-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JttEdjgF7hrDgMmoHdtUbnahF9+qHvoD1Z+vhv/NMpdePkVbOD7R2hu1/7AC0JXQ iED79liGoSNN09V6eYKpdg== 0001032210-01-501024.txt : 20010814 0001032210-01-501024.hdr.sgml : 20010814 ACCESSION NUMBER: 0001032210-01-501024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FISHER COMMUNICATIONS INC CENTRAL INDEX KEY: 0001034669 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 910222175 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22439 FILM NUMBER: 1707347 BUSINESS ADDRESS: STREET 1: 1525 ONE UNION SQ STREET 2: 600 UNIVERSITY ST CITY: SEATTLE STATE: WA ZIP: 98101-3185 BUSINESS PHONE: 2064047000 MAIL ADDRESS: STREET 1: 1525 ONE UNION SQU STREET 2: 600 UNIVERSITY ST CITY: SEATTLE STATE: WA ZIP: 98101-3185 FORMER COMPANY: FORMER CONFORMED NAME: FISHER COMPANIES INC DATE OF NAME CHANGE: 19970226 10-Q 1 d10q.txt FORM 10-Q 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 June 30, 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 -------------- ______________ 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 June 30, 2001: 8,566,051 PART I FINANCIAL INFORMATION Item 1. Financial Statements The following Consolidated Financial Statements (unaudited) are presented for the Registrant, Fisher Communications, Inc. and its subsidiaries. Page no. -------- 1. Consolidated Statement of Operations: Three and six months ended June 30, 2001 and 2000. 3 2. Consolidated Balance Sheet: June 30, 2001 and December 31, 2000. 4 3. Consolidated Statement of Cash Flows: Six months ended June 30, 2001 and 2000. 5 4. Consolidated Statement of Comprehensive Income: Three and six months ended June 30, 2001 and 2000. 6 5. Notes to Consolidated Financial Statements. 7 2 ITEM 1 - FINANCIAL STATEMENTS FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Six months ended Three months ended June 30 June 30 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) (Unaudited) Revenue Broadcasting $ 73,762 $ 94,862 $ 38,574 $ 50,035 Real estate 8,607 6,247 4,174 3,100 - ------------------------------------------------------------------------------------------------------ 82,369 101,109 42,748 53,135 - ------------------------------------------------------------------------------------------------------ Costs and expenses Cost of products and services sold 34,202 35,699 16,605 17,744 Selling expenses 10,255 11,114 5,419 5,794 General and administrative expenses 21,094 22,287 10,090 11,524 Depreciation and amortization 12,032 9,461 6,203 4,984 - ------------------------------------------------------------------------------------------------------ 77,583 78,561 38,317 40,046 - ------------------------------------------------------------------------------------------------------ Income from operations 4,786 22,548 4,431 13,089 Other income, net 1,879 2,066 635 898 Income (loss) in equity investees (1,631) 34 (1,142) 28 Interest expense 8,875 10,866 4,229 5,408 - ------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes (3,841) 13,782 (305) 8,607 Provision for federal and state income taxes (benefit) (1,333) 4,961 (112) 3,172 - ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations (2,508) 8,821 (193) 5,435 Loss from discontinued operations of milling businesses, net of income tax benefit (327) (1,211) (327) (23) - ------------------------------------------------------------------------------------------------------ Net income (loss) $ (2,835) $ 7,610 $ (520) $ 5,412 - ------------------------------------------------------------------------------------------------------ Income (loss) per share: From continuing operations $ (0.29) $ 1.03 (0.02) $ 0.63 From discontinued operations (0.04) (0.14) (0.04) - ------------------------------------------------------------------------------------------------------ Net income (loss) $ (0.33) $ 0.89 (0.06) $ 0.63 - ------------------------------------------------------------------------------------------------------ Income (loss) per share assuming dilution: From continuing operations $ (0.29) $ 1.03 (0.02) $ 0.63 From discontinued operations (0.04) (0.14) (0.04) - ------------------------------------------------------------------------------------------------------ Net income (loss) $ (0.33) $ 0.89 $ (0.06) $ 0.63 - ------------------------------------------------------------------------------------------------------ Weighted average shares outstanding 8,561 8,554 8,563 8,557 Weighted average shares outstanding assuming dilution 8,561 8,589 8,563 8,614 Dividends declared per share $ 0.26 $ 0.52 $ - $ 0.26
See accompanying notes to consolidated financial statements. 3 FISHER COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
