holds a B.A.
from Yale University.
Diana E. Block was appointed a Director and member of the Executive
Committee in 2002 and since January 2002 has served as the Director of Systems
and Technology for the Pittsburgh-Post Gazette. She attended Carnegie Mellon
University from 2000 to 2001, where she received her master's degree.
Previously, she held several positions with the Pittsburgh Post-Gazette
beginning in 1998 and before that taught high school English. Ms. Block also
holds a B.A. from Yale University and a master's degree from the University of
Virginia.
William Block, a Director, served as co-publisher of our two newspapers
from 1941 to 1989, and as Chairman of the Board from 1987 to 2001. Mr. Block
holds a B.A. degree from Yale University.
David G. Huey was promoted to President and a Director effective January 1,
2002. Prior to that, he served as President of our cable operations since 1990.
Mr. Huey holds a B.S. degree from the University of Toledo.
Gary J. Blair has served as Vice President and Chief Financial Officer
since 1990 and is a Director. Prior to that he served as Finance Director. Mr.
Blair holds a B.S. degree and an M.B.A. from Bowling Green State University.
Jodi L. Miehls was appointed Treasurer in April 2002. Prior to that she
served as Assistant Treasurer and Director of Finance. Ms. Miehls holds a
B.S.B.A. degree from The Ohio State University.
76
Fritz Byers has served as Secretary since 1990 and is a Director. He has
also served as Corporate Counsel since 1990. Mr. Byers holds a B.A. degree from
Duke University and a J.D. from Harvard University.
Karen Block Johnese is a Director and has served as Director of Community
Affairs for the Pittsburgh Post-Gazette since 1995. Before that, she held a
similar position with the Monterey Herald. Ms. Johnese holds a B.A. from the
University of Rochester, and a M.S.W. and an M.E.D. from the University of
Pittsburgh.
Donald G. Block is a Director. He is the Executive Director of the Greater
Pittsburgh Literacy Council. Mr. Block holds a B.A. degree from Yale University
and an M.A. from Indiana University.
Mary G. Block is a Director and is the widow of Paul Block, Jr., who served
as Chairman of the Board from 1942-1987.
Cyrus P. Block is a Director. He is a cinematographer with a long resume
of well-known movies, television programs, and related work. Mr. Block holds a
B.A. from Lewis and Clark College.
EXECUTIVE COMMITTEE
Under our Close Corporation Operating Agreement, a four-member Executive
Committee, comprised of two representatives of the families of each of the two
sons of the Company's founder, functions as chief executive officer and, except
for certain powers specifically reserved to the Board of Directors, also
exercises the powers normally exercised by a board of directors. Decisions of
the Executive Committee are made by majority vote. In the event of a tie, the
agreement provides for the deciding vote to be cast by Charles T. Brumback,
former Chairman and Chief Executive Officer of the Tribune Corporation, Chicago,
Illinois.
FAMILY RELATIONSHIPS
Allan J. Block and John R. Block are brothers, and Cyrus P. Block is their
half-brother. Their father, Paul Block, Jr., was the brother of William Block.
Mary G. Block, the widow of Paul Block, Jr., is the step-mother of Allan J.,
John R. and Cyrus P. Block.
William Block is the father of William Block, Jr., Karen D. Johnese and
Donald G. Block, who are brothers and sister. Diana E. Block is the daughter of
William Block, Jr.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
for 2001 to our five most highly compensated executive officers (the "named
officers"):
<Table>
<Caption>
ANNUAL
COMPENSATION(1)
------------------- ALL OTHER
NAME AND PRINCIPAL POSITIONS HELD SALARY BONUS COMPENSATION(2)
- --------------------------------- -------- -------- ---------------
William Block, Jr., Chairman of the Board of Directors... $455,000 -- $49,103
Allan J. Block, Managing Director and Director........... $455,000 -- $14,343
John R. Block, Vice Chairman, Editorial Director and
Director............................................... $455,000 -- $34,131
William Block, Retired Chairman and Director............. $350,000 -- --
David G. Huey, President and Director.................... $285,000 $102,600 $23,430
</Table>
- ---------------
(1) The incremental cost of personal benefits provided to any named officer did
not exceed the lesser of $50,000 or 10% of aggregate salary and bonus.
(2) The amounts reported in this column consist of (1) life insurance premiums
of $38,903 for William Block, Jr., $4,143 for Allan J. Block, $23,931 for
John R. Block and $78 for Mr. Huey and (2) employer contributions to a
401(k) plan and a supplemental deferred compensation plan of $10,200 for
William Block, Jr., $10,200 for Allan J. Block, $10,200 for John R. Block
and $23,352 for Mr. Huey.
Mr. Huey participates in a Phantom Stock Plan under which the Executive
Committee may award to key employees phantom stock units representing values
determined by the Company of a hypothetical
77
percentage interest in one of our divisions or subsidiaries. Phantom stock unit
awards vest in increments of 25% for each year of employment after the date of
the award and are payable in cash after eight years from the date of the award
based on the value of the units at that time. No dividends or dividend
equivalents are paid on phantom stock awards. No phantom stock awards were made
to Mr. Huey in 2001. As of December 31, 2001, the most recent valuation date,
the book value of the phantom stock units held by Mr. Huey was $177,000.
RETIREMENT PLANS
A member of the Executive Committee who is a full-time employee of the
Company and who retires at age 60 or later after at least ten years of service,
or at an earlier age after at least thirty years of service, will receive an
annual pension benefit equal to 70% of the average of his or her total annual
compensation for the last five years of employment.
We have a defined benefit pension plan and supplemental retirement plans in
which our other executive officers participate. The following table shows the
estimated annual benefits payable under these plans upon normal retirement at
age 65 to participating employees, including executive officers, in selected
compensation and years-of-service categories:
<Table>
<Caption>
5-YEAR AVERAGE COMPENSATION
----------------------------------------------------
YEARS OF SERVICE $200,000 $300,000 $400,000 $500,000 $600,000
- ---------------- -------- -------- -------- -------- --------
5........ $ 25,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000
10....... 50,000 75,000 100,000 125,000 150,000
15....... 75,000 112,500 150,000 187,500 225,000
20....... 100,000 150,000 200,000 250,000 300,000
25....... 125,000 187,500 250,000 312,500 375,000
30....... 150,000 225,500 300,000 375,500 450,000
</Table>
The amounts shown in the table are straight-life annuity amounts, assuming
no election of any available survivorship option, and are subject to offset for
social security benefits. Benefits under the plans are based on the average of
the participant's covered compensation for the five years preceding retirement,
with covered compensation consisting of salary and bonus. As of December 31,
2001, Mr. Huey had 16.8 years of credited service under these plans.
COMPENSATION OF DIRECTORS
Except for the General Counsel, Directors who are not employees receive a
payment of $1,000 for each Board of Directors meeting attended.
Cyrus P. Block, a director, is paid a fee of $50,000 per year for certain
consulting services.
78
PRINCIPAL SHAREHOLDERS
The following table shows as of July 2, 2002 the amount and nature of
beneficial ownership of each class of our outstanding capital stock by (1) each
director (2) each executive officer named in the above Summary Compensation
Table, (3) each beneficial owner of 5% or more of our Voting Common Stock and
(4) all directors and executive officers as a group:
<Table>
<Caption>
NON-VOTING
VOTING COMMON STOCK COMMON STOCK CLASS A STOCK
---------------------- ---------------------- ----------------------
AMOUNT AND AMOUNT AND AMOUNT AND
NATURE OF PERCENT NATURE OF PERCENT NATURE OF PERCENT
BENEFICIAL OF BENEFICIAL OF BENEFICIAL OF
NAME OWNERSHIP(1) CLASS OWNERSHIP(1) CLASS OWNERSHIP(1) CLASS
- ---- ------------ ------- ------------ ------- ------------ -------
William Block, Jr................... 7,350 25.0% 37,085 8.7% 1,300 10.3%
Allan J. Block...................... 7,350 25.0% 127,042(2) 29.7% 515 4.1%
John R. Block....................... 7,350 25.0% 127,042(2) 29.7% 515 4.1%
Diana E. Block...................... -- -- 1,382 0.3% 320 2.5%
William Block....................... 7,350 25.0% 228,026 53.3% -- --
David G. Huey....................... -- -- -- -- -- --
Gary J. Blair....................... -- -- -- -- -- --
Jodi L. Miehls...................... -- -- -- -- -- --
Fritz Byers......................... -- -- -- -- -- --
Karen D. Johnese.................... -- -- 362 0.1% -- --
Donald G. Block..................... -- -- 8,677 1.9% 1,980 15.7%
Mary G. Block....................... -- -- 8,330 2.0% 1,297 10.3%
Cyrus P. Block...................... -- -- 122,484(2) 28.6% 2,970 23.5%
All directors and executive officers
as a group (13 persons)........... 29,400 100.0% 415,878 97.2% 8,897 70.5%
</Table>
- ---------------
(1) Under regulations of the Securities and Exchange Commission, a person is
considered the "beneficial owner" of a security if the person has or shares
with others the power to vote the security (voting power) or the power to
dispose of the security (investment power). In the table, beneficial
ownership of our stock is determined in accordance with these regulations
and does not necessarily indicate that the person listed as a beneficial
owner has an economic interest in the shares listed as beneficially owned.
(2) Includes 122,224 shares as to which Allan J. Block, John R. Block and Cyrus
P. Block share voting and investment power.
(3) Less than 0.1% of the outstanding shares.
79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK REDEMPTION AGREEMENT
The Company and the members of the Block family are parties to an agreement
which requires the Company to redeem shares of our Non-Voting Common Stock from
the estate of a deceased shareholder to the extent such redemption qualifies for
sale treatment, rather than dividend treatment, under Section 303 of the
Internal Revenue Code (the "Code"). In general, Section 303 allows sale
treatment where (1) the value for Federal estate tax purposes of all stock of
the Company included in determining the value of the decedent's gross estate
exceeds 35% of the excess of the value of the gross estate over certain
allowable deductions and (2) the amount paid to redeem the stock does not exceed
the sum of all federal and state death taxes (including generation-skipping
taxes), plus funeral and administration expenses allowable as deductions for
federal estate tax purposes. The initial redemption price under the agreement is
the value of the shares for federal estate-tax purposes in the deceased
shareholder's estate. In order to qualify for redemption of stock under the
agreement, the estate of the deceased shareholder must elect under Section 6166
of the Code to pay the federal estate tax in deferred installments over a period
of up to 15 years. In return, the estate is given an option to purchase for $1
per share a number of shares equal to any additional shares required to be
redeemed as a result of the deferral election. The Company is also required to
pay cash to cover the income tax consequences resulting from the redemption and
the option.
The amounts the Company might be required to pay under the agreement and
the timing of such payments will depend upon the year of death of the
shareholders and the value of the stock and the estate tax laws in effect at
that time. To satisfy part of its obligation under the agreement, the Company
has purchased life insurance on lives of certain shareholders who own
significant amounts of our non-voting common stock. The vast majority of the
life insurance in force is on the lives of William Block (our major shareholder)
and his wife. Net of current policy loans, the amount of the death benefit for
Mr. and Mrs. Block is $31.2 million, of which $7.4 million is on the life of
William Block, $10.1 million on the life of Mrs. Block and $13.7 million on
their joint lives.
Although we are unable to determine with any certainty the amounts we may
be required to pay under the agreement, we believe that based on the amount of
life insurance in force for our major shareholders, combined with our ability to
defer redemptions over a 15-year period, the amounts the Company will be
required to pay under the agreement will not have a material adverse effect on
the Company's liquidity or financial position. In certain circumstances,
however, the making of these payments might result in a violation of the fixed
charge coverage requirements of our new senior credit facilities. If this were
to occur, the effect on the Company's liquidity could be material.
RELATED PARTY TRANSACTION
In 1996, Karen Block Johnese, a director of the Company, borrowed $100,000
from the Company under a promissory note bearing interest at the rate of 8% per
annum. Ms. Johnese has repaid $40,000 of the principal amount. Sixty thousand
dollars in principal, together with accrued interest in the current amount of
approximately $50,000, remain outstanding and are overdue, which amounts are the
largest amounts outstanding at any time since January 1, 2001.
80
DESCRIPTION OF SENIOR CREDIT FACILITIES
On May 15, 2002, we entered into a new senior credit agreement with Bank of
America, N.A., as administrative agent, and a syndicate of other lenders
providing for aggregate borrowings of up to $200 million. Our senior credit
facilities under the credit agreement consist of:
- a $40 million delayed-draw seven-year term loan A facility;
- a $75 million seven-and-one-half-year term loan B facility; and
- a $85 million seven-year reducing revolving credit facility.
In addition, to the extent that we desire to, and are able to, identify
lending institutions willing to make additional loans, the new senior credit
agreement provides for a discretionary facility in an amount up to $100 million
in the form of additional revolving credit availability or a term loan C
facility.
The initial borrowings under our new senior credit facilities were used to
refinance our prior senior revolving credit facilities. The remaining
availability under the new senior credit facilities will be used for additional
borrowings to finance capital expenditures and acquisitions and for other
general corporate purposes. As of March 31, 2002, we had approximately $113
million of unused borrowing capacity under our senior credit facilities.
All of our subsidiaries other than WAND (TV) Partnership have guaranteed
our senior credit facilities. In addition, our new senior credit facilities are
secured by:
- all of the equity interests of each of our subsidiaries; and
- substantially all of our other assets and those of our subsidiaries other
than WAND (TV) Partnership.
Our borrowings under our senior credit facilities bear interest at a
floating rate, which can be either a base rate plus an applicable margin or, at
our option, LIBOR as specified in our senior credit facilities, plus an
applicable margin. Base rate is defined as the higher of (x) the Bank of America
prime rate and (y) the federal funds effective rate, plus 0.5% per annum.
The applicable base rate and LIBOR margins will vary depending upon our
consolidated total leverage ratio.
The interest rate payable under our new senior credit facilities will
increase by 2% per annum during the continuance of an event of default.
The commitment fees on unused commitments under our senior credit
facilities is either 0.75% or 0.50% depending on the amount of unborrowed
commitments.
Prior to the maturity date, funds under our revolving credit facility may
be borrowed, repaid and reborrowed, without premium or penalty. Our revolving
credit facility is due in full at maturity. The commitments under our revolving
credit facility will reduce quarterly by the following annual amounts, with
final termination of the commitments occurring at final maturity:
<Table>
<Caption>
YEAR REDUCTION AMOUNT
- ---- ----------------
Loan year 3................................................. 5.0%
Loan year 4................................................. 15.0%
Loan year 5................................................. 25.0%
Loan year 6................................................. 27.5%
Loan year 7................................................. 27.5%
</Table>
Borrowings under our senior term loan A facility may be made from time to
time prior to December 31, 2003. If we have not borrowed at least $20 million
under this facility by June 30, 2003, availability for additional borrowings
under the facility will be reduced by an amount equal to the difference between
$20 million and the amount borrowed under the facility by that date. The
principal amount of our senior term loan A facility will be subject to quarterly
amortization so as to reduce the
81
principal amount by the following annual amounts, with final termination of the
commitments occurring at final maturity:
<Table>
<Caption>
YEAR REDUCTION AMOUNT
- ---- ----------------
Loan year 3................................................. 5.0%
Loan year 4................................................. 15.0%
Loan year 5................................................. 25.0%
Loan year 6................................................. 27.5%
Loan year 7................................................. 27.5%
</Table>
The principal amount of our senior term loan B facility will be subject to
quarterly amortization so as to reduce the principal amount by 1% in each of
loan years 1 through 7, with the remaining outstanding principal payable at
final maturity.
Voluntary prepayments of amounts outstanding under our senior credit
facilities will be permitted at any time, so long as we give notice as required
by the facility. However, if a prepayment is made with respect to a LIBOR loan
on a date other than an interest payment date, we must pay a fee to compensate
the lenders for losses and expenses incurred as a result of the prepayment.
We are required to prepay amounts outstanding under our new senior credit
facilities in an amount equal to:
- 100% of the net proceeds of any equity issuances;
- 100% of all insurance recoveries in excess of amounts used to replace or
restore any properties, subject to a basket;
- 50% of our excess cash flow when the total leverage ratio is equal to or
greater than 4x, commencing with the year ending December 31, 2002; and
- 100% of the net proceeds of asset sales, subject to certain exclusions.
The proceeds of any mandatory prepayment will be applied pro rata with
respect to amounts outstanding under the term loan A facility, term loan B
facility and the revolving credit facility. With respect to prepayments of the
revolving credit facility and, to the extent that the term loan A facility
commitment has not expired, prepayments of the term loan A facility, there will
be an automatic corresponding reduction in the revolving credit facility and the
term loan A facility.
Our new senior credit facilities require us to meet certain financial
tests, including, without limitation, a maximum senior leverage ratio, a maximum
total leverage ratio, a minimum fixed charge coverage ratio and a minimum
interest coverage ratio. In addition, our senior credit facilities contain
certain covenants that, among other things, limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, liens and
encumbrances and other matters customarily restricted in such agreements.
Our new senior credit facilities contain customary events of default,
including, without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness in
excess of specified amounts, certain events of bankruptcy and insolvency,
judgments in excess of specified amounts, ERISA defaults, failure of any
guaranty or security document supporting our new senior credit facilities to be
in full force and effect and change of control.
82
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Block" refers only to Block Communications, Inc. and not to any of its
subsidiaries. Unless otherwise indicated, the term "notes" includes both the
exchange notes and the old notes.
Block issued the old notes, and will issue the exchange notes, under an
indenture among itself, the Guarantors and Wells Fargo Bank Minnesota, National
Association, as trustee. The terms of the notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
Holders of the notes. Certain defined terms used in this description but not
defined below under "-- Certain Definitions" have the meanings assigned to them
in the indenture.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE SUBSIDIARY GUARANTEES
THE NOTES
The notes:
- are general unsecured obligations of Block;
- are subordinated in right of payment to all existing and future Senior
Debt of Block;
- are pari passu in right of payment with any future senior subordinated
Indebtedness of Block; and
- are unconditionally guaranteed by the Guarantors.
THE SUBSIDIARY GUARANTEES
The notes are guaranteed by all of Block's Domestic Subsidiaries, other
than WAND (TV) Partnership.
Each guarantee of the notes:
- is a general unsecured obligation of the Guarantor;
- is subordinated in right of payment to all existing and future Senior
Debt of that Guarantor; and
- is pari passu in right of payment with any future senior subordinated
Indebtedness of that Guarantor.
As of March 31, 2002, after giving effect to the refinancing of Block's
senior credit facilities, Block and the Guarantors would have had total Senior
Debt of approximately $78 million. As indicated above and as discussed in detail
below under the caption "-- Subordination," payments on the notes and under
these guarantees are subordinated to the payment of Senior Debt. The indenture
will permit us and the Guarantors to incur additional Senior Debt.
As of the date of this prospectus, all of our subsidiaries are "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "-- Certain Covenants -- Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants in the indenture. Our Unrestricted
Subsidiaries will not guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
The principal amount of the notes presently outstanding is, and after the
exchange offer will be, $175.0 million. We may, without the consent of the
holders, increase such principal amount in the future on the same terms and
conditions and with the same CUSIP number(s) as the notes being offered hereby.
Any offering of additional notes is subject to the covenants of the indenture
described below, including the
83
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." The notes and any additional
notes subsequently issued under the indenture may be treated as a single class
for all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Block will issue notes in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on April 15, 2009.
Interest on the notes will accrue at the rate of 9 1/4% per annum and will
be payable semi-annually in arrears on April 15 and October 15, commencing on
October 15, 2002. Block will make each interest payment to the Holders of record
on the immediately preceding April 1 and October 1.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date to which it was most recently
paid. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to Block, Block will pay
all principal, interest and premium and Additional Interest, if any, on that
Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless Block elects to make interest
payments by check mailed to the Holders at their address set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. Block may
change the paying agent or registrar without prior notice to the Holders of the
notes, and Block or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents in connection with a
transfer of notes. Holders will be required to pay all taxes due on transfer.
Block is not required to transfer or exchange any note selected for redemption.
Also, Block is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
SUBSIDIARY GUARANTEES
The notes are guaranteed by each of Block's current and future Domestic
Subsidiaries, other than WAND (TV) Partnership. These Subsidiary Guarantees are
joint and several obligations of the Guarantors. Each Subsidiary Guarantee is
subordinated to the prior payment in full in cash or Cash Equivalents of all
Senior Debt of that Guarantor. The obligations of each Guarantor under its
Subsidiary Guarantee are limited with the intention of preventing that
Subsidiary Guarantee from constituting a fraudulent conveyance under applicable
law. See "Risk Factors -- Federal and State statutes allow courts, under
specific circumstances, to void guarantees and require note holders to return
payments received from guarantors."
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than Block or another
Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) if the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such consolidation or
merger is a Restricted Subsidiary immediately following such transaction,
such Person assumes all the obligations of that Guarantor under the
indenture, its Subsidiary Guarantee and the registration rights agreement
pursuant to a supplemental indenture satisfactory to the trustee.
