SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2001
EMMIS COMMUNICATIONS CORPORATION EMMIS OPERATING COMPANY
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
charter) charter)
INDIANA INDIANA
(State of incorporation or organization) (State of incorporation or organization)
0-23264 333-62172-13
(Commission file number) (Commission file number)
35-1542018 35-2141064
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
ONE EMMIS PLAZA ONE EMMIS PLAZA
40 MONUMENT CIRCLE 40 MONUMENT CIRCLE
SUITE 700 SUITE 700
INDIANAPOLIS, INDIANA 46204 INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices) (Address of principal executive offices)
(317) 266-0100 (317) 266-0100
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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________
------------
1
The number of shares outstanding of each of Emmis Communications Corporation's classes of common stock, as of October
1, 2001, was:
42,195,438 Shares of Class A Common Stock, $.01 Par Value
5,230,396 Shares of Class B Common Stock, $.01 Par Value
0 Shares of Class C Common Stock, $.01 Par Value
Emmis Operating Company has 1,000 shares of common stock outstanding as of October 1, 2001 and all of these shares are owned
by Emmis Communications Corporation.
2
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS...................................................................4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.........................................................................5
Emmis Communications Corporation and Subsidiaries:
Condensed Consolidated Statements of Operations for the three and
six months ended August 31, 2000 and 2001..................................................5
Condensed Consolidated Balance Sheets
as of February 28, 2001 and August 31, 2001................................................6
Condensed Consolidated Statements of Cash Flows for the
six months ended August 31, 2000 and 2001..................................................8
Emmis Operating Company and Subsidiaries:
Condensed Consolidated Statements of Operationsfor the three and
six months ended August 31, 2000 and 2001.................................................10
Condensed Consolidated Balance Sheets
as of February 28, 2001 and August 31, 2001...............................................11
Condensed Consolidated Statements of Cash Flows for the
six months ended August 31, 2000 and 2001.................................................13
Notes to Condensed Consolidated Financial Statements...............................................15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................32
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.........................................................................38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................38
Item 4. Submission of Matters to a Vote of Security Holders.........................................39
Item 6. Exhibits and Reports on Form 8-K............................................................40
Signatures ........................................................................................41
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Emmis Communications Corporation and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of Emmis Communications Corporation (an
Indiana corporation) and Subsidiaries as of August 31, 2001, and the related condensed consolidated statements of
operations for the three-month and six-month periods ended August 31, 2000 and 2001, and the condensed consolidated
statements of cash flows for the six-month periods ended August 31, 2000 and 2001. We have also reviewed the
accompanying condensed consolidated balance sheet of Emmis Operating Company (an Indiana corporation and wholly owned
subsidiary of Emmis Communications Corporation) and Subsidiaries as of August 31, 2001, and the related condensed
consolidated statements of operations for the three-month and six-month periods ended August 31, 2000 and 2001, and the
condensed consolidated statements of cash flows for the six-month periods ended August 31, 2000 and 2001. These
financial statements are the responsibility of the Companies' management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public
Accountants. A review of interim financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the financial
statements referred to above for them to be in conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the
consolidated balance sheet of Emmis Communications Corporation and Subsidiaries as of February 28, 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended (not
presented separately herein), and in our report dated March 29, 2001, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet
as of February 28, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from
which it has been derived.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
September 26, 2001.
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited, in thousands, except per share data)
Three Months Six Months
Ended August 31, Ended August 31,
2000 2001 2000 2001
----------- ---------- ----------- -----------
GROSS REVENUES $ 127,697 $ 160,785 $ 245,944 $ 320,940
LESS: AGENCY COMMISSIONS 18,628 18,338 36,356 41,158
----------- ---------- ----------- -----------
NET REVENUES 109,069 142,447 209,588 279,782
Operating expenses 61,714 85,315 123,570 174,367
International business
development expenses 427 273 831 511
Corporate expenses 3,967 4,295 7,687 9,014
Depreciation and amortization 14,721 25,086 28,993 49,222
Time brokerage fee 1,114 - 1,114 479
Non-cash compensation 1,903 1,591 3,567 4,331
Restructuring fees and other - 196 - 768
----------- ---------- ----------- -----------
OPERATING INCOME 25,223 25,691 43,826 41,090
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (9,180) (32,497) (17,592) (67,149)
Minority interest (income) 69 (35) 593 112
Loss from unconsolidated affiliates (310) (1,232) (310) (2,096)
Other income (expense), net 14,396 312 14,182 1,624
----------- ---------- ----------- -----------
Total other income (expense) 4,975 (33,452) (3,127) (67,509)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 30,198 (7,761) 40,699 (26,419)
PROVISION (BENEFIT) FOR INCOME TAXES 13,560 (1,691) 18,150 (6,872)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 16,638 (6,070) 22,549 (19,547)
EXTRAORDINARY LOSS, NET OF TAX - 1,084 - 1,084
----------- ---------- ----------- -----------
NET INCOME (LOSS) 16,638 (7,154) 22,549 (20,631)
----------- ---------- ----------- -----------
PREFERRED STOCK DIVIDENDS 2,246 2,246 4,492 4,492
----------- ---------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 14,392 $ (9,400) $ 18,057 $ (25,123)
=========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary item $ .31 $ (.18) $ .39 $ (.51)
Extraordinary item, net of tax - (.02) - (.02)
----------- --------- ----------- ----------
Net income (loss) available to common
shareholders $ .31 $ (.20) $ .39 $ (.53)
=========== ========= =========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary item $ .30 $ (.18) $ .38 $ (.51)
Extraordinary item, net of tax - (.02) - (.02)
----------- --------- ----------- ----------
Net income (loss) available to common
shareholders $ .30 $ (.20) $ .38 $ (.53)
=========== ========= =========== ==========
Weighted average common shares outstanding:
Basic 46,911 47,353 46,615 47,301
Diluted 48,172 47,353 48,039 47,301
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except share data)
February 28, August 31,
2001 2001
--------------- -----------------
(Note 1) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 6,465
Accounts receivable, net 97,281 110,123
Prepaid expenses 17,096 17,800
Other 40,830 33,488
----------------- -----------------
Total current assets 215,106 167,876
Property and equipment, net 237,887 242,488
Intangible assets, net 1,981,097 2,121,447
Other assets, net 72,782 61,333
----------------- -----------------
Total assets $ 2,506,872 $ 2,593,144
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 43,032
Current portion of other
long-term debt 4,187 2,317
Current portion of TV program
rights payable 28,192 20,606
Accrued salaries and commissions 10,342 8,317
Accrued interest 17,038 16,100
Deferred revenue 17,418 17,053
Other 5,768 18,012
----------------- -----------------
Total current liabilities 117,151 125,437
Credit facility and senior
subordinated notes 1,380,000 1,272,000
Senior discount notes - 213,398
TV program rights payable, net of
current portion 47,567 43,437
Other long-term debt, net of
current portion 13,684 16,204
Other noncurrent liabilities 5,531 8,733
Deferred income taxes 135,468 125,532
----------------- -----------------
Total liabilities 1,699,401 1,804,741
----------------- -----------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
6
February 28, August 31,
2001 2001
------------------- --------------------
(Note 1) (Unaudited)
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A cumulative convertible
preferred stock, $.01 par value;
$50.00 liquidation value;
authorized 10,000,000 shares;
2,875,000 shares issued and
outstanding at February 28, 2001
and August 31, 2001 29 29
Class A common stock, $.01
par value; authorized 170,000,000
shares; issued and outstanding
41,900,315 shares at February 28, 2001
and 42,173,727 shares at August 31, 2001 419 422
Class B common stock, $.01
par value; authorized 30,000,000
shares; issued and outstanding
5,230,396 shares at February 28, 2001
and August 31, 2001 52 52
Additional paid-in capital 830,299 838,262
Accumulated deficit (22,730) (47,853)
Accumulated other comprehensive loss (598) (2,509)
------------------- -----------------
Total shareholders' equity 807,471 788,403
------------------- -----------------
Total liabilities and
shareholders' equity $ 2,506,872 $ 2,593,144
=================== =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
7
