U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from ________________ to ____________________
Commission File Number 0-22439
FISHER COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-0222175
- -------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1525 One Union Square
600 University Street
Seattle, Washington 98101-3185
(Address of Principal Executive Offices) (Zip Code)
(206) 404-7000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $1.25 par value, outstanding as of March 31, 2001: 8,558,042
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The following Consolidated Financial Statements are presented for the
Registrant, Fisher Communications, Inc. and its subsidiaries.
1. Consolidated Statement of Operations:
Three months ended March 31, 2001 and 2000.
2. Consolidated Balance Sheet:
March 31, 2001 and December 31, 2000.
3. Consolidated Statement of Cash Flows:
Three months ended March 31, 2001 and 2000.
4. Consolidated Statement of Comprehensive Income:
Three months ended March 31, 2001 and 2000.
5. Notes to Consolidated Financial Statements.
2
ITEM 1 - FINANCIAL STATEMENTS
FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended
March 31
2001 2000
- -----------------------------------------------------------------------------
(in thousands, except share and per share amounts)
(Unaudited)
Revenue
Broadcasting $ 35,185 $ 44,833
Real estate 4,433 3,147
- -----------------------------------------------------------------------------
39,618 47,980
- -----------------------------------------------------------------------------
Costs and expenses
Cost of products and services sold 22,022 20,750
Selling expenses 4,836 5,320
General and administrative expenses 12,894 12,445
- -----------------------------------------------------------------------------
39,752 38,515
- -----------------------------------------------------------------------------
Income from operations (134) 9,465
Other income, net 1,244 1,168
Interest expense 4,646 5,458
- -----------------------------------------------------------------------------
Income from continuing operations
before income taxes (3,536) 5,175
Provision for federal and state income taxes (1,221) 1,789
- -----------------------------------------------------------------------------
Income from continuing operations (2,315) 3,386
Loss from discontinued operations of milling
businesses, net of income tax benefit of $640,000 - (1,188)
- -----------------------------------------------------------------------------
Net income (loss) $ (2,315) $ 2,198
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Income per share:
From continuing operations $ (0.27) $ 0.40
From discontinued operations - (0.14)
- -----------------------------------------------------------------------------
Net income $ (0.27) $ 0.26
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Income per share assuming dilution:
From continuing operations $ (0.27) $ 0.39
From discontinued operations - (0.13)
- -----------------------------------------------------------------------------
Net income $ (0.27) $ 0.26
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Weighted average shares outstanding 8,558 8,551
Weighted average shares outstanding assuming dilution 8,558 8,574
Dividends declared per share $ 0.26 $ 0.26
See accompanying notes to consolidated financial statements.
3
FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31 December 31
2001 2000
- ----------------------------------------------------------------------------------------------------------
(in thousands, except share and per share amounts) (Unaudited)
ASSETS
Current Assets
Cash and short-term cash investments $ 2,409 $ 218
Receivables 31,432 40,375
Prepaid income taxes 2,360 563
Prepaid expenses 6,629 3,862
Television and radio broadcast rights 6,245 10,253
Net working capital of discontinued operations 11,419 10,526
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Total current assets 60,494 65,797
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Marketable Securities, at market value 87,996 102,080
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Other Assets
Cash value of life insurance and retirement deposits 11,978 11,725
Television and radio broadcast rights 1,016 927
Intangible assets, net of amortization 193,025 194,316
Investments in equity investees 3,106 3,057
Other 11,029 10,017
Net noncurrent assets of discontinued operations 38,093 39,236
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258,247 259,278
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Property, Plant and Equipment, net 221,911 219,649
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$ 628,648 $ 646,804
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 27,948 $ 25,642
Trade accounts payable 3,532 4,981
Accrued payroll and related benefits 8,344 10,458
Television and radio broadcast rights payable 5,965 9,002
Dividends payable 2,227 2,225
Other current liabilities 3,659 3,368
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Total current liabilities 51,675 55,676
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Long-term Debt, net of current maturities 260,828 257,413
- ----------------------------------------------------------------------------------------------------------
Other Liabilities
Accrued retirement benefits 13,743 13,638
Deferred income taxes 48,505 53,648
Television and radio broadcast rights payable, long-term portion 797 794
Other liabilities 5,819 2,934
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68,864 71,014
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Stockholders' Equity
Common stock, shares authorized 12,000,000, $1.25 par value;
issued 8,558,042 10,698 10,698
Capital in excess of par 2,140 2,140
Deferred compensation (114) (135)
Accumulated other comprehensive income - net of income taxes:
Unrealized gain on marketable securities 56,438 65,593
Net loss on interest rate swap (1,744)
Retained earnings 179,863 184,405
- ----------------------------------------------------------------------------------------------------------
247,281 262,701
- ----------------------------------------------------------------------------------------------------------
$ 628,648 $ 646,804
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See accompanying notes to consolidated financial statements.