84
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Restricted Subsidiary of Block, if the
sale or other disposition complies with the "Asset Sale" and the other
provisions of the indenture;
(2) in connection with any sale of the Capital Stock of a Guarantor to
a Person that is not (either before or after giving effect to such
transaction) a Restricted Subsidiary of Block with the effect that
immediately following such transaction such Guarantor is no longer a
Restricted Subsidiary of Block, if the sale complies with the "Asset Sale"
and the other provisions of the indenture; or
(3) if Block designates any Restricted Subsidiary that is a Guarantor
as an Unrestricted Subsidiary in accordance with the applicable provisions
of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales."
SUBORDINATION
The payment of principal, interest and premium and Additional Interest, if
any, on the notes is subordinated to the prior payment in full in cash or Cash
Equivalents of all Senior Debt of Block, including Senior Debt incurred after
the date of the indenture.
The holders of Senior Debt will be entitled to receive payment in full in
cash or Cash Equivalents of all Obligations due in respect of Senior Debt
(including interest after the commencement of any bankruptcy proceeding at the
rate specified in the applicable Senior Debt) before the Holders of notes will
be entitled to receive any payment with respect to the notes (except that
Holders of notes may receive and retain Permitted Junior Securities and payments
made from the trust described under "-- Legal Defeasance and Covenant
Defeasance"), in the event of any distribution to creditors of Block:
(1) in a liquidation or dissolution of Block;
(2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to Block or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of Block's assets and liabilities.
Block also may not make any payment in respect of the notes (except in
Permitted Junior Securities or from the trust described under "-- Legal
Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is
continuing beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of
Designated Senior Debt that permits holders of that series of Designated
Senior Debt to accelerate its maturity and the trustee receives a notice of
such default (a "Payment Blockage Notice") from the holders of any
Designated Senior Debt.
Payments on the notes may and will be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in the case of a nonpayment default, upon the earlier of the date
on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received, unless
the maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and premium and
Additional Interest, if any, on the notes that have come due have been paid
in full in cash.
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No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee will be, or be made, the
basis for a subsequent Payment Blockage Notice.
If the trustee or any Holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under "-- Legal Defeasance and Covenant Defeasance") when the payment is
prohibited by these subordination provisions, the trustee or the Holder, as the
case may be, will hold the payment in trust for the benefit of the holders of
Senior Debt. Upon the proper written request of the holders of Senior Debt, the
trustee or the Holder, as the case may be, will deliver the amounts in trust to
the holders of Senior Debt or their proper representative.
Block must promptly notify holders of Senior Debt if payment of the notes
is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Block, Holders of notes may
recover less ratably than creditors of Block who are holders of Senior Debt. See
"Risk Factors -- Your right to receive payments on the notes is junior to all of
our other existing indebtedness and possibly all of our future borrowings.
Further, the subsidiary guarantees of the notes are junior to all of our
guarantors' existing indebtedness and possibly to all their future borrowings."
OPTIONAL REDEMPTION
At any time prior to April 15, 2005, Block may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 109.250% of the principal amount, plus
accrued and unpaid interest and Additional Interest, if any, to the redemption
date, with the net cash proceeds of one or more Qualified Equity Offerings;
provided that:
(1) at least 65% of the aggregate principal amount of notes issued
under the indenture remains outstanding immediately after the occurrence of
such redemption (excluding notes held by Block and its Subsidiaries); and
(2) the redemption occurs within 45 days of the date of the closing of
such Qualified Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at Block's option prior to April 15, 2006.
After April 15, 2006, Block may redeem all or a part of the notes upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued and unpaid
interest and Additional Interest, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 15 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2006........................................................ 104.625%
2007........................................................ 102.313%
2008 and thereafter......................................... 100.000%
</Table>
MANDATORY REDEMPTION
Block is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of notes will have the right to
require Block to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer, Block
will offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes
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repurchased plus accrued and unpaid interest and Additional Interest, if any, on
the notes repurchased, to the date of purchase. Within ten days following any
Change of Control, Block will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the Change of Control Payment Date specified in the
notice, which date will be no earlier than 30 days and no later than 60 days
from the date such notice is mailed, pursuant to the procedures required by the
indenture and described in such notice. Block will comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent those laws and regulations are applicable
in connection with the repurchase of the notes as a result of a Change of
Control. To the extent that the provisions of any securities laws or regulations
conflict with the Change of Control provisions of the indenture, Block will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Change of Control provisions
of the indenture by virtue of such conflict.
On the Change of Control Payment Date, Block will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by Block.
The paying agent will promptly mail to each Holder of notes properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, Block
will either repay all outstanding Senior Debt or obtain the requisite consents,
if any, under all agreements governing outstanding Senior Debt to permit the
repurchase of notes required by this covenant. Block will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The provisions described above that require Block to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the Holders of the notes to require that Block repurchase or redeem
the notes in the event of a takeover, recapitalization or similar transaction.
Block will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Block and purchases
all notes properly tendered and not withdrawn under the Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of Block and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Block to repurchase its notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of Block and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
87
ASSET SALES
Block will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) Block (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) the fair market value is determined by Block's Board of Directors
and evidenced by a resolution of the Board of Directors set forth in an
officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration received in the Asset Sale by
Block or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following will be
deemed to be cash:
(a) any liabilities, as shown on Block's most recent consolidated
balance sheet, of Block or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes or any Subsidiary Guarantee) that are assumed
by the transferee of any such assets pursuant to a customary novation
agreement that releases Block or such Restricted Subsidiary from further
liability; and
(b) any securities, notes or other obligations received by Block or
any such Restricted Subsidiary from such transferee that are converted
within ninety days by Block or such Restricted Subsidiary into cash or
Cash Equivalents, to the extent of the cash or Cash Equivalents received
in that conversion.
The 75% limitation referred to in clause (3) above will not apply to any
Asset Sale in which the cash or Cash Equivalents portion of the consideration
received therefrom, determined in accordance with the preceding provision, is
equal to or greater than what the after-tax proceeds would have been had such
Asset Sale complied with the aforementioned 75% limitation.
Notwithstanding the foregoing, Block or any Restricted Subsidiary will be
permitted to consummate an Asset Sale without complying with the foregoing if:
(1) Block or such Restricted Subsidiary receives consideration at the
time of such Asset Sale at least equal to the fair market value of the
assets or other property sold, issued or otherwise disposed of;
(2) the fair market value is determined by Block's Board of Directors
and is evidenced by a resolution of the Board of Directors set forth in an
officers' certificate to the trustee; and
(3) at least 75% (or 50% in the case of the sale of all of the Capital
Stock owned by Block of WAND (TV) Partnership) of the consideration for
such Asset Sale constitutes a controlling interest in a Permitted Business,
assets used or useful in a Permitted Business and/or cash;
provided that any cash (other than any amount deemed cash under clause (3)(a) of
the preceding paragraph) received by Block or such Restricted Subsidiary in
connection with any Asset Sale permitted to be consummated under this paragraph
shall constitute Net Proceeds subject to the provisions of the next paragraph.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Block may apply those Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with respect
thereto;
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other non-current assets that are used or useful in a
Permitted Business.
88
Pending the final application of any Net Proceeds, Block may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Block will make an
Asset Sale Offer to all Holders of notes and all holders of other Indebtedness
that is pari passu with the notes containing provisions similar to those set
forth in the indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal amount of notes
and such other pari passu Indebtedness that may be purchased out of the Excess
Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Additional Interest, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, Block may use those
Excess Proceeds for any purpose not otherwise prohibited by the indenture. If
the aggregate principal amount of notes and other pari passu Indebtedness
tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the
trustee will select the notes and such other pari passu Indebtedness to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds will be reset at zero.
Block will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, Block will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.
The agreement governing Block's outstanding Senior Debt prohibits Block
from purchasing any notes, and also provides that certain change of control or
asset sale events with respect to Block would constitute a default under the
agreement. Any future credit agreements or other agreements relating to Senior
Debt to which Block becomes a party may contain similar restrictions and
provisions. In the event a Change of Control or Asset Sale occurs at a time when
Block is prohibited from purchasing notes, Block could seek the consent of its
senior lenders to the purchase of notes or could attempt to refinance the
borrowings that contain such prohibition. If Block does not obtain such a
consent or repay such borrowings, Block will remain prohibited from purchasing
notes. In such case, Block's failure to purchase tendered notes would constitute
an Event of Default under the indenture which would, in turn, constitute a
default under such Senior Debt. In such circumstances, the subordination
provisions in the indenture would likely restrict payments to the Holders of
notes.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange,
on a pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior to
a redemption date if the notice is issued in connection with a defeasance of the
notes or a satisfaction and discharge of the indenture. Notices of redemption
may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder of notes
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for
89
redemption. On and after the redemption date, interest ceases to accrue on notes
or portions of them called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
Block will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Block's or any of its Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving Block or any of its Restricted
Subsidiaries) or to the direct or indirect holders of Block's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Block or to Block or a Restricted Subsidiary of
Block);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving Block) any Equity Interests of Block or any direct
or indirect parent of Block;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Subsidiary Guarantees, except a payment of
interest or principal at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other
actions set forth in these clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment; and
(2) Block would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness (other than Permitted
Debt) pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the date of the indenture
(other than the Restricted Payments made pursuant to clauses (1) through
(7) and (9) of the following paragraph) shall not exceed, at the date of
determination, the sum of (a) an amount equal to Block's Consolidated Cash
Flow from the date of the indenture to the end of Block's most recently
ended full fiscal quarter for which internal financial statements are
available, taken as a single accounting period, less the product of 1.4
times Block's Consolidated Interest Expense from the date of the indenture
to the end of Block's most recently ended full fiscal quarter for which
internal financial statements are available, taken as a single accounting
period, plus (b) an amount equal to the net cash proceeds received by Block
from the sale of Equity Interests after the date of the indenture (other
than (i) sales of Disqualified Stock and (ii) Equity Interests sold to any
of Block's Restricted Subsidiaries) plus (c) to the extent that any
Restricted Investment that was made after the date of the indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (i) the
cash return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (ii) the initial amount of such Restricted
Investment plus (4) to the extent that any Unrestricted Subsidiary is
redesignated as a Restricted Subsidiary after the date of the indenture,
the fair market value of such Subsidiary as of the date of such
redesignation.
90
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Block or any Guarantor or
of any Equity Interests of Block in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary of Block) of, Equity Interests of Block (other than Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition will be excluded from clause (3)(b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Block or any Guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Block to
the holders of its common Equity Interests on a pro rata basis;
(5) the payment of any dividends by Block to holders of its common
Equity Interests not to exceed $2.0 million in any twelve-month period;
(6) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Block or any Restricted Subsidiary of
Block held by any member of Block's (or any of its Restricted
Subsidiaries') management pursuant to any management equity subscription
agreement, stock option agreement or similar agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests may not exceed $750,000 in any twelve-month period
(with unused amounts in any twelve month period being available to be so
utilized in succeeding twelve month periods);
(7) Restricted Payments made solely with the net cash proceeds to
Block or any Restricted Subsidiary of any "key man" life insurance proceeds
(i) to repurchase, redeem or otherwise acquire or retire for value any
Equity Interests of Block or any Restricted Subsidiary of Block held by any
member of Block's (or any of its Restricted Subsidiaries') management
pursuant to any management equity subscription agreement, stock option
agreement or similar agreement or (ii) to repurchase, redeem or otherwise
acquire or retire for value any Equity Interests of Block held by members
of the Block family pursuant to the Amendment to and the Restatement of the
Shareholders Agreement, dated as of December 12, 1991, as in effect on the
date of the indenture, with such changes that from time to time do not
materially adversely affect Block and its Restricted Subsidiaries taken as
a whole or increase the amounts payable thereunder;
(8) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Block held by members of the Block family
pursuant to the Amendment to and the Restatement of the Shareholders
Agreement, dated as of December 12, 1991, as in effect on the date of the
indenture, with such changes that from time to time do not materially
adversely affect Block and its Restricted Subsidiaries taken as a whole or
increase the amounts payable thereunder, other than repurchases,
redemptions, acquisitions or retirements made for similar purposes pursuant
to clause (7) above; and
(9) other Restricted Payments not to exceed $2.5 million in the
aggregate.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Block or such Restricted Subsidiary, as
the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant will be
determined by the Board of Directors whose resolution with respect thereto will
be delivered to the trustee. The Board of Directors' determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
91
banking firm of national standing if the fair market value exceeds $10.0
million. Not later than the date of making any Restricted Payment, Block will
deliver to the trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this "Restricted Payments" covenant were computed, together with a
copy of any fairness opinion or appraisal required by the indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
Block will not, and will not permit any of its Restricted Subsidiaries to,
directly, or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and Block
will not issue any Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that
Block may incur Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if Block's Debt to Cash Flow Ratio at the time of incurrence
of such Indebtedness or the issuance of such Disqualified Stock, after giving
pro forma effect to such incurrence or issuance as of such date and to the use
of proceeds therefrom as if the same had occurred at the beginning of the most
recently ended four full fiscal quarter period of Block for which internal
financial statements are available, would have been no greater than (a) 7.0 to
1, if such incurrence or issuance is on or prior to April 15, 2005 and (b) 6.5
to 1, if such incurrence or issuance is after April 15, 2005.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Block and any of its Restricted Subsidiaries of
additional Indebtedness and letters of credit under Credit Facilities in an
aggregate principal amount at any one time outstanding under this clause
(1)(with letters of credit being deemed to have a principal amount equal to
the maximum potential liability of Block and its Restricted Subsidiaries
thereunder) not to exceed $200.0 million less the aggregate amount of all
Net Proceeds of Asset Sales applied by Block or any of its Restricted
Subsidiaries since the date of the indenture to repay any Indebtedness
under a Credit Facility and effect a corresponding commitment reduction
thereunder pursuant to the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales;"
(2) the incurrence by Block and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by Block and the Guarantors of Indebtedness
represented by the notes and the related Subsidiary Guarantees to be issued
on the date of the indenture and the exchange notes and the related
Subsidiary Guarantees to be issued pursuant to the registration rights
agreement;
(4) the incurrence by Block or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of Block
or such Restricted Subsidiary, in an aggregate principal amount, including
all Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (4), not to
exceed $10.0 million at any time outstanding;
(5) the incurrence by Block or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4), (5), or (10) of this paragraph;
(6) the incurrence by Block or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Block and any of its Restricted
Subsidiaries; provided, however, that:
(a) if Block or any Guarantor is the obligor on such Indebtedness
and the obligee under such Indebtedness is neither Block nor a
Guarantor, such Indebtedness must be expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the notes, in
the case of Block, or the Subsidiary Guarantee, in the case of a
Guarantor; and
92
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Block or a Restricted Subsidiary of Block and (ii) any sale or other
transfer of any such Indebtedness to a Person that is not either Block
or a Restricted Subsidiary of Block; will be deemed, in each case, to
constitute an incurrence of such Indebtedness by Block or such
Restricted Subsidiary, as the case may be, that was not permitted by
this clause (6);
(7) the incurrence by Block or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the indenture to be outstanding;
(8) the guarantee by Block or any of the Guarantors of Indebtedness of
Block or a Restricted Subsidiary of Block that was permitted to be incurred
by another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
(10) Indebtedness incurred by Block or any Restricted Subsidiary
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of business, including, without limitation,
letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit or the incurrence of such
Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(11) Indebtedness consisting of customary indemnification, adjustments
of purchase price or similar obligations, in each case, incurred or assumed
in connection with the acquisition of any business or assets;
(12) Obligations in respect of performance and surety bonds and
completion guarantees provided by Block or any Restricted Subsidiary in the
ordinary course of business; and
(13) the incurrence by Block or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (13), not to exceed $10.0
million.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (13) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, Block
will be permitted to classify such item of Indebtedness on the date of its
incurrence, or later reclassify all or a portion of such item of Indebtedness,
in any manner that complies with this covenant. Accrual of interest, accretion
or amortization of original issue discount and the accretion of accreted value
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant. Indebtedness under Credit Facilities outstanding on the date on which
notes are first issued and authenticated under the indenture will be deemed to
have been incurred on such date in reliance on the exception provided by clause
(1) of the definition of Permitted Debt.
NO SENIOR SUBORDINATED DEBT
Block will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any Senior Debt of Block and senior in any respect in right of payment to the
notes. No Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to the Senior Debt of such Guarantor and senior in any respect in right
of payment to such Guarantor's Subsidiary Guarantee. For purposes of this
covenant, the foregoing limitations shall not apply to distinctions between
categories of
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Senior Debt of Block that exist by reason of any Liens or Guarantees arising or
created in respect of some but not all such Senior Debt.
LIENS
Block will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind securing Indebtedness or trade payables on any asset now owned or hereafter
acquired, except Permitted Liens, unless all payments due under the indenture
and the notes are secured on an equal and ratable basis with the obligations so
secured until such time as such obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Block will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to Block or any of its Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or pay any
indebtedness owed to Block or any of its Restricted Subsidiaries;
(2) make loans or advances to Block or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Block or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities
as in effect on the date of the indenture and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of those agreements, provided that the
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in those agreements on the date of the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Block or any of its Restricted Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness or Capital
Stock was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations (including Capital Lease Obligations)
for property acquired in the ordinary course of business that impose
restrictions on that property of the nature described in clause (3) of the
preceding paragraph;
(7) contracts for the sale of assets, including any agreement for the
sale or other disposition of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale or other
disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
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(9) Liens securing Indebtedness otherwise permitted to be incurred
under the provisions of the covenant described above under the caption
"-- Liens" that limit the right of the debtor to dispose of the assets
subject to such Liens;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, assets sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Block may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Block is the surviving corporation); or (2)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of Block and its Restricted Subsidiaries taken as a
whole, in one or more related transactions, to another Person; unless:
(1) either: (a) Block is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Block) or to which such sale, assignment, transfer, conveyance or other
disposition has been made is a corporation organized or existing under the
laws of the United States, any state of the United States or the District
of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than Block) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of Block under the notes, the indenture and the registration
rights agreement pursuant to agreements reasonably satisfactory to the
trustee;
(3) immediately after such transaction, no Default or Event of Default
exists; and
(4) Block or the Person formed by or surviving any such consolidation
or merger (if other than Block), or to which such sale, assignment,
transfer, conveyance or other disposition has been made will, on the date
of such transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt to Cash Flow Ratio set forth
in the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
In addition, Block may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Block and any Guarantor.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which Block is not the surviving Person and the surviving Person is to assume
all the obligations of Block under the notes and the indenture pursuant to a
supplemental indenture, such surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, Block, and Block
would be discharged from its obligations under the indenture and the notes;
provided that solely for the purpose of calculating amounts described in clause
(2) of the second paragraph under the caption "-- Restricted Payments," any such
surviving Person shall only be deemed to have succeeded to and be substituted
for Block with respect to the period subsequent to the effective time of such
transaction (and Block (before giving effect to such transaction) shall be
deemed to be the "Company" for such purposes for all prior periods).
TRANSACTIONS WITH AFFILIATES
Block will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets
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from, or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to Block or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by Block or such Restricted
Subsidiary with an unrelated Person; and
(2) Block delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to Block of such Affiliate
Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any compensation paid to employees, including pursuant to any
employment agreement, entered into by Block or any of its Restricted
Subsidiaries in the ordinary course of business of Block or such Restricted
Subsidiary;
(2) transactions between or among Block and/or its Restricted
Subsidiaries;
(3) loans, advances, payment of reasonable fees, indemnification of
directors or similar arrangements to officers, directors, employees and
consultants who are not otherwise Affiliates of Block;
(4) sales of Equity Interests (other than Disqualified Stock) of Block
to Affiliates of Block;
(5) Restricted Payments and Permitted Investments that are permitted
by the provisions of the indenture described above under the caption
"-- Restricted Payments;" and
(6) transactions, including the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of Block held
by members of the Block family, pursuant to the Amendment to and the
Restatement of the Shareholders Agreement, dated as of December 12, 1991,
as in effect on the date of the indenture, with such changes that from time
to time do not materially adversely affect Block and its Restricted
Subsidiaries taken as a whole or increase the amounts payable thereunder.
ADDITIONAL SUBSIDIARY GUARANTEES
If Block or any of its Restricted Subsidiaries acquires or creates another
Domestic Subsidiary after the date of the indenture, other than a Subsidiary
that has properly been designated as an Unrestricted Subsidiary in accordance
with the indenture for so long as they continue to constitute Unrestricted
Subsidiaries, then that newly acquired or created Domestic Subsidiary will
become a Guarantor and execute a supplemental indenture and deliver an opinion
of counsel satisfactory to the trustee within 10 Business Days of the date on
which it was acquired or created.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by Block and its
Restricted Subsidiaries in the Subsidiary properly designated will be deemed to
be an Investment made as of the time of the designation and will reduce the
amount available for Restricted Payments under the first paragraph of the
covenant described above under the caption "--Restricted Payments" or Permitted
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Investments, as determined by Block. That designation will only be permitted if
the Investment would be permitted at that time and if the Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. The Board of
Directors may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if the redesignation would not cause a Default.