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited, dollars in thousands)
Six Months
Ended August 31,
2000 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 22,549 $ (20,631)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item - 1,084
Depreciation and amortization 35,498 59,672
Accretion of interest on senior discount notes,
including amortization of related debt costs - 11,268
Provision for bad debts 2,398 1,884
Provision (benefit) for deferred income taxes 3,197 (6,872)
Non-cash compensation 3,567 4,331
Other 866 (3,442)
Changes in assets and liabilities -
Accounts receivable (20,666) (14,880)
Prepaid expenses and other current assets (2,281) 6,582
Other assets (1,262) (17,061)
Accounts payable and accrued liabilities 4,794 5,007
Deferred revenue 1,637 (365)
Other liabilities 1,235 3,869
--------------- --------------
Net cash provided by operating activities 51,532 30,446
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,773) (19,539)
Cash paid for acquisitions (144,283) (140,746)
Other (47,000) (3,231)
--------------- --------------
Net cash used in investing activities (202,056) (163,516)
--------------- --------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
8
Six Months
Ended August 31,
2000 2001
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (93,388) (113,000)
Proceeds from long-term debt 235,388 5,000
Proceeds from senior discount notes offering - 202,612
Proceeds from exercise of stock options 6,401 2,017
Preferred stock dividends paid (4,492) (4,492)
Debt related costs - (12,501)
---------------- ---------------
Net cash provided by financing activities 143,909 79,636
---------------- ---------------
(DECREASE) IN CASH AND CASH
EQUIVALENTS (6,615) (53,434)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,370 59,899
---------------- ---------------
End of period $ 10,755 $ 6,465
================ ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 14,411 $ 54,269
Income taxes 251 1,058
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,456 $ -
Cash paid 36,763 -
---------------- ---------------
Liabilities recorded $ 2,693 $ -
================ ===============
ACQUISITION OF KKFR AND KXPK:
Fair value of assets acquired $ 108,728 $ -
Cash paid 107,520 -
---------------- ---------------
Liabilities recorded $ 1,208 $ -
================ ===============
ACQUISITION OF KKLT-FM, KTAR-AM and
KMVP-AM:
Fair value of assets acquired $ - 160,746
Cash paid, net of deposit - 140,746
Deposit paid in June 2000 - 20,000
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
9
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited, dollars in thousands)
Three Months Six Months
Ended August 31, Ended August 31,
2000 2001 2000 2001
----------- ---------- ----------- -----------
GROSS REVENUES $ 127,697 $ 160,785 $ 245,944 $ 320,940
LESS: AGENCY COMMISSIONS 18,628 18,338 36,356 41,158
----------- ---------- ----------- -----------
NET REVENUES 109,069 142,447 209,588 279,782
Operating expenses 61,714 85,315 123,570 174,367
International business
development expenses 427 273 831 511
Corporate expenses 3,967 4,295 7,687 9,014
Depreciation and amortization 14,721 25,086 28,993 49,222
Time brokerage fee 1,114 - 1,114 479
Non-cash compensation 1,903 1,591 3,567 4,331
Restructuring fees and other - 196 - 768
----------- ---------- ----------- -----------
OPERATING INCOME 25,223 25,691 43,826 41,090
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (9,180) (25,644) (17,592) (55,882)
Minority interest (income) 69 (35) 593 112
Loss from unconsolidated affiliates (310) (1,232) (310) (2,096)
Other income (expense), net 14,396 (663) 14,182 649
----------- ---------- ----------- -----------
Total other income (expense) 4,975 (27,574) (3,127) (57,217)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 30,198 (1,883) 40,699 (16,127)
PROVISION (BENEFIT) FOR INCOME TAXES 13,560 196 18,150 (3,186)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 16,638 (2,079) 22,549 (12,941)
EXTRAORDINARY LOSS, NET OF TAX - 1,084 - 1,084
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ 16,638 $ (3,163) $ 22,549 $ (14,025)
=========== ========== =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
10
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except share data)
February 28, August 31,
2001 2001
--------------- -----------------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 6,465
Accounts receivable, net 97,281 110,123
Prepaid expenses 17,096 17,800
Other 40,830 33,488
----------------- -----------------
Total current assets 215,106 167,876
Property and equipment, net 237,887 242,488
Intangible assets, net 1,981,097 2,121,447
Other assets, net 72,782 50,254
----------------- -----------------
Total assets $ 2,506,872 $ 2,582,065
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 43,032
Current portion of other
long-term debt 4,187 2,317
Current portion of TV program
rights payable 28,192 20,606
Accrued salaries and commissions 10,342 8,317
Accrued interest 17,038 16,100
Deferred revenue 17,418 17,053
Other 5,768 16,889
----------------- -----------------
Total current liabilities 117,151 124,314
Credit facility and senior
subordinated notes 1,380,000 1,272,000
TV program rights payable, net of
current portion 47,567 43,437
Other long-term debt, net of
current portion 13,684 16,204
Other noncurrent liabilities 5,531 8,733
Deferred income taxes 135,468 129,218
----------------- -----------------
Total liabilities 1,699,401 1,593,906
----------------- -----------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
11
February 28, August 31,
2001 2001
----------------- -----------------
(Unaudited) (Unaudited)
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; authorized,
issued and outstanding 1,000 shares
at February 28, 2001 and August 31, 2001 830,799 1,031,915
Additional paid-in capital - -
Accumulated deficit (22,730) (41,247)
Accumulated other comprehensive loss (598) (2,509)
----------------- -----------------
Total shareholders' equity 807,471 988,159
----------------- -----------------
Total liabilities and
shareholders' equity $ 2,506,872 $ 2,582,065
================= =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
12
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited, dollars in thousands)
Six Months
Ended August 31,
2000 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 22,549 $ (14,025)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item - 1,084
Depreciation and amortization 35,498 59,672
Provision for bad debts 2,398 1,884
Provision (benefit) for deferred income taxes 3,197 (3,186)
Non-cash compensation 3,567 4,331
Other 866 (3,442)
Changes in assets and liabilities -
Accounts receivable (20,666) (14,880)
Prepaid expenses and other current assets (2,281) 6,582
Other assets (1,262) (17,060)
Accounts payable and accrued liabilities 4,794 5,007
Deferred revenue 1,637 (365)
Other liabilities 1,235 2,746
--------------- ---------------
Net cash provided by operating activities 51,532 28,348
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,773) (19,539)
Cash paid for acquisitions (144,283) (140,746)
Other (47,000) (3,231)
--------------- --------------
Net cash used in investing activities (202,056) (163,516)
--------------- --------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
13
Six Months
Ended August 31,
2000 2001
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (93,388) (113,000)
Proceeds from long-term debt 235,388 5,000
Distributions to parent (4,492) (4,492)
Contributions from parent 6,401 195,167
Debt related costs - (941)
---------------- ---------------
Net cash provided by financing activities 143,909 81,734
---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,615) (53,434)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,370 59,899
---------------- ---------------
End of period $ 10,755 $ 6,465
================ ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 14,411 $ 54,269
Income taxes 251 1,058
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,456 $ -
Cash paid 36,763 -
---------------- ---------------
Liabilities recorded $ 2,693 $ -
================ ===============
ACQUISITION OF KKFR AND KXPK:
Fair value of assets acquired $ 108,728 $ -
Cash paid 107,520 -
---------------- ---------------
Liabilities recorded $ 1,208 $ -
================ ===============
ACQUISITION OF KKLT-FM, KTAR-AM and
KMVP-AM:
Fair value of assets acquired $ - 160,746
Cash paid, net of deposit - 140,746
Deposit paid in June 2000 - 20,000
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
14
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-------------------------------------------------
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
--------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
August 31, 2001
---------------
(Unaudited)
Note 1. General
-------
Pursuant to the rules and regulations of the Securities and Exchange Commission, the condensed consolidated
interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation
("ECC") and its subsidiaries (collectively, "Emmis" or the "Company") and by Emmis Operating Company and its subsidiaries
(collectively "EOC"). EOC became a wholly owned subsidiary of ECC in connection with the Company's reorganization (see
Note 2) on June 22, 2001. Unless otherwise noted, all disclosures contained in the Notes to Condensed Consolidated
Financial Statements in this Form 10-Q apply to Emmis and EOC. As permitted under the applicable rules and regulations
of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States have been condensed
or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the
information presented not misleading. The condensed consolidated financial statements included herein should be read in
conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report
filed on Form 10-K for the year ended February 28, 2001. The Company's results are subject to seasonal fluctuations.
Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.