4
FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended
March 31
2001 2000
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (2,315) $ 2,198
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 6,905 5,532
Net (gain) loss in equity investees 489 (6)
Other (63) 956
Change in operating assets and liabilities
Receivables 9,336 10,218
Inventories 168 2,510
Prepaid income taxes (2,013) (62)
Prepaid expenses (3,062) (363)
Cash value of life insurance and retirement deposits (261) (232)
Other assets (999) 444
Trade accounts payable, accrued payroll and related
benefits and other current liabilities (4,272) (3,280)
Accrued retirement benefits 151 229
Other liabilities 876 297
Amortization of television and radio broadcast rights 4,102 4,079
Payments for television and radio broadcast rights (3,217) (3,714)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,825 18,806
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Cash flows from investing activities
Proceeds from sale of property, plant and equipment 2 302
Investments in equity investees (537)
Purchase of property, plant and equipment (6,652) (16,977)
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Net cash used in investing activities (7,187) (16,675)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings under notes payable 8,925 4,345
Payments on borrowing agreements and mortgage loans (3,204) (4,365)
Proceeds from exercise of stock options 19
Cash dividends paid (2,225) (2,224)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,496 (2,225)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and short-term cash investments 2,134 (94)
Cash and short-term cash investments, beginning of period 275 3,609
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Cash and short-term cash investments, end of period $ 2,409 $ 3,515
- ----------------------------------------------------------------------------------------------------------------
5
FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three months ended
March 31
2001 2000
- --------------------------------------------------------------------------------
(In thousands)
(Unaudited)
Net income (loss) $ (2,315) $ 2,198
Other comprehensive income:
Cumulative effect of accounting change, net of
income tax benefit of $489 (907)
Unrealized gain (loss) on marketable securities (14,084) 4,085
Net loss on interest rate swap (1,288)
Effect of income taxes 5,380 (1,430)
- --------------------------------------------------------------------------------
Comprehensive income (loss) $ (13,214) $ 4,853
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
FISHER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to state fairly the
consolidated financial position, results of operations, and cash flows of
Fisher Communications, Inc. (the "Company") as of and for the periods
indicated. The Company presumes that users of the interim financial
information herein have read or have access to the Company's audited
consolidated financial statements and that the adequacy of additional
disclosure needed for a fair presentation, except in regard to material
contingencies or recent subsequent events, may be determined in that
context. Accordingly, footnote and other disclosures which would
substantially duplicate the disclosures contained in Form 10-K for the year
ended December 31, 2000 filed on March 14, 2001 by the Company have been
omitted. The financial information herein is not necessarily representative
of a full year's operations. Certain 2000 balances have been reclassified to
conform to 2001 classifications.
Accounting Change
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), as amended. This pronouncement establishes
accounting and reporting standards for derivative instruments, and requires
that an entity recognize those items as assets or liabilities in the
financial statements and measure them at their fair value. If the derivative
is designated as a cash flow hedge, the effective portion of the change in
fair value of the derivative is recorded in other comprehensive income, and
the ineffective portion is recorded in earnings. Changes in the fair value
of derivatives not designated as hedges are recognized in earnings. Grain
forward and future contracts are entered into by the milling subsidiary to
protect the Company from risks related to buy grain and sell flour and are
not designated as hedges. The Company uses an interest rate swap, designated
as a cash flow hedge, to manage exposure to interest rate risks. In
accordance with FAS 133, the effective portion of the change in fair value
of the swap is recorded in other comprehensive income. Adoption of FAS 133
resulted in a reduction to other comprehensive income of $907,000, net of
income tax of $489,000, which is reported as the cumulative effect of the
accounting change. There was no effect on net income.
The effective portion of the change in fair value of the interest rate swap
from January 1, 2001 through March 31, 2001 is included in other
comprehensive income. The fair value of the interest rate swap is included
in other liabilities.
2. Discontinued Operations
In March, 2000, U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray) was engaged
as a financial advisor to assist management with the sale of Fisher's flour
milling and bakery products distribution operations (Fisher Mills). Piper
Jaffray has identified certain interested buyers and has provided meaningful
information regarding the range of proceeds expected to be received. Based
on such information, on October 27, 2000 the Board of Directors authorized
management to negotiate one or more transactions with third parties with
respect to a sale of Fisher Mills, with terms of a specific transaction
subject to approval of the Board. Accordingly, the operating results, net
working capital, and net noncurrent assets of Fisher Mills are reported as
discontinued operations in Management's Discussion and Analysis of Financial
Position and Results of Operations and the accompanying financial
statements. On March 16, 2001 the Company and Pendleton Flour Mills, L.L.C.
entered into an Asset Purchase Agreement for the sale of the assets used in
the Seattle, Blackfoot, Modesto, and Portland flour milling operations for
$31 million plus working capital as of the closing date. The transaction
closed on April 30. Discussions with an interested party for sale of the
distribution businesses are continuing.
Net working capital of discontinued operations includes cash, receivables,
inventories, and prepaid expenses, less accounts payable and current
liabilities relating to the discontinued milling operations. Net noncurrent
assets of discontinued operations includes the estimated fair value of
property, plant and equipment and other noncurrent assets less noncurrent
liabilities relating to the discontinued milling operations.
Sales and other revenue of the discontinued milling operations for the three
month periods ended March 31, 2001 and 2000 were $26,758,000 and
$27,193,000, respectively.
7
3. Income per share is computed as follows:
Three months ended
March 31
2001 2000
(Unaudited)
Weighted average common shares
outstanding during the period 8,558,042 8,550,764
Dilutive effect of:
Restricted stock rights - 12,757
Stock options - 10,091
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Weighted average shares
outstanding assuming dilution 8,558,042 8,573,612
------------- -----------
Income from continuing operations $ (2,315) $ 3,386
Loss from discontinued operations of milling
businesses, net of income tax benefit $ - $ (1,188)
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Net income (loss) $ (2,315) $ 2,198
------------- -----------
Income per share:
From continuing operations $ (0.27) $ 0.40
From discontinued operations $ - $ (0.14)
------------- -----------
Net income $ (0.27) $ 0.26
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Income per share assuming dilution:
From continuing operations $ (0.27) $ 0.39
From discontinued operations $ - $ (0.13)
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Net income $ (0.27) $ 0.26
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The dilutive effect of 12,987 restricted stock rights are excluded for the
three months ended March 31, 2001, and options to purchase 490,988 shares
and 251,125 shares are excluded for the three months ended March 31, 2001
and 2000, respectively, because such rights and options were anti-dilutive.