June 30 December 31 2001 2000 - ----------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) (Unaudited) ASSETS Current Assets Cash and short-term cash investments $ 2,911 $ 218 Receivables 34,095 40,375 Prepaid income taxes 7,997 563 Prepaid expenses 6,174 3,862 Television and radio broadcast rights 4,484 10,253 Net working capital of discontinued operations 10,526 - ----------------------------------------------------------------------------------------------- Total current assets 55,661 65,797 - ----------------------------------------------------------------------------------------------- Marketable Securities, at market value 92,212 102,080 - ----------------------------------------------------------------------------------------------- Other Assets Cash value of life insurance and retirement deposits 12,055 11,725 Television and radio broadcast rights 964 927 Intangible assets, net of amortization 191,716 194,316 Investments in equity investees 2,922 3,057 Other 11,946 10,017 Net noncurrent assets of discontinued operations 1,697 39,236 - ----------------------------------------------------------------------------------------------- 221,300 259,278 - ----------------------------------------------------------------------------------------------- Property, Plant and Equipment, net 227,942 219,649 - ----------------------------------------------------------------------------------------------- $ 597,115 $ 646,804 - ----------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes payable $ 22,289 $ 25,642 Trade accounts payable 4,542 4,981 Accrued payroll and related benefits 8,696 10,458 Television and radio broadcast rights payable 2,490 9,002 Other current liabilities 2,896 5,593 Net current liabilities of discontinued operations 530 - ----------------------------------------------------------------------------------------------- Total current liabilities 41,443 55,676 - ----------------------------------------------------------------------------------------------- Long-term Debt, net of current maturities 241,615 257,413 - ----------------------------------------------------------------------------------------------- Other Liabilities Accrued retirement benefits 12,972 13,638 Deferred income taxes 51,907 53,648 Television and radio broadcast rights payable, long-term portion 873 794 Other liabilities 4,965 2,934 - ----------------------------------------------------------------------------------------------- 70,717 71,014 - ----------------------------------------------------------------------------------------------- Stockholders' Equity Common stock, shares authorized 12,000,000, $1.25 par value; issued 8,566,051 in 2001 and 8,558,042 in 2000 10,708 10,698 Capital in excess of par 2,132 2,140 Deferred compensation (93) (135) Accumulated other comprehensive income - net of income taxes: Unrealized gain on marketable securities 59,178 65,593 Net loss on interest rate swap (1,672) Retained earnings 173,087 184,405 - ----------------------------------------------------------------------------------------------- 243,340 262,701 - ----------------------------------------------------------------------------------------------- $ 597,115 $ 646,804 - -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 4 FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30 2001 2000 - -------------------------------------------------------------------------------------------------- (in thousands) (Unaudited) Cash flows from operating activities Net income (loss) $ (2,835) $ 7,610 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 13,559 11,584 Increase in noncurrent deferred income taxes 5,756 1,276 (Income) loss in equity investees 1,631 (34) Other (81) 527 Change in operating assets and liabilities Receivables 7,009 5,916 Inventories (321) 4,636 Prepaid income taxes (7,610) 1,276 Prepaid expenses (3,337) (802) Cash value of life insurance and retirement deposits (340) (347) Other assets (1,031) 26 Income taxes payable 953 Trade accounts payable, accrued payroll and related benefits and other current liabilities (8,516) (3,732) Accrued retirement benefits (574) 828 Other liabilities 146 1,127 Amortization of television and radio broadcast rights 7,682 7,729 Payments for television and radio broadcast rights (8,383) (9,063) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,755 29,510 - -------------------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from sale of discontinued milling business assets 49,769 Proceeds from sale of property, plant and equipment 212 292 Investments in equity investees (1,496) 125 Purchase of property, plant and equipment (18,324) (36,317) - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 30,161 (35,900) - -------------------------------------------------------------------------------------------------- Cash flows from financing activities Net borrowings under notes payable 2,311 11,767 Borrowings under borrowing agreements 13,000 3,000 Payments on borrowing agreements and mortgage loans (34,464) (3,538) Retirement of preferred stock of subsidiary (6,675) Proceeds from exercise of stock options 19 Cash dividends paid (4,452) (4,449) - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (30,280) 6,799 - -------------------------------------------------------------------------------------------------- Net increase in cash and short-term cash investments 2,636 409 Cash and short-term cash investments, beginning of period 275 3,609 - -------------------------------------------------------------------------------------------------- Cash and short-term cash investments, end of period $ 2,911 $ 4,018 - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 FISHER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six months ended Three months ended June 30 June 30 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------- (In thousands) (Unaudited) Net income (loss) $ (2,835) $ 7,610 $ (520) $ 5,412 Other comprehensive income: Cumulative effect of accounting change, net of income tax benefit of $489 (907) Unrealized gain (loss) on marketable securities (9,868) (16,921) 4,216 (21,006) Net gain (loss) on interest rate swap (1,177) 111 Effect of income taxes 3,865 5,922 (1,515) 7,352 - ------------------------------------------------------------------------------------------------------ Comprehensive income (loss) $(10,922) $ (3,389) $ 2,292 $ (8,242) - ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6 FISHER COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Such reclassifications had no effect on net income or loss. 