BUSINESS ACTIVITIES
Block will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to Block and its Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
Block will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indenture or the notes unless
such consideration is offered to be paid and is paid to all Holders of the notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any notes are
outstanding, Block will furnish to the Holders of notes, within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Block were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by Block's certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Block were required to file such reports.
In addition, following the consummation of the exchange offer described in
this prospectus, whether or not required by the Commission, Block will file a
copy of all of the information and reports referred to in clauses (1) and (2)
above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, Block and the
Subsidiary Guarantors have agreed that, for so long as any notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
If Block has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Block and
its Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of Block.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an "Event of Default:"
(1) default for 30 days in the payment when due of interest on, or
Additional Interest with respect to, the notes whether or not prohibited by
the subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if
any, on the notes, whether or not prohibited by the subordination
provisions of the indenture;
(3) failure by Block or any of its Restricted Subsidiaries to comply
with the provisions described under the captions "-- Repurchase at the
Option of Holders -- Change of Control,"
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(4) failure by Block or any of its Restricted Subsidiaries for 30 days
after notice from the trustee or holders of at least 25% in principal
amount of the notes to comply with the provisions described under the
captions "-- Repurchase at the Option of Holders -- Asset Sales,"
"-- Certain Covenants -- Restricted Payments," "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
(5) failure by Block or any of its Restricted Subsidiaries for 60 days
after notice from the trustee or holders of at least 25% in principal
amount of the notes to comply with any of the other agreements in the
indenture;
(6) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Block or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Block or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of such Indebtedness at
the final stated maturity thereof (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(7) failure by Block or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million not covered by
insurance, which judgments are not paid, discharged or stayed for a period
of 60 days;
(8) except as permitted by the indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or disaffirm
its obligations under its Subsidiary Guarantee; and
(9) certain events of bankruptcy or insolvency described in the
indenture with respect to Block or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Block, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the Holders of
at least 25% in principal amount of the then outstanding notes may declare all
the notes to be due and payable immediately.
In the event of a declaration of acceleration of the notes because an Event
of Default has occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (6) of the definition of Event of Default, the
declaration of acceleration of the notes shall be automatically annulled if the
holders of any Indebtedness described in clause (6) of the definition of Event
of Default have rescinded the declaration of acceleration in respect of the
Indebtedness within 30 days of the date of the declaration and if:
(1) the annulment of the acceleration of notes would not conflict with
any judgment or decree of a court of competent jurisdiction; and
(2) all existing Events of Default, except nonpayment of principal or
interest on the notes that became due solely because of the acceleration of
the notes, have been cured or waived.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notes is in their
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interest, except a Default or Event of Default relating to the payment of
principal or interest or Additional Interest.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Additional Interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Block with the
intention of avoiding payment of the premium that Block would have had to pay if
Block then had elected to redeem the notes pursuant to the optional redemption
provisions of the indenture, an equivalent premium will also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the notes. If an Event of Default occurs prior to April 15, 2006, by reason
of any willful action (or inaction) taken (or not taken) by or on behalf of
Block with the intention of avoiding the prohibition on redemption of the notes
prior to April 15, 2006, then the premium specified in the indenture will also
become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
Block is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, Block is required to deliver to the trustee a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Block or any
Guarantor, as such, will have any liability for any obligations of Block or the
Guarantors under the notes, the indenture, the Subsidiary Guarantees or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Block may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Additional
Interest, if any, on such notes when such payments are due from the trust
referred to below;
(2) Block's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Block's and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Block may, at its option and at any time, elect to have the
obligations of Block and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Block must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium and
Additional Interest, if any, on the outstanding notes on the stated
maturity or on the applicable redemption date, as the case may be, and
Block must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Block has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that (a) Block has received from, or there has been published
by, the Internal Revenue Service a ruling or (b) since the date of the
indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel will confirm that, the Holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Block has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on
the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which Block or any of
its Subsidiaries is a party or by which Block or any of its Subsidiaries is
bound;
(6) Block must deliver to the trustee an officers' certificate stating
that the deposit was not made by Block with the intent of preferring the
Holders of notes over the other creditors of Block with the intent of
defeating, hindering, delaying or defrauding creditors of Block or others;
and
(7) Block must deliver to the trustee an officers' certificate and an
opinion of counsel, which opinion may be subject to customary assumptions
and exclusions, each stating that all conditions precedent relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
The agreements governing Block's outstanding Senior Debt prohibit Block
from defeasing any notes. Any future credit agreements or other agreements
relating to Senior Debt to which Block becomes a party may contain similar
restrictions and provisions. In the event Block elects to exercise its Legal
Defeasance or Covenant Defeasance options at a time when Block is prohibited
from defeasing notes, Block could seek the consent of its senior lenders to the
defease the notes or could attempt to refinance the borrowings that contain such
prohibition. If Block does not obtain such a consent or repay such borrowings,
Block will remain prohibited from defeasing the notes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal
of, or interest or premium, or Additional Interest, if any, on the notes
(except a rescission of acceleration of the notes by the Holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Additional Interest, if
any, on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
indenture relating to (i) subordination that adversely affects the rights of the
Holders of the notes or (ii) the release of any Guarantor from any of its
obligations under its Subsidiary Guarantee or the indenture, except in
accordance with the terms of the indenture, will require the consent of the
Holders of at least 75% in aggregate principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of notes,
Block, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Block's obligations to Holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Block's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the
legal rights under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust Indenture
Act;
(6) to provide for the issuance of additional notes in accordance with
the limitations set forth in the indenture as of its date; or
(7) to allow any Guarantor to execute a supplemental indenture and/or
a Subsidiary Guarantee with respect to the notes.
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SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to
Block, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year and Block or any Guarantor has irrevocably deposited or caused
to be deposited with the trustee as trust funds in trust solely for the
benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination of cash in U.S. dollars and non-callable
Government Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Additional Interest, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on
the date of the deposit or will occur as a result of the deposit and the
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which Block or any Guarantor is a
party or by which Block or any Guarantor is bound;
(3) Block or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4) Block has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, Block must deliver an officers' certificate and an opinion of
counsel, which opinion may be subject to customary assumptions and exclusions,
to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Block or any Guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to Block Communications, Incorporated, 541 North
Superior Street, Toledo, Ohio 43660; Attention: Treasurer.
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BOOK-ENTRY, DELIVERY AND FORM
The notes will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess of $1,000.
The notes will be represented by one or more notes in registered, global form
without interest coupons (collectively, the "Global Notes"). The Global Notes
will be deposited upon issuance with the trustee as custodian for The Depository
Trust Company ("DTC"), in New York, New York, and registered in the name of DTC
or its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for notes
in certificated form except in the limited circumstances described below. See
"-- Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in certificated
form.
In addition, transfers of beneficial interests in the Global Notes will be
subject to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Clearstream),
which may change from time to time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. Block takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Block that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised Block that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the initial purchasers with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system. Euroclear and Clearstream will hold interests in the Global Notes
on behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are
Euroclear Bank S.A./N.V., as operator of Euroclear, and Citibank, N.A., as
operator of Clearstream. All interests in a Global Note, including those held
through Euroclear or Clearstream, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Clearstream may
also be subject to the procedures and requirements of such systems. The
103
laws of some states require that certain Persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Note to pledge such interests to Persons that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate evidencing
such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
Additional Interest, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, Block and the trustee
will treat the Persons in whose names the notes, including the Global Notes, are
registered as the owners of the notes for the purpose of receiving payments and
for all other purposes. Consequently, neither Block, the trustee nor any agent
of Block or the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised Block that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or Block. Neither Block nor the
trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the notes, and Block and the trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Subject to the transfer restrictions set forth under "Notice to Investors,"
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Clearstream participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Clearstream, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, as the case may be, by the counterparty in such system
in accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised Block that it will take any action permitted to be taken by
a Holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global
104
Notes and only in respect of such portion of the aggregate principal amount of
the notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the notes, DTC
reserves the right to exchange the Global Notes for legended notes in
certificated form, and to distribute such notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither Block nor the trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Block that it is unwilling or unable to continue
as depositary for the Global Notes or (b) has ceased to be a clearing
agency registered under the Exchange Act and, in either case, Block fails
to appoint a successor depositary;
(2) in the case of a Global Note held for an account of Euroclear or
Clearstream, Euroclear or Clearstream, as the case may be, (A) is closed
for business for a continuous period of 14 days (other than by reason of
statutory or other holidays), or (B) announces an intention permanently to
cease business or does in fact do so;
(3) Block, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(4) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors."
SAME DAY SETTLEMENT AND PAYMENT
Block will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and Additional Interest,
if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. Block will make all payments of principal,
interest and premium and Additional Interest, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the Holders of the Certificated Notes or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The notes represented by the Global Notes are expected to be eligible
to trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such notes will,
therefore, be required by DTC to be settled in immediately available funds.
Block expects that secondary trading in any Certificated Notes will also be
settled in immediately available funds.
105
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
Block that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Additional Interest" means all additional interest then owing pursuant to
Section 5 of the registration rights agreement.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights; provided that the sale, conveyance or other disposition of all or
substantially all of the assets of Block and its Subsidiaries taken as a
whole will be governed by the provisions of the indenture described above
under the caption "-- Repurchase at the Option of Holders -- Change of
Control" and/or the provisions described above under the caption
"-- Certain Covenants -- Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of Block's Restricted
Subsidiaries or the sale of Equity Interests in any of its Restricted
Subsidiaries.
Notwithstanding the preceding, none of the following items will be deemed
to be an Asset Sale:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among Block and its Restricted
Subsidiaries,
(3) an issuance of Equity Interests by a Restricted Subsidiary to
Block or to another Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) the sale and leaseback of any assets within 90 days of the
acquisition;
106
(7) foreclosures on assets;
(8) the disposition of equipment no longer used or useful in the
business of Block or a Restricted Subsidiary;
(9) the licensing of intellectual property; and
(10) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the
general partner of the partnership; and
(3) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than six months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having capital
and surplus in excess of $500.0 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
107
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of Block and its Restricted Subsidiaries taken as a
whole to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act) other than a Principal or a Related Party of a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution
of Block;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the Beneficial Owner, directly or indirectly, of more than
50% of the Voting Stock of Block, measured by voting power rather than
number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of Block are not Continuing Directors.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale, to the extent such losses were deducted in computing
such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Obligations), to the extent
that any such expense was deducted in computing such Consolidated Net
Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, minus
(6) programming rights payments made during such period,
in each case, on a consolidated basis and determined in accordance with
GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash expenses
of, a Subsidiary of Block will be added to Consolidated Net Income to compute
Consolidated Cash Flow of Block only to the extent that a corresponding amount
would be permitted at the date of determination to be dividended or otherwise
paid to Block by such Subsidiary without prior governmental approval (that has
not been obtained), and
108
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person as of any
date of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the total
amount of Indebtedness of any other Person, to the extent that such Indebtedness
has been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries or is secured by a Lien on assets of the referent Person or any of
its Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
Disqualified Stock of such Person and all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of (i) the consolidated interest expense of the referent Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other fees and
charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations) and (ii)
the consolidated interest expense of the referent Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is guaranteed by the referent
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
the referent Person or one of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon) and (iv) the product of (a) all dividend
payments, whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividend payments on
Equity Interests payable solely in Equity Interests of such Person (other than
Disqualified Stock) or to such Person or any of its Restricted Subsidiaries,
times (b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory tax
rate of the referent Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Restricted
Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded; and
(4) the cumulative effect of a change in accounting principles will be
excluded.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Block who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
109
"Credit Agreement" means that certain Revolving Credit Agreement, dated as
of December 29, 1998, by and among the Company, the Lenders referred to therein,
Mellon Bank, N.A., as Administrative Agent, and The Huntington National Bank, as
Documentation Agent, as amended, and that certain 364-Day Standby Term Loan
Agreement, dated as of December 29, 1998, by and among the Company, the Lenders
referred to therein, Mellon Bank, N.A., as Administrative Agent, and The
Huntington National Bank, as Documentation Agent, as amended, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination, the ratio
of (a) the Consolidated Indebtedness of Block as of such date to (b) the
Consolidated Cash Flow of Block for the four most recent full fiscal quarters
ending immediately prior to such date for which internal financial statements
are available, determined on a pro forma basis after giving effect to all
acquisitions or dispositions of assets made by Block and its Restricted
Subsidiaries from the beginning of such four-quarter period through and
including such date of determination (including any related financing
transactions) as if such acquisitions and dispositions had occurred at the
beginning of such four-quarter period. In addition, for purposes of making the
computation referred to above, (i) acquisitions that have been made by Block or
any of its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the proviso
set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Agreement; and
(2) after payment in full of all Obligations under the Credit
Agreement, any other Senior Debt permitted under the indenture the
principal amount of which is $25.0 million or more and that has been
designated by Block as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder of the Capital Stock, in whole or in part, on or prior to the date that
is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require Block
to repurchase such Capital Stock upon the occurrence of a change of control or
an asset sale will not constitute Disqualified Stock if the terms of such
Capital Stock provide that Block may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." Capital Stock subject to redemption by virtue
of the Amendment to and the Restatement of the Shareholders Agreement, dated as
of December 12, 1991, as in effect on the date of the indenture, shall not be
"Disqualified Stock" solely by virtue of such redemption.
110
"Domestic Subsidiary" means any Restricted Subsidiary of Block that was
formed under the laws of the United States or any state of the United States or
the District of Columbia or that guarantees or otherwise provides direct credit
support for any Indebtedness of Block.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means Indebtedness of Block and its Subsidiaries
(other than Indebtedness under the Credit Agreement) in existence on the date of
the indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) all Domestic Subsidiaries of Block, other than WAND (TV)
Partnership; and
(2) any other subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price
of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
111
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any
interest on the Indebtedness that is more than 30 days past due, in the
case of any other Indebtedness.
"Interest Payment Date" means the dates for payment of interest as set
forth in the indenture and the notes.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Block or any
Restricted Subsidiary of Block sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of Block such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary of
Block, Block will be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of Block's Investments in
such Subsidiary that were not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with: (a) any Asset Sale; or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries; and
(2) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by Block or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result of the Asset Sale, taxes paid or payable as a result of the Asset Sale,
in each case, after taking into account any available tax credits or deductions
and any tax sharing arrangements and amounts required to be applied to the
repayment of Indebtedness, other than Senior Debt, secured by a Lien on the
asset or assets that were the subject of such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Block nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness of Block or any of its Restricted
112
Subsidiaries to declare a default on such other Indebtedness or cause the
payment of the Indebtedness to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Block or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business engaged in by Block or the
Restricted Subsidiaries as of the Closing Date or any business reasonably
related, ancillary or complementary thereto.
"Permitted Investments" means:
(1) any Investment in Block or in a Restricted Subsidiary of Block
that is a Guarantor;
(2) any Investment by Block in WAND (TV) Partnership; provided,
however that:
(a) WAND (TV) Partnership is designated as a Restricted Subsidiary
on the date of such Investment;
(b) on the date of such Investment there does not exist any
consensual encumbrance or restriction (other than those in or
contemplated by the Partnership Agreement of WAND (TV) Partnership as in
effect on the date of the indenture with such changes that from time to
time do not materially adversely affect Block or its Restricted
Subsidiaries (other than WAND (TV) Partnership) or increase the scope or
substance of any such encumbrances or restrictions) on the ability of
WAND (TV) Partnership to (i) pay dividends or make any other
distributions on its Capital Stock to Block or any other Restricted
Subsidiary, or with respect to any other interest or participation in,
or measured by, its profits, or pay any indebtedness owed to Block or
any other Restricted Subsidiary; (ii) make loans or advances to Block or
any other Restricted Subsidiary; or (iii) transfer any of its properties
or assets to Block or any other Restricted Subsidiary; and
(c) senior management of Block reasonably believes that such
Investment is prudent to operate WAND (TV) Partnership's business in the
ordinary course of its business;
(3) any Investment in Cash Equivalents;
(4) any Investment by Block or any Restricted Subsidiary of Block in a
Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Block and a
Guarantor; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Block or a Restricted Subsidiary of Block that is a
Guarantor;
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(6) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Block;
(7) any Investments received in compromise of obligations of trade
creditors or customers that were incurred in the ordinary course of Block's
or any of its Restricted Subsidiaries' business, including pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of any trade creditor or customer;
(8) Hedging Obligations; and
(9) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (9) since the date of the
indenture not to exceed $5.0 million.
113
"Permitted Junior Securities" means:
(1) Equity Interests in Block or any Guarantor; or
(2) debt securities that are subordinated to all Senior Debt and any
debt securities issued in exchange for Senior Debt to substantially the
same extent as, or to a greater extent than, the notes and the Subsidiary
Guarantees are subordinated to Senior Debt under the indenture.
"Permitted Liens" means:
(1) Liens securing Senior Debt that was permitted by the terms of the
indenture to be incurred;
(2) Liens in favor of Block or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Block or any Subsidiary of Block;
provided that such Liens were in existence prior to the contemplation of
such merger or consolidation and do not extend to any assets other than
those of the Person merged into or consolidated with Block or the
Subsidiary;
(4) Liens on property existing at the time of acquisition of the
property by Block or any Subsidiary of Block, provided that such Liens were
in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as is required in
conformity with GAAP has been made therefor;
(9) Liens securing Permitted Refinancing Indebtedness; provided,
however that (a) such new Lien shall be limited to all or part of the same
assets that secured the original Lien (plus improvements on such property)
and (b) the Indebtedness secured by such Lien at such time is not increased
(other than by an amount necessary to pay fees and expenses, including
premiums, related to the refinancing, refunding, extension, renewal or
replacement of such Indebtedness);
(10) easements, rights-of-way, zoning and similar restrictions and
other similar encumbrances or title defects incurred or imposed, as
applicable, in the ordinary course of business and consistent with industry
practices;
(11) any interest or title of a lessor under any Capital Lease
Obligation;
(12) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to letters of credit and products and proceeds thereof;
(13) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty, including rights of
offset and set-off;
(14) Liens securing Hedging Obligations which Hedging Obligations
relate to indebtedness that is otherwise permitted under the indenture;
(15) leases or subleases granted to others;
(16) Liens under licensing agreements;
(17) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(18) judgment Liens not giving rise to an Event of Default;
114
(19) Liens encumbering property of Block or a Restricted Subsidiary
consisting of carriers, warehousemen, mechanics, materialmen, repairmen and
landlords and other Liens arising by operation of law and incurred in the
ordinary course of business for sums which are not overdue or which are
being contested in good faith by appropriate proceedings and (if so
contested) for which appropriate reserves with respect thereto have been
established and maintained on the books of Block or a Restricted Subsidiary
in accordance with GAAP;
(20) Liens encumbering property of Block or a Restricted Subsidiary
incurred in the ordinary course of business in connection with workers'
compensation, unemployment insurance, or other forms of governmental
insurance or benefits, or to secure performance of bids, tenders, statutory
obligations, leases, and contracts (other than for Indebtedness) entered
into in the ordinary course of business of Block or a Restricted
Subsidiary; and
(21) Liens incurred in the ordinary course of business of Block or any
Subsidiary of Block with respect to obligations that do not exceed $5.0
million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of Block or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Block or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the Holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Block or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Principals" means members of the Block family.
"Qualified Equity Offerings" means, any issuance of Capital Stock (other
than Disqualified Stock) by Block to any Person or Persons other than an
Affiliate of Block in a single transaction resulting in gross proceeds to Block
in excess of $50.0 million.
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member or legal guardian (in the case of an individual) of
any Principal;
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any one or
more Principals and/or such other Persons referred to in the immediately
preceding clause (1); or
(3) the estate of any deceased or incompetent Principal.
"Restricted Investment" means an Investment other than a Permitted
Investment.
115
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Debt" means:
(1) all Indebtedness of Block or any Guarantor outstanding under
Credit Facilities and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of Block or any Guarantor permitted to be
incurred under the terms of the indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the notes or any
Subsidiary Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or
owing by Block;
(2) any intercompany Indebtedness of Block or any of its Subsidiaries
to Block or any of its Affiliates;
(3) any trade payables; or
(4) the portion of any Indebtedness that is incurred in violation of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are that Person or one or more
Subsidiaries of that Person (or any combination thereof).
"Subsidiary Guarantee" means, the Guarantee by each Guarantor of Block's
payment obligations under the indenture and the notes, executed pursuant to the
terms of the indenture.
"Unrestricted Subsidiary" means any Subsidiary of Block that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Block or any Restricted Subsidiary of Block unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to Block or such Restricted Subsidiary than those that might
be obtained at the time from Persons who are not Affiliates of Block;
(3) is a Person with respect to which neither Block nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Block or any of its Restricted
Subsidiaries; and
116
(5) has at least one director on its Board of Directors that is not a
director or executive officer of Block or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Block or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Block as an Unrestricted Subsidiary will
be evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding conditions and was
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the preceding requirements as an Unrestricted Subsidiary, it
will thereafter cease to be an Unrestricted Subsidiary for purposes of the
indenture and any Indebtedness of such Subsidiary will be deemed to be incurred
by a Restricted Subsidiary of Block as of such date and, if such Indebtedness is
not permitted to be incurred as of such date under the covenant described under
the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock," Block will be in default of such covenant. The Board of
Directors of Block may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation will be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of Block of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
will only be permitted if (1) such Indebtedness is permitted under the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period;
and (2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then outstanding principal amount of such Indebtedness.