In the opinion of Emmis and EOC, respectively, the accompanying condensed consolidated interim financial
statements contain all material adjustments (consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position of Emmis and EOC at August 31, 2001 and the results of their operations for the three
and six months ended August 31, 2000 and 2001 and their cash flows for the six months ended August 31, 2000 and 2001.
Note 2. Reorganization
On June 22, 2001, ECC transferred all of its assets and substantially all of its liabilities, including its
credit facility and its outstanding senior subordinated notes, to EOC, a newly formed, wholly-owned subsidiary in
exchange for 1,000 shares of no par value common stock. As a result, effective June 22, 2001, EOC became the only direct
subsidiary of ECC and ECC became a holding company that conducts its business operations through EOC and its
subsidiaries. ECC remains the issuer of the Class A, Class B and Class C common stock and the convertible preferred
stock, and is the obligor of the senior discount notes. However, EOC is the obligor of the senior subordinated notes and
the borrower under the credit facility. Pursuant to the terms of the senior subordinated notes, EOC is required to file
with the SEC periodic reports on Forms 10-Q, 10-K and 8-K as if EOC were required to do so pursuant to SEC rules and
regulations. EOC's financial statements are presented herein for all periods required as if EOC had existed at the
beginning of the earliest period presented because the corporate reorganization was accounted for as a reorganization of
entities under common control.
15
Note 3. Accounting Policies
Advertising Costs
On an interim basis, the Company defers major advertising campaigns for which future benefits can be
demonstrated. These costs are amortized over the shorter of the estimated period benefited or the remainder of the
fiscal year.
Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted.
Potentially dilutive securities at August 31, 2000 and 2001 consisted of stock options and the 6.25% Series A cumulative
convertible preferred stock. The 6.25% Series A cumulative convertible preferred stock is not included in the
calculation of diluted net income per common share for the three and six months ended August 31, 2000 and 2001 as the
effect of its conversion to common stock would be antidilutive. For the three and six months ended August 31, 2000, the
difference between the weighted-average shares outstanding used to compute basic and diluted EPS is attributable to
dilution caused by stock options. Weighted average shares excluded from the calculation of diluted net income per share
that would result from the conversion of the 6.25% Series A cumulative convertible preferred stock amounted to
approximately 3.7 million for the three and six months ended August 31, 2000 and 2001.
Because EOC is a wholly-owned subsidiary of Emmis, disclosure of earnings per share for EOC is not required.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" that requires companies to
cease amortizing goodwill and certain other indefinite-lived intangible assets, including broadcast licenses. Under SFAS
142, goodwill and certain indefinite-lived intangibles will not be amortized into results of operations, but instead the
recorded value of certain indefinite-lived intangibles will be tested for impairment annually with impairment being
measured as the excess of the asset's carrying amount over its fair value. Intangible assets that have finite useful
lives will continue to be amortized over their useful lives and measured for impairment in accordance with SFAS 121. Any
impairment loss resulting from the initial adoption of SFAS 142 will be reported as a change in accounting principle;
however, the Company has not yet determined whether it will recognize an impairment loss resulting from adoption. This
statement will be adopted by the Company on March 1, 2002. The adoption of this accounting standard will reduce our
amortization of goodwill and intangibles. However, impairment reviews may result in future periodic write-downs.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
that addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has
not yet determined the impact, if any, of adopting SFAS 144.
16
Reclassifications
Certain reclassifications have been made to the August 31, 2000 and February 28, 2001 financial statements to be
consistent with the August 31, 2001 presentation. The reclassifications have no impact on net income or retained
earnings previously reported.
Note 4. Significant Events
------------------
On March 28, 2001, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM,
KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus transaction
related costs of $0.7 million. The Company financed the acquisition through a $20.0 million advance payment borrowed
under the credit facility in June 2000 and the remainder with borrowings under the credit facility and proceeds from
ECC's March 2001 senior discount notes offering. The acquisition was accounted for as a purchase. Emmis began
programming and selling advertising on the radio stations on August 1, 2000 under a time brokerage agreement. The total
purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal.
Broadcast licenses are included in intangible assets in the accompanying condensed consolidated balance sheets and are
being amortized over 40 years.
On March 27, 2001, Emmis received $202.6 million of proceeds from the issuance of senior discount notes due 2011,
less approximately $11.6 million of debt issuance costs. The notes, for which ECC is the obligor, are unsecured and
accrete interest at a rate of 12.5% per year, compounded semi-annually to an aggregate principal amount of $370.0 million
on March 15, 2006. Commencing on September 15, 2006, interest is payable in cash on each March 15 and September 15, with
the aggregate principal amount of $370.0 million due on March 15, 2011. A portion of the net proceeds was used to fund
the acquisition of three radio stations in Phoenix, Arizona and the remaining net proceeds ($93.0 million) were placed in
escrow. In June 2001, upon completion of the Company's reorganization (see Note 2), the proceeds held in escrow were
released and used to reduce outstanding borrowings under the credit facility.
During the three months ended May 31, 2001, the Company incurred a restructuring charge of $0.6 million
associated with centralizing certain technical functions within the television division. This charge consisted of
severance and related costs for approximately 30 employees and will be fully paid by the quarter ended August 31, 2002.
During the three months ended August 31, 2001, Emmis incurred professional fees of approximately $0.2 million
related to the proposed separation of our radio and television businesses. Management remains committed to the
separation as a long-term strategy; however, due to market conditions, plans to separate the businesses via a taxable
spin-off have been postponed.
In June 2001, ECC filed an Exchange Offer Registration Statement with the SEC to exchange the senior discount
notes for new senior discount notes registered under the Securities Act. The terms of the new senior discount notes are
identical to the terms of the senior discount notes they replaced. Also in June 2001, Emmis filed a universal shelf
registration statement that gives ECC and its subsidiaries (including EOC) the ability to issue up to $500.0 million in
various debt or equity securities.
17
During the three months ended August 31, 2001, EOC repaid $108.0 million of indebtedness under its credit
facility, which permanently reduced amounts available thereunder. As a result of the early payoff of the indebtedness,
the Company recorded an extraordinary loss of approximately $1.1 million, net of taxes, related to unamortized deferred
debt costs.
Based on current projections, by November 30, 2001, absent actions to the contrary by the Company, we do not
expect to be in compliance with certain leverage ratios (debt divided by pro forma EBITDA, as defined) under our credit
facility. Under the terms of our credit facility, our debt is callable if we exceed these leverage ratios, and if our
credit facility debt is called, the senior discount notes and senior subordinated notes become callable as well.
However, we are currently working with our lenders to obtain waivers or amendments to remain in compliance. We also
believe we have access to various debt or equity markets to prevent or cure any violation. Based on these options, we do
not expect any of our debt to be called.
Additionally, our indentures related to the senior discount notes and the senior subordinated notes contain
leverage ratio covenants of 8:1 and 7:1, respectively. Our leverage ratio under the senior discount notes currently
exceeds 8:1 and we expect that the leverage ratio under the senior subordinated notes will exceed 7:1 in the near
future. As a result, Emmis is currently , and EOC soon will be, restricted in the amount of additional debt they can
incur, in their ability to make certain payments, and in other respects outlined in the senior discount notes indenture
and the senior subordinated notes indenture. Exceeding these leverage ratios is not an event of default under the
indentures; it simply triggers these certain restrictions. Accordingly, neither Emmis nor EOC is, or is expected to be,
in violation of the indentures. We believe we can continue to operate our businesses within the restrictions imposed by
the indentures.
Note 5. Pro Forma Financial Information
--------------------------------
Emmis
Unaudited pro forma summary information is presented below for the three and six months ended August 31, 2000 and
2001, assuming the following events all had occurred on the first day of the pro forma periods presented below: (a) the
acquisition of (i) KKLT-FM, KTAR-AM and KMVP-AM in March 2001, (ii) KALC-FM in January 2001, (iii) KZLA-FM, eight
network-affiliated television stations from Lee Enterprises, Inc. and KPNT-FM, KXOK-FM AND KIHT-FM in October 2000, and
(iv) KKFR-FM and KXPK-FM in August 2000; (b) the disposition of (i) WTLC-AM in April 2001 and (ii) WKKX-FM in October
2000; (c) the issuance of the senior discount notes in March 2001 and subsequent pay-down of senior debt and (d) the
refinancing of the credit facility in December 2000.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company's
management. The pro forma summary information presented below is not necessarily indicative of the results that actually
would have occurred if the transactions indicated above had been consummated at the beginning of the periods presented,
and is not intended to be a projection of future results.