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. 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 June 30, 2001 is included in other comprehensive income. The fair value of the interest rate swap is included in other liabilities. 2. Discontinued Operations 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 current liabilities, and net noncurrent assets of Fisher Mills have been reported as discontinued operations in Management's Discussion and Analysis of Financial Position and Results of Operations and the accompanying financial statements. On April 30, 2001 the sale of the assets and working capital used in the Seattle, Blackfoot, Modesto, and Portland flour milling operations was completed. On June 29, 2001 the sale of the distribution assets and working capital of Fisher Mills Inc. and its subsidiary Sam Wylde Flour Co. was completed. Proceeds from the transactions totaled $49,769,000. Proceeds from working capital included in the sales described above were based on estimated amounts at the date of closing, and are subject to adjustment when amounts are finally determined. As a result of these sales, and an increase in the estimate of benefits for employees of the milling and distribution operations based upon updated information from its actuaries, the Company increased the estimated loss from discontinued operations by $500,000. This revision in estimate, net of taxes, has been recorded as loss from discontinued operations in the quarter ended June 30, 2001. Net noncurrent assets of discontinued operations includes the estimated fair value of property, plant and equipment not included in the sales described above and other noncurrent assets less noncurrent liabilities relating to the discontinued milling operations. Net current liabilities of discontinued operations includes accounts payable and other net current liabilities relating to the discontinued milling operations. The value of the property, plant and equipment as well as liabilities related to benefits for terminated employees are also based on estimates and are subject to adjustment when the amounts are finally determined. 7 Revenue of the discontinued milling operations for the six and three month periods ended June 30, 2001 and 2000 was $44,675,000, $55,809,000, $17,918,000 and $28,616,000, respectively. The income tax benefit attributable to the loss from discontinued operations was $172,500 and $726,000 for the six months ended June 30, 2001 and 2000, respectively; and $172,500 and $86,000 for the three months ended June 30, 2001 and 2000, respectively. 3. Preferred Stock Redemption: During the second quarter of 2001 the broadcasting subsidiary redeemed outstanding preferred stock held by minority investors for $6,675,000. The redemption has been accounted for as a capital transaction. 4. Income per share is computed as follows:
Six months ended Three months ended June 30 June 30 2001 2000 2001 2000 ----------- ---------- ----------- ----------- (Unaudited) Weighted average common shares outstanding during the period 8,560,578 8,554,007 8,563,114 8,557,281 Dilutive effect of: Restricted stock rights - 10,833 - 8,965 Stock options - 24,382 - 47,932 ----------- ----------- ----------- ----------- Weighted average shares outstanding assuming dilution 8,560,578 8,589,222 8,563,114 8,614,178 =========== =========== =========== =========== Income (loss) from continuing operations $ (2,508) $ 8,821 $ (193) $ 5,435 Loss from discontinued operations of milling businesses, net of income tax benefit (327) (1,211) (327) (23) ----------- ----------- ----------- ----------- Net income (loss) $ (2,835) $ 7,610 $ (520) $ 5,412 =========== =========== =========== =========== Income (loss) per share: From continuing operations $ (0.29) $ 1.03 $ (0.02) $ 0.63 From discontinued operations (0.04) (0.14) (0.04) ----------- ----------- ----------- ----------- Net income (loss) $ (0.33) $ 0.89 $ (0.06) $ 0.63 =========== =========== =========== =========== Income (loss) per share assuming dilution: From continuing operations $ (0.29) $ 1.03 $ (0.02) $ 0.63 From discontinued operations (0.04) (0.14) (0.04) ----------- ----------- ----------- ----------- Net income (loss) $ (0.33) $ 0.89 $ (0.06) $ 0.63 =========== =========== =========== ===========
The dilutive effect of 4,728 restricted stock rights and options to purchase 490,988 shares are excluded for the six month and three month periods ended June 30, 2001, respectively, because such rights and options were anti-dilutive. 5. 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:
June 30 December 31 2001 2000 ----------- ----------- Broadcasting $ 347,228 $ 356,230 Real estate 131,772 127,681 Corporate, eliminations and other 116,418 113,131 ---------- ---------- Continuing operations 595,418 597,042 Discontinued operations 1,697 49,762 ---------- ---------- $ 597,115 $ 646,804 ---------- ----------
Income from operations for each segment are as follows:
Six months ended Three months ended June 30 June 30 2001 2000 2001 2000 ---- ---- ---- ---- Broadcasting $ 5,813 $ 23,588 $ 5,112 $ 13,760 Real estate 3,712 2,096 1,679 944 Corporate, eliminations and other (4,739) (3,136) (2,360) (1,615) ---------- --------- ---------- ----------- Continuing operations 4,786 22,548 4,431 13,089 Discontinued operations (500) (1,232) (500) (109) ---------- --------- ---------- ----------- $ 4,286 $ 21,316 $ 3,931 $ 12,980 ---------- --------- ---------- -----------
6. Recent Accounting Pronouncements: On June 29, 2001, the Financial Accounting Standards Board (FASB) approved FASB Statement No. 141 (FAS 141), "Business Combinations" and FASB Statement No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141 establishes new standards for accounting and reporting requirements for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method for combinations initiated after June 30, 2001. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of FAS 142, goodwill will be tested at the reporting unit annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past business combinations, will cease. The adoption date for the Company will be January 1, 2002. We are still assessing what the impact of FAS 141 and FAS 142 will be on our results of operations and financial position. 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 BG, 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 and six month periods ended June 30, 2001 compared with the similar periods in 2000. 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. 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 current liabilities, and net noncurrent assets of Fisher Mills have been reported as discontinued operations in Management's Discussion and Analysis of Financial Position and Results of Operations and the accompanying financial statements. On April 30, 2001 the sale of the assets and working capital used in the Seattle, Blackfoot, Modesto, and Portland flour milling operations was completed. On June 29, 2001 the sale of the distribution assets and working capital of Fisher Mills Inc. and its subsidiary Sam Wylde Flour Co. was completed. Proceeds from the transactions totaled $49,769,000. Proceeds from working capital included in the sales described above were based on estimated amounts at the date of closing, and are subject to adjustment when amounts are finally determined. 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. On May 18, 2001, our stock began trading on the NASDAQ National Market under the symbol FSCI. CONSOLIDATED RESULTS OF OPERATIONS Operating results for the six months ended June 30, 2001 showed a consolidated loss of $2,835,000, including a loss of $327,000, net of tax effects, from the milling businesses, which is reported as discontinued operations. Net income for the six months ended June 30, 2000 was $7,610,000 including a $1,211,000 loss from the milling businesses. First half 2001 broadcasting revenue declined $21,100,000 compared with the same period of last year. Factors occurring during the first half of 2001 which have contributed to the decline include decreased advertiser demand, particularly by national advertisers, relative weakness of ABC Network programming, competition for viewers and listeners as a result of the success of the Seattle Mariners baseball team, and absence of revenue that contributed to last year's results including approximately $3,800,000 political revenue and $4,500,000 earned by KJEO which was sold on August 1, 2000. Total expenses relating to broadcasting operations, including interest and depreciation, decreased approximately $7,250,000. Operating income from the real estate segment improved compared with last year's first half 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. Operating results for the second quarter of 2001 showed a consolidated loss of $520,000, including a loss of $327,000, net of tax effects, from the milling businesses, which is reported as discontinued operations. Net income for the second quarter of 2000 was $5,412,000 including a $23,000 loss from the milling businesses. Second 10 quarter 2001 broadcasting revenue declined $11,461,000 compared with the same period of last year. As with the first half of the year, factors occurring during the second quarter of 2001 which have contributed to the decline include decreased advertiser demand, particularly by national advertisers, relative weakness of ABC Network programming, competition for viewers and listeners as a result of the success of the Seattle Mariners baseball team, and absence of revenue that contributed to last year's results including approximately $2,000,000 political revenue and $2,200,000 earned by KJEO which was sold on August 1, 2000. Total expenses relating to broadcasting operations, including interest and depreciation, decreased approximately $4,800,000. Operating income from the real estate segment for the second quarter of 2001 improved compared with the second quarter of 2000 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. Six months ended June 30, 2001 compared to six months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $82,369,000 -18.5% $101,109,000 Broadcasting revenue in the first six months of 2001 declined 22.2% compared with the first six months of 2000, while revenue from real estate operations increased 37.8%. Broadcasting and real estate operations are discussed further on pages 15-17. Cost of products and services sold - -------------------------------------------------------------------------------- Six months ended June 30 2001 2000 $34,202,000 -4.2% $35,699,000 Percentage of revenue 41.5% 35.3% 