117
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, including the opinion of counsel described below,
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice as of the date hereof. The Internal Revenue Service may
take a contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the following statements and conditions.
Any changes or interpretations may or may not be retroactive and could affect
the tax consequences to holders. The discussion does not address all the tax
consequences that may be relevant to a particular holder or to certain holders
subject to special treatment under U.S. federal income tax laws (including, but
not limited to, certain financial institutions, tax-exempt organizations,
insurance companies, broker-dealers, and persons that have a functional currency
other than the U.S. Dollar or persons in special circumstances, such as those
who have elected to mark securities to market or those who hold notes as part of
a straddle, hedge, conversion transaction, or other integrated investment).
Reed Smith LLP has advised us that, in its opinion, the exchange of the old
notes for exchange notes pursuant to the exchange offer will not be treated as
an "exchange" for federal income tax purposes because the exchange notes will
not be considered to differ materially in kind or extent from the old notes.
Rather, the exchange notes received by a holder will be treated as a
continuation of the old notes in the hands of such holder. As a result, there
will be no federal income tax consequences to holders exchanging old notes for
exchange notes pursuant to the exchange offer.
This discussion is for general information only. We recommend that each
holder consult his own tax advisor as the particular tax consequences of
exchanging such holder's old notes for exchange notes, including the
applicability and effect of any state, local or foreign tax law.
118
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of exchange notes. Broker-dealers may use this prospectus, as it
may be amended or supplemented from time to time, in connection with resales of
exchange notes received in exchange for old notes if the broker-dealer acquired
the old notes as a result of market-making activities or other trading
activities. We have agreed that for a period of 180 days after the effective
date of the registration statement of which this prospectus is a part we will
make this prospectus, as amended or supplemented, available to any broker-dealer
who requests it in the letter of transmittal for use in connection with any such
resale. In addition, until , 2002, all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or other persons. Broker-dealers may from time to time sell
exchange notes received for their own accounts in the exchange offer in one or
more transactions:
- in the over-the-counter market;
- in negotiated transactions;
- through the writing of options on the exchange notes or a combination of
such methods of resale;
- at market prices prevailing at the time of resale;
- at prices related to such prevailing market prices; or
- at negotiated prices.
Broker-dealers may resell exchange notes directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any broker-dealer and/or the purchasers of the
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of the exchange notes may be deemed
to be "underwriters" within the meaning of the Securities Act, and any profit on
any resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of the notes (including any broker-dealers) against liabilities under
the Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer agrees to notify us in writing
before using the prospectus in connection with the sale or transfer of exchange
notes. The broker-dealer further acknowledges and agrees that, upon receipt of
notice from us of the happening of any event which makes any statement in the
prospectus untrue in any material respect or which requires the making of any
changes in the prospectus to make the statements in the prospectus not
misleading or which may impose upon us disclosure obligations that my have a
material adverse effect on us, which notice we agree to deliver promptly to the
broker-dealer, the broker-dealer will suspend use of the prospectus until we
have notified the broker-dealer that delivery of the prospectus may resume and
have furnished to the broker-dealer copies of any amendment or supplement to the
prospectus. We have agreed in the registration rights agreement that for a
period of 180 days after the effective date of the registration statement of
which this prospectus is a part we will make this prospectus, as amended or
supplemented, available to any broker-dealer who requests it in writing for use
in connection with any such resale.
119
LEGAL MATTERS
Certain legal matters with regard to the validity of the notes will be
passed upon for us by Reed Smith LLP, Pittsburgh, Pennsylvania and by Fritz
Byers, Toledo, Ohio. Mr. Byers is a director of the Company and serves as
Secretary and General Counsel to the Company.
EXPERTS
Our consolidated financial statements as of December 31, 2001 and 2000 and
for each of the three years in the period ended December 31, 2001, appearing in
this prospectus and registration statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in this prospectus in reliance upon such report, given
on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-4 that we
have filed with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement. For
further information about us and the notes, you should refer to the registration
statement. This prospectus summarizes material provisions of contracts and other
documents to which we refer you. Since this prospectus may not contain all of
the information that you may find important, you should review the full text of
these documents. We have filed these documents as exhibits to our registration
statement.
The Company has not previously been subject to the periodic reporting and
other informational requirements of the Securities Exchange Act of 1934. In
connection with the exchange offer, the Company will become subject to these
requirements and will file reports and other information with the SEC. You may
read and copy any reports and other information the Company files at the public
reference facilities of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain copies of those materials from the
SEC by mail at prescribed rates. You should direct requests to the SEC at the
SEC's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or by calling (800) SEC-0330. The SEC also
maintains a website (www.sec.gov) that will contain the reports and other
information filed by the Company. In addition, for so long as any of the notes
remains outstanding, we have agreed to make available to any prospective
purchaser of the notes or beneficial owner of the notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act.
120
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES:
Audited Financial Statements:
<Table>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Interim Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001..................................... F-29
Condensed Consolidated Statements of Income for the three
months ended March 31, 2002 and 2001...................... F-31
Condensed Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2002 and 2001........ F-32
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001................ F-33
Notes to Condensed Consolidated Financial Statements........ F-34
</Table>
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Block Communications, Inc.
We have audited the accompanying consolidated balance sheets of Block
Communications, Inc. (the Company) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. 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 Block
Communications, Inc. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2001, the
Company adopted Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities.
ERNST &
YOUNG LLP
February 22, 2002
Toledo, Ohio
F-2
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,882,732 $ 4,212,970
Receivables, less allowances for doubtful accounts and
discounts of $4,861,094 and $4,673,533, respectively... 44,225,634 48,814,918
Recoverable income taxes.................................. 4,483,300 3,210,786
Inventories............................................... 5,548,784 10,443,933
Prepaid expenses.......................................... 3,703,756 3,077,961
Broadcast rights.......................................... 6,083,782 6,103,312
Deferred income taxes..................................... 9,803,800 8,696,300
------------ ------------
Total current assets........................................ 79,731,788 84,560,180
Property, plant and equipment:
Land and land improvements................................ 12,194,446 9,654,743
Buildings and leasehold improvements...................... 41,186,933 39,775,332
Machinery and equipment................................... 209,196,143 197,409,282
Cable television distribution systems and equipment....... 187,804,505 148,719,101
Security alarm and video systems installation costs....... 5,923,280 4,948,828
Construction in progress.................................. 11,495,916 34,652,447
------------ ------------
467,801,223 435,159,733
Less allowances for depreciation and amortization......... 204,605,517 189,727,851
------------ ------------
263,195,706 245,431,882
Other assets:
Intangibles, less accumulated amortization of $26,281,955
and $39,610,669, respectively.......................... 83,913,101 85,041,014
Deferred income taxes..................................... 12,946,900 7,881,000
Prepaid pension costs..................................... 11,145,446 8,319,540
Cash value of life insurance, net of policy loans of
$12,735,560 and $5,346,266, respectively............... 10,691,105 16,675,979
Pension intangibles....................................... 7,230,030 4,630,209
Broadcast rights, less current portion.................... 6,217,880 3,079,580
Deferred financing costs.................................. 5,676,725 3,738,265
Other..................................................... 3,138,246 4,832,531
------------ ------------
140,959,433 134,198,118
------------ ------------
$483,886,927 $464,190,180
============ ============
</Table>
See accompanying notes.
F-3
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12,355,122 $ 21,320,671
Salaries, wages and payroll taxes......................... 16,321,468 17,569,856
Workers' compensation and medical reserves................ 9,184,074 10,683,321
Other accrued liabilities................................. 32,279,367 24,547,445
Current maturities of long-term debt...................... 9,908,334 21,435,963
------------ ------------
Total current liabilities................................... 80,048,365 95,557,256
Long-term debt, less current maturities..................... 227,355,513 191,920,705
Other long-term obligations................................. 126,635,551 102,823,699
Minority interest........................................... 12,264,398 12,499,020
Stockholders' equity:
5% Non-cumulative, non-voting Class A Stock, par value
$100 a share (entitled in liquidation to $100 per share
in priority over Common Stock) -- 15,680 shares
authorized; 12,620 shares issued
and outstanding........................................ 1,262,000 1,262,000
Common Stock, par value $.10 a share:
Voting Common Stock -- 29,400 shares authorized,
issued and outstanding............................... 2,940 2,940
Non-voting Common Stock -- 588,000 shares
authorized; 427,786 and 430,123 shares issued
and outstanding, respectively........................ 42,779 43,012
Accumulated other comprehensive loss...................... (4,725,589) (521,942)
Additional paid-in capital................................ 771,274 771,274
Retained earnings......................................... 40,229,696 59,832,216
------------ ------------
37,583,100 61,389,500
------------ ------------
$483,886,927 $464,190,180
============ ============
</Table>
See accompanying notes.
F-4
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenue:
Publishing....................................... $264,678,678 $286,717,128 $275,827,043
Cable............................................ 89,420,000 82,110,320 75,413,714
Broadcasting..................................... 35,183,897 42,531,103 36,293,428
Other Communications............................. 25,282,312 14,298,551 8,681,928
------------ ------------ ------------
414,564,887 425,657,102 396,216,113
Expense:
Publishing....................................... 262,798,933 277,312,265 263,951,460
Cable............................................ 84,578,461 74,535,841 62,845,134
Broadcasting..................................... 36,972,664 37,098,498 34,221,483
Other Communications............................. 27,954,522 18,444,805 12,734,197
Corporate general and administrative............. 2,705,412 4,151,939 1,523,760
------------ ------------ ------------
415,009,992 411,543,348 375,276,034
------------ ------------ ------------
Operating income (loss)............................ (445,105) 14,113,754 20,940,079
Nonoperating income (expense):
Interest expense................................. (19,486,186) (14,174,830) (11,243,454)
Gain on disposition of WLFI-TV................... -- 22,338,881 --
Change in fair value of interest rate swaps...... (5,340,046) -- --
Interest income.................................. 47,452 105,897 200,021
------------ ------------ ------------
(24,778,780) 8,269,948 (11,043,433)
------------ ------------ ------------
Income (loss) before income taxes and minority
Interest......................................... (25,223,885) 22,383,702 9,896,646
Provision (credit) for income taxes:
Federal:
Current....................................... (3,680,000) 445,000 3,500,000
Deferred...................................... (3,809,400) 8,029,500 261,500
------------ ------------ ------------
(7,489,400) 8,474,500 3,761,500
State and local.................................. 357,000 701,686 794,047
------------ ------------ ------------
(7,132,400) 9,176,186 4,555,547
------------ ------------ ------------
Income (loss) before minority interest............. (18,091,485) 13,207,516 5,341,099
Minority interest.................................. 234,622 (427,020) --
------------ ------------ ------------
Net income (loss).................................. $(17,856,863) $ 12,780,496 $ 5,341,099
============ ============ ============
</Table>
See accompanying notes.
F-5
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 2001
<Table>
<Caption>
COMMON STOCK
----------------------------------- ACCUMULATED
CLASS A STOCK VOTING NON-VOTING OTHER ADDITIONAL
------------------- --------------- ----------------- COMPREHENSIVE PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT LOSS CAPITAL
------ ---------- ------ ------ ------- ------- ------------- ----------
Balances at January 1, 1999........ 13,000 $1,300,000 29,400 $2,940 436,251 $43,625 $ (674,801) $697,843
Net income........................
Change in net minimum pension
liability (net of $88,000 of
deferred income taxes).......... 156,480
Total comprehensive income........
Cash dividends declared:
Class A stock -- $5.00 a
share.........................
Common stock:
Voting -- $2.85 a share.......
Non-voting -- $2.85 a share...
Redemption of:
Class A stock at $41.50 a
share......................... (380) (38,000)
Non-voting common shares at
$453.00 a share............... (1,410) (141)
Non-voting common shares at
$494.58 a share............... (2,531) (253)
------ ---------- ------ ------ ------- ------- ----------- --------
Balances at December 31, 1999...... 12,620 1,262,000 29,400 2,940 432,310 43,231 (518,321) 697,843
Net income........................
Change in net minimum pension
liability (net of $2,000 of
deferred income taxes).......... (3,621)
Total comprehensive income........
Cash dividends declared:
Class A stock -- $5.00 a
share.........................
Common stock:
Voting -- $3.00 a share.......
Non-voting -- $3.00 a share...
Executive stock incentives at
$494.58 a share................. 147 15 73,431
Redemption of non-voting common
shares at $518.59 a share....... (2,334) (234)
------ ---------- ------ ------ ------- ------- ----------- --------
Balances at December 31, 2000...... 12,620 1,262,000 29,400 2,940 430,123 43,012 (521,942) 771,274
Net loss..........................
Change in net minimum pension
liability (net of $1,860,500 of
deferred income taxes).......... (3,307,662)
Fair value of interest rate swaps
at January 1, 2001, less
accumulated amortization of
$706,638 (net of deferred taxes
of $503,500).................... (895,985)
Total comprehensive loss..........
Cash dividends declared:
Class A stock -- $2.50 a
share.........................
Common stock:
Voting -- $1.20 a share.......
Non-voting -- $1.20 a share...
Redemption of non-voting common
shares at $497.61 a share....... (2,337) (233)
------ ---------- ------ ------ ------- ------- ----------- --------
Balances at December 31, 2001...... 12,620 $1,262,000 29,400 $2,940 427,786 $42,779 $(4,725,589) $771,274
====== ========== ====== ====== ======= ======= =========== ========
<Caption>
RETAINED
EARNINGS TOTAL
----------- -----------
Balances at January 1, 1999........ $47,623,561 $48,993,168
Net income........................ 5,341,099 5,341,099
Change in net minimum pension
liability (net of $88,000 of
deferred income taxes).......... 156,480
-----------
Total comprehensive income........ 5,497,579
Cash dividends declared:
Class A stock -- $5.00 a
share......................... (64,050) (64,050)
Common stock:
Voting -- $2.85 a share....... (83,790) (83,790)
Non-voting -- $2.85 a share... (1,238,385) (1,238,385)
----------- -----------
(1,386,225) (1,386,225)
Redemption of:
Class A stock at $41.50 a
share......................... 22,230 (15,770)
Non-voting common shares at
$453.00 a share............... (638,589) (638,730)
Non-voting common shares at
$494.58 a share............... (1,251,529) (1,251,782)
----------- -----------
Balances at December 31, 1999...... 49,710,547 51,198,240
Net income........................ 12,780,496 12,780,496
Change in net minimum pension
liability (net of $2,000 of
deferred income taxes).......... (3,621)
-----------
Total comprehensive income........ 12,776,875
Cash dividends declared:
Class A stock -- $5.00 a
share......................... (63,100) (63,100)
Common stock:
Voting -- $3.00 a share....... (88,200) (88,200)
Non-voting -- $3.00 a share... (1,297,371) (1,297,371)
----------- -----------
(1,448,671) (1,448,671)
Executive stock incentives at
$494.58 a share................. 73,446
Redemption of non-voting common
shares at $518.59 a share....... (1,210,156) (1,210,390)
----------- -----------
Balances at December 31, 2000...... 59,832,216 61,389,500
Net loss.......................... (17,856,863) (17,856,863)
Change in net minimum pension
liability (net of $1,860,500 of
deferred income taxes).......... (3,307,662)
Fair value of interest rate swaps
at January 1, 2001, less
accumulated amortization of
$706,638 (net of deferred taxes
of $503,500).................... (895,985)
-----------
Total comprehensive loss.......... (22,060,510)
Cash dividends declared:
Class A stock -- $2.50 a
share......................... (31,550) (31,550)
Common stock:
Voting -- $1.20 a share....... (35,280) (35,280)
Non-voting -- $1.20 a share... (516,147) (516,147)
----------- -----------
(582,977) (582,977)
Redemption of non-voting common
shares at $497.61 a share....... (1,162,680) (1,162,913)
----------- -----------
Balances at December 31, 2001...... $40,229,696 $37,583,100
=========== ===========
</Table>
See accompanying notes.
F-6
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------------------------
2001 2000 1999
------------ ----------- ------------
OPERATING ACTIVITIES
Net income (loss)........................................... $(17,856,863) $12,780,496 $ 5,341,099
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 44,601,107 38,864,632 30,351,578
Amortization of intangibles and deferred charges........ 4,421,315 3,478,025 2,896,817
Amortization of broadcast rights........................ 6,510,196 6,318,878 7,302,463
Payments for broadcast rights........................... (5,117,113) (5,884,612) (5,552,457)
Gain on sale of WLFI-TV................................. -- (22,338,881) --
Deferred income taxes (credit).......................... (3,809,400) 8,029,500 261,500
Provision for bad debts................................. 5,065,784 2,286,533 2,034,113
Minority interest....................................... (234,622) 427,020 --
Change in fair value of interest rate swaps............. 5,340,046 -- --
Loss on disposal of property and equipment.............. 23,117 303,434 229,890
Changes in operating assets and liabilities:
Receivables........................................... (367,929) (8,782,363) (3,146,908)
Inventories........................................... 4,895,149 (3,683,991) (18,531)
Prepaid expenses...................................... (626,695) (341,126) 203,500
Accounts payable...................................... (8,958,999) 4,419,035 804,927
Salaries, wages, payroll taxes and other accrued
liabilities........................................ 2,678,519 2,611,953 1,697,353
Other assets.......................................... (7,077,120) (1,288,464) (313,544)
Postretirement benefits and other long-term
obligations........................................ 8,296,980 1,465,690 (2,043,153)
------------ ----------- ------------
Net cash provided by operating activities................... 37,783,472 38,665,759 40,048,647
INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (62,153,533) (80,340,116) (66,702,099)
Payments for acquisitions................................... (1,640,000) (200,000) (1,900,000)
Change in cash value of life insurance...................... 5,984,874 (2,244,465) (2,052,789)
Proceeds from disposal of property and equipment............ 50,499 83,678 532,070
------------ ----------- ------------
Net cash used in investing activities....................... (57,758,160) (82,700,903) (70,122,818)
FINANCING ACTIVITIES
Borrowings on term loan agreement........................... 62,500,000 12,500,000 --
(Payments) borrowings on long-term revolving credit
agreement................................................. (23,000,000) 41,500,000 44,000,000
(Payments) borrowings on short-term revolving credit
agreement................................................. (2,620,229) (2,062,771) 2,977,000
Payments on senior notes payable............................ (12,667,000) (6,167,000) (9,914,128)
Payment on agreements not to compete........................ (503,000) -- --
Cash dividends paid......................................... (582,977) (1,448,671) (1,386,225)
Payments on redemption of shares............................ (1,162,913) (1,210,390) (1,906,282)
Payments on notes payable and capital leases................ (319,431) (578,185) (33,989)
------------ ----------- ------------
Net cash provided by financing activities................... 21,644,450 42,532,983 33,736,376
------------ ----------- ------------
Increase (decrease) in cash and cash equivalents............ 1,669,762 (1,502,161) 3,662,205
Cash and cash equivalents at beginning of year.............. 4,212,970 5,715,131 2,052,926
------------ ----------- ------------
Cash and cash equivalents at end of year.................... $ 5,882,732 $ 4,212,970 $ 5,715,131
============ =========== ============
</Table>
See accompanying notes.
F-7
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Block Communications, Inc. (the Company) operates primarily in the
publishing, cable and broadcasting industries through its newspapers, cable
systems and television stations located primarily in the Midwest. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions have been
eliminated. 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 reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of commercial accounts and
interest-bearing bank deposits and are carried at cost, which approximates
current value. Items are considered to be cash equivalents if the original
maturity is three months or less.
INVENTORIES
Inventories principally relate to newsprint and security alarm system
components and are stated at the lower of cost or market. Costs are determined
by either the first-in, first-out (FIFO) or last-in, first-out (LIFO) method.
Inventories valued on the LIFO method (newsprint inventories) comprise
approximately 64% and 84% of total inventories at December 31, 2001 and 2000,
respectively. If the FIFO method had been used, such inventories would have been
approximately $914,000, $2,324,000 and $1,007,000 higher than reported at
December 31, 2001, 2000 and 1999, respectively.
BROADCAST RIGHTS
Broadcast rights represent the cost of the rights to broadcast films and
syndicated programming for specified periods of time. Such costs are capitalized
and amortized on the straight-line method over the number of estimated showings.
Broadcast rights payable represent the related liabilities under these long-
term, non-interest bearing contracts. Additions to the broadcast rights were
$9,629,589, $3,161,712 and $6,900,178 in 2001, 2000 and 1999, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded on the basis of cost.
Expenditures for additions and improvements that add materially to productive
capacity or extend the useful life of an asset are capitalized, and expenditures
for maintenance and repairs are charged to earnings. When properties are retired
or otherwise disposed of, the related accounts for cost and depreciation are
relieved, and any gain or loss resulting from the disposal is included in
operations. Depreciation is computed by the straight-line and declining-balance
methods. The cost of buildings and leasehold improvements is depreciated over 7
to 40 years, machinery and equipment over 3 to 11 years and cable television and
security alarm systems over 8 to 12.5 years.
