10-Q 1 sdc475.txt 10-Q QUARTERLY REPORT UNITED STATES 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 15, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-7831 JOURNAL COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) WISCONSIN 39-0382060 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 333 W. State Street, Milwaukee, Wisconsin 53203 (Address of principal executive offices) (Zip Code) 414-224-2728 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 Securities Exchange Act of 1934 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 23, 2003: Class Outstanding at July 23, 2003 Common Stock, par value $0.125 28,800,000 Units of Beneficial Interest 25,920,000* * 2,884,263 of which were held by us in treasury JOURNAL COMMUNICATIONS, INC. INDEX Page No. ---- Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets as of June 15, 2003 (Unaudited) and December 31, 2002 2 Unaudited Consolidated Condensed Statements of Earnings for the Second Quarter and Two Quarters Ended June 15, 2003 and June 16, 2002 3 Unaudited Consolidated Condensed Statements of Cash Flows for the Two Quarters Ended June 15, 2003 and June 16, 2002 4 Notes to Unaudited Consolidated Condensed Financial Statements as of June 15, 2003 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure of Market Risk 23 Item 4. Controls and Procedures 23 Part II. Other Information Items 1 - 3 23 Items 4 - 6 24 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JOURNAL COMMUNICATIONS, INC. Consolidated Condensed Balance Sheets (in thousands, except per share amounts)

~~Third~~ASSETS ~~Quarter~~June ~~Ended Three Quarters Ended ----------------------- ----------------------- October 6~~15, ~~October~~2003 7,December ~~October 6~~31, ~~October 7,~~ 2002 ~~2001 2002 2001~~ ---------- ---~~-------~~ ---------- -------~~---~~ ~~Continuing~~(unaudited) ~~operations:~~Current ~~Revenue~~assets: ~~Publishing~~Cash and cash equivalents ................................ $ 874,~~259~~192 $ 868,~~303~~455 ~~$ 218~~Receivables,~~235~~ less allowance for doubtful accounts of $6,992 ~~225~~and $6,~~215~~453 ~~Broadcasting~~...........................~~...~~ 4692,~~776~~181 4089,~~390~~920 ~~112~~Inventories,~~387~~ ~~100,166~~lower ~~Telecommunications~~of cost (first-in-first-out) or market: Paper and supplies .................................... 456,~~082~~403 477,~~202~~725 ~~114,181~~Work ~~116,600~~in ~~Printing~~process ....................................... 551,~~261~~060 623,~~828~~456 ~~140,027~~Finished ~~152,894~~goods ~~Other~~........................................ 107,~~939~~954 105,~~257~~019 ~~26,573 25,146~~ --------- --------- 15,417 16,200 Prepaid expenses ......................................... 10,004 11,786 Deferred income taxes .................................... 8,164 8,164 --------- --------- ~~Total~~TOTAL ~~revenue~~CURRENT ASSETS ..................................... ~~245~~129,~~317~~958 ~~246~~134,~~980~~525 ~~611~~Property and equipment,~~403~~ ~~620~~at cost,~~021~~ ~~Costs~~less accumulated depreciation of ~~sales:~~$332,867 ~~Publishing~~and $345,333 ..................... 328,587 324,405 Goodwill .................................................... 40113,~~174~~373 41111,~~322~~998 ~~99,629~~Broadcast ~~105,953~~licenses ~~Broadcasting~~.......................................... 18125,~~678~~492 17125,~~102~~492 ~~45,174~~Other 42intangible assets,~~062~~ ~~Telecommunications~~net ................................ 2411,~~281~~369 2412,~~399~~115 ~~61,111~~Prepaid ~~58,319~~pension ~~Printing~~costs ....................................... 4429,~~589~~156 5230,~~472~~337 ~~114,372~~Other ~~127,522~~assets ~~Other~~................................................ 84,~~781~~987 85,~~696~~880 ~~21,445 21,126~~ --------- --------- ~~---------~~TOTAL ~~---------~~ASSETS ~~Total costs of sales~~........................ ~~136,503 143,991 341,731 354,982 Selling and administrative expenses~~................... ~~75,264~~$ 77742,~~767~~922 ~~180,945~~$ ~~203~~744,~~804~~752 ~~---------~~========= ~~---------~~========= ~~---------~~LIABILITIES ~~---------~~AND ~~Total~~SHAREHOLDERS' ~~costs~~EQUITY ofCurrent ~~sales~~liabilities: ~~and~~Notes ~~selling~~payable ~~and~~to ~~administrative~~banks ~~expenses~~................................... ~~211,767~~$ ~~221~~74,~~758~~370 ~~522,676~~$ ~~558~~90,~~786~~775 ~~Operating~~Accounts ~~earnings~~payable ......................................... 3342,~~550~~395 2537,~~222~~757 ~~88,727~~Accrued ~~61,235~~compensation ~~Other income and expense: Interest income and dividends~~..................................... ~~127 550 960 1~~19,~~440~~762 ~~Interest expense~~29,712 ~~net~~Deferred ofrevenue ~~amounts capitalized~~......................................... ~~(199)~~22,007 ~~(226)~~20,741 ~~(507)~~Accrued ~~(310)~~employee ~~---------~~benefits ~~--------- --------- --------- Total other income and expense~~................................ ~~(72)~~9,407 ~~324 453 1~~9,~~130~~576 ~~Earnings~~Other ~~from~~current ~~continuing~~liabilities ~~operations before income taxes and accounting change~~................................ 3320,~~478~~091 259,~~546~~525 ~~89,180~~Current ~~62,365~~portion ~~Provision~~of ~~for~~long-term ~~income~~liabilities ~~taxes~~.................. ~~13,890~~581 101,~~062~~645 ~~37,975 24,507~~ --------- --------- ~~---------~~TOTAL ~~---------~~CURRENT ~~Earnings~~LIABILITIES ~~from continuing operations before accounting change~~................................ 19188,~~588~~613 15199,~~484~~731 ~~51,205~~Accrued ~~37,858~~employee ~~Gain~~benefits ~~(loss) from discontinued operations, net of applicable income tax expense (benefit) of $196, $(56), $(4,986) and $(603)~~..................................... ~~1 (53) (338) (1~~16,~~002)~~948 ~~Cumulative effect of accounting change~~16,945 ~~net~~Other oflong-term ~~applicable~~liabilities ~~income taxes of $0, $0, $1,648 and $0~~................................. --8,894 ~~-- (7~~9,~~282)~~238 --Deferred ~~---------~~income ~~---------~~taxes ~~--------- --------- Net earnings~~....................................... ~~$ 19~~42,~~589~~294 ~~$ 15~~42,~~431~~294 $Shareholders' ~~43,585~~equity: $Common 36stock,~~856~~ ~~=========~~authorized ~~=========~~and ~~=========~~issued ~~=========~~28,800 ~~Weighted~~shares ~~average~~($0.125 ~~number~~par ofvalue) ~~common shares outstanding~~....................... ~~26,326 28,486 26,587 28,026 Basic and diluted earnings per share: Continuing operations before accounting change~~............... 3,600 3,600 Retained earnings ......... ~~$ 0~~.~~74 $ 0~~.~~54 $ 1~~.~~92 $ 1~~.~~35 Discontinued operations~~................... ~~-- -- (0~~.~~01) (0~~.~~04) Cumulative effect of accounting change~~.... ~~-- -- (0~~.~~27)~~. --590,990 ~~---------~~581,361 --------- --------- ~~---------~~Units ~~Net~~of ~~earnings~~beneficial ~~per~~interest ~~share~~in treasury, at cost ........ (108,417) (108,417) TOTAL SHAREHOLDERS' EQUITY .............. ~~$ 0~~.~~74 $ 0~~.~~54 $ 1~~.64.............. $486,173 ~~1.31~~476,544 ~~=========~~--------- ~~=========~~--------- ~~=========~~TOTAL ~~=========~~LIABILITIES ~~Cash~~AND ~~dividends~~SHAREHOLDERS' ~~per~~EQUITY ~~share~~...............~~.....~~ $ ~~0.30~~742,922 $ ~~0.35~~744,752 ~~$ 0.90 $ 1.05~~ ========= ========= ~~=========~~Note: ~~=========~~The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. See accompanying notes to unaudited consolidated condensed financial statements.

2 JOURNAL COMMUNICATIONS, INC. Unaudited Consolidated Condensed Statements of Earnings (in thousands, except per share amounts)