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 vary directly with revenue. First half 2001 operating expenses of the broadcasting segment were unchanged from a year ago, after adjusting first half 2000 to exclude the Fresno television station sold in August, 2000. Overall operating costs of the real estate segment declined modestly. Selling expenses - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $10,255,000 -7.7% $11,114,000 Percentage of broadcasting revenue 13.9% 11.7% 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 six months of 2000 were excluded, the percentage decrease would be 3.5%. The increase in selling expenses as a percentage of revenue also reflects the relatively fixed nature of certain sales department costs, such as management salaries, information systems, and ratings services. General and administrative expenses - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $21,094,000 -5.4% $22,287,000 Percentage of revenue 25.6% 22.1% 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, reduction in personnel 11 costs as a result of the retirement of two officers, and absence of expenses incurred by the Fresno station during the first six months of 2000. Expenses declined at the real estate segment as expenses associated with certain officers were transferred to the corporate segment in connection with a restructuring. The corporate segment incurred increased costs in connection with reassignment of personnel and other costs associated with a restructuring. Depreciation and amortization - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $12,032,000 27.2% $9,461,000 Percentage of revenue 14.6% 9.4% Depreciation expense increased because of depreciation of Fisher Plaza, which was placed in service in June of 2000, and depreciation of new broadcast and related equipment acquired by KOMO TV, which began operations in new digital studios located in Fisher Plaza in June of 2000. Other income, net - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $1,879,000 -9.1% $2,066,000 Other income, net includes dividends received on marketable securities and, to a lesser extent, interest and miscellaneous income. The decline in other income for the first six months of 2001 compared to the same period in 2000 is primarily attributable to a reduction in the dividend paid by SAFECO Corporation. Income (loss) in equity investees - -------------------------------------------------------------------------------- Six months ended June 30 2001 2000 $(1,631,000) $34,000 Investments in entities over which we have significant influence (equity investees) are accounted for using the equity method. The loss in equity investees for the six months ended June 30, 2001 is a result of costs related to development of new business opportunities. Interest expense - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $8,875,000 -18.3% $10,866,000 Interest expense includes interest on borrowed funds, loan fees, and 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 interest expense for the six months ended June 30, 2001 compared with the same period in 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 (benefit) - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $(1,333,000) -126.9% $4,961,000 Effective tax rate 34.7% 36.0% The provision for federal and state income taxes varies directly with pre-tax income. Other comprehensive income (loss) - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $(8,087,000) 26.5% $(10,999,000) 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 six months ended June 30, 2001 the value of the marketable securities declined $6,415,000, net of tax. A significant portion of 12 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, $29.50 at June 30, 2001, $24.88 at December 31, 1999, and $19.88 at June 30, 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 June 30, 2001, the fair value of the swap was $(2,573,000), or $(1,672,000) net of tax effects. Unrealized gains and losses are reported as accumulated other comprehensive income, a separate component of stockholders' equity. Three months ended June 30, 2001 compared to three months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $42,748,000 -19.6% $53,135,000 Second quarter 2001 broadcasting revenue declined 22.9% compared with second quarter 2000, while revenue from real estate operations increased 34.7%. Broadcasting and real estate operations are discussed further on pages 15-17. Cost of products and services sold - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $16,605,000 -6.4% $17,744,000 Percentage of revenue 38.8% 33.4% 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 vary directly with revenue. Second quarter 2001 operating expenses of the broadcasting segment were modestly lower compared with second quarter 2000, after adjustment to exclude the Fresno television station sold in August, 2000. Overall operating costs incurred by the real estate segment in the second quarter of 2001 declined modestly compared with second quarter 2000. Selling expenses - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $5,419,000 -6.5% $5,794,000 Percentage of broadcasting revenue 14.0% 11.6% 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 second quarter of 2000 were excluded, the percentage decrease would be 2.1%. The increase in selling expenses as a percentage of revenue also reflects the relatively fixed nature of certain sales department costs, such as management salaries, information systems and ratings services. 