4. Segment information:
The operations of the Company have been organized into two principal
business segments; broadcasting and real estate. Intersegment sales are not
significant. Income from operations by business segment consist of revenue
less operating expenses. In computing income from operations by business
segment, other income, net, has not been added, and interest expense, income
taxes and unusual items have not been deducted. Identifiable assets by
business segment are those assets used in the operations of each segment.
Corporate assets are principally marketable securities.
8
Identifiable assets for each segment are as follows:
March 31 December 31
2001 2000
---------- -----------
Broadcasting $ 343,870 $ 356,230
Real estate 131,054 127,681
Corporate, eliminations and other 104,140 113,131
---------- -----------
Continuing operations 579,064 597,042
Discontinued operations 49,512 49,762
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$ 628,576 $ 646,804
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Income from operations for each segment are as follows:
March 31
2001 2000
---------- -----------
Broadcasting $ 698 $ 9,833
Real estate 1,547 1,153
Corporate, eliminations and other (2,379) (1,521)
---------- -----------
Continuing operations (134) 9,465
Discontinued operations - (1,341)
---------- -----------
$ (134) $ 8,124
---------- -----------
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this Form
10-Q. Except for the historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties, such as our
objectives, expectations and intentions. Our actual results could differ
materially from results that may be anticipated by such forward-looking
statements and discussed elsewhere herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, those discussed under the caption "Additional Factors That May Affect Our
Business, Financial Condition And Future Results", and those discussed in our
Form 10-K for the year ended December 31, 2000. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. We undertake no obligation to revise any forward-
looking statements in order to reflect events or circumstances that may
subsequently arise. Readers are urged to carefully review and consider the
various disclosures made in this report and in our other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect our business, prospects and results of
operations.
This discussion is intended to provide an analysis of significant trends and
material changes in the Company's financial position and operating results
during the three month period ended March 31, 2001 compared with the similar
period in 2000.
In March, 2000, U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray) was engaged as a
financial advisor to assist management with the sale of Fisher's flour milling
and bakery products distribution operations (Fisher Mills). Piper Jaffray has
identified certain interested buyers and has provided meaningful information
regarding the range of proceeds expected to be received. Based on such
information, on October 27, 2000 the Board of Directors authorized management to
negotiate one or more transactions with third parties with respect to a sale of
Fisher Mills, with terms of a specific transaction subject to approval of the
Board. Accordingly, the operating results, net working capital, and net
noncurrent assets of Fisher Mills are reported as discontinued operations in
Management's Discussion and Analysis of Financial Position and Results of
Operations and the accompanying financial statements. On March 16, 2001 the
Company and Pendleton Flour Mills, L.L.C. entered into an Asset Purchase
Agreement for the sale of the assets used in the Seattle, Blackfoot, Modesto,
and Portland flour milling operations for $31 million plus working capital as of
the closing date. The transaction closed on April 30. Discussions with an
interested party for sale of the distribution businesses are continuing.
On August 1, 2000, the broadcasting subsidiary completed the sale of its wholly
owned membership interest in a limited liability company, which owned and
operated KJEO-TV in Fresno, CA, for $60 million.
Each of these transactions had an effect on the comparative results of
operations in terms of revenue, costs and expenses, and operating income
referred to in the following analysis.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three months ended March 31, 2001 showed a
consolidated loss of $2,315,000. Net income for the three months ended March 31,
2000 was $2,198,000 including a $1,188,000 loss from the milling businesses,
which is reported as discontinued operations. First quarter 2001 broadcasting
revenue declined $9,648,000 compared with the same period of last year due
largely to a softening economy. Approximately $1,800,000 of that decline
resulted from the absence of political revenue that contributed to last year's
results. Total expenses relating to broadcasting operations, including interest
and depreciation, decreased approximately $2,400,000. Operating income from the
real estate segment improved compared with last year's first quarter due to the
completion of phase one and start up of operations at Fisher Plaza. Corporate
expenses increased primarily due to reassignment of personnel and other costs
associated with a restructuring. Interest expense declined as a result of
reduced borrowing and lower interest rates.
The first clients of the Fisher Plaza project began moving into that facility
during May 2000. Financial results for the project are included in the
broadcasting and real estate segments.
10
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenue
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$39,618,000 -17.4% $47,980,000
First quarter broadcasting revenue declined 21.5% compared with first quarter
2000, while revenue from real estate operations increased 40.8%. Broadcasting
and real estate operations are discussed further on pages 12 and 13.
Cost of products and services sold
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$22,022,000 6.1% $20,750,000
Percentage of revenue 55.6% 43.3%
The cost of products and services sold consists primarily of costs to acquire,
produce, and promote broadcast programming, and costs to operate the properties
held by the real estate segment. These costs are relatively fixed in nature, and
do not necessarily vary with revenue. First quarter 2001 operating expenses of
the broadcasting segment were only modestly higher than a year ago, after
adjusting first quarter 2000 to exclude the Fresno television station sold in
August, 2000. However, depreciation expense increased approximately $1,400,000
largely due to KOMO TV's new broadcast equipment and studios. The real estate
segment also experienced increased operating costs primarily due to depreciation
of Fisher Plaza.