GOODWILL AND OTHER INTANGIBLES
Intangibles acquired after October 31, 1970 primarily include licenses,
network affiliation agreements, subscriber lists, agreements not to compete, and
amortizable goodwill and are being amortized using the straight-line method over
their estimated useful lives which range from 10 to 40 years. Intangibles
F-8
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired prior to October 31, 1970 include $3,964,262 of the excess of the
purchase price over the book value and circulation, franchise, and goodwill that
arose in connection with a reorganization of the Company in 1934. The pre-1970
intangibles are not being amortized because, in the opinion of the Company's
management, there has been no diminution in value.
LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed annually to determine
if facts and circumstances suggest that the assets may be impaired or that the
depreciable life may need to be changed. If various external factors or the
projected undiscounted cash flows of the Company over the remaining amortization
period indicate that the asset will not be recoverable, the carrying value will
be adjusted to the estimated fair value. As of December 31, 2001, the Company
does not believe there is any indication that the carrying value or the
amortization period of its assets needs to be adjusted.
REVENUE RECOGNITION
The Company recognizes revenue primarily from advertising, newspaper
subscriptions and cable and other services. Advertising revenue is recorded when
the related advertisements are published by the newspapers or are provided by
broadcast or cable services. Newspaper subscriptions and cable and other
services are either (1) billed to customers in advance and recognized as revenue
over the period of the newspaper subscriptions and services provided, or (2)
billed to customers and recognized as revenue when the newspapers and services
are provided.
OTHER COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) is defined as net income (loss)
adjusted for the change in net minimum pension liability and the effect of the
interest rate swaps in the current year. Accumulated other comprehensive loss of
$4,725,589 at December 31, 2001 includes net minimum pension liability of
$3,829,604 and net remaining fair value of swaps of $895,985 while the
accumulated other comprehensive loss of $521,942 at December 31, 2000 includes
only the net minimum pension liability.
RECLASSIFICATIONS
Certain balances in prior years have been reclassified to conform to the
presentation adopted in the current year.
ACCOUNTING CHANGE
Effective January 1, 2001, the Company adopted Statement of the Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement Nos. 137 and 138, (collectively,
SFAS No. 133), which requires the Company to record all derivatives on the
balance sheet at fair value. The Company has three interest rate swap agreements
for which the Company has not elected to implement hedge accounting. As of
January 1, 2001, the Company recorded the transition adjustment as a liability
of $2,106,123 with an offset to other comprehensive loss, net of $758,000 of
deferred income taxes, which is being amortized over the remaining life of the
swap agreements, with notional amounts of $121,000,000. The agreements expire on
July 28, 2003 -- $36,000,000, April 10, 2006 -- $55,000,000 and February 1,
2008 -- $30,000,000. The 2001 decrease in derivative fair values of $4,633,408
and 2001 amortization of the transition adjustment of $706,638 are recognized in
earnings as change in fair value of interest rate swaps.
NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company is required to adopt SFAS No. 142,
Goodwill and Other Intangible Assets, which requires goodwill and indefinite
lived intangible assets to no longer be amortized but reviewed annually for
impairment, or more frequently if impairment indicators arise. Intangible assets
F-9
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with lives restricted by contractual, legal or other means will continue to be
amortized over their useful lives. Amortization of goodwill and other
intangibles for 2001 was $2,645,287 and $1,509,274, respectively. The Company
has not yet determined the impact of the adoption of SFAS No. 142.
Effective January 1, 2002, the Company is required to adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and provides a single accounting model for
long-lived assets to be disposed of. The Company does not expect the adoption of
SFAS No. 144 to have a material effect on its consolidated results of operations
or financial position.
2. ACQUISITIONS
In November 2001, the Company entered into an asset exchange agreement with
Comcast Corporation to exchange Monroe Cablevision Inc. for Comcast's cable
system in Bedford, Michigan, plus a cash payment to the Company of approximately
$12 million. The exchange transaction is expected to become effective March 29,
2002.
Effective March 30, 2001, the Company purchased the broadcast license for
WFTE and other assets of Kentuckiana Broadcasting, Inc. for $400,000. The
Company previously had an operating agreement to manage WFTE.
Effective January 1, 2001, the Company purchased the remaining membership
interest of Access Toledo, Ltd. for $990,000 in cash. The net assets were
recorded at fair value and related primarily to goodwill and other intangibles.
The Company also obtained agreements not to compete from the former members and
recorded additional intangibles and related obligations of $1,355,000. This
acquisition has been accounted for as a purchase, and results of operations are
included from the date of acquisition.
Effective April 1, 2000, the Company consummated an asset exchange
agreement and a general partnership agreement with LIN Television Corporation
(LIN) which resulted in an exchange of 100% of the assets of WLFI-TV, Inc.
(WLFI), a wholly owned subsidiary of the Company, for an equal value of assets
of WAND Television, Inc. (WAND), a wholly owned subsidiary of LIN. The Company
and LIN contributed their respective assets to a general partnership, WAND (TV)
Partnership (WAND TV), which owns and operates 100% of the assets of the
station.
The Company recorded a $22.3 million gain on the disposition of WLFI
resulting from the difference between the fair value and the net book value of
the assets exchanged. For tax reporting, the transaction has been treated as a
like-kind exchange, and the gain has been deferred. The operations of WLFI are
included in the Company's financial statements through March 31, 2000. The
Company is a 66% owner of the general partnership and has controlling interest
of the Board of Representatives; therefore, WAND TV has been consolidated for
financial statement purposes with the appropriate minority interest recorded
since April 1, 2000. The net assets of WAND TV were recorded at their fair value
and primarily relate to property and equipment of $6.5 million and intangibles
of $29.3 million, offset by minority interest of $12.1 million.
On December 11, 1998, the Company acquired all of the outstanding shares of
stock of Corporate Protection Services, Inc. (CPS), which is primarily involved
in selling, leasing, monitoring and installing commercial and residential
security alarm and video systems. The aggregate purchase price for the stock
acquired was $2,300,000 in cash ($400,000 in 1998 and $1,900,000 in 1999) plus
contingent payments for each of the five calendar years following 1998. There
was no contingency payment for 2001. The contingency payments were $250,000 and
$200,000 for 2000 and 1999, respectively. These payments were made in the
subsequent year and have been recorded as additions to goodwill.
F-10
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
-------------------------------------
2001 2000 1999
----------- ---------- ----------
Federal statutory rate.......................... $(8,828,400) $7,834,300 $3,463,800
State and local taxes, net of federal tax
benefit....................................... 232,000 456,100 516,100
Amortization of intangibles..................... 785,400 784,400 697,900
Valuation allowance............................. 586,800 -- --
Other........................................... 91,800 101,386 (122,253)
----------- ---------- ----------
Provision (credit) for income taxes............. $(7,132,400) $9,176,186 $4,555,547
=========== ========== ==========
</Table>
Total income taxes paid amounted to $802,000, $1,955,150 and $5,626,000 in
2001, 2000 and 1999, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<Table>
<Caption>
DECEMBER 31
-------------------------
2001 2000
----------- -----------
Deferred tax assets:
Postretirement benefits other than pensions.............. $28,879,000 $28,314,000
Tax loss and credit carryforwards........................ 7,616,000 948,000
Deferred compensation and severance...................... 5,210,000 5,008,000
Insurance................................................ 3,470,000 3,871,000
Vacation pay............................................. 3,083,000 2,971,000
Fair value of interest rate swaps........................ 2,426,000 --
Intangibles.............................................. 965,000 1,178,000
Other.................................................... 1,067,700 322,300
----------- -----------
52,716,700 42,612,300
Valuation allowance...................................... (587,000) --
----------- -----------
52,129,700 42,612,300
</Table>
<Table>
<Caption>
DECEMBER 31
-------------------------
2001 2000
----------- -----------
Deferred tax liabilities:
Tax over book depreciation and amortization.............. 19,944,000 15,093,000
Intangibles.............................................. 7,296,000 7,595,000
Net pension costs........................................ 2,139,000 3,347,000
----------- -----------
29,379,000 26,035,000
----------- -----------
Net deferred tax assets.................................... $22,750,700 $16,577,300
=========== ===========
</Table>
At December 31, 2001, the Company has unused alternative minimum tax (AMT)
credits of $445,000. In addition, the Company has net operating loss and
charitable contribution carryforwards of $18,288,000 and $1,630,000,
respectively. These credits have been recognized in computing deferred income
taxes. The AMT credits are available indefinitely to offset regular income tax
in excess of AMT. The net operating loss carryforwards will expire in 2020. The
Company has recorded a valuation allowance of $587,000 to recognize the
uncertainty of realizing the deferred tax asset related to charitable
contribution carryforwards that expire in 2005.
F-11
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are as follows:
<Table>
<Caption>
DECEMBER 31
-------------------------
2001 2000
----------- -----------
Goodwill................................................... $52,461,687 $53,684,315
FCC licenses............................................... 14,054,851 14,172,763
Network affiliation agreements............................. 13,302,578 13,659,301
Subscriber lists........................................... 1,029,372 1,364,314
Agreements not to compete.................................. 977,750 --
Program rights............................................. 958,200 983,000
Other...................................................... 1,128,663 1,177,321
----------- -----------
$83,913,101 $85,041,014
=========== ===========
</Table>
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities are as follows:
<Table>
<Caption>
DECEMBER 31
-------------------------
2001 2000
----------- -----------
Deferred revenue........................................... $ 6,531,999 $ 6,357,591
Broadcast rights payable................................... 4,766,956 3,748,973
Interest................................................... 4,485,814 3,756,196
Local taxes................................................ 4,298,879 2,985,515
Carriage fees.............................................. 2,750,014 2,316,491
Other...................................................... 9,445,705 5,382,679
----------- -----------
$32,279,367 $24,547,445
=========== ===========
</Table>
6. RETIREMENT AND PENSION PLANS
The Company and certain subsidiaries have several defined benefit pension
plans covering substantially all active and retired employees. Benefits are
generally based on compensation and length of service.
F-12
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the benefit obligation, plan assets and funded status of
the defined benefit pension plans are as follows:
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
Change in benefit obligation:
Benefit obligation, beginning of year.................. $167,287,400 $161,835,686
Service cost........................................... 4,919,777 4,487,612
Interest cost.......................................... 12,380,775 11,542,029
Plan amendments........................................ -- 991,497
Actuarial loss (gain).................................. 10,723,581 (1,002,999)
Benefits paid.......................................... (10,746,532) (10,566,425)
------------ ------------
Benefit obligation, end of year........................ $184,565,001 $167,287,400
============ ============
Change in plan assets:
Fair value of plan assets, beginning of year........... $176,527,565 $164,382,679
Contributions.......................................... 4,626,900 4,777,798
Actual return on plan assets........................... (16,572,969) 17,933,513
Benefits paid.......................................... (10,746,532) (10,566,425)
------------ ------------
Fair value of plan assets, end of year................. $153,834,964 $176,527,565
============ ============
Reconciliation of funded status:
Funded status of the plans............................. $(30,730,037) $ 9,240,165
Unrecognized net loss (gain)........................... 28,295,476 (14,679,309)
Unrecognized prior year service cost................... 9,479,138 10,786,531
Unrecognized net transition obligation................. (98,250) (162,478)
------------ ------------
Net amount recognized.................................. $ 6,946,327 $ 5,184,909
============ ============
</Table>
The net amount recognized above is recorded in the consolidated balance
sheets as follows:
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
Prepaid pension costs.................................... $ 11,145,446 $ 8,319,540
Pension liabilities...................................... (17,412,753) (8,580,282)
Intangible pension asset................................. 7,230,030 4,630,209
Net minimum pension liability............................ 5,983,604 815,442
------------ ------------
....................................................... $ 6,946,327 $ 5,184,909
============ ============
</Table>
The weighted-average assumptions used at December 31, 2001 and 2000 are
discount rate of 7.2% and 7.7%, respectively, expected return on plan assets of
9.0% and rate of compensation increase of 5.0% and 4.6%, respectively. Plan
assets primarily include marketable equity securities and government and
corporate debt securities.
Certain defined benefit pension plans have a projected benefit obligation
that exceeds the fair value of plan assets. The aggregate projected benefit
obligation and fair value of plan assets for these plans are $159,491,252 and
$127,045,311, respectively, at December 31, 2001 and $64,076,067 and
$58,175,920, respectively, at December 31 2000. Certain plans have an
accumulated benefit obligation that exceeds the fair value of plan assets. The
aggregate accumulated benefit obligation and fair value of plan assets for these
plans are $127,706,510 and $115,349,390, respectively, at December 31, 2001 and
$6,690,842 and $1,580,731, respectively, at December 31, 2000.
F-13
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net periodic pension cost are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Service cost............................... $ 4,919,777 $ 4,487,612 $ 5,204,778
Interest cost.............................. 12,380,775 11,542,029 11,237,949
Expected return on plan assets............. (15,312,255) (14,258,254) (13,616,922)
Amortization of transition asset........... (64,228) (64,228) (64,228)
Amortization of prior service cost......... 1,307,393 1,292,092 1,292,475
Actuarial (gain) loss recognized........... (365,980) (313,468) 71,740
------------ ------------ ------------
Net periodic pension cost.................. $ 2,865,482 $ 2,685,783 $ 4,125,792
============ ============ ============
</Table>
The Company and certain subsidiaries also sponsor defined contribution
plans and participate in several multi-employer and jointly-trusteed defined
benefit pension plans. Total payments to the defined contribution and
multi-employer and jointly-trusteed defined benefit plans were approximately
$5,404,279, $5,373,882 and $5,343,750 in 2001, 2000 and 1999, respectively. The
portions of plan assets and benefit obligations for the multi-employer and
jointly-trusteed plans, which are applicable to employees of the Company and its
subsidiaries, have not been determined.
7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and certain subsidiaries provide access to health care benefits
for certain active and retired employees. The components of the nonpension
retirement benefit obligation and amounts accrued are as follows:
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
Change in accumulated postretirement benefit obligation:
Benefit obligation, beginning of year.................. $ 71,915,000 $ 71,785,000
Service cost........................................... 1,474,000 1,334,000
Interest cost.......................................... 5,246,000 5,060,000
Actuarial loss (gain).................................. 13,395,000 (1,325,000)
Benefits paid.......................................... (4,428,000) (4,939,000)
------------ ------------
Benefit obligation, end of year........................ $ 87,602,000 $ 71,915,000
============ ============
Funded status of plan.................................... $(87,602,000) $(71,915,000)
Unrecognized actuarial loss (gain)....................... 6,778,000 (6,736,000)
------------ ------------
Accrued benefit cost..................................... $(80,824,000) $(78,651,000)
============ ============
</Table>
The components of the nonpension retirement benefit expense are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
Service cost..................................... $1,474,000 $1,334,000 $1,356,000
Actuarial gain recognized........................ (125,000) (12,000) (43,000)
Interest cost.................................... 5,246,000 5,060,000 4,406,000
---------- ---------- ----------
Net nonpension retirement benefit expense........ $6,595,000 $6,382,000 $5,719,000
========== ========== ==========
</Table>
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2002 through 2004. The rate
was assumed to decrease gradually to 5% for 2010 and remain at that level
thereafter. A 1% increase in these rates would have increased the net nonpension
F-14
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
retirement benefit expense by $1,208,000 and the benefit obligation by
$10,462,000. A 1% decrease in these rates would have decreased the net
nonpension retirement expense by $1,408,000 and the benefit obligation by
$8,814,000. The weighted-average discount rate used in determining the
accumulated nonpension retirement benefit obligation was 7.25% in 2001 and 7.75%
in 2000.
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term obligations are as follows:
<Table>
<Caption>
DECEMBER 31
---------------------------
2001 2000
------------ ------------
Senior notes payable:
1996 issues............................................ $ 35,000,000 $ 35,000,000
1994 issue............................................. 4,999,000 6,666,000
1993 issues............................................ 19,500,000 26,000,000
1991 issue............................................. 8,000,000 12,500,000
------------ ------------
67,499,000 80,166,000
Revolving credit agreements.............................. 92,500,000 118,120,229
Term loan agreement...................................... 75,000,000 12,500,000
Capital leases........................................... 2,264,847 2,570,439
------------ ------------
237,263,847 213,356,668
Less current maturities:
Senior notes payable................................... 5,833,334 18,500,334
Term loan agreement.................................... 3,750,000 --
Revolving credit agreements............................ -- 2,620,229
Capital leases......................................... 325,000 315,400
------------ ------------
9,908,334 21,435,963
------------ ------------
$227,355,513 $191,920,705
============ ============
</Table>
Maturities of long-term obligations for five years subsequent to December
31, 2001 are: 2002 -- $9,908,334, 2003 -- $47,575,666, 2004 -- $38,073,334,
2005 -- $62,408,334, 2006 -- $78,658,332.
The Company has various fixed rate senior notes payable to Teachers
Insurance and Annuity Association of America (TIAA), The Travelers Companies
(Travelers) and Massachusetts Mutual Life Insurance Company (Massachusetts
Mutual) as described below. The Company may prepay all or part of
these senior notes plus a redemption premium based on the amount and time of
prepayment. The senior notes payable and revolving credit agreements are
guaranteed by the Company and its subsidiaries.
At December 31, 2001, the senior notes payable are as follows:
Massachusetts Mutual 1996 issue -- Interest at 9.92% is payable
semi-annually with principal payments of $2,500,000 due in 2002, $5,000,000
in 2003 and $2,500,000 annually from 2004 through 2006.
Travelers 1996 issue -- Interest at 9.92% is payable semi-annually
with principal payments of $1,666,667 due in 2002, $3,333,334 in 2003 and
$1,666,667 annually from 2004 through 2006.
TIAA 1996 issue -- Interest at 9.92% is payable semi-annually with
principal payments of $1,666,667 due in 2002, $3,333,334 in 2003 and
$1,666,667 annually from 2004 through 2006.
TIAA 1994 issue -- Interest at 10.28% is payable semi-annually with
principal payments of $3,334,000 due in 2003 and $1,665,000 in 2004.
F-15
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Travelers 1993 issue -- Interest at 10.38% is payable semi-annually
with principal payments of $7,000,000 due in 2003 and $3,500,000 in 2004.
TIAA 1993 issue -- Interest at 10.38% is payable semi-annually with
principal payments of $6,000,000 due in 2003 and $3,000,000 in 2004.
TIAA 1991 issue -- Interest at 11.29% is payable semi-annually with a
principal payment of $8,000,000 due in 2003.
The Company has a revolving credit agreement with nine banks to borrow up
to $150,000,000 at the banks' prime rate of interest plus applicable margin
ranging from 1.875% to 2.625% or LIBOR plus applicable margin ranging from 3.0%
to 3.75%. The agreement provides for the payment of a commitment fee of 0.50%
per annum on the unborrowed portion of the revolving credit agreement. The
margin ranges step-up through 2002, remaining at the highest rate thereafter.
The amount of credit committed will be reduced at each quarter-end beginning
December 31, 2002, with final maturity on December 31, 2006. Principal payments
will be due at each quarter-end, to the extent that total borrowings outstanding
at the quarter-end exceeds the reduced credit committed. The credit committed
reductions range from $5,625,000 to $11,250,000 each quarter. The outstanding
debt relating to this agreement is $92,500,000 at December 31, 2001, with a
weighted-average interest rate of 5.17%.
The Company also has a term loan agreement with eight banks to borrow up to
$75,000,000 at the banks' prime rate of interest plus applicable margin ranging
from 1.875% to 2.625% or LIBOR plus applicable margin ranging from 3.0% to
3.75%. The amount of credit committed will be reduced at each quarter-end
beginning December 31, 2002, with final maturity on December 31, 2006. Principal
payments will be due at each quarter-end, to the extent that total borrowings
outstanding at the quarter-end exceeds the reduced credit committed. The credit
committed reductions range from $2,812,500 to $5,625,000 each quarter. The
outstanding debt relating to this agreement is $75,000,000 at December 31, 2001,
with a weighted-average interest rate of 5.84%.
The Company has three interest rate swap agreements with notional amounts
of $121,000,000. The swap agreements effectively convert this portion of the
Company's borrowings from variable rate debt to a fixed rate, thus reducing the
impact of interest rate changes on future income. The average interest rate for
the Company's borrowings related to the swap agreements at December 31, 2001 was
5.91%, with a weighted-average remaining period of 4.4 years. The fair value of
the swap agreements of $6,739,531 is recorded in other long-term obligations at
December 31, 2001.
The Company has a short-term revolving credit agreement with a bank to
borrow up to $5,000,000 evidenced by revolving credit notes at the bank's prime
rate of interest or LIBOR plus applicable margin ranging from 3.0% to 3.75%.
Daily cash balances on deposits in excess of a predetermined amount are credited
against the outstanding line of credit balance. If daily cash balances are less
than the predetermined amount, the Company draws against the line of credit to
increase the cash balance to the predetermined level. The revolving credit
agreement matures on June 30, 2002. No borrowings are outstanding at December
31, 2001.
The terms of the debt agreements include covenants, which provide, among
other things, restrictions on leverage and indebtedness, and minimums on
earnings before interest, taxes, depreciation and amortization and maximums on
capital expenditures.