18
Three Months Six Months
Ended August 31, Ended August 31,
(Pro Forma) (Pro Forma)
2000 2001 2000 2001
------------- -------------- ------------- --------------
(In thousands, except per share data)
Net revenues $ 150,378 $ 142,447 $ 298,833 $ 279,782
============= ============== ============= ==============
Broadcast/publishing cash flow $ 61,964 $ 57,132 $ 118,282 $ 105,415
============= ============== ============= ==============
Net income (loss) before extraordinary
item $ 4,949 $ (5,846) $ (1,230) $ (19,465)
============= ============== ============= ==============
Net income (loss) available to common
shareholders before extraordinary
income $ 2,700 $ (8,095) $ (5,725) $ (23,960)
============= ============== ============= ==============
Net income (loss) available to common
shareholders before extraordinary
income:
Basic $ 0.06 $ (0.17) $ (0.12) $ (0.51)
============= ============= ============ =============
Diluted $ 0.06 $ (0.17) $ (0.12) $ (0.51)
============= ============= ============ =============
Weighted average shares outstanding:
Basic 46,911 47,353 46,615 47,301
Diluted 48,172 47,353 48,039 47,301
EOC
Unaudited pro forma summary information is presented below for the three and six months ended August 31, 2000 and
2001, using the same assumptions as those described in the Emmis pro formas, except that the issuance of ECC's senior
discount notes and subsequent paydown of senior debt is not reflected.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate by EOC's
management. The pro forma summary information presented below is not necessarily indicative of the results that actually
would have occurred if the transactions indicated above had been consummated at the beginning of the periods presented,
and is not intended to be a projection of future results.
Three Months Six Months
Ended August 31, Ended August 31,
(Pro Forma) (Pro Forma)
2000 2001 2000 2001
------------- -------------- ------------- --------------
(In thousands)
Net revenues $ 150,378 $ 142,447 $ 298,833 $ 279,782
============= ============== ============= ==============
Broadcast/publishing cash flow $ 61,964 $ 57,132 $ 118,282 $ 105,415
============= ============== ============= ==============
Net income (loss) before extraordinary
item $ 8,617 $ (2,079) $ 6,581 $ (12,913)
============= ============== ============= ==============
19
Note 6. Comprehensive Income
--------------------
Emmis
Comprehensive income was comprised of the following for the three and six months ended August 31, 2000 and 2001
(dollars in thousands):
Three Months Six Months
Ended August 31, Ended August 31,
2000 2001 2000 2001
------------- -------------- ------------- --------------
Net income (loss) $ 16,638 $ (7,154) $ 22,549 $ (20,631)
Translation adjustment 425 (500) 749 12
Change in fair value of
derivative instruments - (935) - (1,923)
------------- -------------- ------------- --------------
Total comprehensive
income (loss) $ 17,063 $ (8,589) $ 23,298 $ (22,542)
============= ============== ============= ==============
EOC
Comprehensive income was comprised of the following for the three and six months ended August 31, 2000 and 2001
(dollars in thousands):
Three Months Six Months
Ended August 31, Ended August 31,
2000 2001 2000 2001
------------- -------------- ------------- --------------
Net income (loss) $ 16,638 $ (3,163) $ 22,549 $ (14,025)
Translation adjustment 425 (500) 749 12
Change in fair value of
derivative instruments - (935) - (1,923)
------------- -------------- ------------- --------------
Total comprehensive
income (loss) $ 17,063 $ (4,598) $ 23,298 $ (15,936)
============= ============== ============= ==============
Note 7. Segment Information
-------------------
The Company's operations are aligned into four business segments: Radio, Television, Publishing and Other and
Interactive. These business segments are consistent with the Company's management of these businesses and its financial
reporting structure. Corporate represents expense not allocated to reportable segments.
The Company's segments operate primarily in the United States with one radio station located in Hungary and two
radio stations located in Argentina. Total revenues of the radio station in Hungary for the three and six months ended
August 31, 2000 were $1.8 million and $3.2 million, respectively, while total revenues for the three and six months ended
August 31, 2001 were $2.1 million and $3.2 million, respectively. Long lived assets of this radio station as of August
31, 2000 and 2001 were $11.5 million and $8.4 million, respectively. Total revenues of our two radio stations in Buenos
Aires, Argentina for the three and six months ended August 31, 2000 were $1.8 million and $3.1 million, respectively,
while total revenues for the three and six months ended August 31, 2001 were $2.4 million and $4.3 million,
respectively. Long lived assets of these radio stations as of August 31, 2000 and 2001 were $19.1 million and $18.0
million, respectively.
20
The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing
cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of
operating performance between companies in the industry and serve as an indicator of the market value of a group of
stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a
measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF
and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are
not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other
discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally
accepted in the United States, and should be viewed as a supplement to, and not a substitute for, our results of
operations presented on the basis of accounting principles generally accepted in the United States. Moreover, BCF and
PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net
of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of
advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of
print advertising inventory. Interactive derives revenue from the sale of advertisements on the websites of the
Company's stations. The most significant broadcast operating expenses are employee salaries and commissions, costs
associated with programming, advertising and promotion, and station general and administrative costs. Significant
publishing operating expenses are employee salaries and commissions, costs associated with producing a magazine, and
general and administrative costs. Significant interactive operating expenses are employee salaries and general and
administrative costs.
The accounting policies as described in the summary of significant accounting policies included in the Company's
Annual Report filed on Form 10-K for the year ended February 28, 2001, are applied consistently across segments.
Unless otherwise noted, all information pertaining to segments applies to Emmis and EOC.
Three Months Ended Publishing
August 31, 2001 Radio Television and Other Interactive Corporate Consolidated
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 72,101 $ 52,480 $ 17,675 $ 191 $ - $ 142,447
Operating expenses 35,624 33,617 15,692 382 - 85,315
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 36,477 18,863 1,983 (191) - 57,132
International business
development expenses - - - - 273 273
Corporate expenses - - - - 4,295 4,295
Depreciation and
amortization 8,608 13,202 2,111 2 1,163 25,086
Time brokerage fee - - - - - -
Non-cash compensation - - - - 1,591 1,591
Restructuring fees and other - - - - 196 196
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 27,869 $ 5,661 $ (128) $ (193) $ (7,518) $ 25,691
=========== =========== ========== ========== =========== ==============
Total assets $ 1,085,922 $ 1,297,075 $ 92,423 $ 126 $ 117,598 $ 2,593,144
=========== =========== ========== ========== =========== ==============
With respect to EOC, the above information would be identical, except corporate total assets would be $106,519 and
consolidated total assets would be $2,582,065.
21
Six Months Ended Publishing
August 31, 2001 Radio Television and Other Interactive Corporate Consolidated
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 137,453 $ 106,275 $ 35,759 $ 295 $ - $ 279,782
Operating expenses 71,651 69,289 32,728 699 - 174,367
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 65,802 36,986 3,031 (404) - 105,415
International business
development expenses - - - - 511 511
Corporate expenses - - - - 9,014 9,014
Depreciation and
amortization 16,451 26,259 4,249 4 2,259 49,222
Time brokerage fee 479 - - - - 479
Non-cash compensation - - - - 4,331 4,331
Restructuring fees and other - - - - 768 768
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 48,872 $ 10,727 $ (1,218) $ (408) $ (16,883) $ 41,090
=========== =========== ========== ========== =========== ==============
Total assets $ 1,085,922 $ 1,297,075 $ 92,423 $ 126 $ 117,598 $ 2,593,144
=========== =========== ========== ========== =========== ==============
With respect to EOC, the above information would be identical, except corporate total assets would be $106,519 and
consolidated total assets would be $2,582,065.