Selling expenses
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$4,836,000 -9.1% $5,320,000
Percentage of broadcasting
revenue 13.7% 11.9%
Selling expenses are incurred by the broadcasting segment. The principal cause
of the reduction in selling expenses is the overall decrease in revenue, which
resulted in decreased sales department compensation, primarily in the form of
sales commissions. If the selling expenses incurred by the Fresno station during
the first three months of 2000 were excluded, the percentage decrease would be
5.0%.
General and administrative expenses
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$12,894,000 3.6% $12,445,000
Percentage of revenue 32.5% 25.9%
General and administrative expenses declined at the broadcasting segment largely
due to cessation of benefit accruals for the segment's defined benefit plan,
which is in the process of being terminated, and reduction in personnel costs as
a result of the retirement of two officers. The real estate segment incurred
increased costs related to development of new business opportunities, which were
partially offset by reduced personnel costs as certain officers were transferred
to the corporate segment in connection with a corporate restructuring. The
corporate segment incurred increased costs in connection with reassignment of
personnel and other costs associated with a restructuring.
Other income, net
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$1,244,000 6.5% $1,168,000
Other income, net includes dividends received on marketable securities and, to a
lesser extent, interest and miscellaneous income.
11
Interest expense
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$4,646,000 -14.9% $5,458,000
Interest expense includes interest on borrowed funds, loan fees, net payments
under a swap agreement, and is net of interest allocated to discontinued
operations based on net borrowing of the discontinued operations. The decrease
in 2001 interest expense compared with 2000 is attributable to lower amounts
borrowed and to lower interest rates. Interest incurred in connection with funds
borrowed to finance construction of Fisher Plaza and other significant capital
projects is capitalized as part of the cost of the related project.
Provision for federal and state income taxes
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$(1,221,000) -168.2% $1,789,000
Effective tax rate 34.5% 34.6%
The provision for federal and state income taxes varies directly with pre-tax
income.
Other comprehensive income
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$(10,899,000) -510.5% $2,655,000
Other comprehensive income includes unrealized gain or loss on our marketable
securities and the effective portion of the change in fair value of an interest
rate swap agreement, and is net of income taxes. During the three months ended
March 31, 2001 the value of the marketable securities declined $9,155,000, net
of tax. A significant portion of the marketable securities consists of 3,002,376
shares of SAFECO Corporation. The per share market price of SAFECO Corporation
common stock was $32.88 at December 31, 2000, $28.19 at March 31, 2001, $24.88
at December 31, 1999, and $25.56 at March 31, 2000.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133), as amended. This pronouncement establishes accounting and reporting
standards for derivative instruments, and requires that an entity recognize
those items as assets or liabilities in the financial statements and measure
them at their fair value. We use an interest rate swap, designated as a cash
flow hedge, to manage exposure to interest rate risks. The effective portion of
the change in fair value of the swap is recorded in other comprehensive income.
At March 31, 2001, the fair value of the swap was $-2,684,000, or $-1,744,000
net of tax effects.
Unrealized gains and losses are reported as accumulated other comprehensive
income, a separate component of stockholders' equity.
Broadcasting Operations
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenue
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$35,185,000 -21.5% $44,833,000
Comparability between the periods is affected by the sale, in August 2000, of
the Fresno television station. If, for purposes of comparison, revenue from the
Fresno station is excluded from the 2000 revenue, the decrease would have been
- -17.2%. In contrast to an extremely strong first quarter in 2000 which included
significant political activity, decreased advertiser demand and declining spot
rates resulted in a decline in first-quarter revenue for broadcasting
operations. KOMO TV in Seattle and KATU Television in Portland experienced
revenue declines of 22.2% and 17.3%, respectively. Revenue from the smaller
market television stations declined 9.4% (adjusted to
12
exclude the Fresno station). Revenue from the Seattle and Portland radio groups
declined 14.6% and 28.6%, respectively, while revenue from the small market
radio operations was unchanged from the year ago period.
Income from operations
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$698,000 -92.9% $9,833,000
Percentage of revenue 2.0% 21.9%
The decline in first-quarter income from operations compared with last year, is
primarily due to the decline in revenue discussed above. When adjusted to
exclude the Fresno television station, operating expenses in first quarter 2001
were only modestly higher than a year ago, however depreciation expense
increased approximately $1,400,000 largely due to KOMO TV's new broadcast
equipment and studios.
Real Estate Operations
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenue
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$4,433,000 40.8% $3,147,000
The real estate segment includes the real estate subsidiary and the portion of
the Fisher Plaza project not occupied by KOMO TV. First quarter 2001 revenue of
the real estate segment increased as a result of rent increases, lease
cancellation fees, and rent received from Fisher Plaza.
Income from operations
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$1,547,000 34.2% $1,153,000
Percentage of revenue 34.9% 36.6%
The increase in operating income for the real estate segment is primarily
attributable to the operations of the portion of Fisher Plaza not occupied by
KOMO TV, partially offset by costs related to development of new business
opportunities. Exclusive of the Fisher Industrial Technology Center, which was
completed in the Fall of 2000 but is not yet occupied by tenants, average
occupancy for the first quarter of 2001 was 97.9% compared with 98.1% for the
first quarter of 2000.