13 General and administrative expenses - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $10,090,000 -12.4% $11,524,000 Percentage of revenue 23.6% 21.7% 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, reduction in personnel costs as a result of the retirement of two officers, and absence of expenses incurred by the Fresno station during the second quarter of 2000. Expenses declined at the real estate segment as expenses associated with 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. Depreciation and amortization - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $6,203,000 24.5% $4,984,000 Percentage of revenue 14.5% 9.4% Depreciation expense increased because of depreciation of Fisher Plaza, which was placed in service in June of 2000, and depreciation of new broadcast and related equipment acquired by KOMO TV, which began operations in new digital studios located in Fisher Plaza in June of 2000. Other income, net - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $635,000 -29.3% $898,000 Other income, net includes dividends received on marketable securities and, to a lesser extent, interest and miscellaneous income. The decline in other income for the second quarter of 2001 compared to the same period in 2000 is primarily attributable to a reduction in the dividend paid by SAFECO Corporation. Income (loss) in equity investees - -------------------------------------------------------------------------------- Three months ended June 30 2001 2000 $(1,142,000) $28,000 Investments in entities over which we have significant influence (equity investees) are accounted for using the equity method. The loss in equity investees for the three months ended June 30, 2001 is a result of costs related to development of new business opportunities. Interest expense - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $4,229,000 -21.8% $5,408,000 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 (benefit) - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $(112,000) -103.5% $3,172,000 Effective tax rate 36.7% 36.8% The provision for federal and state income taxes varies directly with pre-tax income. 14 Other comprehensive income (loss) - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $2,812,000 120.6% $(13,654,000) 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 June 30, 2001 the value of the marketable securities increased $2,740,000, 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 $28.19 at March 31, 2001, $29.50 at June 30, 2001, $26.56 at March 31, 2000, and $19.88 at June 30, 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. At June 30, 2001, the fair value of the swap was $(2,573,000), or $(1,672,000) net of tax effects. Unrealized gains and losses are reported as accumulated other comprehensive income, a separate component of stockholders' equity. Broadcasting Operations Six months ended June 30, 2001 compared to six months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $73,762,000 -22.2% $94,862,000 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 in revenue from broadcasting operations for the six months ended June 30, 2001 compared with the first half of 2000 would have been 18.4%. Factors occurring during the first half of 2001 which have contributed to the decline include decreased advertiser demand, particularly by national advertisers, relative weakness of ABC Network programming, and competition for viewers and listeners as a result of the success of the Seattle Mariners baseball team. In addition, significant political activity during the first half of 2000 contributed to strong revenue during that period. KOMO TV in Seattle and KATU Television in Portland experienced revenue declines of 22.4% and 19.6%, respectively, in the first six months of 2001 compared to the same period in 2000. Revenue from the smaller market television stations declined 12.8% (adjusted to exclude the Fresno station) from the year ago period. Revenue from the Seattle and Portland radio groups declined 17.1% and 21.4%, respectively, from the year ago period. Revenue from the small market radio operations declined 3.3% from the year ago period. Income from operations - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $5,813,000 -75.4% $23,588,000 Percentage of revenue 7.9% 24.9% The decline in income from operations for the first half of 2001 compared with the same period in 2000, is primarily due to the decline in revenue discussed above. When adjusted to exclude the Fresno television station, operating expenses in the first half of 2001 were modestly lower compared to the same period in 2000, however depreciation expense increased approximately $2,000,000 largely due to KOMO TV's new broadcast equipment 15 and studios. When adjusted to exclude the Fresno television station, the decline in income from operations for the first half of 2001 was 74.7% compared with the same period last year. Three months ended June 30, 2001 compared to three months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $38,574,000 -22.9% $50,035,000 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 in revenue from broadcasting operations for the three months ended June 30, 2001 compared with the second quarter of 2000 would have been 19.4%. Factors occurring during the second quarter of 2001 which have contributed to the decline include decreased advertiser demand, particularly by national advertisers, relative