Three Months Ended Publishing
August 31, 2000 Radio Television and Other Interactive Corporate Consolidated
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 62,654 $ 26,419 $ 19,963 $ 33 $ - $ 109,069
Operating expenses 28,933 15,444 17,189 148 - 61,714
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 33,721 10,975 2,774 (115) - 47,355
International business
development expenses - - - - 427 427
Corporate expenses - - - - 3,967 3,967
Depreciation and
amortization 4,225 5,745 3,788 2 961 14,721
Time brokerage fee 1,114 - - - - 1,114
Non-cash compensation - - - - 1,903 1,903
Restructuring fees and other - - - - - -
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 28,382 $ 5,230 $ (1,014) $ (117) $ (7,258) $ 25,223
=========== =========== ========== ========== =========== ==============
Total assets $ 587,946 $ 694,097 $ 102,202 $ - $ 128,958 $ 1,513,203
=========== =========== ========== ========== =========== ==============
Six Months Ended Publishing
August 31, 2000 Radio Television and Other Interactive Corporate Consolidated
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 117,509 $ 54,561 $ 37,485 $ 33 $ - $ 209,588
Operating expenses 58,086 32,252 32,964 268 - 123,570
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 59,423 22,309 4,521 (235) - 86,018
International business
development expenses - - - - 831 831
Corporate expenses - - - - 7,687 7,687
Depreciation and
amortization 7,862 11,687 7,556 2 1,886 28,993
Time brokerage fee 1,114 - - - - 1,114
Non-cash compensation - - - - 3,567 3,567
Restructuring fees and other - - - - - -
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 50,447 $ 10,622 $ (3,035) $ (237) $ (13,971) $ 43,826
=========== =========== ========== ========== =========== ==============
Total assets $ 587,946 $ 694,097 $ 102.202 $ - $ 128,958 $ 1,513,203
=========== =========== ========== ========== =========== ==============
22
Note 8. Financial Information for Subsidiary Guarantors
and Subsidiary Non-Guarantors of Emmis Operating Company
--------------------------------------------------------
The senior subordinated notes of EOC are fully and unconditionally guaranteed, jointly and severally, by certain
direct and indirect subsidiaries of EOC (the "Subsidiary Guarantors"). As of February 28, 2001 and August 31, 2001,
subsidiaries holding EOC's interest in its radio stations in Hungary and Argentina, as well as certain other subsidiaries
conducting joint ventures with third parties, did not guarantee the senior subordinated notes (the "Subsidiary
Non-Guarantors"). The claims of creditors of the Subsidiary Non-Guarantors have priority over the rights of EOC to
receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the EOC Parent Company Only retroactively
adjusted to reflect the reorganization (see Note 2), the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of
February 28, 2001 and August 31, 2001 and for the three and six months ended August 31, 2000 and 2001.
EOC uses the equity method with respect to investments in subsidiaries. Separate financial statements for
Subsidiary Guarantors are not presented based on management's determination that they do not provide additional
information that is material to investors.
23
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of August 31, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 4,580 $ 1,885 $ - $ 6,465
Accounts receivable, net - 104,598 5,525 - 110,123
Current portion of TV program rights - 5,355 - - 5,355
Income tax refunds receivable 10,935 - - - 10,935
Prepaid expenses 793 16,612 395 - 17,800
Other 6,382 10,721 95 - 17,198
------------- ------------ ----------- ------------- --------------
Total current assets 18,110 141,866 7,900 - 167,876
Property and equipment, net 37,196 201,082 4,210 - 242,488
Intangible assets, net 9,976 2,091,155 20,316 - 2,121,447
Investment in affiliates 2,334,358 - - (2,334,358) -
Other assets, net 45,055 10,248 1,870 (6,919) 50,254
------------- ------------ ----------- ------------- --------------
Total assets $ 2,444,695 $ 2,444,351 $ 34,296 $ (2,341,277) $ 2,582,065
============= ============ =========== ============= ==============
CURRENT LIABILITIES:
Accounts payable $ 22,695 $ 14,586 $ 5,751 $ - $ 43,032
Current portion of other
long-term debt 34 23 2,260 - 2,317
Current portion of TV
program rights payable - 20,606 - - 20,606
Accrued salaries and
commissions 277 7,461 579 - 8,317
Accrued interest 15,571 - 529 - 16,100
Deferred revenue - 17,053 - - 17,053
Other 12,300 4,589 - - 16,889
------------- ------- ----------- ------------- --------------
Total current liabilities 50,877 64,318 9,119 - 124,314
Credit facility and senior
subordinated notes 1,272,000 - - - 1,272,000
Senior discount notes - - - - -
TV program rights payable,
net of current portion - 43,437 - - 43,437
Other long-term debt, net of
current portion 41 450 22,632 (6,919) 16,204
Other noncurrent liabilities 3,814 4,384 535 - 8,733
Deferred income taxes 129,218 - - - 129,218
------------- ------------ ----------- ------------- --------------
Total liabilities 1,455,950 112,589 32,286 (6,919) 1,593,906
Shareholders' equity
Common stock 1,031,915 - - - 1,031,915
Additional paid-in capital - - 4,393 (4,393) -
Subsidiary investment - 1,951,475 17,722 (1,969,197) -
Retained earnings/
(accumulated deficit) (41,247) 380,287 (19,519) (360,768) (41,247)
Accumulated other
comprehensive loss (1,923) - (586) - (2,509)
------------- ------------ ----------- ------------- --------------
Total shareholders' equity 988,745 2,331,762 2,010 (2,334,358) 988,159
------------- ------------ ----------- ------------- --------------
Total liabilities and
shareholders' equity $ 2,444,695 $ 2,444,351 $ 34,296 $ (2,341,277) $ 2,582,065
============= ============ =========== ============= ==============
24
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 28, 2001
(Note 1, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
-----------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 55,175 $ 4,018 $ 706 $ - $ 59,899
Accounts receivable, net - 91,754 5,527 - 97,281
Current portion of TV program rights - 12,028 - - 12,028
Income tax refunds receivable 13,970 - - - 13,970
Prepaid expenses 2,032 14,737 327 - 17,096
Other 1,932 12,124 776 - 14,832
------------- ------------ ----------- -------------- -------------
Total current assets 73,109 134,661 7,336 - 215,106
Property and equipment, net 38,151 195,404 4,332 - 237,887
Intangible assets, net - 1,959,341 21,756 - 1,981,097
Investment in affiliates 2,169,602 - - (2,169,602) -
Other assets, net 68,113 9,706 1,882 (6,919) 72,782
------------- ------------ ----------- -------------- -------------
Total assets $ 2,348,975 $ 2,299,112 $ 35,306 $ (2,176,521) $ 2,506,872
============= ============ ========== ============= ============
CURRENT LIABILITIES:
Accounts payable $ 6,908 $ 22,499 $ 4,799 $ - $ 34,206
Current portion of other
long-term debt 34 18 4,135 - 4,187
Current portion of TV
program rights payable - 28,192 - - 28,192
Accrued salaries and
commissions 1,410 8,482 450 - 10,342
Accrued interest 16,236 - 802 - 17,038
Deferred revenue - 17,418 - - 17,418
Other 813 4,955 - - 5,768
------------- ------------ ----------- -------------- -------------
Total current liabilities 25,401 81,564 10,186 - 117,151
Credit facility and senior
subordinated notes 1,380,000 - - - 1,380,000
Senior discount notes - - - - -
TV program rights payable,
net of current portion - 47,567 - - 47,567
Other long-term debt, net of
current portion 37 598 19,968 (6,919) 13,684
Other noncurrent liabilities - 4,884 647 - 5,531
Deferred income taxes 135,468 - - - 135,468
------------- ------------ ----------- -------------- -------------
Total liabilities 1,540,906 134,613 30,801 (6,919) 1,699,401
Shareholders' equity
Common stock 830,799 - - - 830,799
Additional paid-in capital - - 4,393 (4,393) -
Subsidiary investment - 1,818,050 17,581 (1,835,631) -
Retained earnings /
(accumulated deficit) (22,730) 346,449 (16,871) (329,578) (22,730)
Accumulated other
comprehensive loss - - (598) - (598)
------------- ------------ ----------- -------------- -------------
Total shareholders' equity 808,069 2,164,499 4,505 (2,169,602) 807,471
------------- ------------ ----------- -------------- -------------
Total liabilities and
shareholders' equity $ 2,348,975 $ 2,299,112 $ 35,306 $ (2,176,521) $ 2,506,872
============= ============ =========== ============= =============
25
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Three Months Ended August 31, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 759 $ 137,139 $ 4,549 $ - $ 142,447
Operating expenses 403 81,490 3,422 - 85,315
International business
development expenses - 273 - - 273
Corporate expenses 4,295 - - - 4,295
Depreciation and amortization 1,163 23,104 819 - 25,086
Time brokerage fee - - - - -
Non-cash compensation 1,193 398 - - 1,591
Restructuring fees and other 196 - - - 196
------------- ----------- ----------- ----------- -------------
Operating income (loss) (6,491) 31,874 308 - 25,691
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (25,132) 100 (780) 168 (25,644)
Minority interest - - - (35) (35)
Other income (expense), net 307 (1,985) (49) (168) (1,895)
------------- ----------- ----------- ----------- -------------
Total other income (expense) (24,825) (1,885) (829) (35) (27,574)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (31,316) 29,989 (521) (35) (1,883)
Provision (benefit) for income taxes (11,200) 11,396 - - 196
------------- ----------- ----------- ----------- -------------
(20,116) 18,593 (521) (35) (2,079)
Extraordinary item, net of tax (1,084) - - - (1,084)
Equity in earnings (loss) of
subsidiaries 18,037 - - (18,037) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ (3,163) $ 18,593 $ (521) $ (18,072) $ (3,163)
============ ========== ========== ========== ============
26
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Six Months Ended August 31, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,102 $ 271,180 $ 7,500 $ - $ 279,782
Operating expenses 716 166,802 6,849 - 174,367
International business
development expenses - 511 - - 511
Corporate expenses 9,014 - - - 9,014
Depreciation and amortization 2,259 45,318 1,645 - 49,222
Time brokerage fee - 479 - - 479
Non-cash compensation 3,248 1,083 - - 4,331
Restructuring fees and other 768 - - - 768