Discontinued Operations
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Loss from discontinued operations of milling businesses
- --------------------------------------------------------------------------------
Three months ended March 31 2001 % Change 2000
$ - $(1,188,000)
The loss from discontinued operations of milling businesses for the three months
ended March 31, 2000 includes results of operations of the milling businesses
amounting to $1,828,000, net of income tax benefit of $640,000. The discontinued
milling operations did not impact operating results for the first quarter of
2001 as estimated operating results of the discontinued operations from October
1, 2000 through the date of disposal were accrued in the third quarter of 2000.
Liquidity and Capital Resources
As of March 31, 2001 we had working capital of $8,818,000 and cash totaling
$2,409,000. We intend to finance working capital, debt service, capital
expenditures, and dividend requirements primarily through operating activities.
13
However, we will consider using available lines of credit to fund acquisition
activities and significant real estate project development activities. In this
regard, we have a five-year unsecured revolving line of credit (revolving line
of credit) with two banks for a maximum amount of $100,000,000 to finance
construction of the Fisher Plaza project and for general corporate purposes. The
revolving line of credit provides that borrowings under the line will bear
interest at variable rates. The revolving line of credit also places limitations
on the disposition or encumbrance of certain assets and requires us to maintain
certain financial ratios. At March 31, 2001, $32,000,000 was available under the
revolving line of credit.
In March, 2000, U.S. Bancorp Piper Jaffray Inc. (Piper Jaffray) was engaged as a
financial advisor to assist management with the sale of Fisher's flour milling
and bakery products distribution operations (Fisher Mills). Piper Jaffray has
identified certain interested buyers and has provided meaningful information
regarding the range of proceeds expected to be received. Based on such
information, on October 27, 2000 the Board of Directors authorized management to
negotiate one or more transactions with third parties with respect to a sale of
Fisher Mills, with terms of a specific transaction subject to approval of the
Board. Accordingly, the operating results, net working capital, and net
noncurrent assets of Fisher Mills are reported as discontinued operations in the
accompanying financial statements. On March 16, 2001 the Company and Pendleton
Flour Mills, L.L.C. entered into an Asset Purchase Agreement for the sale of the
assets used in the Seattle, Blackfoot, Modesto, and Portland flour milling
operations for $31 million plus working capital as of the closing date. The
transaction closed on April 30. Discussions with an interested party for sale of
the distribution businesses are continuing.
Net cash provided by operating activities during the three months ended March
31, 2001 was $5,825,000. Net cash provided by operating activities consists of
our net income, increased by non-cash expenses such as depreciation and
amortization, and adjusted by changes in operating assets and liabilities. Net
cash used in investing activities during the period was $7,187,000, principally
$6,652,000 for purchase of property, plant and equipment (including the Fisher
Plaza project). Net cash provided by financing activities was $3,496,000,
comprised of net borrowings under notes payable of $8,925,000 less payments of
$3,204,000 on borrowing agreements and mortgage loans and cash dividends paid to
stockholders totaling $2,225,000 or $.26 per share.
ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND FUTURE
RESULTS
The following risk factors and other information included in this Quarterly
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results and cash flows could be materially
adversely affected.
Our proposed restructuring may cause disruption of operations and distraction of
management, and may not achieve the desired results.
We have begun to restructure our corporate enterprise with the objective of
allowing greater functional integration of core competencies and improving
operational efficiencies. This restructuring may disrupt operations and distract
management, which could have a material adverse effect on our operating results.
We cannot predict whether this restructuring will achieve the desired benefits,
or whether our company will be able to fully integrate our broadcast
communications, media services and other operations. We cannot assure you that
the restructuring will be completed in a timely manner or that any benefits of
the restructuring will justify its costs. We may incur costs in connection with
the restructuring in the areas of professional fees, marketing expenses,
employment expenses, and administrative expenses. In addition, we may incur
additional costs which we are unable to predict at this time.
Competition in the broadcasting industry and the rise of alternative
entertainment and communications media may result in losses of audience share
and advertising revenue by our stations.
We cannot assure you that any of our stations will continue to maintain or
increase its current audience ratings or advertising revenue market share.
Fisher Broadcasting's television and radio stations face intense competition
from local network affiliates and independent stations, as well as from cable
and alternate methods of broadcasting brought about by technological advances
and innovations. The stations compete for audiences on the basis of programming
popularity, which has a direct effect on advertising rates. Additional
significant factors affecting a station's competitive position include assigned
frequency and signal strength. The possible rise in popularity of
14
competing entertainment and communications media could also have a materially
adverse effect on Fisher Broadcasting's audience share and advertising revenue.
We cannot predict either the extent to which such competition will materialize
or, if such competition materializes, the extent of its effect on our business.
An economic downturn in the Seattle, Washington or Portland, Oregon areas could
adversely affect our operations, revenue, cash flow and earnings.
Our operations are concentrated primarily in the Pacific Northwest. The Seattle,
Washington and Portland, Oregon markets are particularly important for our
financial well-being. Operating results for the first quarter of 2001 were
adversely impacted by a softening economy, and continued economic downturn in
these markets could have a material adverse effect on our operations and
financial condition. Because our costs of products and services are relatively
fixed, we will likely be unable to significantly reduce costs if our revenues
decrease. Our net income therefore would be substantially reduced if lower
revenues continue as a result of an economic downturn in our key markets.
Our efforts to develop new business opportunities are subject to technological
risk and may not be successful, or results may take longer than expected to
realize.