The carrying amounts of the revolving credit agreements and term note
approximate their fair value. The fair values of the senior notes payable are
estimated using discounted cash flows analyses based on the
F-16
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's current incremental borrowing rates for new long-term debt. The fair
values of such fixed obligations are as follows:
<Table>
<Caption>
2001 2000
------------------------- -------------------------
RECORDED FAIR RECORDED FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
TIAA senior notes payable:
1996 issue..................... $10,000,000 $ 9,953,146 $10,000,000 $ 9,482,355
1994 issue..................... 4,999,000 5,084,729 6,666,000 6,566,425
1993 issue..................... 9,000,000 9,432,308 12,000,000 12,266,609
1991 issue..................... 8,000,000 8,463,445 12,500,000 12,876,671
Massachusetts Mutual Life senior
note payable -- 1996 issue
15,000,000 14,981,373 15,000,000 14,223,532
Travelers senior notes payable:
1996 issue.................. 10,000,000 9,953,146 10,000,000 9,482,355
1993 issue.................. 10,500,000 11,004,359 14,000,000 14,311,044
----------- ----------- ----------- -----------
$67,499,000 $68,872,506 $80,166,000 $79,208,991
=========== =========== =========== ===========
</Table>
Total interest paid was $19,197,316, $13,361,000 and $12,956,000 in 2001,
2000 and 1999, respectively. The Company capitalized, $985,000, $1,490,000 and
$945,000 of interest in 2001, 2000 and 1999, respectively.
9. COMMITMENTS AND CONTINGENCIES
On March 15, 1987, a shareholder owning 50 percent of the Company's
outstanding voting common stock died. The Company had an agreement with the
shareholder which provided that upon his death, the estate of the deceased
shareholder (the Estate) could require the Company to redeem shares owned by
such shareholder to the extent necessary to provide his estate with funds to pay
estate taxes. In 2001, 2000 and 1999, the Company made payments of $1,162,913,
$1,210,390 and $1,251,782 to redeem 2,337, 2,334 and 2,531 non-voting shares
based on a per share value of $497.61, $518.59 and $494.58, respectively.
Through December 31, 2001, the Company has redeemed 153,694 non-voting shares
for approximately $45.0 million. The Company does not expect the Estate to
redeem additional shares subsequent to December 31, 2001. The Company has the
same agreement with other shareholders.
The Company has an Executive Stock Incentive Plan for three executives to
receive non-voting common shares based on attaining certain levels of operating
profit. The Company issued 147 shares related to this plan in 2000, and the
related cost of $148,374 was expensed during the year ended December 31, 1999.
No shares were earned or issued related to years ended December 31, 2001 and
2000.
The Company is involved in matters associated with several libel lawsuits
and other legal matters arising out of the normal course of business. Management
of the Company believes, based upon information now known, that the ultimate
liability of the Company relating to these matters will not have a material
adverse effect on its financial position and results of operations. The Company
intends to vigorously defend these matters; however, the ultimate outcome of the
actions cannot be predicted with certainty at the present time.
The Company has outstanding irrevocable letters of credit from a bank
totaling $11,500,000, with annual fees ranging from 1.125% to 2.00%.
Two subsidiaries of the Company have entered into agreements for future
broadcast rights, which become available in 2002 or later. Total payments
required for those rights are $9,500,900.
F-17
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its subsidiaries incurred rental expense of approximately
$4,064,000, $3,529,000 and $3,274,000 for 2001, 2000 and 1999, respectively.
Future rental commitments subsequent to December 31, 2001 are:
2002 -- $1,383,439, 2003 -- $951,145, 2004 -- $455,859, 2005 -- $244,784, 2006
and thereafter -- $159,113.
10. BUSINESS SEGMENT INFORMATION
The Company has three reportable segments -- publishing, cable and
broadcasting. The publishing segment operates two daily newspapers located in
Ohio and Pennsylvania. The cable segment includes three cable companies located
in Ohio and Michigan. The broadcasting segment has five television stations
located in Idaho, Illinois, Indiana, Kentucky, and Ohio. The "Other
Communications" category includes non-reportable segments and corporate items.
The non-reportable segments provide services such as telephony, security systems
and monitoring, internet connection, cable plant construction and distributed
advertising services.
The accounting policies of the reportable segments are consistent with
those policies described in Note 1. Revenues are mostly from external customers
with some intersegment revenues, primarily due to newspaper advertising, as
shown in the intersegment amount under revenues. Operating income (loss)
represents gross revenues before intersegment eliminations, less operating
expenses. Operating expenses are mostly from external vendors with some
intersegment expenses, primarily due to newspaper advertising and telephony
services. The intersegment operating income (loss) is the net of the
intersegment revenues and intersegment expenses. Certain corporate general and
administrative expenses are included in operating income (loss) and are not
allocated to individual segments. Nonoperating income (expense) includes
interest expense and income, change in fair value of interest rate swaps and
gain on
F-18
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sale of WLFI-TV and are not allocated to segments. The following tables present
certain financial information for the three reportable segments and the other
category.
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Revenues:
Publishing............................... $269,940,958 $293,630,370 $281,025,282
Intersegment............................. (5,262,280) (6,913,242) (5,198,239)
------------ ------------ ------------
External Publishing...................... 264,678,678 286,717,128 275,827,043
Cable.................................... 89,420,000 82,110,320 75,413,714
Broadcasting............................. 35,183,897 42,531,103 36,293,428
Other Communications..................... 25,282,312 14,298,551 8,681,928
------------ ------------ ------------
$414,564,887 $425,657,102 $396,216,113
============ ============ ============
Operating income (loss):
Publishing............................... $ 6,009,107 $ 14,512,223 $ 16,077,046
Intersegment............................. (4,129,362) (5,107,360) (4,294,527)
------------ ------------ ------------
Net Publishing........................... 1,879,745 9,404,863 11,782,519
Cable.................................... 509,415 2,064,005 8,239,109
Intersegment............................. 4,332,124 5,510,474 4,029,390
------------ ------------ ------------
Net Cable................................ 4,841,539 7,574,479 12,268,499
Broadcasting............................. (1,788,767) 5,432,605 2,071,945
Corporate expenses....................... (2,705,412) (4,151,939) (1,095,579)
Other Communications..................... (2,672,210) (4,146,254) (4,087,305)
------------ ------------ ------------
Operating income (loss).................... (445,105) 14,113,754 20,940,079
Nonoperating income (expense).............. (24,778,780) 8,269,948 (11,043,433)
------------ ------------ ------------
Income (loss) before income taxes and
minority interest........................ $(25,223,885) $ 22,383,702 $ 9,896,646
============ ============ ============
Depreciation:
Publishing............................... $ 11,381,856 $ 11,978,341 $ 11,506,684
Cable.................................... 27,165,658 22,123,154 15,282,275
Broadcasting............................. 2,528,464 1,927,714 1,685,408
Other Communications..................... 3,525,129 2,835,423 1,875,749
------------ ------------ ------------
$ 44,601,107 $ 38,864,632 $ 30,350,116
============ ============ ============
Amortization of intangibles and deferred
charges:
Publishing............................... $ 2,485,915 $ 2,485,947 $ 2,485,920
Cable.................................... 44,047 45,894 45,894
Broadcasting............................. 780,734 598,102 56,033
Other Communications..................... 1,110,619 348,082 310,432
------------ ------------ ------------
$ 4,421,315 $ 3,478,025 $ 2,898,279
============ ============ ============
</Table>
F-19
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
Capital expenditures:
Publishing............................... $ 4,294,832 $ 4,792,075 $ 7,390,171
Cable.................................... 52,548,163 62,898,219 47,798,296
Broadcasting............................. 1,268,908 2,222,327 2,199,711
Other Communications..................... 4,041,630 10,427,495 9,313,921
------------ ------------ ------------
$ 62,153,533 $ 80,340,116 $ 66,702,099
============ ============ ============
Assets:
Publishing............................... $174,713,665 $188,967,117 $193,071,400
Cable.................................... 164,556,366 140,530,843 99,580,214
Broadcasting............................. 64,662,625 62,634,898 29,893,236
Other Communications..................... 79,954,271 72,057,322 65,757,107
------------ ------------ ------------
$483,886,927 $464,190,180 $388,301,957
============ ============ ============
</Table>
11. SUPPLEMENTAL GUARANTOR INFORMATION (UNAUDITED)
Subsequent to year-end, the Company anticipates refinancing the entirety of
its debt outstanding at December 31, 2001. The new debt is expected to include
an undetermined amount of senior credit facilities consisting of a revolver and
term loan. The new credit facilities will be guaranteed jointly and severally by
all of the Company's wholly owned subsidiaries (collectively, the Guarantors).
Such guarantees are full and unconditional. WAND (TV) Partnership, a partially
owned subsidiary of the Company will not be a guarantor of the new credit
facilities.
Supplemental consolidating financial information of the Company,
specifically including such information for the Guarantors, is presented below.
Financial information for the Parent Company includes both the Holding Company
and its one division, The Toledo Blade Company. Investments in subsidiaries are
presented using the cost method of accounting and eliminated. Separate financial
statements of the Guarantors are not provided as the consolidating financial
information contained herein provides a more meaningful disclosure to allow
investors to determine the nature of assets held and the operations of the
combined groups.
F-20
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------- ------------
ASSETS:
Current assets........ $ 15,717,915 $ 55,969,309 $ 4,138,933 $ 3,905,631 $ 79,731,788
Property, plant and
equipment, net...... 28,992,144 228,208,431 5,962,544 32,587 263,195,706
Intangibles, net...... 4,784,698 50,860,955 28,068,959 198,489 83,913,101
Cash value of life
insurance, net...... 10,486,057 205,048 -- -- 10,691,105
Prepaid pension
costs............... 1,852,686 9,276,267 -- 16,493 11,145,446
Pension intangibles... 645,495 6,584,535 -- -- 7,230,030
Investments in
subsidiaries........ 211,745,229 -- -- (211,745,229) --
Other................. 10,366,210 17,627,480 2,554 (16,493) 27,979,751
------------ ------------ ----------- ------------- ------------
$284,590,434 $368,732,025 $38,172,990 $(207,608,522) $483,886,927
============ ============ =========== ============= ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current Liabilities... $ 24,017,694 $ 50,444,551 $ 1,773,706 $ 3,812,414 $ 80,048,365
Long-term debt........ 227,355,513 -- -- -- 227,355,513
Other long-term
obligations......... 21,238,306 242,620,050 -- (137,222,805) 126,635,551
Minority interest..... -- -- -- 12,264,398 12,264,398
Stockholders'
equity.............. 11,978,921 75,667,424 36,399,284 (86,462,529) 37,583,100
------------ ------------ ----------- ------------- ------------
$284,590,434 $368,732,025 $38,172,990 $(207,608,522) $483,886,927
============ ============ =========== ============= ============
</Table>
F-21
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2000
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------- ------------
ASSETS:
Current assets........ $ 18,382,802 $ 60,827,651 $ 2,825,000 $ 2,524,727 $ 84,560,180
Property, plant and
equipment, net...... 30,256,960 207,758,356 6,340,000 1,076,566 245,431,882
Intangibles, net...... 3,806,948 52,191,377 28,803,000 239,689 85,041,014
Cash value of life
insurance, net...... 16,442,672 233,307 -- -- 16,675,979
Prepaid pension
costs............... 2,202,973 6,116,567 -- -- 8,319,540
Pension intangibles... -- 4,630,209 -- -- 4,630,209
Investments in
subsidiaries........ 202,965,217 -- -- (202,965,217) --
Other................. (977,221) 20,508,597 -- -- 19,531,376
------------ ------------ ----------- ------------- ------------
$273,080,351 $352,266,064 $37,968,000 $(199,124,235) $464,190,180
============ ============ =========== ============= ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current Liabilities... $ 36,557,375 $ 55,616,283 $ 858,000 $ 2,525,598 $ 95,557,256
Long-term debt........ 191,920,705 -- -- -- 191,920,705
Other long-term
obligations......... 12,069,969 219,425,671 -- (128,671,941) 102,823,699
Minority interest..... -- -- -- 12,499,020 12,499,020
Stockholders'
equity.............. 32,532,302 77,224,110 37,110,000 (85,476,912) 61,389,500
------------ ------------ ----------- ------------- ------------
$273,080,351 $352,266,064 $37,968,000 $(199,124,235) $464,190,180
============ ============ =========== ============= ============
</Table>
F-22
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
Revenue................ $ 88,025,044 $335,123,103 $6,088,943 $(14,672,203) $414,564,887
Expenses............... 88,035,944 333,724,744 6,836,328 (13,587,024) 415,009,992
------------ ------------ ---------- ------------ ------------
Operating income
(loss)............... (10,900) 1,398,359 (747,385) (1,085,179) (445,105)
Nonoperating income
(expense)............ (23,684,342) (1,130,848) 36,410 -- (24,778,780)
------------ ------------ ---------- ------------ ------------
Income (loss) before
income taxes and
minority interest.... (23,695,242) 267,511 (710,975) (1,085,179) (25,223,885)
Provision (credit) for
income taxes......... (7,818,800) 686,400 -- -- (7,132,400)
------------ ------------ ---------- ------------ ------------
Income (loss) before
minority interest.... (15,876,442) (418,889) (710,975) (1,085,179) (18,091,485)
Minority interest...... -- -- -- 234,622 234,622
------------ ------------ ---------- ------------ ------------
Net income (loss)...... $(15,876,442) $ (418,889) $ (710,975) $ (850,557) $(17,856,863)
============ ============ ========== ============ ============
</Table>
F-23
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Revenue................. $98,142,356 $334,949,406 $6,363,000 $(13,797,660) $425,657,102
Expenses................ 95,322,378 329,511,832 5,069,000 (18,359,862) 411,543,348
----------- ------------ ---------- ------------ ------------
Operating income
(loss)................ 2,819,978 5,437,574 1,294,000 4,562,202 14,113,754
Nonoperating income
(expense)............. 10,429,240 2,067,508 -- (4,226,800) 8,269,948
----------- ------------ ---------- ------------ ------------
Income before income
taxes and minority
interest.............. 13,249,218 7,505,082 1,294,000 335,402 22,383,702
Provision for income
taxes................. 5,301,986 3,874,200 -- -- 9,176,186
----------- ------------ ---------- ------------ ------------
Income (loss) before
minority interest..... 7,947,232 3,630,882 1,294,000 335,402 13,207,516
Minority interest....... -- -- -- (427,020) (427,020)
----------- ------------ ---------- ------------ ------------
Net income (loss)....... $ 7,947,232 $ 3,630,882 $1,294,000 $ (91,618) $ 12,780,496
=========== ============ ========== ============ ============
</Table>
F-24
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Revenue................. $92,590,971 $313,833,215 $-- $(10,208,073) $396,216,113
Expenses................ 86,320,343 301,995,968 -- (13,040,277) 375,276,034
----------- ------------ -- ------------ ------------
Operating income
(loss)................ 6,270,628 11,837,247 -- 2,832,204 20,940,079
Nonoperating income
(expense)............. (8,305,056) (241,077) -- (2,497,300) (11,043,433)
----------- ------------ -- ------------ ------------
Income (loss) before
income taxes and
minority interest..... (2,034,428) 11,596,170 -- 334,904 9,896,646
Provision (credit) for
income taxes.......... (398,353) 4,953,900 -- -- 4,555,547
----------- ------------ -- ------------ ------------
Income (loss) before
minority interest..... (1,636,075) 6,642,270 -- 334,904 5,341,099
Minority interest....... -- -- -- -- --
----------- ------------ -- ------------ ------------
Net income (loss)....... $(1,636,075) $ 6,642,270 $-- $ 334,904 $ 5,341,099
=========== ============ == ============ ============
</Table>
F-25
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities............. $(12,059,185) $48,669,183 $2,446,601 $(1,273,127) $37,783,472
Additions to property, plant and
equipment........................ (2,826,823) (59,784,679) (586,010) 1,043,979 (62,153,533)
Other investing activities......... 5,975,472 (1,580,099) -- -- 4,395,373
------------ ----------- ---------- ----------- -----------
Net cash provided by (used in)
investing activities............. 3,148,649 (61,364,778) (586,010) 1,043,979 (57,758,160)
Borrowing on term loan agreement... 49,833,000 -- -- -- 49,833,000
Payments on revolving credit
agreements....................... (25,620,229) -- -- -- (25,620,229)
Cash dividends paid................ (582,977) -- -- -- (582,977)
Other financing activities......... (13,555,080) 11,340,588 -- 229,148 (1,985,344)
------------ ----------- ---------- ----------- -----------
Net cash provided by financing
activities....................... 10,074,714 11,340,588 -- 229,148 21,644,450
------------ ----------- ---------- ----------- -----------
Increase (decrease) in cash and
equivalents...................... 1,164,178 (1,355,007) 1,860,591 -- 1,669,762
Cash and equivalents at beginning
of year.......................... 2,021,900 1,290,070 901,000 -- 4,212,970
------------ ----------- ---------- ----------- -----------
Cash and equivalents at end of
year............................. $ 3,186,078 $ (64,937) $2,761,591 $ -- $ 5,882,732
============ =========== ========== =========== ===========
</Table>
F-26
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $(6,274,442) $43,244,477 $1,319,000 $376,724 $38,665,759
Additions to property, plant and
equipment......................... (2,948,550) (76,757,964) (257,000) (376,602) (80,340,116)
Other investing activities.......... -- (2,360,787) -- -- (2,360,787)
----------- ----------- ---------- -------- -----------
Net cash provided by (used in)
investing activities.............. (2,948,550) (79,118,751) (257,000) (376,602) (82,700,903)
Borrowing on term loan agreement.... 6,333,000 -- -- -- 6,333,000
Payments on revolving credit
agreements........................ 39,120,229 -- -- 317,000 39,437,229
Cash dividends paid................. (1,448,671) -- -- -- (1,448,671)
Other financing activities.......... (33,635,423) 32,007,970 (161,000) (122) (1,788,575)
----------- ----------- ---------- -------- -----------
Net cash provided by financing
activities........................ 10,369,135 32,007,970 (161,000) 316,878 42,532,983
----------- ----------- ---------- -------- -----------
Increase (decrease) in cash and
equivalents....................... 1,146,143 (3,866,304) 901,000 317,000 (1,502,161)
Cash and equivalents at beginning of
year.............................. 875,757 5,156,374 -- (317,000) 5,715,131
----------- ----------- ---------- -------- -----------
Cash and equivalents at end of
year.............................. $ 2,021,900 $ 1,290,070 $ 901,000 $ -- $ 4,212,970
=========== =========== ========== ======== ===========
</Table>
F-27
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $(4,298,282) $43,973,525 $ -- $ 373,404 $40,048,647
Additions to property, plant and
equipment......................... (3,495,253) (62,833,442) -- (373,404) (66,702,099)
Other investing activities.......... (1,639,569) (1,781,150) -- -- (3,420,719)
----------- ----------- -------- ----------- -----------
Net cash provided by (used in)
investing activities.............. (5,134,822) (64,614,592) -- (373,404) (70,122,818)
Borrowing on term loan agreement.... (9,667,000) (247,128) -- -- (9,914,128)
Payments on revolving credit
agreements........................ 44,000,000 -- -- 2,977,000 46,977,000
Cash dividends paid................. (1,386,225) -- -- -- (1,386,225)
Other financing activities.......... (23,812,567) 21,872,296 -- -- (1,940,271)
----------- ----------- -------- ----------- -----------
Net cash provided by financing
activities........................ 9,134,208 21,625,168 -- 2,977,000 33,736,376
----------- ----------- -------- ----------- -----------
Increase (decrease) in cash and
equivalents....................... (298,896) 984,101 -- 2,977,000 3,662,205
Cash and equivalents at beginning of
year.............................. 1,174,653 4,172,273 -- (3,294,000) 2,052,926
----------- ----------- -------- ----------- -----------
Cash and equivalents at end of
year.............................. $ 875,757 $ 5,156,374 $ -- $ (317,000) $ 5,715,131
=========== =========== ======== =========== ===========
</Table>
F-28
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,569,383 $ 5,882,732
Receivables, less allowances for doubtful accounts and
discounts of $5,081,970 and $4,861,094, respectively... 38,880,133 44,225,634
Recoverable income taxes.................................. 7,534,749 4,483,300
Inventories............................................... 6,325,211 5,548,784
Prepaid expenses.......................................... 3,638,793 3,703,756
Broadcast rights.......................................... 5,662,144 6,083,782
Deferred income taxes..................................... 9,325,259 9,803,800
------------ ------------
Total current assets........................................ 74,935,672 79,731,788
Property, plant and equipment:
Land and land improvements.................................. 12,196,346 12,194,446
Buildings and leasehold improvements........................ 41,941,374 41,186,933
Machinery and equipment................................... 209,561,241 209,196,143
Cable television distribution systems and equipment....... 186,943,569 187,804,505
Security alarm and video systems installation costs....... 6,030,869 5,923,280
Construction in progress.................................. 13,841,712 11,495,916
------------ ------------
470,515,111 467,801,223
Less allowances for depreciation and amortization......... 210,822,886 204,605,517
------------ ------------
259,692,225 263,195,706
Other assets:
Intangibles, net.......................................... 91,950,870 83,913,101
Deferred income taxes..................................... 3,166,419 12,946,900
Prepaid pension costs..................................... 11,201,365 11,145,446
Cash value of life insurance, net of policy loans of
$12,735,560............................................ 11,104,991 10,691,105
Pension intangibles....................................... 7,230,030 7,230,030
Broadcast rights, less current portion.................... 5,071,314 6,217,880
Deferred financing costs.................................. 5,486,677 5,676,725
Other..................................................... 3,047,747 3,138,246
------------ ------------
138,259,413 140,959,433
------------ ------------
$472,887,310 $483,886,927
============ ============
</Table>
See accompanying notes.