weakness of ABC Network programming, and competition for viewers and listeners as a result of the success of the Seattle Mariners baseball team. In addition, significant political activity during the second quarter of 2000 contributed to strong revenue during that period. KOMO TV in Seattle and KATU Television in Portland experienced revenue declines of 22.5% and 21.6%, respectively, for the second quarter of 2001 compared to the same period in 2000. Revenue from the smaller market television stations declined 15.6% (adjusted to exclude the Fresno station) from the year ago period. Revenue from the Seattle and Portland radio groups declined 19.5% and 15.0%, respectively from the year ago period. Revenue from the small market radio operations declined 4.4% from the year ago period. Income from operations - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $5,112,000 -62.8% $13,760,000 Percentage of revenue 13.3% 27.5% The decline in income from operations for the second quarter of 2001 compared with the same period last year, is primarily due to the decline in revenue discussed above. When adjusted to exclude the Fresno television station, operating expenses in second quarter 2001 were approximately 3.0% lower as compared to the same period in 2000, however depreciation expense increased approximately $900,000 largely due to KOMO TV's new broadcast equipment and studios. When adjusted to exclude the Fresno television station, the decline in income from operations for the second quarter of 2001 was 62.3% compared with the same period last year. Real Estate Operations Six months ended June 30, 2001 compared to six months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $8,607,000 37.8% $6,247,000 The real estate segment includes the real estate subsidiary and the portion of the Fisher Plaza project not occupied by KOMO TV. First half 2001 revenue of the real estate segment increased as a result of rent increases, lease cancellation fees, and rent received from Fisher Plaza which was placed in service in June, 2000. Income from operations - -------------------------------------------------------------------------------- Six months ended June 30 2001 % Change 2000 $3,712,000 77.1% $2,096,000 Percentage of revenue 43.1% 33.6% 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. Exclusive of the Fisher Industrial Technology Center, which was completed in the Fall of 2000 and is in lease-up phase, average occupancy for the first half of 2001 was 97.4% compared with 98.5% for the first half of 2000. 16 Three months ended June 30, 2001 compared to three months ended June 30, 2000 Revenue - -------------------------------------------------------------------------------- Three months ended June 30 2001 % Change 2000 $4,174,000 34.7% $3,100,000 The real estate segment includes the real estate subsidiary and the portion of the Fisher Plaza project not occupied by KOMO TV. Second 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 June 30 2001 % Change 2000 $1,679,000 77.9% $944,000 Percentage of revenue 40.2% 30.4% 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. Exclusive of the Fisher Industrial Technology Center, which was completed in the Fall of 2000 and is in lease-up phase, average occupancy for the second quarter of 2001 was 96.8% compared with 98.1% for the second quarter of 2000. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board (FASB) approved FASB Statement No. 141 (FAS141), "Business Combinations" and FASB Statement No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141 establishes new standards for accounting and reporting requirements for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method for combinations initiated after June 30, 2001. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of FAS 142, goodwill will be tested at the reporting unit annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past business combinations, will cease. The adoption date for the Company will be January 1, 2002. We are still assessing what the impact of FAS 141 and FAS 142 will be on our results of operations and financial position. Liquidity and Capital Resources As of June 30, 2001, we had working capital of $14,218,000 and cash totaling $2,911,000. We intend to finance working capital, debt service, capital expenditures, and dividend requirements primarily through operating activities. 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 June 30, 2001, $22,000,000 was available under the revolving line of credit. 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 April 30, 2001 the sale of the assets and working capital used in the Seattle, Blackfoot, Modesto, and Portland flour milling operations was completed. On June 29, 2001 the sale of the distribution assets and working capital of Fisher Mills Inc. and its subsidiary Sam Wylde Flour Co. was completed. Proceeds from the transactions totaled $49,769,000. Proceeds from working capital included in the sales described above were based on estimated amounts at the date of closing, and are subject to adjustment when amounts are finally determined. Net cash provided by operating activities during the six months ended June 30, 2001 was $2,755,000. 