We are developing new opportunities for creating, aggregating and distributing
content through non-broadcast media channels, such as the Internet, cell phones,
and web-enabled personal digital assistants. The success of our efforts is
subject to technological innovations and risks beyond our control, so that the
anticipated benefits may take longer than expected to realize. In addition, we
have limited experience in non-broadcast media, which may result in errors in
the conception, design or implementation of a strategy to take advantage of the
opportunities available in that area. We therefore cannot give any assurance
that our efforts will result in successful products or services.
The FCC's extensive regulation of the broadcasting industry limits our ability
to own and operate television and radio stations and other media outlets.
The broadcasting industry is subject to extensive regulation by the Federal
Communications Commission ("FCC") under the Communications Act of 1934, as
amended. Compliance with and the effects of existing and future regulations
could have a material adverse impact on us. Issuance, renewal or transfer of
broadcast station operating licenses requires FCC approval, and we cannot
operate our stations without FCC licenses. Failure to observe FCC rules and
policies can result in the imposition of various sanctions, including monetary
forfeitures, the grant of short-term (i.e., less than the full eight years)
license renewals or, for particularly egregious violations, the denial of a
license renewal application or revocation of a license. While the majority of
such licenses are renewed by the FCC, there can be no assurance that Fisher
Broadcasting's licenses will be renewed at their expiration dates, or, if
renewed, that the renewal terms will be for eight years. If the FCC decides to
include conditions or qualifications in any of our licenses, we may be limited
in the manner in which we may operate the affected stations.
The Communications Act and FCC rules impose specific limits on the number of
stations and other media outlets an entity can own in a single market. The FCC
attributes interests held by, among others, an entity's officers, directors and
stockholders to that entity for purposes of applying these ownership
limitations. The existing ownership rules or proposed new rules may prevent us
from acquiring additional stations in a particular market. We may also be
prevented from engaging in a swap transaction if the swap would cause the other
company to violate these rules.
Dependence on key personnel may expose us to additional risks.
Our business is dependent on the performance of certain key employees, including
our chief executive officer and other executive officers. We also employ several
on-air personalities who have significant loyal audiences in their respective
markets. A substantial majority of our executive officers do not have employment
contracts with us. We can give no assurance that all such key personnel will
remain with us. The loss of any key personnel could adversely affect our
operations and financial results.
15
The non-renewal or modification of affiliation agreements with major television
networks could harm our operating results.
Our television stations' affiliation with one of the four major television
networks (ABC, CBS, NBC and FOX) has a significant impact on the composition of
the stations' programming, revenues, expenses and operations. We cannot give any
assurance that we will be able to renew our affiliation agreements with the
networks at all, or on satisfactory terms. In recent years, the networks have
been attempting to change affiliation arrangements in manners that would
disadvantage affiliates. The non-renewal or modification of any of the network
affiliation agreements could have a material adverse effect on our operating
results.
A network might acquire a television station in one of our markets, which could
harm our business and operating results.
If a network acquires a television station in a market in which we own a station
affiliated with that network, the network will likely decline to renew the
affiliation agreement for our station in that market, which could materially and
adversely affect our business and results of operations.
Our operations may be adversely affected by power outages, increased energy
costs or earthquakes in the Pacific Northwest.
Our corporate headquarters and a significant portion of our operations are
located in the Pacific Northwest. The Pacific Northwest has from time-to-time
experienced earthquakes and experienced a significant earthquake on February 28,
2001 which caused damage to some of our facilities, including Fisher Mills. We
do not know the ultimate impact on our operations of being located near major
earthquake faults, but an earthquake could materially adversely affect our
operating results. In addition, due to the ongoing power shortages in
California, the Pacific Northwest may experience power shortages or outages and
increased energy costs. Power shortages or outages could cause disruptions to
our operations, which in turn may result in a material decrease in our revenues
and earnings and have a material adverse effect on our operating results. Power
shortages or increased energy costs in the Northwest could adversely affect the
region's economy and our advertising, which could reduce our advertising
revenues. Our insurance coverage may not be adequate to cover the losses and
interruptions caused by earthquakes and power outages.
Our development, ownership and operation of real property is subject to risks,
including those relating to the economic climate, local real estate conditions,
potential inability to provide adequate management, maintenance and insurance,
potential collection problems, reliance on significant tenants, and regulatory
risks.
Revenue and operating income from our properties and the value of our properties
may be adversely affected by the general economic climate, the local economic
climate and local real estate conditions, including prospective tenants'
perceptions of attractiveness of the properties and the availability of space in
other competing properties. We are developing the second building at Fisher
Plaza which will entail significant investment by us. An economic downturn in
the Seattle area could adversely affect our ability to lease the space of our
properties on attractive terms or at all, which could have a material adverse
effect on our operating results. Other risks relating to our real estate
operations include the potential inability to provide adequate management,
maintenance and insurance, and the potential inability to collect rent due to
bankruptcy or insolvency of tenants or otherwise. Several of our properties are
leased to tenants that occupy substantial portions of such properties and the
departure of one or more of them or the inability of any of them to pay their
rents or other fees could have a significant adverse effect on our real estate
revenues. Real estate income and values may also be adversely affected by such
factors as applicable laws and regulations, including tax and environmental
laws, interest rate levels and the availability of financing. We carry
comprehensive liability, fire, extended coverage and rent loss insurance with
respect to our properties. There are, however, certain losses that may be either
uninsurable, not economically insurable or in excess of our current insurance
coverage limits. If an uninsured loss occurs with respect to a property, it
could materially and adversely affect our operating results.
16
We have a substantial investment in the common stock of SAFECO.