~~Third~~Second Quarter Ended ~~Three~~Two Quarters Ended ~~October~~----------------------------- 7----------------------------- June 15, ~~2001~~2003 ~~October~~June 716, ~~2001~~2002 June 15, 2003 June 16, 2002 ------------- ------------- ------------- ------------- ~~Reported~~Continuing ~~earnings from continuing~~ operations: ~~before~~Operating ~~accounting~~revenue: ~~change~~Publishing ................................. $ 74,168 $ 73,801 $ 142,505 $ 143,318 Broadcasting ............................... $35,061 1534,~~484~~931 ~~$ 37~~64,~~858~~523 ~~Goodwill amortization~~65,611 ~~net~~Telecommunications ~~of tax~~.......................... ~~673~~34,618 134,~~685~~194 ~~Broadcast~~68,368 ~~licenses amortization~~69,099 ~~net~~Printing ofservices ~~tax~~.......................... ~~958~~19,180 221,~~395~~246 ~~Network~~40,205 ~~affiliation agreements amortization~~46,274 ~~net~~Other ~~of tax~~...................................... 2422,039 5821,859 43,932 41,784 --------- --------- ~~Adjusted~~--------- ~~earnings~~--------- ~~from~~Total ~~continuing~~operating ~~operations~~revenue ~~before accounting change~~....................... 185,066 186,031 359,533 366,086 Operating costs and expenses: Publishing ................................. $37,045 1733,~~139~~339 $71,773 4167,~~996~~219 ~~=========~~Broadcasting ~~========= Reported net earnings~~............................... 14,614 13,413 28,454 26,496 Telecommunications ......................... $19,257 1518,~~431~~607 $37,819 36,~~856~~830 ~~Goodwill~~Printing ~~amortization,~~services ~~net of tax~~.......................... ~~676~~16,225 118,~~692~~112 ~~Broadcast~~33,259 ~~licenses amortization~~39,608 ~~net~~Other ~~of tax~~...................................... ~~958~~18,090 217,~~395~~926 ~~Network~~36,485 ~~affiliation~~35,075 ~~agreements~~--------- ~~amortization~~--------- --------- --------- Total operating costs and expenses ............ 105,231 ~~net~~101,397 of207,790 ~~tax~~205,228 Selling and administrative expenses ........... 2455,653 5851,447 108,309 107,191 --------- --------- ~~Adjusted~~--------- ~~net~~--------- ~~earnings~~Total operating costs and expenses and selling and administrative expenses .......... 160,884 152,844 316,099 312,419 Operating earnings .............................. $24,182 1733,~~089~~187 $43,434 4153,~~001~~667 ~~=========~~Other ~~=========~~income ~~Basic~~ and ~~diluted~~expense: ~~earnings~~Interest ~~per~~income ~~share:~~and ~~Reported~~dividends ~~earnings~~.............. ~~from~~59 ~~continuing~~202 ~~operations~~136 ~~before~~833 ~~accounting~~Interest ~~change~~expense, net ...................... (898) (163) (1,389) (308) --------- --------- --------- --------- Total other income and expense ................ (839) 39 (1,253) 525 Earnings from continuing operations before income taxes and accounting change ..... ~~$ 0~~.54..... $23,343 ~~1.35~~33,226 ~~Goodwill~~42,181 ~~amortization~~54,192 ~~net~~Provision offor ~~tax~~income taxes .................... 9,467 14,884 17,003 23,598 --------- --------- --------- --------- Earnings from continuing operations before accounting change ...... 0.~~02 0~~.06........... ~~Broadcast~~13,876 ~~licenses~~18,342 ~~amortization~~25,178 30,594 Loss from discontinued operations, net of applicable income tax benefit of $0, $2,515, $0, and $5,182 ................ 0.~~03 0~~.09. ~~Network~~-- ~~affiliation~~(1,684) ~~agreements~~-- ~~amortization~~(89) Cumulative effect of accounting change, net of ~~tax~~applicable income taxes of $1,161 ..... -- -- -- (6,509) --------- --------- ~~Adjusted~~--------- ~~earnings~~--------- ~~from~~Net ~~continuing~~earnings ~~operations before accounting change~~..................................~~.........~~ $ ~~0.59~~13,876 $ ~~1.50~~16,658 $ 25,178 $ 23,996 ========= ========= ~~Basic~~========= ~~and~~========= ~~diluted~~Weighted ~~earnings~~average ~~per~~number ~~share:~~of ~~Reported~~shares ~~net~~outstanding ~~earnings~~..................................~~......~~ $25,916 ~~0.54~~26,749 $25,916 ~~1.31~~26,762 ~~Goodwill~~Basic ~~amortization,~~and ~~net~~diluted ofearnings ~~tax~~per share: Continuing operations before accounting change .......................... $ 0.0254 $ 0.0669 ~~Broadcast~~$ ~~licenses~~0.97 ~~amortization,~~$ ~~net~~1.14 ofDiscontinued ~~tax~~operations ................ 0.03... -- (0.0906) ~~Network~~-- ~~affiliation~~-- ~~agreements~~Cumulative ~~amortization,~~effect ~~net~~ of ~~tax~~accounting change ..... -- -- -- (0.24) --------- --------- ~~Adjusted~~--------- ~~net~~--------- Net earnings per share ........................ $ 0.54 $ 0.63 $ 0.97 $ 0.90 ========= ========= ========= ========= Cash dividends per share ...................... $ 0.5930 $ 10.4630 $ 0.60 $ 0.60 ========= ========= ========= ========= See accompanying notes to unaudited consolidated condensed financial statements.

3 JOURNAL COMMUNICATIONS, INC. Unaudited Consolidated Condensed Statements of Cash Flows (in thousands)

~~Goodwill~~Two atQuarters ~~Goodwill~~Ended ~~Goodwill Transfer of Goodwill at January 1, related to related to unidentifiable Impairment October 6, Segment 2002 acquisitions divestitures intangible losses 2002~~ ------- ----------- ------------ June 15, 2003 June 16, 2002 ------------- ------------- Cash flow from operating activities: Net earnings ............................................. $ 25,178 $ 23,996 Less loss from discontinued operations ................... -- (89) Less cumulative effect of accounting change .............. -- (6,509) ------ -- --------- ~~Journal~~Earnings ~~Sentinel~~from $continuing ~~2,084~~operations $before --accounting $change --....................................... $25,178 --30,594 $Adjustments for non--cash $items: 2Depreciation .......................................... 21,~~084~~142 ~~Journal~~20,208 ~~Broadcast~~Amortization ~~Group~~.......................................... 76772 942 Provision for doubtful accounts ....................... 1,~~584~~399 51,~~368~~494 Net loss from disposal of assets ...................... 808 215 Impairment of long--lived ~~167~~assets ....................... -- 821,~~119~~260 ~~NorthStar~~Net ~~Print~~changes ~~Group~~in operating assets and liabilities, excluding effects of sales and acquisitions: Receivables ........................................... (3,538) (2,~~362~~700) Inventories ........................................... 783 2,023 Accounts payable ...................................... 4,135 (6,985) Other assets and liabilities .......................... 3,479 3,018 -- -- ---- -------- 2NET CASH PROVIDED BY OPERATING ACTIVITIES .......... 54,~~362~~158 ~~Add~~50,069 ~~Inc~~Cash flow from investing activities: Capital expenditures for property and equipment .......... 23(27,~~713~~885) --(27,591) ~~398~~Proceeds ~~724~~from sales of assets ............................ 1,803 434 Acquisition of business .................................. (1,450) -- 24Other,~~835~~ ~~Norlight~~net ~~Telecom-~~............................................... ~~munications~~1,214 ~~188~~239 -- -- ---- -------- ~~188~~NET ~~PrimeNet~~CASH ~~Marketing~~USED ~~Services~~FOR 7INVESTING ACTIVITIES ............. (26,~~358~~318) --(26,918) Cash flow from financing activities: Net increase (decrease) in notes payable to bank ......... (16,405) 46,945 Purchases of units of beneficial interest ................ -- (93,186) Sales of units of beneficial interest .................... -- 38,709 Cash dividends ........................................... (615,~~948~~549) ~~410~~(15,982) Deferred revenue ......................................... (149) (149) --------- -------- NET CASH USED FOR FINANCING ACTIVITIES ............. (32,103) (23,663) NET CASH USED FOR DISCONTINUED OPERATIONS ................... -- (1,408) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (4,263) (1,920) Cash and cash equivalents Beginning of year ........................................ 8,455 8,911 --------- --------- ~~Total~~At $June ~~112~~15,~~289~~ $2003 ~~5,368~~and $June ~~398~~16, $2002 ~~891~~....................... $ (64,~~948)~~192 $ ~~111~~6,~~998~~991 ========= ======== ~~======~~See ~~=======~~accompanying ~~=========~~notes ~~=========~~to unaudited consolidated condensed financial statements.

4 JOURNAL COMMUNICATIONS, INC. Notes to Unaudited Consolidated Condensed Financial Statements (in thousands) 1 BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared by Journal Communications, Inc. and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect normal and recurring adjustments, which we believe to be necessary for a fair presentation. As permitted by these regulations, these statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. However, we believe that the disclosures are adequate to make the information presented not misleading. The operating results for the two quarters ended June 15, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. You should read these unaudited consolidated condensed financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. We reclassified certain prior year amounts to conform to the 2003 presentation. 2 ACCOUNTING PERIODS We divide our calendar year into 13 four-week accounting periods, except that the first and thirteenth periods may be longer or shorter to the extent necessary to make each accounting year end on December 31. We follow a practice of publishing our interim financial statements at the end of the third accounting period (the first quarter), at the end of the sixth accounting period (the second quarter), and at the end of the tenth accounting period (the third quarter). 3 SEGMENT INFORMATION

June 15, 2003 December 31, 2002 ------------- ----------------- Audited Identifiable total assets ------- ------------------------- Publishing........................... $ 232,133 $ 224,290 Broadcasting......................... 297,840 298,426 Telecommunications................... 110,102 114,545 Printing services.................... 26,879 31,005 Other................................ 75,968 76,486 --------- --------- $ 742,922 $ 744,752 ========= ========= 4 COMPREHENSIVE INCOME

5 JOURNAL COMMUNICATIONS, INC. Notes to Unaudited Consolidated Condensed Financial Statements (in thousands) 5 GOODWILL AND OTHER INTANGIBLE ASSETS Definite-lived Intangibles -------------------------- Our definite-lived intangible assets consist primarily of customer lists and non-compete agreements. We amortize the customer lists over the period of time we expect the assets to contribute to our cash flows and we amortize the non-compete agreements over the terms of the contracts. The gross carrying amount, accumulated amortization and net carrying amount of the major classes of definite-lived intangible assets as of June 15, 2003 and December 31, 2002 is as follows:

Amortization expense was $376 for the second quarter ended June 15, 2003 and $772 for the two quarters ended June 15, 2003. Estimated amortization expense for each of the next five years ending December 31 is as follows: Year Amount ---- -------- 2003.................................................. $ 1,641 2004.................................................. 1,036 2005.................................................. 463 2006.................................................. 449 2007.................................................. 410 Indefinite-lived Intangibles ---------------------------- Broadcast licenses and network affiliation agreements are deemed to have indefinite useful lives because we have renewed these agreements without issue in the past and we intend to renew them indefinitely in the future. Consequently, we expect the cash flows from both our broadcast licenses and our network affiliation agreements to continue indefinitely. We performed transitional impairment tests on our broadcast licenses and network affiliation agreements as of January 1, 2002 at the level of separate identifiable assets and recorded a transitional broadcast license impairment charge of $722 ($458 after tax) at our broadcasting business during the first quarter ended March 24, 2002, which is reported as a component of the cumulative effect of accounting change in the consolidated statements of earnings. No impairment resulted from our 2002 annual impairment test. There were no changes to the carrying amount of the major classes of indefinite-lived intangible assets in the two quarters ended June 15, 2003. Goodwill -------- In 2002, we performed transitional impairment tests on the carrying value of goodwill as of January 1, 2002. As a result, we recorded a transitional goodwill impairment charge of $6,948 ($6,051 after tax) at our direct marketing services business during the first quarter ended March 24, 2002, which is reported as a component of the cumulative effect of accounting change in the consolidated statements of earnings. For goodwill amortization that was nondeductible for income tax purposes, the transitional goodwill impairment charge is also nondeductible. No impairment resulted from our 2002 annual impairment test. 6 JOURNAL COMMUNICATIONS, INC. Notes to Unaudited Consolidated Condensed Financial Statements (in thousands) The changes in the carrying amount of goodwill in the two quarters ended June 15, 2003 are as follows:

6 NOTES PAYABLE TO BANKS We have a $120,000 bank revolving credit agreement, expiring April 30, 2004, to support our cash requirements. Borrowings under this credit agreement are at the Base Rate (derived from prime or Federal Fund rates) or at the LIBOR based rate. As of June 15, 2003, we had borrowings of $74,370 under the credit agreement, including $4,370 bearing interest at the Base Rate of 4.25% and $70,000 bearing interest at the LIBOR based rate of 2.21%. 7 DISCONTINUED OPERATIONS In January 2002, we announced the closure of Fox Cities Newspapers, a business in our publishing segment located in Appleton, Wisconsin. On April 29, 2002, we decided to liquidate IPC Communications Services, S.A., a business in our printing services segment located in Roncq, France. The following table summarizes the results of operations of Fox Cities Newspapers and IPC Communication Services, S.A.:

There were no assets or liabilities of Fox Cities Newspapers or IPC Communication Services, S.A. included in the unaudited consolidated condensed balance sheet at June 15, 2003 and the consolidated balance sheet at December 31, 2002. 8 EXIT ACTIVITY Effective January 1, 2003, we adopted Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Statement No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the previous guidance on the subject. It requires, among other things, that a liability for a cost associated with an exit or disposal activity initiated after December 31, 2002 be recognized, at fair value, when the liability is incurred rather than at the commitment date to the exit or disposal plan. In February 2003, we announced the closure of our CD-ROM mastering and replication facility, a business in our printing services segment, in Foothill Ranch, California. These functions will be performed by third parties, eliminating the need for all 33 employees, and will allow us to focus on our core printing services business. This action was completed in May 2003. We incurred expenses of $505. These costs are reported as selling and administrative expenses in the unaudited consolidated condensed statement of earnings. The liability is reported as accrued employee benefits in the unaudited consolidated condensed balance sheet at June 15, 2003.

7 JOURNAL COMMUNICATIONS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with our unaudited consolidated condensed financial statements for the second quarter and the two quarters ended June 15, 2003, including the notes thereto. Certain prior year amounts have been reclassified to reflect Fox Cities Newspapers and IPC Communication Services, S. A. as discontinued operations in our unaudited consolidated condensed financial statements and to conform with the 2003 presentation. These reclassifications had no impact on reported 2002 net earnings. More information regarding us is available at our website at www.jc.com. We are not including the information contained in our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public at no charge, other than a reader's own internet access charges, through a link appearing on our website. We provide access to such material through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Forward-Looking Statements We make certain statements in this Quarterly Report on Form 10-Q that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in that Act, and we are including this statement for purposes of those safe harbor provisions. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. We use words such as "may," "will," "intend," "anticipate," "believe," or "should" and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among such risks, uncertainties and other factors that may impact us are the following: o changes in advertising demand; o changes in newsprint prices and other costs of materials; o changes in federal or state laws and regulations or their interpretations (including changes in regulations governing the number and types of broadcast and cable system properties, newspapers and licenses that a person may control in a given market or in total); o the availability of quality broadcast programming at competitive prices; o changes in network affiliation agreements; o quality and rating of network over-the-air broadcast programs available to our customers; o effects of the loss of commercial inventory resulting from uninterrupted television news coverage and potential advertising cancellations due to war or terrorist acts; o effects of the rapidly changing nature of the publishing, broadcasting, telecommunications, and printing industries, including general business issues and the introduction of new technologies; o effects of bankruptcies and government investigations on customers for our telecommunications wholesale services; o the ability of regional telecommunications companies to expand service offerings to include intra-exchange services; o changes in interest rates; o the outcome of pending or future litigation; o energy costs; o the availability and effect of acquisitions, investments, and dispositions on our results of operations or financial condition; and o changes in general economic conditions. We caution you not to place undue reliance on these forward-looking statements, which we have made as of the date of this Quarterly Report on Form 10-Q. Overview Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. We previously reported eight business segments, which included our corporate operations and the operations of each one of our wholly-owned subsidiaries. In order to better reflect our operations as a diversified media company, and to reflect certain changes in the way our management receives internal financial information, we determined it appropriate under Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," to aggregate previously reported 8 segments and identify new segments by type of business rather than by names of individual operating entities. As a result, we changed our reportable business segments in 2002 to the following: (i) publishing; (ii) broadcasting; (iii) telecommunications; (iv) printing services; and (v) other. Our publishing segment consists of a daily newspaper, the Milwaukee Journal Sentinel, and more than 90 community newspapers and shoppers. Our broadcasting segment consists of 36 radio stations and six television stations in 11 states. Our telecommunications segment consists of wholesale and business-to-business telecommunications services provided through a high speed fiber optic telecommunications network that covers more than 4,400 route miles in seven states. Our printing services segment reflects the operations of our printing and assembly and fulfillment business. Our other segment consists of a label printing business and a direct marketing services business. Also included in other are corporate expenses and eliminations. Results of Operations Second Quarter Ended June 15, 2003 compared to Second Quarter Ended June 16, 2002 Consolidated Our consolidated operating revenue in the second quarter of 2003 was $185.1 million, a decrease of $0.9 million, or 0.5%, compared to $186.0 million in the second quarter of 2002. Our consolidated operating costs and expenses in the second quarter of 2003 were $105.2 million, an increase of $3.8 million, or 3.8%, compared to $101.4 million in the second quarter of 2002. Our consolidated selling and administrative expenses in the second quarter of 2003 were $55.7 million, an increase of $4.3 million, or 8.2%, compared to $51.4 million in the second quarter of 2002. The following table presents our total operating revenue by segment, total operating costs and expenses, selling and administrative expenses and total operating earnings as a percent of total operating revenue for the second quarter of 2003 and 2002:

The decrease in total operating revenue was primarily due to a reduction in revenue from our largest customer in our printing services business, Dell Computer Corporation, partially offset by the increase from commercial telecommunication services, the increase in retail advertising at our daily newspaper, the increase in direct mail services from our direct marketing services business of our other reportable segment and an increase in local advertising at our television broadcasting business. The increase in total operating costs and expenses was primarily due to additional costs related to the daily newspaper's transition to its new production facility. The increase in selling and administrative expenses was primarily due to the reduction in the litigation reserve in the second quarter of 2002 and the recording of a liability for employment taxes in the second quarter of 2003. 9 Our consolidated operating earnings in the second quarter of 2003 were $24.2 million, a decrease of $9.0 million, or 27.1%, compared to $33.2 million in the second quarter of 2002. The following table presents our operating earnings by segment for the second quarter of 2003 and 2002: Percent of Percent of Total Total Operating Operating 2003 Earnings 2002 Earnings -------- ---------- -------- ---------- (dollars in millions) Publishing...................... $ 8.1 33.3% $ 10.3 31.0% Broadcasting.................... 7.0 29.2 7.5 22.7 Telecommunications.............. 8.9 36.8 9.3 27.9 Printing services............... 0.6 2.5 0.3 0.9 Other........................... (0.4) (1.8) 5.8 17.5 ------- ----- ------- ----- Total operating earnings........ $ 24.2 100.0% $ 33.2 100.0% ======= ===== ======= ===== The decrease in total operating earnings was primarily due to the decrease in the litigation reserve in the second quarter of 2002 and the recording of a liability for employment taxes in the second quarter of 2003 at our other reportable segment, the additional costs related to the daily newspaper's new production facility, the increase in depreciation at our television broadcasting business and the decrease in the profit margin on operating revenue on telecommunications services due to service disconnections and price reductions that occurred during 2002, partially offset by decreases in operating costs and expenses at our printing services business. Our consolidated EBITDA in the second quarter of 2003 was $35.3 million, a decrease of $8.7 million, or 19.8%, compared to $44.0 million in the second quarter of 2002. We define EBITDA as net earnings plus total other income and expense, provision for income taxes, gain/loss from discontinued operations, net, cumulative effect of accounting change, net, depreciation and amortization. We believe the presentation of EBITDA is relevant and useful because it helps improve our investors' ability to understand our operating performance and makes it easier to compare our results with other companies that have different financing and capital structures or tax rates. Our management uses EBITDA, among other things, to evaluate our operating performance, to value prospective acquisitions and as a component of incentive compensation targets for certain management personnel. In addition, our lenders use EBITDA to measure our ability to service our debt. EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States. EBITDA should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies. In addition, EBITDA does not represent funds available for discretionary use. The following table presents a reconciliation of our consolidated net earnings to consolidated EBITDA for the second quarter of 2003 and 2002: 2003 2002 -------- -------- (in millions) Net earnings....................................... $ 13.9 $ 16.7 Total other (income) and expense................... 0.8 -- Provision for income taxes......................... 9.5 14.9 Loss from discontinued operations, net............. -- 1.7 Depreciation....................................... 10.7 10.2 Amortization....................................... 0.4 0.5 ------- ------- EBITDA............................................. $ 35.3 $ 44.0 ======= ======= The decrease in total EBITDA is consistent with decreases in operating earnings in our other, publishing, broadcasting and telecommunications reportable segments partially offset by an increase in operating earnings at our printing services reportable segment. Publishing Operating revenue from publishing in the second quarter of 2003 was $74.2 million, an increase of $0.4 million, or 0.5%, compared to $73.8 million in the second quarter of 2002. Operating earnings from publishing in the second quarter of 2003 were $8.1 million, a decrease of $2.2 million, or 21.7%, compared to $10.3 million in the second quarter of 2002. 10 The following table presents our publishing operating revenue by category for the second quarter of 2003 and 2002:

Advertising revenue in the second quarter of 2003 accounted for 75.3% of total publishing revenue compared to 74.5% in the second quarter of 2002. Retail advertising revenue in the second quarter of 2003 was $32.5 million, an increase of $1.1 million, or 3.5%, compared to $31.4 million in the second quarter of 2002. The increase is comprised of a $0.8 million increase in daily newspaper retail ROP (run-of-press) and a $0.5 million increase in daily newspaper retail preprints offset by a $0.2 million decrease in community newspaper retail advertising. The increase in advertising revenue at the daily newspaper in the second quarter of 2003 is primarily due to a new advertising program for a large retail customer and an increase in advertising revenue from several telecommunications customers. The shift to preprint advertising from retail ROP by certain major local retail customers continued in the second quarter of 2003. Classified advertising revenue in the second quarter of 2003 was $16.2 million, a decrease of $1.4 million, or 8.0%, compared to $17.6 million in the second quarter of 2002. Decreases in employment advertising of $0.8 million and automotive advertising of $0.4 million at our daily newspaper and a $0.4 million decrease at our community newspapers and shoppers were partially offset by increases in general advertising of $0.1 million and real estate advertising of $0.1 million. The decrease in employment advertising, which accounted for 29.6% of total classified advertising in the second quarter of 2003, represented a 15.2% decrease from the second quarter of 2002. We believe the decrease in employment and automotive advertising resulted primarily from continuing economic weakness and uncertainty. General advertising revenue in the second quarter of 2003 was $2.5 million, an increase of $0.3 million, or 13.6%, compared to $2.2 million in the second quarter of 2002. The increase was attributable to an increase in general preprints mainly from a large computer hardware manufacturer. The following table presents our daily newspaper's core newspaper advertising linage by category for the second quarter of 2003 and 2002: 2003 2002 Change ------ ------ ------ Advertising linage (inches in thousands): Full run Retail................................... 168.8 160.7 +5.0% Classified............................... 207.6 215.4 -3.6% General.................................. 10.7 10.6 +0.9% ------ ------ Total full run................................ 387.1 386.7 +0.1% Part run...................................... 28.8 22.0 +30.9% ------ ------ Total advertising linage...................... 415.9 408.7 +1.8% ====== ====== Preprint pieces (in millions)................. 189.3 174.8 +8.3% ====== ====== Total advertising linage in the second quarter of 2003 increased 1.8% compared to the second quarter of 2002. The increase was largely due to a 30.9% increase in part run linage and a 0.1% increase in full run linage. The part run linage in the second quarter of 2003 increased primarily due to an increase in zoned retail advertising. Full run linage increased in the second quarter of 2003 primarily due to a 5.0% increase in retail advertising and a 0.9% increase in general advertising partially offset by a 3.6% decrease in classified advertising. The increase in retail advertising linage is consistent with its revenue increase and the increase in general advertising linage is due to increased general ROP revenue from telecommunications and pharmaceutical customers while the decrease in classified advertising linage is consistent with its revenue decrease. Preprint advertising pieces rose 8.3% primarily as a result of the continuing shift to preprint advertising from by certain major local retail customers. 11 The following table presents the full pages of advertising and revenue per page of our community newspapers and shoppers for the second quarter of 2003 and 2002: 2003 2002 Change -------- -------- ------ Full pages of advertising: Community newspapers................ 21,592 22,814 -5.4% Shoppers............................ 23,036 25,552 -9.8% -------- -------- Total full pages of advertising.......... 44,628 48,366 -7.7% ======== ======== Revenue per page......................... $ 327.19 $ 313.69 +4.3% ======== ======== Total pages of full page advertising in the second quarter of 2003 decreased 7.7% compared to the second quarter of 2002. The decrease was largely due to a 9.8% decrease in advertising in shoppers and a 5.4% decrease in advertising in community newspapers. This corresponds with the decrease in community newspapers and shoppers advertising revenue. Revenue per page increased 4.3% due to rate increases. Other advertising revenue, consisting of revenue from direct marketing efforts, JSOnline, niche publications and event marketing, in the second quarter of 2003 was $4.7 million, an increase of $0.9 million, or 23.7%, compared to $3.8 million in the second quarter of 2002. The increase was largely due to increases in direct mail advertising and online classified advertising. Circulation revenue in the second quarter of 2003 accounted for 14.3% of total publishing revenue compared to 15.3% in the second quarter of 2002. Circulation revenue in the second quarter of 2003 was $10.6 million, a decrease of $0.7 million, or 6.2%, compared to $11.3 million in the second quarter of 2002. The decrease in circulation revenue is mainly attributed to an increase in reduced rate offerings at the daily newspaper. Average net paid circulation for the Milwaukee Journal Sentinel's weekday edition increased 5.3% in the second quarter of 2003 compared to the second quarter of 2002. Average net paid circulation for Milwaukee Journal Sentinel's Sunday edition increased 0.5% in the second quarter of 2003 compared to the second quarter of 2002. On June 30, 2002, in an effort to increase readership in certain areas of Milwaukee County, we began offering greater discounts on home delivery and single copy sales. Circulation in those areas has increased since offering the discounts. Average paid circulation for our community newspapers decreased 0.1% in the second quarter of 2003 compared to the second quarter of 2002. Other revenue, which consists of revenue from commercial printing opportunities at the print plants for our community newspapers and shoppers and promotional and distribution revenue of our daily newspaper, in the second quarter of 2003 accounted for 10.4% of total publishing revenue compared to 10.2% in the second quarter of 2002. Other revenue in the second quarter of 2003 was $7.7 million, an increase of $0.2 million, or 2.7%, compared to $7.5 million in the second quarter of 2002. The increase was primarily attributed to an increase in promotional revenue at the daily newspaper. Commercial printing revenue at our community newspapers and shoppers remained flat compared to the second quarter of 2002. Publishing operating earnings in the second quarter of 2003 were $8.1 million, a decrease of $2.2 million, or 21.7%, compared to $10.3 million in the second quarter of 2002. The decrease was attributed to $1.6 million in additional costs related to the daily newspaper's production operations being conducted in two facilities and an increase of $0.6 million in the cost of newsprint. Included in the $1.6 million of additional costs were $0.6 million for equipment disposal costs, a $0.6 million increase in depreciation expense and $0.2 million increase in payroll and benefits costs. The increase in the cost of newsprint was primarily attributed to price increases totaling $0.9 million partially offset by $0.3 million in savings at the daily newspaper from utilizing a smaller page size. As of March 30, 2003, all production and distribution of the daily newspaper have been transitioned to the new production facility. Production and distribution of the newspaper were done at both the old and new production facilities from October 2002 until March 2003. Although the facility is operational, many final adjustments to the equipment have not yet been made and our operators are still learning how to effectively utilize the features of the new equipment. We expect that our new presses will provide improved print reproduction quality and increased productivity, as well as additional opportunities to pursue commercial printing revenue from third parties. We do not expect to achieve full benefit from the operating efficiencies of the new production facility before the end of the year. Broadcasting Operating revenue from broadcasting in the second quarter of 2003 was $35.1 million, an increase of $0.2 million, or 0.4%, compared to $34.9 million in the second quarter of 2002. Operating earnings from broadcasting in the second quarter of 2003 were $7.0 million, a decrease of $0.5 million, or 6.2%, compared to $7.5 million in the second quarter of 2002. Operating revenue from our radio stations in the second quarter of 2003 was $17.9 million, a decrease of $0.2 million, or 1.1%, compared to $18.1 million in the second quarter of 2002. The decrease was primarily attributed to a $0.2 million decrease in local advertising revenue and a $0.1 million decrease from other advertising revenue, offset by a $0.1 million increase in national advertising revenue across most markets. 12 Operating earnings from our radio stations in the second quarter of 2003 were $3.7 million, an increase of $0.3 million, or 8.8%, compared to $3.4 million in the second quarter of 2002. The increase was primarily attributed to a decrease in operating costs and expenses resulting from cost control initiatives at all of our radio stations. Operating revenue from our television stations in the second quarter of 2003 was $17.2 million, an increase of $0.4 million, or 2.4%, compared to $16.8 million in the second quarter of 2002. The increase was primarily attributed to an increase of $0.7 million in local advertising revenue in most markets offset by decreases of $0.2 in national advertising revenue and $0.1 million in production revenue. Operating earnings from our television stations in the second quarter of 2003 were $3.3 million, a decrease of $0.8 million, or 19.5%, compared to $4.1 million in the second quarter of 2002. The decrease was primarily attributed to increases in news expenses, technology and depreciation expenses, programming expenses and promotional expenses. The threatened outbreak of hostilities in Iraq in March 2003 and the war itself had a $0.3 million negative impact on our television broadcasting revenue in the second quarter of 2003 due to reduced spending levels by some advertisers. There was hesitancy on the part of some advertisers to place schedules after the war began and cancellations by some advertisers during the war. Telecommunications Operating revenue from telecommunications in the second quarter of 2003 was $34.6 million, an increase of $0.4 million, or 1.2%, compared to $34.2 million in the second quarter of 2002. Operating earnings from telecommunications in the second quarter of 2003 were $8.9 million, a decrease of $0.4 million, or 4.0%, compared to $9.3 million in the second quarter of 2002. Wholesale telecommunication services provide network transmission solutions for other service providers by offering bulk transmission capacity. Operating revenue from wholesale services in the second quarter of 2003 was $21.6 million, a decrease of $1.0 million, or 4.4%, compared to $22.6 million in the second quarter of 2002. The decrease was primarily attributed to service disconnections. Due to the turmoil in the telecommunications industry, we have experienced a significant increase in customers disconnecting or terminating service. We believe this is primarily the result of financially weaker customers going out of business, along with current customers eliminating excess network capacity and thus minimizing their costs. While we are not always able to determine the specific reason a customer may disconnect service, we believe the trend of customers focusing on reducing their network costs will continue, primarily due to consolidating traffic on least cost routes and economic and other changes occurring within our customers' "end-user" customer base. Monthly recurring revenue from wholesale services was $7.4 million at both the end and the beginning of the second quarter of 2003 compared to $7.6 million at the end of the second quarter of 2002. During the second quarter of 2003, new circuit connections of $0.3 million in monthly recurring revenue were offset by service disconnections. Commercial telecommunication services provide advanced data communications and long distance service to small and medium sized businesses in the Upper Midwest, principally in Wisconsin, Michigan, Indiana, Minnesota and Illinois. Operating revenue from commercial services in the second quarter of 2003 was $13.0 million, an increase of $1.4 million, or 12.1%, compared to $11.6 million in the second quarter of 2002. The increase was primarily attributed to an increase in long distance services. Monthly recurring revenue from commercial advanced data services at the end of the second quarter of 2003 was $3.2 million compared to $3.1 million at the beginning of the second quarter of 2003 and $3.0 million at the end of the second quarter of 2002. The decrease in operating earnings from telecommunications was primarily attributed to wholesale service disconnections that occurred during 2003 and 2002. We expect service disconnections and price reductions in our wholesale telecommunications business will cause an increasing downward trend that could result in a significant decrease in our telecommunications operating earnings during 2003. WorldCom and Global Crossing together accounted for 18.4% and 17.9% of our telecommunications revenue in the second quarter of 2003 and 2002, respectively. Global Crossing filed for Chapter 11 bankruptcy protection in January 2002 and WorldCom filed for Chapter 11 bankruptcy protection in July 2002. In April 2003, we sold our WorldCom pre-petition receivable, net of applicable "set-off" accounts payable, to a third party. We continue to provide services to WorldCom and Global Crossing and receive advance or timely payment for those services. The loss of the ongoing business from either of these two customers would have a significant adverse effect on our results of operations. In addition to the legal costs of protecting our interests and maintaining the revenue from these contracts, we remain at risk to lose a portion of our business through rejection of some or all of those underlying pre-petition circuit orders and/or the re-pricing of continued services post bankruptcy. A renewal service contract with Global Crossing is being negotiated, though Global Crossing retains the right to accept or reject our current contract under federal bankruptcy law. WorldCom also has a right to accept or reject our current contract under federal bankruptcy law. If either contract is rejected, we would have an unsecured claim for the balance due on the contracts in the bankruptcy proceeding. We do not believe we have a material bad debt exposure because we bill all data services for both wholesale and commercial customers in advance of providing services and we have the contractual ability to turn off service if a payment problem exits. Most customers are required to pay their bill before services are provided. 13 Printing Services Operating revenue from printing services in the second quarter of 2003 was $19.2 million, a decrease of $2.0 million, or 9.7%, compared to $21.2 million in the second quarter of 2002. Operating earnings from printing services in the second quarter of 2003 were $0.6 million, an increase of $0.3 million, or 95.2%, compared to $0.3 million in the second quarter of 2002. The decrease in printing services operating revenue was primarily attributed to the reduction in revenue from our largest customer, Dell Computer Corporation, resulting from its decision to switch vendors for one of the several products they purchase from us, as well as the loss of sales resulting from the consolidation of assembly and fulfillment operations into Michigan in the third quarter of 2002 and the closure of our CD-ROM mastering and replications operation in February 2003. The increase in printing services operating earnings was primarily attributed to a reduction in operational costs. These increases were partially offset by the decreases in sales of products with higher margins, a $0.3 million charge for the settlement of a customer invoicing dispute and $0.2 million in closure costs related to the CD-ROM mastering and replications operations. Dell Computer Corporation accounted for 27.8% and 37.0% of our printing services revenue in the second quarter of 2003 and 2002, respectively. The loss of this business could have a material adverse effect on our results of operations. Other Other operating revenue in the second quarter of 2003 was $22.0 million, an increase of $0.1 million, or 0.8%, compared to $21.9 million in the second quarter of 2002. Other operating losses in the second quarter of 2003 were $0.4 million, a decrease of $6.2 million, or 107.7%, compared to operating earnings of $5.8 million in the second quarter of 2002. The following table presents our other operating revenue and operating earnings by business for the second quarter of 2003 and 2002:

The increase in other operating revenue was primarily attributed to an increase in mail and print services and database marketing services in our direct marketing services business and was partially offset by a decrease in gravure labels sold to SAB/Miller Brewing Company by our label printing business. Included in operating revenue from our direct marketing services is $5.0 million and $4.7 million of postage amounts billed to customers in the second quarter of 2003 and 2002, respectively. The decrease in other operating earnings was primarily attributed to the decrease in the litigation reserve by $4.1 million in the second quarter of 2002 to reflect a settlement and the recording of a $2.1 million liability for employment taxes in the second quarter of 2003. SAB/Miller Brewing Company accounted for 47.9% and 52.8% of our label printing business' revenue in the second quarter of 2003 and 2002, respectively. In 2003, our label printing business was in the third year of a five-year contract with SAB/Miller Brewing Company. The loss of SAB/Miller Brewing Company could have a material adverse effect on our results of operations. Non Operating Income and Taxes from Continuing Operations Interest income and dividends in the second quarter of 2003 were $0.1 million, a decrease of $0.1 million, or 70.8%, compared to $0.2 million in the second quarter of 2002. The decrease was primarily attributed to the decrease in the invested balances of cash and cash equivalents. Interest expense in the second quarter of 2003 was $0.9 million compared to $0.2 million in the second quarter of 2002. Gross interest expense from borrowings under our credit agreement in the second quarter of 2003 was $0.4 million compared to $0.3 million in the second quarter of 2002. Interest expense of $0.3 million was accrued for a liability for employment taxes in the second quarter of 2003. There was no interest expense capitalized as part of our construction of the Milwaukee Journal Sentinel production facility in the second quarter of 2003 compared to $0.3 million in the second quarter of 2002. The effective tax rate on continuing operations was 40.6% in the second quarter of 2003 compared to 44.8% in the second quarter of 2002. The difference between the statutory federal and state tax rates and the effective tax rate in the second quarter of 2002 was primarily the result of non deductible expenses related to litigation that was settled in the second quarter of 2002. 14 Discontinued Operations In January 2002, we announced the closure of Fox Cities Newspapers, located in Appleton, Wisconsin, which published six community newspapers. These community newspapers were part of the publishing segment. On April 29, 2002, the board of directors of our French printing services subsidiary approved a resolution to proceed through a liquidation process. The remaining operations of IPC Communication Services, S.A., were turned over to a liquidator on December 31, 2002. The operations of Fox Cities Newspapers and IPC Communication Services, S.A. have been reflected as discontinued operations in our consolidated financial statements. Net revenue from discontinued operations in the second quarter of 2002 was $1.3 million. The loss from discontinued operations in the second quarter of 2002 was $1.7 million. Applicable income tax benefits were $2.5 million in the second quarter of 2002. Net assets of discontinued operations at June 15, 2003 and December 31, 2002 were zero. Two Quarters Ended June 15, 2003 compared to Two Quarters Ended June 16, 2002 Consolidated Our consolidated operating revenue in the two quarters of 2003 was $359.5 million, a decrease of $6.6 million, or 1.8%, compared to $366.1 million in the two quarters of 2002. Our consolidated operating costs and expenses in the two quarters of 2003 were $207.8 million, an increase of $2.6 million, or 1.2%, compared to $205.2 million in the two quarters of 2002. Our consolidated selling and administrative expenses in the two quarters of 2003 were $108.3 million, an increase of $1.1 million, or 1.0%, compared to $107.2 million in the two quarters of 2002. The following table presents our total operating revenue by segment, total operating costs and expenses, selling and administrative expenses and total operating earnings as a percent of total operating revenue for the two quarters of 2003 and 2002:

The decrease in total operating revenue was due to a reduction in revenue from our largest customer in our printing services business, a decrease in local and other advertising from our radio stations, the decrease in Olympic advertising at our television stations, a decrease in classified advertising and circulation revenue at our publishing business and service disconnections at our telecommunications business. These decreases were partially offset by an increase from our other reportable segment, specifically in direct mail services from our direct marketing services business and an increase in gravure label printing from our label printing business. The increase in total operating costs and expenses was primarily due to additional costs related the daily newspaper's transition to its new production facility. The increase in selling and administrative expenses was primarily due to the recording of a liability for employment taxes. 15 Our consolidated operating earnings in the two quarters of 2003 were $43.4 million, a decrease of $10.3 million, or 19.1%, compared to $53.7 million in the two quarters of 2002. The following table presents our operating earnings by segment for the two quarters of 2003 and 2002: Percent of Percent of Total Total Operating Operating 2003 Revenue 2002 Revenue -------- ---------- -------- ---------- (dollars in millions) Publishing.................... $ 11.6 26.8% $ 15.5 28.9% Broadcasting.................. 10.5 24.1 12.2 22.8 Telecommunications............ 18.1 41.7 19.6 36.5 Printing services............. 1.7 4.0 1.1 2.0 Other......................... 1.5 3.4 5.3 9.8 -------- ----- -------- ----- Total operating earnings...... $ 43.4 100.0% $ 53.7 100.0% ======== ===== ======== ===== The decrease in total operating earnings was primarily due to the $6.6 million decrease in operating revenue, the additional costs related to the daily newspaper's new production facility, the recording of a liability for employment taxes at our other reportable segment and the decrease in the profit margin on operating revenue on telecommunications services due to service disconnections and price reductions. Our consolidated EBITDA in the two quarters of 2003 was $65.3 million, a decrease of $9.5 million, or 12.7%, compared to $74.8 million in the two quarters of 2002. We define EBITDA as net earnings plus total other income and expense, provision for income taxes, gain/loss from discontinued operations, net, cumulative effect of accounting change, net, depreciation and amortization. We believe the presentation of EBITDA is relevant and useful because it helps improve our investors' ability to understand our operating performance and makes it easier to compare our results with other companies that have different financing and capital structures or tax rates. Our management uses EBITDA, among other things, to evaluate our operating performance, to value prospective acquisitions and as a component of incentive compensation targets for certain management personnel. In addition, our lenders use EBITDA to measure our ability to service our debt. EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States. EBITDA should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies. In addition, EBITDA does not represent funds available for discretionary use. The following table presents a reconciliation of our consolidated net earnings to consolidated EBITDA for the two quarters of 2003 and 2002: 2003 2002 -------- -------- (in millions) Net earnings....................................... $ 25.2 $ 24.0 Total other (income) and expense................... 1.2 (0.5) Provision for income taxes......................... 17.0 23.6 (Gain) loss from discontinued operations, net...... -- 0.1 Cumulative effect of accounting change, net........ -- 6.5 Depreciation....................................... 21.1 20.2 Amortization....................................... 0.8 0.9 ------- ------- EBITDA............................................. $ 65.3 $ 74.8 ======= ======= The decrease in total EBITDA is consistent with decreases in operating earnings in our publishing, broadcasting, other and telecommunications reportable segment partially offset by an increase in operating earnings at our printing services reportable segment. Publishing Operating revenue from publishing in the two quarters of 2003 was $142.5 million, a decrease of $0.8 million, or 0.6%, compared to $143.3 million in the two quarters of 2002. Operating earnings from publishing in the two quarters of 2003 were $11.6 million, a decrease of $3.9 million, or 25.0%, compared to $15.5 million in the two quarters of 2002. 16 The following table presents our publishing operating revenue by category for the two quarters of 2003 and 2002:

Advertising revenue in the two quarters of 2003 accounted for 74.3% of total publishing revenue compared to 73.1% in the two quarters of 2002. Retail advertising revenue in the two quarters of 2003 was $60.5 million, an increase of $1.6 million, or 2.7%, compared to $58.9 million in the two quarters of 2002. The increase is comprised of a $1.4 million increase in daily newspaper retail preprints and a $0.6 million increase in daily newspaper retail ROP (run-of-press) partially offset by a $0.4 million decrease in community newspaper and shopper retail advertising. The increase in advertising revenue at the daily newspaper in the two quarters of 2003 is primarily due to the shift to preprint advertising from ROP by certain major local retail customers, a new advertising program for a large retail customer and an increase in advertising revenue from several telecommunications customers. Classified advertising revenue in the two quarters of 2003 was $31.4 million, a decrease of $2.0 million, or 6.0%, compared to $33.4 million in the two quarters of 2002. Decreases in employment advertising of $1.1 million and automotive advertising of $0.9 million at our daily newspaper and a $0.8 million decrease at our community newspapers and shoppers were partially offset by increases in general advertising of $0.6 million and real estate advertising of $0.2 million. The decrease in employment advertising, which accounted for almost 32.7% of total classified advertising in the two quarters of 2003, represented a 9.9% decrease from the two quarters of 2002. We believe the decrease in employment and automotive advertising resulted primarily from continuing economic weakness and uncertainty. General advertising revenue in the two quarters of 2003 was $5.0 million, an increase of $0.4 million, or 8.7%, compared to $4.6 million in the two quarters of 2002. The increase was primarily attributable to an increase in general preprints mainly from a large computer hardware manufacturer and general ROP advertisements mainly from telecommunications and pharmaceutical customers. The following table presents the advertising linage of our daily newspaper's core newspaper by category for the two quarters of 2003 and 2002: 2003 2002 Change ------ ------ ------ Advertising linage (inches in thousands): Full run Retail................................ 312.7 316.2 -1.1% Classified............................ 393.9 411.8 -4.5% General............................... 21.9 21.3 +2.8% ------ ------ Total full run............................. 728.5 749.3 -2.8% Part run................................... 46.8 33.2 +41.0% ------ ------ Total advertising linage................... 775.3 782.5 -0.9% ====== ====== Preprint pieces (in millions).............. 392.6 357.5 +9.8% ====== ====== Total advertising linage in the two quarters of 2003 decreased 0.9% compared to the two quarters of 2002. The decrease was largely due to a 2.8% decrease in full run linage offset by a 41.0% increase in part run linage. Full run linage in the two quarters of 2003 decreased primarily due to a 4.5% decrease in classified advertising and a 1.1% decrease in retail advertising partially offset by 2.8% increase in general advertising. The decrease in classified advertising linage is consistent with the decrease in classified advertising revenue and the increase in general advertising linage is consistent with the increase in general advertising revenue. Part run linage increased in the two quarters of 2003 due to an increase in retail advertising. Preprint advertising pieces rose 9.8% primarily as a result of the continuing shift to preprint advertising from full run retail advertising by certain major local retail customers. 17 The following table presents the full pages of advertising and revenue per page of our community newspapers and shoppers for the two quarters of 2003 and 2002: 2003 2002 Change -------- -------- ------ Full pages of advertising: Community newspapers.................... 40,766 42,648 -4.4% Shoppers................................ 43,442 48,304 -10.1% -------- -------- Total full pages of advertising............ 84,208 90,952 -7.4% ======== ======== Revenue per page........................... $ 319.82 $ 309.56 3.3% ======== ======== Total pages of full page advertising in the two quarters of 2003 decreased 7.4% compared to the two quarters of 2002. The decrease was largely due to a 10.1% decrease in advertising in shoppers and a 4.4% decrease in advertising in community newspapers. Revenue per page increased 3.3% due to rate increases. Other advertising revenue, consisting of revenue from direct marketing efforts, JSOnline, niche publications and event marketing, in the two quarters of 2003 was $9.0 million, an increase of $1.1 million, or 13.9%, compared to $7.9 million in the two quarters of 2002. The increase was largely due to increased direct mail advertising and online classified advertising. Circulation revenue in the two quarters of 2003 accounted for 14.7% of total publishing revenue compared to 15.8% in the two quarters of 2002. Circulation revenue in the two quarters of 2003 was $20.9 million, a decrease of $1.7 million, or 7.5%, compared to $22.6 million in the two quarters of 2002. The decrease in circulation revenue is mainly attributed to an increase in reduced rate offerings at the daily newspaper. Average net paid circulation for the Milwaukee Journal Sentinel's weekday edition increased 5.1% in the two quarters of 2003 compared to the two quarters of 2002. Average net paid circulation for Milwaukee Journal Sentinel's Sunday edition increased 0.5% in the two quarters of 2003 compared to the two quarters of 2002. On June 30, 2002, in an effort to increase readership in certain areas of Milwaukee County, we began offering greater discounts on home delivery and single copy sales. Circulation in those areas has increased since offering the discounts. Average paid circulation for our community newspapers decreased 2.8% in the two quarters of 2003 compared to the two quarters of 2002. Other revenue, which consists of revenue from commercial printing opportunities at the print plants for our community newspapers and shoppers and other revenue at our daily newspaper, in the two quarters of 2003 accounted for 11.0% of total publishing revenue compared to 11.1% in the two quarters of 2002. Other revenue in the two quarters of 2003 was $15.7 million, a decrease