F-29
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(UNAUDITED) (NOTE 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,500,284 $ 12,355,122
Salaries, wages and payroll taxes......................... 14,436,501 16,321,468
Workers' compensation and medical reserves................ 9,005,393 9,184,074
Other accrued liabilities................................. 29,180,853 32,279,367
Current maturities of long-term debt...................... 10,121,057 9,908,334
------------ ------------
Total current liabilities................................... 73,244,088 80,048,365
Long-term debt, less current maturities..................... 209,548,004 227,355,513
Other long-term obligations................................. 127,174,685 126,635,551
Minority interest........................................... 12,271,572 12,264,398
Stockholders' equity:
5% Non-cumulative, non-voting Class A Stock, par value
$100 a share (entitled in liquidation to $100 per share
in priority over Common Stock) -- 15,680 shares
authorized; 12,620 shares issued
and outstanding........................................ 1,262,000 1,262,000
Common Stock, par value $.10 a share:
Voting Common Stock -- 29,400 shares authorized,
issued and outstanding............................... 2,940 2,940
Non-voting Common Stock -- 588,000 shares
authorized; 427,786 shares issued and outstanding.... 42,779 42,779
Accumulated other comprehensive loss...................... (4,612,430) (4,725,589)
Additional paid-in capital................................ 771,274 771,274
Retained earnings......................................... 53,182,398 40,229,696
------------ ------------
50,648,961 37,583,100
------------ ------------
$472,887,310 $483,886,927
============ ============
</Table>
See accompanying notes.
F-30
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------- ------------
Revenue:
Publishing................................................ $ 61,562,804 $61,854,437
Cable..................................................... 25,096,835 21,147,906
Broadcasting.............................................. 9,000,653 8,727,210
Other Communications...................................... 6,352,744 5,148,690
------------ -----------
102,013,036 96,878,243
Expense:
Publishing................................................ 61,519,313 65,487,481
Cable..................................................... 22,813,956 18,444,193
Broadcasting.............................................. 9,055,039 9,179,226
Other Communications...................................... 6,243,737 6,355,613
Corporate general and administrative...................... 951,280 350,035
------------ -----------
100,583,325 99,816,548
------------ -----------
Operating income (loss)..................................... 1,429,711 (2,938,305)
Nonoperating income (expense):
Interest expense.......................................... (4,748,149) (4,675,626)
Gain on disposition of Monroe Cablevision................. 21,600,189 --
Change in fair value of interest rate swaps............... 1,461,826 (1,579,820)
Interest income........................................... 8,831 6,120
------------ -----------
18,322,697 (6,249,326)
------------ -----------
Income (loss) before income taxes and minority interest..... 19,752,408 (9,187,631)
Provision (credit) for income taxes:
Federal:
Current................................................ 3,192,616 (1,181,915)
Deferred............................................... 3,260,301 (1,294,715)
------------ -----------
6,452,917 (2,476,630)
State and local........................................... 339,615 (125,199)
------------ -----------
6,792,532 (2,601,829)
------------ -----------
Income (loss) before minority interest...................... 12,959,876 (6,585,802)
Minority interest........................................... (7,174) 53,658
------------ -----------
Net income (loss)........................................... $ 12,952,702 $(6,532,144)
============ ===========
</Table>
See accompanying notes.
F-31
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
<Table>
<Caption>
COMMON STOCK
----------------------------------- ACCUMULATED
CLASS A STOCK VOTING NON-VOTING OTHER ADDITIONAL
------------------- --------------- ----------------- COMPREHENSIVE PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT LOSS CAPITAL
------ ---------- ------ ------ ------- ------- ------------- ----------
Balances at January 1, 2002................ 12,260 $1,262,000 29,400 $2,940 427,786 $42,779 $(4,725,589) $771,274
Net income...............................
Amortization of fair value of interest
rate swaps at January 1, 2001 (net of
deferred tax of $63,500)............... 113,159
Total comprehensive income.................
------ ---------- ------ ------ ------- ------- ----------- --------
Balances at March 31, 2002................. 12,620 $1,262,000 29,400 $2,940 427,786 $42,779 $(4,612,430) $771,274
====== ========== ====== ====== ======= ======= =========== ========
Balances at January 1, 2001................ 12,620 $1,262,000 29,400 $2,940 430,123 $43,012 $ (521,942) $771,274
Net loss.................................
Fair value of interest swaps at January
1, 2001, less accumulated amortization
of $176,559 (net of deferred tax of
$694,500).............................. (1,234,964)
Total comprehensive loss.................
------ ---------- ------ ------ ------- ------- ----------- --------
Balance at March 31, 2001.................. 12,260 $1,262,000 29,400 $2,940 430,123 $43,012 $(1,756,906) $771,274
====== ========== ====== ====== ======= ======= =========== ========
<Caption>
RETAINED
EARNINGS TOTAL
----------- -----------
Balances at January 1, 2002................ $40,229,696 $37,583,100
Net income............................... 12,952,702 12,952,702
Amortization of fair value of interest
rate swaps at January 1, 2001 (net of
deferred tax of $63,500)............... 113,159
-----------
Total comprehensive income................. 13,065,861
----------- -----------
Balances at March 31, 2002................. $53,182,398 $50,648,961
=========== ===========
Balances at January 1, 2001................ $59,832,216 $61,389,500
Net loss................................. (6,532,144) (6,532,144)
Fair value of interest swaps at January
1, 2001, less accumulated amortization
of $176,559 (net of deferred tax of
$694,500).............................. (1,234,964)
-----------
Total comprehensive loss................. (7,767,108)
----------- -----------
Balance at March 31, 2001.................. $53,300,072 $53,622,392
=========== ===========
</Table>
See accompanying notes.
F-32
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income (loss)........................................... $ 12,952,702 $ (6,532,144)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation........................................... 11,323,191 9,765,174
Amortization of intangibles and deferred charges....... 372,526 884,407
Amortization of broadcast rights....................... 1,573,871 1,439,660
Payments for broadcast rights.......................... (1,179,886) (1,386,000)
Gain on sale of Monroe Cablevision..................... (21,600,189) --
Deferred income taxes (credit)......................... 3,260,301 (1,294,715)
Provision for bad debts................................ 220,876 1,013,157
Minority interest...................................... 7,174 (53,658)
Change in fair value of interest rate swaps............ (1,461,826) 1,579,820
Loss on disposal of property and equipment............. 396,866 --
Changes in operating assets and liabilities:
Receivables.......................................... 5,093,222 9,319,671
Inventories.......................................... (891,359) 3,743,607
Prepaid expenses..................................... (71,640) (519,237)
Accounts payable..................................... (1,862,245) (8,094,428)
Salaries, wages, payroll taxes and other accrued
liabilities....................................... (4,261,833) (6,607,1005)
Other assets......................................... 4,023,251 (2,157,361)
Postretirement benefits and other long-term
obligations....................................... 2,457,531 310,820
------------ ------------
Net cash provided by operating activities................... 10,352,533 1,411,668
INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (5,862,022) (17,107,918)
Change in cash value of life insurance...................... (413,886) (513,363)
Proceeds from sale of Monroe Cablevision.................... 12,059,115 --
Proceeds from disposal of property and equipment............ 3,247 --
------------ ------------
Net cash provided by (used in) investing activities......... 5,786,454 (17,621,548)
FINANCING ACTIVITIES
(Payments) borrowings on long-term revolving credit
agreement................................................. (19,000,000) 20,000,000
Net borrowings on short-term revolving credit agreement..... 639,126 2,214,799
Payments on senior notes payable............................ -- (6,500,000)
Payment on notes payable and capital leases................. (91,462) (80,248)
------------ ------------
Net cash provided by (used in) financing activities......... (18,452,336) 15,634,551
------------ ------------
Increase (decrease) in cash and cash equivalents............ (2,313,349) (575,329)
Cash and cash equivalents at beginning of year.............. 5,882,732 4,212,970
------------ ------------
Cash and cash equivalents at end of year.................... $ 3,569,383 $ 3,637,641
============ ============
Non-cash borrowings under capital lease..................... $ 857,550 --
============ ============
</Table>
See accompanying notes.
F-33
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Block Communications, Inc. (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the December 31, 2001 audited consolidated financial statements and footnotes
thereto included elsewhere in this prospectus.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement Nos. 137 and 138, (collectively,
SFAS No. 133), which requires the Company to record all derivatives on the
balance sheet at fair value. The Company has three interest rate swap agreements
for which it has not elected to implement hedge accounting. The Company has
recognized a non-cash derivative valuation gain (loss) of $1,461,826 and
$(1,579,820) during the three-month periods ended March 31, 2002 and 2001,
respectively.
Effective January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased
goodwill and indefinite lived intangible assets are no longer amortized but
reviewed annually for impairment, or more frequently if impairment indicators
arise. Intangible assets with lives restricted by contractual, legal or other
means will continue to be amortized over their useful lives. During the three
month period ended March 31, 2001, the Company recognized $837,035 of
amortization expense related to goodwill, resulting in net loss of $5,695,109
when adjusted for the non-amortization provisions of SFAS No. 142. Subsequent to
March 31, 2002 the Company has completed the initial impairment testing required
by SFAS No. 142. No impairment charges will be recognized based on the results
of this testing.
Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of. The adoption of this standard has had no effect on the Company's
consolidated results of operations or financial position for the three months
ended March 31, 2002.
Subsequent to March 31, 2002, SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, was issued and requires a gain or loss related to the
extinguishment of debt to no longer be recorded as an extraordinary item. The
Company has elected early adoption as encouraged by SFAS No. 145, which would
not otherwise require adoption until fiscal year 2003. As a result, second
quarter losses related to the refinancing discussed below will be included in
income from continuing operations.
F-34
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 2 -- ACQUISITION
Effective March 29, 2002, the Company consummated an asset exchange
agreement with Comcast Corporation which resulted in an exchange of 100% of the
assets of Monroe Cablevision for 100% of the assets of Comcast's Bedford,
Michigan operations and $12.1 million cash. The Company recorded a $21.6 million
gain on the disposition of Monroe Cablevision resulting from the difference in
fair value versus the net book value of assets exchanged. For tax reporting, the
transaction has been treated as a like kind exchange and the amount of the gain
in excess of the cash received has been deferred. The operations of Monroe
Cablevision are included in the Company's financial statements through March 28,
2002.
The net assets of the acquired Bedford system have been recorded at their
fair value and relate primarily to the cable distribution system and
intangibles. The operations of the Bedford system have been included in the
Company's financial statements since March 29, 2002.
NOTE 3 -- LONG-TERM DEBT
In April 2002, the Company issued $175 million of 9 1/4% senior
subordinated notes, the proceeds of which where used to pay off the existing
senior term loan and senior notes and a portion of the balance outstanding under
the revolving credit agreement. The subordinated notes mature April 15, 2009. On
May 15, 2002 the Company completed the refinancing of the remainder of its
senior credit facilities. The new senior credit facilities include a $40 million
delayed draw term loan A, a $75 million term loan B, and an $85 million
revolver. Term loan A matures May 2009, however the availability is reduced if
required withdrawals are not made ($20 million by June 2003 and $20 million by
December 2003). Term loan B matures November 2009. The term loan A and revolving
credit agreements provide for scheduled reductions beginning September 2004,
with a final maturity date of May 2009. Only the availability under term loan B
was drawn at the date of the refinancing.
In conjunction with the refinancing of existing debt, the Company will
recognize a second quarter pre-tax loss of $9.0 million consisting of prepayment
penalties and unamortized deferred financing costs relating to the refinanced
debt. As noted above, this amount will be reported as a component of income from
continuing operations as the Company has elected early adoption of SFAS No. 145.
NOTE 4 -- OTHER LONG-TERM OBLIGATIONS
Other long-term obligations consist of the following:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
Other postretirement benefits............................. $ 81,396,816 $ 80,824,000
Pension liabilities....................................... 17,984,049 17,412,753
Deferred compensation obligations......................... 14,805,960 13,594,736
Broadcast rights payable.................................. 5,575,149 6,446,520
Interest rate swap liability.............................. 5,101,047 6,739,531
Other..................................................... 2,311,664 1,618,011
------------ ------------
$127,174,685 $126,635,551
============ ============
</Table>
NOTE 5 -- BUSINESS SEGMENT INFORMATION
The Company has three reportable segments -- publishing, cable and
broadcasting. The publishing segment operates two daily newspapers located in
Ohio and Pennsylvania. The cable segment includes two cablevision companies
located in Ohio. The broadcasting segment has five television stations located
in Idaho, Illinois, Indiana, Kentucky, and Ohio. The "Other Communications"
category includes non-
F-35
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
reportable segments and corporate items. The non-reportable segments provide
services such as telephony, security systems and monitoring, cable plant
construction and distributed advertising services. The following table presents
certain financial information for the three reportable segments and the other
category:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
----------------------------
2002 2001
------------ ------------
Revenues:
Publishing............................................ $ 62,253,335 63,531,677
Intersegment.......................................... 690,531 1,677,240
------------ ------------
External Publishing................................... 61,562,804 61,854,437
Cable................................................. 25,096,835 21,147,906
Broadcasting.......................................... 9,000,653 8,727,210
Other Communications.................................. 6,352,744 5,148,690
------------ ------------
102,013,036 96,878,243
Operating income (loss):
Publishing............................................ 690,357 (2,444,204)
Intersegment.......................................... 646,866 1,188,840
------------ ------------
Net Publishing........................................ 43,491 (3,633,044)
Cable................................................. 1,601,490 1,568,183
Intersegment.......................................... (681,389) (1,340,930)
------------ ------------
Net Cable............................................. 2,282,879 2,909,113
Broadcasting.......................................... (54,386) (452,016)
Corporate expenses.................................... (951,280) (350,035)
Other Communications.................................. 109,007 (1,412,323)
------------ ------------
1,429,711 (2,938,305)
Nonoperating income (expense)........................... 18,322,697 (6,249,326)
------------ ------------
Income (loss) before income taxes and minority
interest.............................................. $ 19,752,408 (9,187,631)
============ ============
</Table>
NOTE 6 -- SUPPLEMENTAL GUARANTOR INFORMATION
The new credit facilities referred to in Note 3 to these financial
statements are guaranteed jointly and severally by all of the Company's wholly
owned subsidiaries (collectively, the Guarantors). Such guarantees are full and
unconditional. WAND (TV) Partnership, a partially owned subsidiary of the
Company, is not a guarantor of the credit facilities.
Supplemental consolidating financial information of the Company,
specifically including such information for the Guarantors, is presented below.
Financial information for the Parent Company includes both the Holding Company
and its one division, The Toledo Blade Company. Investments in subsidiaries are
presented using the cost method of accounting and eliminated. Separate financial
statements of the Guarantors are not provided as the consolidating financial
information contained herein provides a more meaningful disclosure to allow
investors to determine the nature of assets held and the operations of the
combined groups.
F-36
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 31, 2002
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------- ------------
ASSETS:
Current assets........ $ 25,881,392 $ 46,043,263 $ 2,966,741 $ 44,276 $ 74,935,672
Property, plant and
equipment, net...... 28,886,484 224,462,480 5,953,174 390,087 259,692,225
Intangibles, net...... 4,658,948 59,024,474 28,068,959 198,489 91,950,870
Cash value of life
insurance, net...... 10,899,943 205,048 -- -- 11,104,991
Prepaid pension
costs............... 1,743,945 9,457,420 -- -- 11,201,365
Pension intangibles... 645,495 6,584,535 -- -- 7,230,030
Investments in
subsidiaries........ 211,056,074 -- -- (211,056,074) --
Other................. (4,424,565) 21,267,501 (70,779) -- 16,772,157
------------ ------------ ----------- ------------- ------------
$279,347,716 $367,044,721 $36,918,095 $(210,423,222) $472,887,310
============ ============ =========== ============= ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current liabilities... $ 23,839,844 $ 48,914,290 $ 497,071 $ (7,117) $ 73,244,088
Long-term debt........ 209,548,004 -- -- -- 209,548,004
Other long-term
obligations......... 19,664,479 235,785,680 -- (128,275,474) 127,174,685
Minority interest..... -- -- -- 12,271,572 12,271,572
Stockholders'
equity.............. 26,295,389 82,344,751 36,421,024 (94,412,203) 50,648,961
------------ ------------ ----------- ------------- ------------
$279,347,716 $367,044,721 $36,918,095 $(210,423,222) $472,887,310
============ ============ =========== ============= ============
</Table>
F-37
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------- ------------
ASSETS:
Current assets........ $ 15,717,915 $ 55,969,309 $ 4,138,933 $ 3,905,631 $ 79,731,788
Property, plant and
equipment, net...... 28,992,144 228,208,431 5,962,544 32,587 263,195,706
Intangibles, net...... 4,784,698 50,860,955 28,068,959 198,489 83,913,101
Cash value of life
insurance, net...... 10,486,057 205,048 -- -- 10,691,105
Prepaid pension
costs............... 1,852,686 9,276,267 -- 16,493 11,145,446
Pension intangibles... 645,495 6,584,535 -- -- 7,230,030
Investments in
subsidiaries........ 211,745,229 -- -- (211,745,229) --
Other................. 10,366,210 17,627,480 2,554 (16,493) 27,979,751
------------ ------------ ----------- ------------- ------------
$248,590,434 $368,732,025 $38,172,990 $(207,608,522) $483,886,927
============ ============ =========== ============= ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current liabilities... $ 24,017,694 $ 50,444,551 $ 1,773,706 $ 3,812,414 $ 80,048,365
Long-term debt........ 227,355,513 -- -- -- 227,355,513
Other long-term
obligations......... 21,238,306 242,620,050 -- (137,222,805) 126,635,551
Minority interest..... -- -- -- 12,264,398 12,264,398
Stockholders'
equity.............. 11,978,921 75,667,424 36,399,284 (86,462,529) 37,583,100
------------ ------------ ----------- ------------- ------------
$284,590,434 $368,732,025 $38,172,990 $(207,608,522) $483,886,927
============ ============ =========== ============= ============
</Table>
F-38
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Revenue................... $19,069,026 $83,275,369 $1,812,798 $(2,144,157) $102,013,036
Expenses.................. 20,857,528 80,579,846 1,647,608 (2,501,657) 100,583,325
----------- ----------- ---------- ----------- ------------
Operating income (loss)... (1,788,502) 2,695,523 165,190 357,500 1,429,711
Nonoperating income....... 18,316,482 2,208 4,007 -- 18,322,697
----------- ----------- ---------- ----------- ------------
Income before income taxes
and minority interest... 16,527,980 2,697,731 169,197 357,500 19,752,408
Provision for income
taxes................... 5,778,662 1,013,870 -- -- 6,792,532
----------- ----------- ---------- ----------- ------------
Income before minority
interest................ 10,749,318 1,683,861 169,197 357,500 12,959,876
Minority interest......... -- -- -- (7,174) (7,174)
----------- ----------- ---------- ----------- ------------
Net income................ $10,749,318 $ 1,683,861 $ 169,197 $ 350,326 $ 12,952,702
=========== =========== ========== =========== ============
</Table>
F-39
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
Revenue.................... $20,671,037 $78,498,175 $1,581,882 $(3,872,851) $96,878,243
Expenses................... 21,667,460 80,296,014 1,744,481 (3,891,407) 99,816,548
----------- ----------- ---------- ----------- -----------
Operating income (loss).... (996,423) (1,797,839) (162,599) 18,556 (2,938,305)
Nonoperating expense....... (6,248,269) (1,057) -- -- (6,249,326)
----------- ----------- ---------- ----------- -----------
Income (loss) before income
taxes and minority
interest................. (7,244,692) (1,798,896) (162,599) 18,556 (9,187,631)
Provision (credit) for
income taxes............. (3,270,744) 668,915 -- -- (2,601,829)
----------- ----------- ---------- ----------- -----------
Income (loss) before
minority interest........ (3,973,948) (2,467,811) (162,599) 18,556 (6,585,802)
Minority interest.......... -- -- -- 53,658 53,658
----------- ----------- ---------- ----------- -----------
Net income (loss).......... $(3,973,948) $(2,467,811) $ (162,599) $ 72,214 $(6,532,144)
=========== =========== ========== =========== ===========
</Table>
F-40
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
Net cash provided by operating
activities........................ $ 5,854,988 $5,384,759 $(1,244,714) $357,500 $10,352,533
Additions to property, plant and
equipment......................... (77,790) (5,261,452) (165,280) (357,500) (5,862,022)
Other investing activities.......... 11,645,229 3,247 -- -- 11,648,476
------------ ---------- ----------- -------- -----------
Net cash used in investing
activities........................ 11,567,439 (5,258,205) (165,280) (357,500) 5,786,454
Payments on capital leases.......... (91,462) -- -- -- (91,462)
Payments on revolving credit
agreements........................ (18,360,874) -- -- -- (18,360,874)
Net cash used in financing
activities........................ (18,452,336) -- -- -- (18,452,336)
------------ ---------- ----------- -------- -----------
Increase (decrease) in cash and
equivalents....................... (1,029,909) 126,554 (1,409,994) -- (2,313,349)
Cash and equivalents at beginning of
period............................ 3,186,078 (64,937) 2,761,591 -- 5,882,732
------------ ---------- ----------- -------- -----------
Cash and equivalents at end of
period............................ $ 2,156,169 $ 61,617 $ 1,351,597 $ -- $ 3,569,383
============ ========== =========== ======== ===========
</Table>
F-41
BLOCK COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001
<Table>
<Caption>
UNCONSOLIDATED
-------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
Net cash provided by operating
activities...................... $(13,928,452) $14,584,564 $ 737,000 $18,556 $ 1,411,668
Additions to property, plant and
equipment....................... (1,330,602) (15,758,760) -- (18,556) (17,107,918)
Other investing activities........ (545,894) 32,264 -- -- (513,630)
------------ ----------- ---------- ------- ------------
Net cash used in investing
activities...................... (1,876,496) (15,726,496) -- (18,556) (17,621,548)
Payments on long-term debt........ (6,580,248) -- -- -- (6,580,248)
Borrowings on revolving credit
agreements...................... 22,214,799 -- -- -- 22,214,799
Net cash provided by financing
activities...................... 15,634,551 -- -- -- 15,634,551
------------ ----------- ---------- ------- ------------
Increase (decrease) in cash and
equivalents..................... (170,397) (1,141,932) 737,000 -- (575,329)
Cash and equivalents at beginning
of period....................... 2,021,900 1,290,070 901,000 -- 4,212,970
------------ ----------- ---------- ------- ------------
Cash and equivalents at end of
period.......................... $ 1,851,503 $ 148,138 $1,638,000 $ -- $ 3,637,641
============ =========== ========== ======= ============
</Table>
F-42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[BCI LOGO]
BCI
BLOCK COMMUNICATIONS, INC.