------------- ----------- ----------- ----------- -------------
Operating income (loss) (14,903) 56,987 (994) - 41,090
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (54,482) (145) (1,591) 336 (55,882)
Minority interest - - - 112 112
Other income (expense), net 1,217 (2,265) (63) (336) (1,447)
------------- ----------- ----------- ----------- -------------
Total other income (expense) (53,265) (2,410) (1,654) 112 (57,217)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (68,168) 54,577 (2,648) 112 (16,127)
Provision (benefit) for income taxes (23,925) 20,739 - - (3,186)
------------- ----------- ----------- ----------- -------------
(44,243) 33,838 (2,648) 112 (12,941)
Extraordinary item, net of tax (1,084) - - - (1,084)
Equity in earnings (loss) of
subsidiaries 31,302 - - (31,302) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ (14,025) $ 33,838 $ (2,648) $ (31,190) $ (14,025)
============ ========== ========== ========== ============
27
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Three Months Ended August 31, 2000
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 656 $ 104,828 $ 3,585 $ - $ 109,069
Operating expenses 332 58,365 3,017 - 61,714
International business
development expenses - 427 - - 427
Corporate expenses 3,967 - - - 3,967
Depreciation and amortization 1,024 12,825 872 - 14,721
Time brokerage fee - 1,114 - - 1,114
Non-cash compensation 1,427 476 - - 1,903
Restructuring fees and other - - - - -
------------- ----------- ----------- ----------- -------------
Operating income (loss) (6,094) 31,621 (304) - 25,223
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (8,586) (65) (694) 165 (9,180)
Minority interest - - - 69 69
Other income (expense), net 17,213 (2,914) (48) (165) 14,086
------------- ----------- ----------- ----------- -------------
Total other income (expense) 8,627 (2,979) (742) 69 4,975
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes 2,533 28,642 (1,046) 69 30,198
Provision (benefit) for income taxes 2,421 11,139 - - 13,560
------------- ----------- ----------- ----------- -------------
112 17,503 (1,046) 69 16,638
Equity in earnings (loss) of
subsidiaries 16,526 - - (16,526) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ 16,638 $ 17,503 $ (1,046) $ (16,457) $ 16,638
============ ========== ========== ========== ============
28
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Six Months Ended August 31, 2000
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,048 $ 202,269 $ 6,271 $ - $ 209,588
Operating expenses 660 116,896 6,014 - 123,570
International business
development expenses - 831 - - 831
Corporate expenses 7,687 - - - 7,687
Depreciation and amortization 1,949 25,270 1,774 - 28,993
Time brokerage fee - 1,114 - - 1,114
Non-cash compensation 2,675 892 - - 3,567
Restructuring fees and other - - - - -
------------- ----------- ----------- ----------- -------------
Operating income (loss) (11,923) 57,266 (1,517) - 43,826
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (16,132) (122) (1,663) 325 (17,592)
Minority interest - - - 593 593
Other income (expense), net 17,378 (2,978) (203) (325) 13,872
------------- ----------- ----------- ----------- -------------
Total other income (expense) 1,246 (3,100) (1,866) 593 (3,127)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (10,677) 54,166 (3,383) 593 40,699
Provision (benefit) for income taxes (2,433) 20,583 - - 18,150
------------- ----------- ----------- ----------- -------------
(8,244) 33,583 (3,383) 593 22,549
Equity in earnings (loss) of
subsidiaries 30,793 - - (30,793) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ 22,549 $ 33,583 $ (3,383) $ (30,200) $ 22,549
============ ========== ========== ========== ============
29
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended August 31, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (14,025) $ 33,838 $ (2,648) $ (31,190) $ (14,025)
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating
activities - - - - - -
Extraordinary item 1,084 - - - 1,084
Depreciation and amortization 4,960 53,066 1,646 - 59,672
Provision for bad debts - 1,884 - - 1,884
Provision (benefit) for deferred
Income taxes (3,186) - - - (3,186)
Non-cash compensation 3,248 1,083 - - 4,331
Equity in earnings of
subsidiaries (31,302) - - 31,302 -
Other (3,457) 115 12 (112) (3,442)
Changes in assets and
liabilities -
Accounts receivable - (14,882) 2 - (14,880)
Prepaid expenses and other
current assets (176) 6,145 613 - 6,582
Other assets (7,315) (9,757) 12 - (17,060)
Accounts payable and accrued
liabilities 14,853 (10,654) 808 - 5,007
Deferred revenue - (365) - - (365)
Other liabilities 15,305 (15,111) 2,552 - 2,746
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
operating activities (20,011) 45,362 2,997 - 28,348
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (1,184) (18,184) (171) - (19,539)
Cash paid for acquisitions - (140,746) - - (140,746)
Other (3,231) - - - (3,231)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
investing activities (4,415) (158,930) (171) - (163,516)
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (113,000) - - - (113,000)
Proceeds from long-term debt 5,000 - - - 5,000
Distributions to parent (4,492) - - - (4,492)
Contributions from parent 82,684 114,130 (1,647) - 195,167
Debt related costs (941) - - - (941)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
financing activities (30,749) 114,130 (1,647) - 81,734
----------- ----------- ----------- ----------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS:
Beginning of period 55,175 4,018 706 - 59,899
----------- ----------- ----------- ----------- -------------
End of period $ - $ 4,580 $ 1,885 $ - $ 6,465
=========== =========== =========== =========== =============
30
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended August 31, 2000
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 22,549 $ 33,583 $ (3,383) $ (30,200) $ 22,549
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating
activities -
Depreciation and amortization 2,891 30,833 1,774 - 35,498
Provision for bad debts - 2,398 - - 2,398
Provision for deferred income
taxes 3,197 - - - 3,197
Non-cash compensation 2,675 892 - - 3,567
Equity in earnings of
subsidiaries (30,793) - - 30,793 -
Other 710 - 749 (593) 866
Changes in assets and
liabilities -
Accounts receivable - (19,971) (695) - (20,666)
Prepaid expenses and other
current assets 3,758 (6,506) 467 - (2,281)
Other assets (1,306) 339 (295) - (1,262)
Accounts payable and accrued
liabilities 1,403 3,756 (365) - 4,794
Deferred revenue - 1,637 - - 1,637
Other liabilities 10,128 (9,989) 1,096 - 1,235
----------- ----------- ----------- ------------ --------------
Net cash provided (used) by
operating activities 15,212 36,972 (652) - 51,532
----------- ----------- ----------- ------------ --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (2,026) (8,705) (42) - (10,773)
Cash paid for acquisitions - (144,283) - - (144,283)
Other (47,000) - - - (47,000)
--------- ----------- ----------- ------------ --------------
Net cash used by investing
activities (49,026) (152,988) (42) - (202,056)
----------- ----------- ----------- ----------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (93,388) - - - (93,388)
Proceeds from long-term debt 235,388 - - - 235,388
Distributions to parent (4,492) - - - (4,492)
Contributions from parent (99,154) 116,906 (11,351) - 6,401
Debt related costs - - - - -
----------- ----------- ----------- ----------- --------------
Net cash provided (used) by
financing activities 38,354 116,906 (11,351) - 143,909
----------- ----------- ----------- ----------- --------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: 4,540 890 (12,045) - (6,615)
Beginning of period 448 2,564 14,358 - 17,370
----------- ----------- ----------- ----------- --------------
End of period $ 4,988 $ 3,454 $ 2,313 $ - $ 10,755
=========== =========== =========== =========== ==============
31
Note 9. Subsequent Event
----------------
The terms of ECC's preferred stock provide for a quarterly dividend payment of $.78125 per share on October 15,
2001. While Emmis has sufficient liquidity to declare and pay the dividend, it is not permitted to do so because Emmis'
current leverage ratio under the senior discount notes indenture exceeds 8:1. ECC's board of directors set October 12,
2001 as the record date for the October 15, 2001 dividend, but did not declare the dividend. Instead, on October 15, a
wholly-owned, unrestricted subsidiary of EOC is making a payment of $.78125 per share to each preferred shareholder of
record on October 12, 2001. This subsidiary is permitted to make the payment to the preferred shareholders under the
senior discount notes indenture. When ECC is permitted to declare the October 15, 2001 dividend, we expect ECC's board
of directors to do so and to deem the obligation to pay the dividend to have been discharged by the subsidiary's payment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Note: Certain statements included in this report which are not statements of historical fact, including but not limited
to those identified with the words "expect," "will" or "look" are intended to be, and are, identified as "forward-looking
statements," as defined in the Securities and Exchange Act of 1934, as amended, and involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be
materially different from any future result, performance or achievement expressed or implied by such forward-looking
statement. Such factors include, among others, general economic and business conditions; fluctuations in the demand for
advertising; our ability to service our outstanding debt; increased competition in our markets and the broadcasting
industry; inability to obtain necessary approvals for purchases or sale transactions or to complete the transactions;
changes in the costs of programming; inability to grow through suitable acquisitions, including the desired radio; tax
and other regulatory or practical limitations on the Company's ability to effectively separate the Company's radio and
television businesses; war or terrorist acts; and other factors mentioned in other documents filed by the Company with
the Securities and Exchange Commission. Emmis does not undertake any obligation to publicly update or revise any
forward-looking statements because of new information, future events or otherwise.