of $0.2 million, or 1.3%, compared to $15.9 million in the two quarters of 2002. The decrease was primarily attributed to reduced press runs and page counts from existing commercial printing customers. Publishing operating earnings in the two quarters of 2003 were $11.6 million, a decrease of $3.9 million, or 25.0%, compared to $15.5 million in the two quarters of 2002. The decrease was primarily due to $3.6 million in additional costs related to the daily newspaper's production operations being conducted in two facilities in the two quarters of 2003 and a $0.2 million increase in the cost of newsprint. Included in the $3.6 million of additional costs were a $1.5 million increase in depreciation expense, a $0.6 million increase in payroll and benefits costs, $0.6 million equipment disposal expenses, $0.3 million new product promotion expenses and $0.3 million increase in expenses for new equipment testing and utilities. The increase in the cost of newsprint was primarily attributed to price increases totaling $0.7 million partially offset by $0.3 million in savings at the daily newspaper from utilizing a smaller page size and decrease of $0.2 million from consumption. As of March 30, 2003, all production and distribution of the daily newspaper have been transitioned to the new production facility. Production and distribution of the newspaper were done at both the old and new production facilities from October 2002 until March 2003. Although the facility is operational, many final adjustments to the equipment have not yet been made and our operators are still learning how to effectively utilize the features of the new equipment. We expect that our new presses will provide improved print reproduction quality and increased productivity, as well as additional opportunities to pursue commercial printing revenue from third parties. We do not expect to achieve full benefit from the operating efficiencies of the new production facility before the end of the year. Broadcasting Operating revenue from broadcasting in the two quarters of 2003 was $64.5 million, a decrease of $1.1 million, or 1.7%, compared to $65.6 million in the two quarters of 2002. Operating earnings from broadcasting in the two quarters of 2003 were $10.5 million, a decrease of $1.8 million, or 14.4%, compared to $12.2 million in the two quarters of 2002. Operating revenue from our radio stations in the two quarters of 2003 was $32.3 million, a decrease of $0.7 million, or 2.1%, compared to $33.0 million in the two quarters of 2002. The decrease was primarily attributed to a $0.7 million decrease in local advertising revenue and a $0.4 million decrease from other advertising revenue, offset by a $0.4 million increase in national advertising revenue across certain markets. 18 Operating earnings from our radio stations in the two quarters of 2003 were $5.4 million, an increase of $0.4 million, or 8.0%, compared to $5.0 million in the two quarters of 2002. The increase was primarily attributed to a decrease in operating costs and expenses resulting from cost control initiatives at all of our radio stations. Operating revenue from our television stations in the two quarters of 2003 was $32.2 million, a decrease of $0.4 million, or 1.2%, compared to $32.6 million in the two quarters of 2002. The decrease was primarily attributed to a $2.5 million decrease in Olympic advertising revenue, a $0.3 million decrease in political and issue advertising revenue and a $0.1 million decrease in other revenue which was partially offset by a $2.2 million increase in local advertising revenue and a $0.3 million increase in national advertising revenue. Operating earnings from our television stations in the two quarters of 2003 were $5.1 million, a decrease of $2.1 million, or 29.2%, compared to $7.2 million in the two quarters of 2002. The decrease was primarily attributed to increases in news expenses, technology and depreciation expenses, programming expenses and promotional expenses. The threatened outbreak of hostilities in Iraq in March 2003 and the war itself had a $0.6 million negative impact on our television broadcasting revenue in the two quarters of 2003 due to reduced spending levels by some advertisers. There was hesitancy on the part of some advertisers to place schedules during the period of time leading up to the war, cancellations by some advertisers for the duration of war coverage and elimination of advertising inventory available from our television networks, our local news products and syndicated and local programming during their coverage of the war. Telecommunications Operating revenue from telecommunications in the two quarters of 2003 was $68.4 million, a decrease of $0.7 million, or 1.1%, compared to $69.1 million in the two quarters of 2002. Operating earnings from telecommunications in the two quarters of 2003 were $18.1 million, a decrease of $1.5 million, or 7.5%, compared to $19.6 million in the two quarters of 2002. Wholesale telecommunication services provide network transmission solutions for other service providers by offering bulk transmission capacity. Operating revenue from wholesale services in the two quarters of 2003 was $43.0 million, a decrease of $2.8 million, or 6.1%, compared to $45.8 million in the two quarters of 2002. The decrease was primarily due to service disconnections. Due to the turmoil in the telecommunications industry, we have experienced a significant increase in customers disconnecting or terminating service. We believe this is primarily the result of financially weaker customers going out of business, along with current customers eliminating excess network capacity and thus minimizing their costs. While we are not always able to determine the specific reason a customer may disconnect service, we believe the trend of customers focusing on reducing their network costs will continue, primarily due to consolidating traffic on least cost routes and economic and other changes occurring within our customers' "end-user" customer base. Monthly recurring revenue from wholesale services at the end of the two quarters of 2003 was $7.4 million compared to $7.5 million at the beginning of 2003 and $7.6 million at the end of the two quarters of 2002. During the two quarters of 2003, new circuit connections of $0.4 million in monthly recurring revenue were more than offset by service disconnections. Commercial telecommunication services provide advanced data communications and long distance service to small and medium sized businesses in the Upper Midwest, principally in Wisconsin, Michigan, Indiana, Minnesota and Illinois. Operating revenue from commercial services in the two quarters of 2003 was $25.4 million, an increase of $2.1 million, or 9.0%, compared to $23.3 million in the two quarters of 2002. The increase was primarily attributed to an increase in long distance services. Monthly recurring revenue from commercial advanced data services at the end of the two quarters of 2003 of $3.2 million compared to $3.0 million at the beginning of 2003 and at the end of the two quarters of 2002. The decrease in operating earnings from telecommunications was primarily attributed to wholesale service disconnections that occurred during 2003 and 2002. We expect service disconnections and price reductions in our wholesale telecommunications business will cause an increasing downward trend that could result in a significant decrease in our telecommunications operating earnings during 2003. WorldCom and Global Crossing together accounted for 18.7% and 20.6% of our telecommunications revenue in the two quarters of 2003 and 2002, respectively. Global Crossing filed for Chapter 11 bankruptcy protection in January 2002 and WorldCom filed for Chapter 11 bankruptcy protection in July 2002. In April 2003, we sold our WorldCom pre-petition receivable, net of applicable "set-off" accounts payable, to a third party. We continue to provide services to WorldCom and Global Crossing and receive advance or timely payment for those services. The loss of the ongoing business from either of these two customers would have a significant adverse effect on our results of operations. In addition to the legal costs of protecting our interests and maintaining the revenue from these contracts, we remain at risk to lose a portion of our business through rejection of some or all of those underlying pre-petition circuit orders and/or the re-pricing of continued services post-bankruptcy. A renewal service contract with Global Crossing is being negotiated, though Global Crossing retains the right to accept or reject our current contract under federal bankruptcy law. WorldCom also has a right to accept or reject our current contract under federal bankruptcy law. If either contract is rejected, we would have an unsecured claim for the balance due on the contracts in the bankruptcy proceeding. 19 We do not believe we have a material bad debt exposure because we bill all data services for both wholesale and commercial customers in advance of providing services and we have the contractual ability to turn off service if a payment problem exists. Most customers are required to pay their bill before services are provided. Printing Services Operating revenue from printing services in the two quarters of 2003 was $40.2 million, a decrease of $6.1 million, or 13.1%, compared to $46.3 million in the two quarters of 2002. Operating earnings from printing services in the two quarters of 2003 were $1.7 million, an increase of $0.6 million, or 63.0%, compared to $1.1 million in the two quarters of 2002. The decrease in printing services operating revenue was primarily attributed to the reduction in revenue from our largest customer, Dell Computer Corporation, resulting from its decision to switch vendors for one of the several products they purchase from us, as well as the loss of sales resulting from the consolidation of assembly and fulfillment operations into Michigan in the third quarter of 2002 and the closure of our CD-ROM mastering and replications operation in February 2003. The increase in printing services operating earnings was primarily attributed to a reduction in operational costs and an increase in the sales of products with higher margins. These increases were partially offset by the decrease in revenue, a $0.5 million charge for the settlement of a customer invoicing dispute and $0.5 million in closure costs related to the CD-ROM mastering and replications operations. Dell Computer Corporation accounted for 28.2% and 35.6% of our printing services revenue in the two quarters of 2003 and 2002, respectively. The loss of this business could have a material adverse effect on our results of operations. Other Other operating revenue in the two quarters of 2003 was $43.9 million, an increase of $2.1 million, or 5.1%, compared to $41.8 million in the two quarters of 2002. Other operating earnings in the two quarters of 2003 were $1.5 million, a decrease of $3.8 million, or 71.7% compared to $5.3 million in the two quarters of 2002. The following table presents our other operating revenue and operating earnings by business for the two quarters of 2003 and 2002:

The increase in other operating revenue was primarily attributed to an increase in mail and print services and database marketing services in our direct marketing services business and in the gravure label printing operation in new products for our consumer goods and beverage customers. Included in operating revenue from our direct marketing services is $9.6 million and $9.5 million of postage amounts billed to customers in the two quarters of 2003 and 2002, respectively. The decrease in other operating earnings was primarily attributed to the decrease in the litigation reserve by $4.1 million to reflect a settlement during the two quarters ended 2002 and the recording of a $2.1 million liability for employment taxes in the two quarters of 2003 partially offset by the $1.3 million impairment of a customer list recorded in the two quarters of 2002 at our direct marketing services business and the increase in revenue at both our direct marketing services business and our label printing business. SAB/Miller Brewing Company accounted for 45.7% and 53.2% of our label printing business' revenue in the two quarters of 2003 and 2002, respectively. In 2003, our label printing business was in the third year of a five-year contract with SAB/Miller Brewing Company. The loss of SAB/Miller Brewing Company could have a material adverse effect on our results of operations. Non Operating Income and Taxes from Continuing Operations Interest income and dividends in the two quarters of 2003 were $0.1 million, a decrease of $0.7 million, or 83.7%, compared to $0.8 million in the two quarters of 2002. The decrease was primarily attributed to the decrease in the invested balances of cash and cash equivalents and interest income received in the two quarters of 2002 from refunds of state income taxes. Interest expense in the two quarters of 2003 was $1.4 million compared to $0.3 million in the two quarters of 2002. Gross interest expense from borrowings under our credit agreement in the two quarters of 2003 was $1.1 million compared to $0.6 million in the two quarters of 2002. Interest expense of $0.3 million was accrued for a liability for employment taxes in the two quarters of 2003. There was no interest expense 20 capitalized as part of our construction of the Milwaukee Journal Sentinel production facility in the two quarters of 2003 compared to $0.5 million in the two quarters of 2002. The effective tax rate on continuing operations was 40.3% in the two quarters of 2003 compared to 43.5% in the two quarters of 2002. The difference between the statutory federal and state tax rates and the effective tax rate in the two quarters of was primarily the result of non deductible expenses related to litigation that was settled in the two quarters of 2002. Discontinued Operations In January 2002, we announced the closure of Fox Cities Newspapers, located in Appleton, Wisconsin, which published six community newspapers. These community newspapers were part of the publishing segment. On April 29, 2002, the board of directors of our French printing services subsidiary approved a resolution to proceed through a liquidation process. The remaining operations of IPC Communication Services, S.A., were turned over to a liquidator on December 31, 2002. The operations of Fox Cities Newspapers and IPC Communication Services, S.A. have been reflected as discontinued operations in our consolidated financial statements. Net revenue from discontinued operations in the two quarters of 2002 was $2.9 million. The loss from discontinued operations in the two quarters of 2002 was $0.1 million. Applicable income tax benefits were $5.2 million in the two quarters of 2002. Net assets of discontinued operations at June 15, 2003 and December 31, 2002 were zero. Cumulative Effect of Accounting Change Effective January 1, 2002, we adopted Statement No. 142, "Goodwill and Other Intangible Assets." Under Statement No. 142, goodwill and intangible assets deemed to have indefinite lives, including broadcast licenses and network affiliation agreements, are no longer amortized but are reviewed for impairment and written down and charged to operations when their carrying amounts exceed their estimated fair values. We performed transitional impairment tests on the carrying value of our goodwill and indefinite-lived intangible assets as of January 1,2002. The resulting impairment charges of $7.7 million ($6.5 million after tax) were recorded during the two quarters ended June 16, 2002 and are reported as the cumulative effect of accounting change in our consolidated statements of earnings. Liquidity and Capital Resources Our principal liquidity and capital requirements have been to pay dividends that have supported employee ownership and to meet our working capital and capital expenditure needs. Since 2000, we have also required liquidity to purchase units in the Journal Employees' Stock Trust Agreement (JESTA) from employees and former employees. Historically, we have relied on cash flow from operations and, in 2002, supplemented these cash flows with borrowings under our credit facility, to satisfy our liquidity and capital requirements. We believe that current cash balances, which were $4.2 million at June 15, 2003, expected cash flows from operations and borrowings available under our credit facility will be adequate for the foreseeable future to provide for our working capital, debt service, capital expenditures and cash dividends. We have a $120.0 million bank revolving credit agreement, expiring April 30, 2004, to support our cash requirements. As of June 15, 2003, we had borrowings of $74.4 million under this credit agreement, including $4.4 million bearing interest at the base rate of 4.25% and $70.0 million bearing interest at the LIBOR based rate of 2.21%, and immediately available credit of $45.6 million. The material covenants of this agreement include the following: o A consolidated funded debt ratio as determined for the four fiscal quarter period preceding the date of determination of not greater than 1.0:1.0. As of June 15, 2003, the consolidated funded debt ratio was 0.50. o A fixed charge coverage ratio as determined for the four fiscal quarter period preceding the date of determination of not less than 1.75:1.0. As of June 15, 2003, the fixed charge coverage ratio was 3.10. o A consolidated tangible net worth as of the end of any quarter of not less than $290 million. As of June 15, 2003, consolidated tangible net worth was $361 million. o A consolidated rent expense during any fiscal year of not more than $40 million. As of June 15, 2003, consolidated rent expense was $12 million. 21 We currently intend to establish a new debt facility which will replace the existing $120 million revolving credit facility. Based on our discussions to date, we anticipate the new agreement will be a $350 million, five-year senior unsecured revolving credit facility. Under the new credit agreement, we expect interest will be LIBOR based or derived from prime or Federal Fund rates. Although covenants, coverage ratios and coverage amounts have not been determined, we expect the material covenants of this new agreement will generally include the following: o A maximum consolidated funded debt ratio as determined for the four fiscal quarter period preceding the date of determination. o A minimum fixed charge coverage ratio as determined for the four fiscal quarter period preceding the date of determination. o A minimum consolidated tangible net worth as of the date of the end of any quarter. o A maximum consolidated rent expense during any fiscal year. o A maximum consolidated capital expenditure amount during any fiscal year. Cash Flow Cash provided by operating activities was $54.2 million in the two quarters of 2003 compared to $50.1 million in the two quarters of 2002. The increase is primarily attributed to an increase in accounts payable due to recording a $4.2 million amount payable for equipment for the daily newspaper's new production facility. Cash used for investing activities was $26.3 million in the two quarters of 2003 compared to $26.9 million in the two quarters of 2002. Capital expenditures for property and equipment were $27.9 million in the two quarters of 2003 and $27.6 million in the two quarters of 2002. We continued to invest in the equipment and the building for our daily newspaper production facility and upgrades to our telecommunications fiber optic network plus upgrades to our facilities and technology equipment at our broadcasting business. We expect to spend up to $112.7 on our daily newspaper production facility. As of June 15, 2003 we have spent $109.2 million on this project. Acquisition of businesses was $1.5 million in the two quarters of 2003 representing the purchase of the Antigo Area Shopper's Guide by our community newspapers and shoppers business. Cash used for financing activities was $32.1 million in the two quarters of 2003 compared to $23.7 million in the two quarters of 2002. We decreased our borrowing under our credit agreement by $16.4 million in the two quarters of 2003 compared to the increase in borrowing of $46.9 million in the two quarters of 2002. The increased borrowing in 2002 was primarily used to purchase units of beneficial interest from employees and former employees. In the two quarters of 2003, there were no sales or purchases of units due to the suspension of trading in the third quarter of 2002 compared to purchases of units of $93.2 million and sales of units of $38.7 million in the two quarters of 2002. We paid cash dividends of $15.5 million and $16.0 million in the two quarters of 2003 and 2002, respectively. Cash used for discontinued operations was $1.4 million in the two quarters of 2002. Stock Trust As of June 15, 2003, our treasury, our employees, and former employees owned units representing beneficial ownership of 90% of our stock. As of June 15, 2003, we believe that employees and former employees had outstanding balances under demand notes secured by pledges of units from various financial institutions totaling approximately $431.6 million. Eligible optionees under the stock trust, including certain categories of designated employees, the Grant family shareholders and us, have the right to purchase units offered for sale. We are not obligated to purchase units, though in recent years prior to the suspension of trading on October 25, 2002, we have elected to do so for the convenience of stock trust unitholders. On October 25, 2002, our board of directors determined to indefinitely suspend our purchase and sale of units and also directed us to explore potential sources for additional permanent capital. On May 14, 2003, we announced a plan for a new permanent capital structure, including a share exchange, an initial public offering and the amendment and termination of JESTA. In the share exchange, current shareholders and unitholders would receive shares of class B common stock, which would have 10 votes per share. A Registration Statement on Form S-1 was filed with the Securities and Exchange Commission related to the initial public offering. Class A common stock with one vote per share would be offered to the public. We filed a joint proxy statement/prospectus with the SEC relating to the new capital structure on Form S-4. The plan is subject to the approval of our shareholders, including approvals required under JESTA. We also filed a Registration Statement on Form S-2 offering to rescind the sale of all of the units of beneficial interest purchased during certain periods by employees and former employees who purchased the units in California, Idaho, Louisiana, Maryland, Minnesota, Missouri, Nebraska and Tennessee because our sales of these units may have been in violation of certain state securities laws' requirements. Critical Accounting Policies There are no material changes to the disclosures regarding critical accounting policies made in our Annual Report on Form 10-K for the year ended December 31, 2002. 22 New Accounting Standards In June 2002, Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued. Statement No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the previous guidance on the subject. It requires, among other things, that a liability for a cost associated with an exit or disposal activity be recognized, at fair value, when the liability is incurred rather than at the commitment date to the exit or disposal plan. The provisions for Statement No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, Statement No. 146 may affect when future costs associated with exit or disposal activities are recognized. In February 2003, we announced the closure of our CD-ROM mastering and replication facility, a part of our printing services business. In the two quarters of 2003, $0.5 million in closure costs were recorded. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK There are no material changes to the disclosures regarding interest rate risk and foreign currency exchange risk made in our Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, within 90 days prior to the filing date of this report, under the supervision and with the participation of our Disclosure Committee, including our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Conley Publishing Group, Ltd. et al. v. Journal Communications, Inc. In August 2000, the publisher of the Waukesha Freeman, West Bend Daily News and several other publications in southeastern Wisconsin filed an amended antitrust complaint in state court against us. The plaintiff alleged we attempted to monopolize by the use of predatory pricing on subscriptions, secret rebates to advertisers, exclusionary discounts in advertising and contracts in restraint of trade. On October 2, 2001, the Waukesha County Circuit Court granted summary judgment to us and dismissed all of the plaintiff's claims. The plaintiff appealed, and the Wisconsin Court of Appeals certified the case for direct appeal to the Wisconsin Supreme Court. On July 17, 2003, the Wisconsin Supreme Court affirmed the circuit court's decision to grant summary judgment. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 3, 2003, the Company held its Annual Meeting of Stockholders for the purpose of electing 13 directors. Steven J. Smith and Douglas G. Kiel, as the designated proxies, voted the shares of common stock of Journal Communications, Inc., as they were instructed by the shareholders and unitholders of the Company and the Trustees of the Journal Employees Stock Trust. 82% of all shares eligible to vote were represented at the Annual Meeting in person or by Proxy. All nominees for Director were elected by the affirmative vote of at least 98% of the shares voted. The following nominees were elected to the Board of Directors for the 2003-2004 term: Paul M. Bonaiuto James J. Ditter David J. Drury James L. Forbes Cynthia L. Gault Douglas G. Kiel Mary Hill Leahy Roger D. Peirce David D. Reszel Steven J. Smith Keith K. Spore Mary Ellen Stanek Karen O. Trickle ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 99.1 Certification of Steven J. Smith, Chairman and Chief Executive Officer of Journal Communications, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Paul M. Bonaiuto, Executive Vice President and Chief Financial Officer of Journal Communications, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 24 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. JOURNAL COMMUNICATIONS, INC. Registrant Date July 23, 2003 /s/ Steven J. Smith ------------------------------------------ Steven J. Smith, Chairman and Chief Executive Officer Date July 23, 2003 /s/ Paul M. Bonaiuto ------------------------------------------ Paul M. Bonaiuto, Executive Vice President and Chief Financial Officer 25 CERTIFICATIONS I, Steven J. Smith, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Journal Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date July 23, 2003 /s/ Steven J. Smith ------------------------------------- Steven J. Smith Chairman and Chief Executive Officer 26 I, Paul M. Bonaiuto, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Journal Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 23, 2003 /s/ Paul M. Bonaiuto ------------------------------------- Paul M. Bonaiuto Executive Vice President and Chief Financial Officer 27

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