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 provided by investing 17 activities during the period was $30,161,000, including $49,769,000 proceeds from the sales of milling and distribution assets and working capital, reduced by $18,324,000 for purchase of property, plant and equipment (including the Fisher Plaza project) and $1,496,000 for investments in equity investees. Net cash used in financing activities was $30,280,000, comprised of payments of $34,464,000 on borrowing agreements and mortgage loans, $6,675,000 for retirement of preferred stock of our broadcasting subsidiary, cash dividends paid to stockholders totaling $4,452,000 or $.52 per share, reduced by net borrowings under notes payable of $15,311,000. 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. 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 alternative 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 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 half 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 restructuring may cause disruption of operations and distraction of management, and may not achieve the desired results. We are restructuring 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. 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 18 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. 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. 19 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. 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, 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. The softening economy 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. We have a substantial investment in the common stock of SAFECO. As a 2.3% 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 $21.22 to $31.89 per share during the first six months of 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. 20 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 Hart-Scott-Rodino 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 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. 21 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 prices and rates. We are exposed to market risk in the areas of interest rates and securities prices. These exposures are directly related to our normal funding and investing activities. 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 June 30, 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 June 30, 2001, amounted to $1,316,000 on our fixed rate debt which totaled $48,946,000. We also had $214,703,000 in variable-rate debt outstanding at June 30, 2001. A hypothetical 10 percent change in interest rates underlying these borrowings would result in a $1,659,000 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 June 30, 2001, the notional amount of the swap was $75,000,000 and the fair value of the swap agreement was $(2,573,000). A hypothetical 10 percent change in interest rates would change the fair value of our swap agreement by approximately $721,000 at June 30, 2001. Marketable Securities Exposure The fair value of our investments in marketable securities at June 30, 2001 was $92,212,000. 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 June 30, 2001, these shares represented 2.3% 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 $9,221,000 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. 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 22 None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held April 26, 2001. The five nominees elected to the Board of Directors for three year terms expiring in 2004 are listed below. There were no broker non-votes with respect to any of the nominees. Votes Votes For Withheld --- -------- Carol H. Fratt 6,998,504 52,879 Donald G. Graham, Jr. 7,006,664 44,719 Donald G. Graham, III 7,003,978 47,405 William W. Krippaehne, Jr. 7,008,320 43,063 John D. Mangels 7,006,960 44,423 Continuing as Directors are Jean F. McTavish, Jacklyn F. Meurk, George F. Warren, and William W. Warren, Jr., whose terms expire in 2002, and James W. Cannon, George D. Fisher, Phelps K. Fisher, William O. Fisher, and Robin J. Campbell Knepper, whose terms expire in 2003. The proposal to approve the Fisher Communications Incentive Plan of 2001 was approved by the vote set forth below: For Against Abstain Broker Non-vote --- ------- ------- --------------- 5,946,393 423,559 23,832 657,599 The proposal to approve the Amended and Restated Fisher Communications Incentive Plan of 1995 was approved by the vote set forth below: For Against Abstain Broker Non-vote --- ------- ------- --------------- 5,941,137 427,635 25,012 657,599 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 dated April 30, 2001 was filed with the Commission on May 9, 2001 announcing that the previously announced sale of Fisher's flour milling assets to Pendleton Flour Mills, L.L.C. was concluded. A report on Form 8-K dated May 10, 2001 was filed with the Commission on May 11, 2001 announcing plans for stock of Fisher Communications, Inc. to begin trading on the Nasdaq Stock Market on May 18, 2001. A report on Form 8-K dated June 29, 2001 was filed with the Commission on July 5, 2001 announcing that the previously announced sale of Fisher's distribution assets and its subsidiary, Sam Wylde Flour Co. Inc. was concluded. 23 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 August 10, 2001 /s/ Warren J. Spector -------------------- ---------------------------------- Warren J. Spector Executive Vice President and Chief Operating Officer Dated August 10, 2001 /s/ David D. Hillard -------------------- ---------------------------------- David D. Hillard Senior Vice President and Chief Financial Officer 24 -----END PRIVACY-ENHANCED MESSAGE-----