General
The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing
cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of
operating performance between companies in the industry and serve as an indicator of the market value of a group of
stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a
measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF
and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are
not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other
discretionary uses.
32
BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally
accepted in the United States, and should be viewed as a supplement to, and not a substitute for, our results of
operations presented on the basis of accounting principles generally accepted in the United States. Moreover, BCF and
PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net
of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of
advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of
print advertising inventory. Interactive derives revenue from the sale of advertisements on the websites of the
Company's stations. The most significant broadcast operating expenses are employee salaries and commissions, costs
associated with programming, advertising and promotion, and station general and administrative costs. Significant
publishing operating expenses are employee salaries and commissions, costs associated with producing a magazine, and
general and administrative costs. Significant interactive operating expenses are employee salaries and general and
administrative costs.
The Company's results are subject to seasonal fluctuations. Therefore, results shown on a quarterly basis are
not necessarily indicative of results for a full year.
Unless otherwise noted, all disclosures contained in the Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q apply to Emmis and EOC.
Results of Operations for the Three and Six Months Ended August 31, 2001 Compared to August 31, 2000
Since March 1, 2000, we have acquired and retained eight radio stations, eight television stations and one
magazine publication for an aggregate cash purchase price of $1.2 billion. These transactions impact the comparability
of operating results period over period.
Net revenues for the three months ended August 31, 2001 were $142.4 million compared to $109.1 million for the
same period of the prior year, an increase of $33.3 million or 30.6%. Net revenues for the six months ended August 31,
2001 were $279.8 million compared to $209.6 million for the same period of the prior year, an increase of $70.2 million,
or 33.5%. On a pro forma basis (after giving effect to all acquisitions consummated since March 1, 2000), net revenues
for the three months ended August 31, 2001 decreased $7.9 million, or 5.3% and decreased $19.1 million, or 6.4% for the
six months ended August 31, 20001. This decrease in net revenues is generally due to a softening U.S. economy resulting
in an overall decrease in advertisement sales, coupled with a decrease in dot.com advertising in the six months ended
August 31, 2001 as compared to the same period of the prior year.
Operating expenses for the three months ended August 31, 2001 were $85.3 million compared to $61.7 million for
the same period of the prior year, an increase of $23.6 million or 38.2%. Operating expenses for the six months ended
August 31, 2001 were $174.4 million compared to $123.6 million for the same period of the prior year, and increase of
$50.8 million, or 41.4%. On a pro forma basis, operating expenses for the three months ended August 31, 2001 decreased
$3.1 million, or 3.5% and decreased $6.2 million, or 3.4% for the six months ended August 31, 2001. This decrease is
primarily due to the elimination of certain operational positions in the television division and a decrease in
promotional spending, offset by sales personnel increases in all of our divisions.
33
Broadcast/publishing cash flow for the three months ended August 31, 2001 was $57.1 million compared to $47.4
million for the same period of the prior year, an increase of $9.7 million or 20.6%. Broadcast/publishing cash flow for
the six months ended August 31, 2001 was $105.4 million compared to $86.0 million for the same period of the prior year,
and increase of $19.4 million, or 22.5%. On a pro forma basis, broadcast/publishing cash flow for the three months ended
August 31, 2001 decreased by $4.8 million, or 7.8% and decreased $12.9 million, or 10.9% for the six months ended August
31, 2001. This decrease is due to decreased net revenues partially offset by decreased operating expenses as discussed
above.
Corporate expenses for the three months ended August 31, 2001 were $4.3 million compared to $4.0 million for the
same period of the prior year, an increase of $0.3 million or 8.3%. Corporate expenses for the six months ended August
31, 2001 were $9.0 million compared to $7.7 million for the same period of the prior year, and increase of $1.3 million,
or 17.3%. This increase is largely attributable to an increase in the number of corporate employees in all departments
as a result of our growth over the last twelve months.
EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international
business development expenses. EBITDA before certain charges for the three months ended August 31, 2001 was $52.6
million compared to $43.0 million for the same period of the prior year, an increase of $9.6 million or 22.4%. EBITDA
for the six months ended August 31, 2001 was $95.9 million compared to $77.5 million for the same period of the prior
year, and increase of $18.4 million, or 23.7%. On a pro forma basis, EBITDA before certain charges for the three months
ended August 31, 2001 decreased $5.0 million, or 8.7% and decreased $13.9 million, or 12.6% for the six months ended
August 31, 2001. This decrease reflects the decrease in broadcast/publishing cash flow coupled with the increase in
corporate expenses.
Depreciation and amortization expense for the three months ended August 31, 2001 was $25.1 million compared to
$14.7 million for the same period of the prior year, an increase of $10.4 million or 70.4%. Depreciation and
amortization for the six months ended August 31, 2001 was $49.2 million compared to $29.0 million for the same period of
the prior year, an increase of $20.2 million, or 69.8%. Substantially all of the increase in depreciation and
amortization expense for the three and six months ended August 31, 2001 is due to acquisitions consummated since March 1,
2000.
Non-cash compensation expense for the three months ended August 31, 2001 was $1.6 million compared to $1.9
million for the same period of the prior year, a decrease of $0.3 million or 16.4%. Non-cash compensation for the six
months ended August 31, 2001 was $4.3 million compared to $3.6 million for the same period of the prior year, an increase
of $0.7 million, or 21.4%. Non-cash compensation includes compensation expense associated with stock options granted,
restricted common stock issued under employment agreements, common stock contributed to the Company's Profit Sharing Plan
and common stock issued to employees at our discretion. The increase for the six months ended August 31, 2001 was due to
the payment of certain employee incentives with our common stock, while the decrease for the three months ended August
31, 2001 was principally due to the decrease in our stock price.
With respect to Emmis, interest expense for the three months ended August 31, 2001 was $32.5 million compared to
$9.2 million for the same period of the prior year, an increase of $23.3 million or 254.0%. Interest expense for the six
months ended August 31, 2001 was $67.1 million compared to $17.6 million for the same period of the prior year, an
increase of $49.5 million, or 281.7%. This increase reflects higher outstanding debt due to acquisitions consummated
since March 1, 2000, all of which were financed with debt.