As a 2.4% stockholder of the common stock of SAFECO, we will suffer a reduction
in the value of our marketable securities assets if the market price of SAFECO
common stock significantly declines. In addition, if SAFECO reduces its periodic
dividends, it will negatively affect our revenue, cash flow and earnings. In
February 2001, SAFECO reduced its quarterly dividend from $0.37 to $0.185 per
share. SAFECO's common stock price has been volatile in recent years, and ranged
from $21.38 to $29.39 per share during 2001.
Our debt service consumes a substantial portion of the cash we generate, but our
ability to generate cash depends on many factors beyond our control.
We currently use a significant portion of our operating cash flow to service our
debt. Our leverage makes us vulnerable to an increase in interest rates or a
downturn in the operating performance of our businesses or a decline in general
economic conditions. It further limits our ability to obtain additional
financing for working capital, capital expenditures, acquisitions, debt service
requirements or other purposes, and may limit our ability to pay dividends.
Finally, it inhibits our ability to compete with competitors who are less
leveraged than we are, and it restrains our ability to react to changing market
conditions, changes in our industry and economic downturns.
Prevailing economic conditions and financial, business and other factors, many
of which are beyond our control, will affect our ability to satisfy our debt
obligations. If in the future we cannot generate sufficient cash flow from
operations to meet our obligations, we may need to refinance our debt, obtain
additional financing, forego or delay acquisitions and capital expenditures or
sell assets. Any of these actions could adversely affect the value of our common
stock. We cannot assure you that we will generate sufficient cash flow or be
able to obtain sufficient funding to satisfy our debt service requirements.
Antitrust law and other regulatory considerations could prevent or delay
expansion of our business or adversely affect our revenues.
The completion of any future transactions we may consider will likely be subject
to the notification filing requirements, applicable waiting periods and possible
review by the Department of Justice or the Federal Trade Commission under the
HSR Act. Any television or radio station acquisitions or dispositions will be
subject to the license transfer approval process of the FCC. Review by the
Department of Justice or the Federal Trade Commission may cause delays in
completing transactions and, in some cases, result in attempts by these agencies
to prevent completion of transactions or to negotiate modifications to the
proposed terms. Review by the FCC, particularly review of concentration of
market revenue share, may also cause delays in completing transactions. Any
delay, prohibition or modification could adversely affect the terms of a
proposed transaction or could require us to abandon an acquisition or
disposition opportunity. In addition, campaign finance reform laws or
regulations could result in a reduction in funds being spent on advertising in
certain political races, which would adversely affect our revenues and results
of operations in election years.
Our efforts to sell our bakery distribution assets may not be successful or may
take longer than expected.
We have been seeking to sell our flour milling and bakery distribution assets in
order to focus our resources on our remaining businesses and to focus on
becoming a more fully integrated communications and media enterprise. Sale of
our flour milling assets was concluded on April 30, 2001. Our efforts to sell
the bakery distribution assets may not be successful, or may take longer than
expected. Delay or failure of our efforts to sell the food distribution assets
could also adversely affect our ability to retain personnel and customers.
The food manufacturing and distribution industry is subject to the risks
including competition, regulation, potential product liability, supply risks,
and dependence on third parties.
The food manufacturing and distribution industry is subject to significant risk.
Competition in the food industry is intense. Food production is a heavily
regulated industry, and federal laws or regulations promulgated by the Food and
Drug Administration, or agencies having jurisdiction at the state level, could
adversely effect Fisher Mills' revenues and results of operations. Certain risks
are associated with the production and sale of food products. Food producers and
distributors can be liable for damages if contaminated food causes injury to
consumers. Although
17
flour is not a highly perishable product, Fisher Mills is subject to some risk
as a result of its need for timely and efficient transportation of its products.
There is competition for certain staff, including competition for sales staff in
the food distribution portion of Fisher Mills' business. Loss of key sales staff
can affect and in some instances has significantly and adversely affected
certain food distribution operations. Production and distribution of food
products also depends on transportation and can be adversely affected if a key
carrier serving a facility (e.g., a railroad) experiences operational
difficulties.
Our investments in HDTV and digital broadcasting may not result in revenue
sufficient to justify the investment.
The ultimate success of digital television broadcasting will depend on
programming being produced and distributed in a digital format, the effect of
current or future laws and regulations relating to digital television, including
the FCC's determination with respect to "must-carry" rules for carriage of each
station's digital channel and receiver standards for digital reception, and
public acceptance and willingness to buy new digital television sets. Unless
consumers embrace digital television and purchase enough units to cause home
receiver prices to decline, the general public may not switch to the new
technology, delaying or preventing its ultimate economic viability. Our
investments in HDTV and digital broadcasting may not generate earnings and
revenue sufficient to justify the investments.
The risks inherent in a new business venture may adversely affect the operating
results of Fisher Entertainment.
While Fisher Broadcasting has created programming in the past, we do not have
significant experience in the creation and distribution of programming on the
scale contemplated by Fisher Entertainment. Factors that could materially and
adversely affect the results of Fisher Entertainment include competition from
existing and new competitors, as well as related performance and price
pressures, potential difficulties in relationships with cable and television
networks, failure to obtain air time for the programming produced and the
changing tastes and personnel of the acquirers of programming. There are many
inherent risks in a new business venture such as Fisher Entertainment, including
startup costs, performance of certain key personnel, and the unpredictability of
audience tastes.
Acquisitions could disrupt our business and harm our financial condition and are
in any event uncertain.