OFFER TO EXCHANGE
UP TO $175,000,000 OF ITS
9 1/4% SENIOR SUBORDINATED NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR UP TO $175,000,000 OF ITS OUTSTANDING
9 1/4% SENIOR SUBORDINATED NOTES DUE 2009
--------------------
PROSPECTUS
, 2002
--------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
(a) The Company is an Ohio corporation. Section 1701.13(E) of the Ohio
Revised Code provides that:
(1) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right
of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or a partnership,
joint venture, trust, or other enterprise, against expenses, including
attorney's fees, judgments, fines, and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit, or
proceeding, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit, or proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner he reasonably believed to be not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was
unlawful.
(2) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation
to procure a judgment in its favor, by reason of the fact that he is or was
a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability company, or a
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following: (a) Any
claim, issue, or matter as to which such person is adjudged to be liable
for negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that, the court of common pleas
or the court in which such action or suit was brought determines, upon
application, that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common pleas or
such other court shall deem proper; (b) Any action or suit in which the
only liability asserted against a director is pursuant to section 1701.95
of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense
of any action, suit, or proceeding referred to in division (E)(1) or (2) of
this section, or in defense of any claim, issue, or matter therein, he
shall be indemnified against expenses, including attorney's fees, actually
and reasonably incurred by him in connection with the action, suit, or
proceeding.
(4) Any indemnification under division (E)(1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case, upon a determination that indemnification
of the director, trustee, officer, employee, member, manager, or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in division (E)(1) or (2) of this section. Such
determination shall be made as follows: (a) By a majority vote of a quorum
consisting of directors of the indemnifying corporation who were not and
are not parties to or threatened with the action, suit, or proceeding
referred to in division (E)(1) or (2) of this section;
II-1
(b) If the quorum described in division (E)(4)(a) of this section is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation or any person
to be indemnified within the past five years; (c) By the shareholders; (d)
By the court of common pleas or the court in which the action, suit, or
proceeding referred to in division (E)(1) or (2) of this section was
brought. Any determination made by the disinterested directors under
division (E)(4)(a) or by independent legal counsel under division (E)(4)(b)
of this section shall be promptly communicated to the person who threatened
or brought the action or suit by or in the right of the corporation under
division (E)(2) of this section, and, within ten days after receipt of such
notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to
review the reasonableness of such determination.
(5) (a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in division (E)(1) or
(2) of this section, the articles or regulations of a corporate state, by
specific reference to this division, that the provisions of this division
do not apply to the corporation and unless the only liability asserted
against a director in an action, suite, or proceeding referred to in
division (E)(1) or (2) of this section is pursuant to section 1701.95 of
the Revised Code, expenses, including attorney's fees, incurred by a
director in defending the action, suit, or proceeding shall be paid by the
corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding, upon receipt of an undertaking by or on
behalf of the director in which he agrees to do both of the following: (i)
Repay such amount if it is proved by clear and convincing evidence in a
court of competent jurisdiction that his action or failure to act involved
an act or omission undertaken with deliberate intent to cause injury to the
corporation or undertaken with reckless disregard for the best interests of
the corporation; (ii) Reasonably cooperate with the corporation concerning
the action, suit, or proceeding. (b) Expenses, including attorney's fees,
incurred by a director, trustee, officer, employee, member, manager, or
agent in defending any action, suit, or proceeding referred to in division
(E)(1) or (2) of this section, may be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding, as authorized by the directors in the specific case, upon
receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, member, manager, or agent to repay such amount, if it
ultimately is determined that he is not entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to
those seeking indemnification under the articles, the regulations, any
agreement, a vote of shareholders or disinterested directors, or otherwise,
both as to action in their official capacities and as to action in another
capacity while holding their offices or positions, and shall continue as to
a person who has ceased to be a director, trustee, officer, employee,
member, manager, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including, but not limited to, trust funds, letters of
credit, or self-insurance, on behalf of or for any person who is or was a
director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation, domestic or foreign, nonprofit
or for profit, a limited liability company, or a partnership, joint
venture, trust, or other enterprise, against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status
as such, whether or not the corporation would have the power to indemnify
him against such liability under this section. Insurance may be purchased
from or maintained with a person in which the corporation has a financial
interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E)(1) or (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other
protection that may be provided pursuant to divisions (E)(5), (6), and (7)
of this section. Divisions (E)(1) and (2) of this section do not create any
obligation to repay or return payments made by the corporation pursuant to
division (E)(5), (6), or (7).
II-2
(9) As used in division (E) of this section, "corporation" includes
all constituent entities in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director,
officer, employer, employee, trustee, member, manager, or agent of such a
constituent entity, or is or was serving at the request of such constituent
entity as a director, trustee, officer, employee, member, manager, or agent
of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise, shall stand in the same position under this section with
respect to the new or surviving corporation as he would if he had served
the new or surviving corporation in the same capacity.
(b) Article VII of the Company's Regulations provides that:
The Corporation shall indemnify or agree to indemnify, to the fullest
extent now or hereafter permitted by law, a director, officer or salaried
employee, or a former director, officer, agent or salaried employee or any
person who is serving or has served at the request of the Corporation as a
director, officer or salaried employee of any other corporation, joint venture,
or other enterprise, or as a trustee of any trust, against costs and expenses
reasonably incurred by or imposed upon him, judgments, decrees, fines, penalties
or amounts paid in settlement or in connection with the defense of any pending,
concluded, or threatened action, suit or proceeding, criminal, civil,
administrative, investigative, or otherwise, to which he is or may be made a
party by reason of being or having been such director, officer, employee or
trustee; provides that, a determination is made (a) that he was not, and has not
been adjudicated to have been, negligent or guilty of misconduct in the
performance of his duty to the Corporation or other entity of which he is a
director, officer, employee or trustee, (b) that he acted in good faith in what
he reasonably believed to be in or not opposed to the best interest of the
Corporation, or other entity, (c) that, in any matter the subject of a criminal
action, suit or proceeding, he had no reasonable cause to believe that his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. Any such determination shall be made, and any action authorizing
such indemnification shall be taken, by the directors of the Corporation acting
at a meeting at which a quorum of directors who are and were not parties to or
threatened with such action, suit or proceeding is present. Any director who is
a party to or threatened with such action, suit, or proceeding shall not be
qualified to vote respecting such determination or action, and if for this
reason a quorum of directors cannot be obtained for such vote, such
determination shall be made by any of the following procedures: (1) by a written
opinion of independent counsel, (2) by resolution adopted by a majority of a
committee of stockholders or directors who have not incurred such expenses,
appointed by the Board of Directors, or (3) by the affirmative vote at a meeting
held for such purpose of the holders of shares entitling them to exercise a
majority of the voting power of the Corporation on such matters, or by a written
consent of the holders of shares entitling them to exercise two-thirds (2/3) of
the voting power on such matters (whether or not such shareholders are
personally interested in the determination).
Upon any such determination by the Board of Directors, or by any one of the
other foregoing procedures, that the conditions set forth in clauses (a), (b)
and (c), of this article have been fulfilled, such indemnity shall be binding
upon the Corporation and shall be made without further action of the directors.
Indemnification under this article shall not be deemed exclusive of any
other rights to which such director, officer, employee, or trustee may be
entitled under the Articles of Incorporation, the Regulations of the
Corporation, any agreement, vote of shareholders, or as a matter of law.
(c) The Company maintains director and officer liability insurance covering
its directors and officers with respect to liability which they may incur in
connection with their serving as such, which liability could include liability
under the Securities Act of 1933.
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) A list of exhibits filed with this registration statement on Form
S-4 is set forth on the Index to Exhibits and Financial Statement Schedule
and is incorporated in this Item 21 by reference.
(b) The following report of independent auditors and financial
statement schedule are filed with this registration statement and should be
read in conjunction with the financial statements included elsewhere
herein:
Report of Independent Auditors on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
All other schedules are not applicable and have therefore been omitted.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event hat a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
BLOCK COMMUNICATIONS, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Managing Director
(Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Managing Director (Principal July 16, 2002
------------------------------------------------ Executive Officer); Director
Allan J. Block
/s/ GARY J. BLAIR Vice President and Chief Financial July 16, 2002
------------------------------------------------ Officer; Director
Gary J. Blair
/s/ JODI L. MIEHLS Treasurer July 16, 2002
------------------------------------------------ (Principal Accounting Officer)
Jodi L. Miehls
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
Director July , 2002
------------------------------------------------
William Block
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
</Table>
II-6
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FRITZ BYERS Director July 16, 2002
------------------------------------------------
Fritz Byers
/s/ KAREN D. JOHNESE Director July 16, 2002
------------------------------------------------
Karen D. Johnese
Director July , 2002
------------------------------------------------
Donald G. Block
/s/ MARY G. BLOCK Director July 16, 2002
------------------------------------------------
Mary G. Block
/s/ CYRUS P. BLOCK Director July 16, 2002
------------------------------------------------
Cyrus P. Block
/s/ DIANA E. BLOCK Director July 16, 2002
------------------------------------------------
Diana E. Block
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
</Table>
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
ACCESS TOLEDO, LTD.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Vice President
(Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Vice President July 16, 2002
------------------------------------------------ (Principal Executive Officer);
Allan J. Block Director
/s/ RICK MLCEK Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer
Rick Mlcek and Principal Accounting Officer)
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
</Table>
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
BUCKEYE TELESYSTEM, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ BRIAN REX Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Brian Rex Officer)
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ JOSEPH JENSEN Director July 16, 2002
------------------------------------------------
Joseph Jensen
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
CARS HOLDING, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: President (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ JOHN R. BLOCK Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
John R. Block Officer); Director
Director July , 2002
------------------------------------------------
William Block
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
</Table>
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
COMMUNITY COMMUNICATION SERVICES, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Vice President
(Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Vice-President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ GLORIA SHANK President and General Manager July 16, 2002
------------------------------------------------ (Principal Financial Officer and
Gloria Shank Principal Accounting Officer);
Director
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
</Table>
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
CORPORATE PROTECTION SERVICES, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ ROY CHASE Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Roy Chase Officer)
/s/ KIM KLEWER Director July 16, 2002
------------------------------------------------
Kim Klewer
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ JOSEPH JENSEN Director July 16, 2002
------------------------------------------------
Joseph Jensen
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
</Table>
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
ERIE COUNTY CABLEVISION, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ RICK MLCEK Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Rick Mlcek Officer)
Director July , 2002
------------------------------------------------
Patrick Deville
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
</Table>
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
IDAHO INDEPENDENT TELEVISION, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ JAMES MCKENNA Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
James McKenna Officer)
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
Director July , 2002
------------------------------------------------
Ricky Joseph
</Table>
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
INDEPENDENCE TELEVISION COMPANY
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ RICK ROBERTS Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Rick Roberts Officer)
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
LIMA COMMUNICATIONS CORPORATION
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ DAVID E. PLAUGHER Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
David E. Plaugher Officer)
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
/s/ BRUCE OPPERMAN Director July 16, 2002
------------------------------------------------
Bruce Opperman
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
METRO FIBER & CABLE CONSTRUCTION
COMPANY
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Vice President
(Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Vice President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ BRIAN REX Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Brian Rex Officer)
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ JOSEPH JENSEN Director July 16, 2002
------------------------------------------------
Joseph Jensen
</Table>
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
MONROE CABLEVISION, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ RICK MLCEK Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Rick Mlcek Officer)
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ GARY J. BLAIR Director July 16, 2002
------------------------------------------------
Gary J. Blair
/s/ FLORENCE BUCHANAN Director July 16, 2002
------------------------------------------------
Florence Buchanan
</Table>
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
PG PUBLISHING COMPANY
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Vice President (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Vice President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ ROBERT STAMM Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Robert Stamm Officer); Director
Director July , 2002
------------------------------------------------
William Block
/s/ RAYMOND N. BURNETT Director July 16, 2002
------------------------------------------------
Raymond N. Burnett
Director July , 2002
------------------------------------------------
John G. Craig
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
</Table>
II-19
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
Director July , 2002
------------------------------------------------
Maddy Ross
/s/ DAVID M. BEIHOFF Director July 16, 2002
------------------------------------------------
David M. Beihoff
Director July , 2002
------------------------------------------------
Michael Tomasieski
Director July , 2002
------------------------------------------------
Scott Brooks
/s/ KAREN D. JOHNESE Director July 16, 2002
------------------------------------------------
Karen D. Johnese
Director July , 2002
------------------------------------------------
Randy Waugaman
/s/ DIANA E. BLOCK Director July 16, 2002
------------------------------------------------
Diana E. Block
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
</Table>
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
TOLEDO AREA TELECOMMUNICATIONS
SERVICES, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Vice President (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Vice President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ BRADLEY MEFFERD Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Bradley Mefferd Officer)
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
</Table>
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
WLFI-TV, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: President (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK President (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ GARY J. BLAIR Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Executive
Gary J. Blair Officer); Director
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
</Table>
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Toledo, State of Ohio, on
the 16th day of July, 2002.
BUCKEYE CABLEVISION, INC.
By: /s/ ALLAN J. BLOCK
------------------------------------
Name: Allan J. Block
Title: Chairman (Principal
Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan J. Block, Gary J. Blair, Jodi L. Miehls,
Fritz Byers and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, 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, as
fully to all intents and purposes as he 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 substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements and the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALLAN J. BLOCK Chairman (Principal Executive July 16, 2002
------------------------------------------------ Officer); Director
Allan J. Block
/s/ RICK MCLEK Treasurer (Principal Financial July 16, 2002
------------------------------------------------ Officer and Principal Accounting
Rick Mclek Officer)
/s/ WILLIAM BLOCK, JR. Director July 16, 2002
------------------------------------------------
William Block, Jr.
/s/ DAVID G. HUEY Director July 16, 2002
------------------------------------------------
David G. Huey
/s/ JOHN R. BLOCK Director July 16, 2002
------------------------------------------------
John R. Block
</Table>
II-23
INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS
FINANCIAL STATEMENT SCHEDULE
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
Report of Independent Auditors on Financial Statement
Schedule
II Valuation and Qualifying Accounts
</Table>
EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Articles of Incorporation of Block Communications, Inc. (the
"Company"), as amended to date.
3.2 Code of Regulations of the Company.
3.3 Close Corporation Operating Agreement, dated December 12,
1988, by and among the Company (f/n/a Blade Communications,
Inc.) and the holders of all of its issued and outstanding
stock.
3.4 Agreement to Amend and Extend Close Corporation Operating
Agreement, dated October 15, 1994, by and among the Company
(f/n/a Blade Communications, Inc.) and the holders of all of
its issued and outstanding stock.
4.1 Indenture, dated as of April 18, 2002, among the Company,
the Guarantors and Wells Fargo Bank Minnesota, National
Association, as trustee.
4.2 Purchase Agreement, dated April 11, 2002, among the Company,
the Guarantors and the initial purchasers of the notes.
4.3 Registration Rights Agreement, dated April 18, among the
Company, the Guarantors and the initial purchasers of the
notes.
5.1 Opinion of Reed Smith, LLP.
5.2 Opinion of Fritz Byers, Esq.
8.1 Tax opinion of Reed Smith, LLP.
10.1 Credit Agreement, dated as of May 15, 2002, by and among the
Company and Bank of America, N.A., as Administrative Agent.
10.2 Guaranty Agreement, dated as of May 15, 2002, by and among
each of the Guarantors and Bank of America, N.A., as
Administrative Agent.
10.3 Security Agreement, dated as of May 15, 2002, by and among
the Company, each of the Guarantors and Bank of America,
N.A., as Administrative Agent.
10.4 Intellectual Property Security Agreement, dated as of May
15, 2002, by and among the Company, each of the Guarantors
and Bank of America, N.A., as Administrative Agent.
10.5 Assignment of Patents, Trademarks and Copyrights, undated,
by and among the Company, each of the Guarantors and Bank of
America, N.A., as Administrative Agent.
10.6 Securities Pledge Agreement, by and among the Company, each
Guarantor that owns Subsidiary Securities, and Bank of
America, N.A., as Administrative Agent.
10.7 Mortgage, dated May 15, 2002, between Block Communications,
Inc. and Bank of America, N.A., as Agent.
10.8 Phantom Stock Plan, dated December 13, 1999, for Block
Communications, Inc. (f/n/a Blade Communications, Inc.).
10.9 Incentive Compensation Plan, dated January 1, 1991, for
Block Communications, Inc. (f/n/a Blade Communications,
Inc.).
10.10 Amendment to and Restatement of Stock Redemption Agreement,
dated December 12, 1991.
10.11 Shareholders' Agreement.
12.1 Statement re computation of ratios.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Reed Smith LLP (included in Exhibits 5.1 and
8.1).
23.3 Consent of Fritz Byers, Esq. (included in Exhibit 5.2).
25.1 Statement of Eligibility under the Trust Indenture Act of
1939 of Wells Fargo Bank Minnesota, National Association
(Form T-1).
99.1 Letter of Transmittal with Respect to the Exchange Offer.
</Table>
II-24
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
99.2 Notice of Guaranteed Delivery with Respect to the Exchange
Offer.
99.3 Letter to DTC Participants Regarding the Exchange Offer.
99.4 Letter to Beneficial Holders Regarding the Exchange Offer.
</Table>
II-25
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
BLOCK COMMUNICATIONS, INC.
We have audited the consolidated financial statements of Block
Communications, Inc. and subsidiaries (the "Company") as of December 31, 2001
and 2000, and for each of the three years in the period ended December 31, 2001,
and have issued our report thereon dated February 22, 2002 (included elsewhere
in this Registration Statement). Our audits also included the financial
statement schedule listed in Item 21(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
February 22, 2002
Toledo, Ohio
BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
BALANCE AT CHARGED TO COSTS BALANCE AT
JANUARY 1, 2001 AND EXPENSES DEDUCTIONS(1) DECEMBER 31, 2001
--------------- ---------------- ------------- -----------------
Allowance for doubtful receivables
and discounts.................... $4,674 5,066 4,879 $4,861
Tax valuation allowance............ -- 587 -- 587
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO COSTS BALANCE AT
JANUARY 1, 2000 AND EXPENSES DEDUCTIONS(1) DECEMBER 31, 2000
--------------- ---------------- ------------- -----------------
Allowance for doubtful receivables
and discounts.................... $3,695 2,287 1,308 $4,674
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO COSTS BALANCE AT
JANUARY 1, 1999 AND EXPENSES DEDUCTIONS(1) DECEMBER 31, 1999
--------------- ---------------- ------------- -----------------
Allowance for doubtful receivables
and discounts.................... $2,806 2,034 1,145 $3,695
</Table>
- ---------------
(1) Deductions represent accounts receivable written off as uncollectible or
credits given.