We may opportunistically acquire broadcasting and other assets we believe will
improve our competitive position. However, any acquisition may fail to increase
our cash flow or yield other anticipated benefits due to a number of other
risks, including:
. failure or unanticipated delays in completing acquisitions due to
difficulties in obtaining regulatory approval,
. failure of an acquisition to maintain profitability, generate cash flow,
or provide expected benefits,
. difficulty in integrating the operations, systems and management of any
acquired assets or operations,
. diversion of management's attention from other business concerns, and
. loss of key employees of acquired assets or operations.
Some competitors for acquisition of broadcasting or other assets are likely to
have greater financial and other resources than we do. We cannot predict the
availability of acquisition opportunities in which we might be interested.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The market risk in our financial instruments represents the potential loss
arising from adverse changes in financial and commodity market prices and rates.
We are exposed to market risk in the areas of interest rates, securities prices
18
and grain prices. These exposures are directly related to its normal funding and
investing activities and to its use of agricultural commodities in its
operations.
Interest Rate Exposure
Our strategy in managing exposure to interest rate changes is to maintain a
balance of fixed- and variable-rate instruments. See Note 6 to our 2000
consolidated financial statements for information regarding the contractual
interest rates of our debt. We will also consider entering into interest rate
swap agreements at such times as it deems appropriate. At March 31, 2001, the
fair value of our debt is estimated to approximate the carrying amount. Market
risk is estimated as the potential change in fair value resulting from a
hypothetical 10 percent change in interest rates and, at March 31, 2001,
amounted to $1,378,000 on our fixed rate debt which totaled $49,331,000.
We also had $239,186,000 in variable-rate debt outstanding at March 31, 2001. A
hypothetical 10 percent change in interest rates underlying these borrowings
would result in a $1,734,000 annual change in our pre-tax earnings and cash
flows.
We are a party to an interest rate swap agreement fixing the interest rate at
6.52%, plus a margin based on the our ratio of funded debt to operating cash
flow, on a portion of our floating rate debt outstanding under a senior credit
facility. The notional amount of the swap reduces as payments are made on
principal outstanding under the senior credit facility until termination of the
contract on December 30, 2004. At March 31, 2001, the notional amount of the
swap was $78,750,000 and the fair value of the swap agreement was $-2,684,000. A
hypothetical 10 percent change in interest rates would change the fair value of
our swap agreement by approximately $820,000 at March 31, 2001.
Marketable Securities Exposure
The fair value of our investments in marketable securities at March 31, 2001 was
$87,996,000. Marketable securities consist of equity securities traded on a
national securities exchange or reported on the NASDAQ securities market. A
significant portion of the marketable securities consists of 3,002,376 shares of
SAFECO Corporation. As of March 31, 2001, these shares represented 2.4% of the
outstanding common stock of SAFECO Corporation. While we have no intention to
dispose of its investments in marketable securities, we have classified the
investments as available-for-sale under applicable accounting standards. Mr.
William W. Krippaehne, Jr., President, CEO, and a Director of the Company, is a
Director of SAFECO Corporation. A hypothetical 10 percent change in market
prices underlying these securities would result in a $8,800,000 change in the
fair value of the marketable securities portfolio. Although changes in
securities prices would affect the fair value of the marketable securities
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments are sold.
Commodity Price Exposure
We have exposure to price fluctuations associated with grain and flour
inventories, product gross margins, and certain anticipated transactions in our
milling operations. Commodities such as wheat are purchased at market prices
that are subject to volatility. As an element of our strategy to manage the risk
of market price fluctuations, we enter into various exchange-traded futures
contracts. We closely monitor and manage our exposure to market risk on a daily
basis in accordance with formal policies established for this activity. These
policies limit the level of exposure to futures contracts. All transactions
involving derivative financial instruments are required to have a direct
relationship to the price risk associated with existing inventories or future
purchase and sales of its products.
When commitments are made for the sale of flour, generally matched transactions
are also booked to protect against price fluctuations in the market price of
wheat, using purchased wheat, forward commitments, and exchange-traded futures
contracts.
We determine the fair value of our exchange-traded contracts based on the
settlement prices for open contracts, which are established by the exchange on
which the instruments are traded. The margin accounts for open commodity futures
contracts, which reflect daily settlements as market values change, represent
our basis in those contracts. As of March 31, 2001, the carrying value of our
investment in commodities futures contracts and the total net gains and losses
on open contracts were immaterial. At March 31, 2001, the actual open positions
of these instruments and the potential near-term losses in earnings, fair value,
and/or cash flows from changes in market rates or prices were not material.
The disposition of the milling businesses will eliminate our exposure to
fluctuations in commodity prices.
19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal actions
and complaints in the ordinary course of their businesses. In the Company's
opinion, all such matters are adequately covered by insurance, are without merit
or are of such kind, or involve such amounts, that unfavorable disposition would
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Commission on March 8, 2001 announcing
that the Company changed its name from Fisher Companies Inc. to Fisher
Communications, Inc.
A report on Form 8-K was filed with the Commission on March 16, 2001 announcing
an agreement to sell the Company's flour milling assets to Pendleton Flour
Mills, L.L.C. for approximately $31 million, subject to certain conditions and
regulatory approvals.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FISHER COMMUNICATIONS, INC.
(Registrant)
Dated May 8, 2001 /s/ Warren J. Spector
----------------------------------- -----------------------------------
Warren J. Spector
Executive Vice President and Chief
Operating Officer
Dated May 8, 2001 /s/ David D. Hillard
----------------------------------- -----------------------------------
David D. Hillard
Senior Vice President and Chief
Financial Officer
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