34
With respect to EOC, interest expense for the three months ended August 31, 2001 was $25.6 million compared to
$9.2 million for the same period of the prior year, an increase of $16.4 million or 179.3%. Interest expense for the six
months ended August 31, 2001 was $55.9 million compared to $17.6 million for the same period of the prior year, an
increase of $38.3 million, or 217.7%. This increase reflects higher outstanding debt due to acquisitions consummated
since March 1, 2000. The difference between interest expense for Emmis and EOC is due to interest expense associated
with the senior discount notes, for which ECC is the obligor, and thus it is excluded from the operations of EOC.
Other income for the three months ended August 31, 2001 was $0.3 million, compared to $14.4 million for the same
period of the prior year. Other income for the six months ended August 31, 2001 was $1.6 million, compared to $14.2
million for the same period of the prior year. Other income for the three and six months ended August 31, 2000 included
a $17.0 million break-up fee received in connection with the sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net
of related expenses and an asset valuation adjustment.
With respect to Emmis, our effective tax rate for the six months ended August 31, 2001 was 26.0%, compared to
44.6% for the same period of the prior year. With respect to EOC, our effective tax rate for the six months ended August
31, 2001 was 19.8%, compared to 44.6% for the same period of the prior year. The variance in our effective tax rate from
the statutory tax rate is due to non-deductible expenses, primarily consisting of certain goodwill amortization that is
not deductible for tax purposes.
During the three months ended August 31, 2001, EOC repaid $108.0 million of indebtedness under its credit
facility, which permanently reduced amounts available thereunder. As a result of the early payoff of the indebtedness,
the Company recorded an extraordinary loss of approximately $1.1 million, net of taxes, related to unamortized deferred
debt costs.
Liquidity and Capital Resources
Capital Requirements
Our primary uses of capital have been historically, and are expected to continue to be, funding acquisitions,
capital expenditures, working capital and debt service and, in the case of ECC, preferred stock dividend requirements.
Emmis is constructing new operating facilities for WALA-TV in Mobile, Alabama. The project is expected to be
completed in December of 2001 for an estimated cost of $11.3 million of which $6.4 million has been incurred through
August 31, 2001. This project will be financed through cash flows from operating activities and/or borrowings under the
credit facility.
Capital Expenditures
In the six month periods ended August 31, 2000 and 2001, we had capital expenditures of $10.8 million and $19.5
million, respectively. The capital expenditures in the period ended August 31, 2001 primarily related to the WALA
operating facilities project, leasehold improvements to various office and studio facilities, broadcast equipment
purchases and tower upgrades. We anticipate that future requirements for capital expenditures will include capital
expenditures incurred during the ordinary course of business, including costs related to our conversion to digital
television. We expect to fund such capital expenditures with cash generated from operating activities and borrowings
under our credit facility.
35
Debt Service and Preferred Stock Dividend Requirements
As of August 31, 2001, EOC had $1.272 billion of corporate indebtedness outstanding under our credit facility
($.972 billion) and senior subordinated notes ($0.3 billion), and an additional $18.5 million of other indebtedness. As
of August 31, 2001, total indebtedness outstanding for Emmis included all of EOC's indebtedness as well as $213.4 million
of senior discount notes. Emmis also had $143.8 million of our convertible preferred stock outstanding. All outstanding
amounts under our credit facility bear interest, at our option, at a rate equal to the Eurodollar rate or an alternative
Base Rate plus a margin. As of August 31, 2001, our weighted average borrowing rate under our credit facility was
approximately 6.8% and our overall weighted average borrowing rate, after taking into account amounts outstanding under
our senior subordinated notes and senior discount notes, was approximately 7.9%.
Based on amounts currently outstanding under our senior subordinated notes, the debt service requirements of EOC
for these notes over the next twelve-month period are $24.4 million. ECC has no additional debt service requirements in
the next twelve-month period since interest on its senior discount notes accretes into the principal balance of the notes
until March 2006. However, ECC has preferred stock dividend requirements of $9.0 million for the next twelve-month
period. The terms of ECC's preferred stock provide for a quarterly dividend payment of $.78125 per share on October 15,
2001. While Emmis has sufficient liquidity to declare and pay the dividend, it is not permitted to do so because Emmis'
current leverage ratio under the senior discount notes indenture exceeds 8:1. ECC's board of directors set October 12,
2001 as the record date for the October 15, 2001 dividend, but did not declare the dividend. Instead, on October 15, a
wholly-owned, unrestricted subsidiary of EOC is making a payment of $.78125 per share to each preferred shareholder of
record on October 12, 2001. This subsidiary is permitted to make the payment to the preferred shareholders under the
senior discount notes indenture. When ECC is permitted to declare the October 15, 2001 dividend, we expect ECC's board
of directors to do so and to deem the obligation to pay the dividend to have been discharged by the subsidiary's payment.
Sources of Liquidity
Our primary sources of liquidity are cash provided by operations and funds available under our credit facility.
At August 31, 2001, we had cash and cash equivalents of $6.5 million and net working capital of $42.4 million. At
February 28, 2001, we had cash and cash equivalents of $59.9 million and net working capital of $98.0 million. On June
22, 2001, we effectuated our corporate reorganization (see Note 2) and $93.0 million that was previously held in escrow
was released to us. We used the cash to repay amounts outstanding under the credit facility. At September 30, 2001, we
had $309.0 million available under our credit facility, less $6.6 million in outstanding letters of credit. Based on
current projections, by November 30, 2001, absent actions to the contrary by the Company, we do not expect to be in
compliance with certain leverage ratios (debt divided by pro forma EBITDA, as defined) under our credit facility. Under
the terms of our credit facility, our debt is callable if we exceed these leverage ratios, and if our credit facility
debt is called, the senior discount notes and senior subordinated notes become callable as well. However, we are
currently working with our
lenders to obtain waivers or amendments to remain in compliance. We also believe we have access to various debt or
equity markets to prevent or cure any violation. Based on these options, we do not expect any of our debt to be called.
Additionally, our indentures related to the senior discount notes and the senior subordinated notes contain
leverage ratio covenants of 8:1 and 7:1, respectively. Our leverage ratio under the senior discount notes currently
exceeds 8:1 and we expect that the leverage ratio under the senior subordinated notes will exceed 7:1 in the near
future. As a result, Emmis is currently , and EOC soon will be, restricted in the amount of additional debt they can
incur, in their ability to make certain payments, and in other respects outlined in the senior discount notes indenture
and the senior subordinated notes indenture. Exceeding these leverage ratios is not an event of default under the
indentures; it simply triggers these certain restrictions. Accordingly, neither Emmis nor EOC is, or is expected to be,
in violation of the indentures. We believe we can continue to operate our businesses within the restrictions imposed by
the indentures.
As part of our business strategy, we continually evaluate potential acquisitions of radio and television
stations, as well as publishing properties. If we elect to take advantage of future acquisition opportunities, we may
incur additional debt or issue additional equity or debt securities, depending on market conditions and other factors.
Intangibles
At August 31, 2001, approximately 82% of our total assets consisted of intangible assets, such as FCC broadcast
licenses, goodwill, subscription lists and similar assets, the value of which depends significantly upon the operational
results of our businesses. In the case of our radio and television stations, we would not be able to operate the
properties without the related FCC license for each property. FCC licenses are renewed every eight years; consequently,
we continually monitor our stations' compliance with the various regulatory requirements. Historically, all of our FCC
licenses have been renewed at the end of their respective eight-year periods, and we expect that all FCC licenses will
continue to be renewed in the future.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" that requires companies to
cease amortizing goodwill and certain other indefinite-lived intangible assets, including broadcast licenses. Under SFAS
142, goodwill and certain indefinite-lived intangibles will not be amortized into results of operations, but instead the
recorded value of certain indefinite-lived intangibles will be tested for impairment annually with impairment being
measured as the excess of the asset's carrying amount over its fair value. Intangible assets that have finite useful
lives will continue to be amortized over their useful lives and measured for impairment in accordance with SFAS 121. Any
impairment loss resulting from the initial adoption of SFAS 142 will be reported as a change in accounting principle;
however, the Company has not yet determined whether it will recognize an impairment loss resulting from adoption. This
statement will be adopted by the Company on March 1, 2002. The adoption of this accounting standard will reduce our
amortization of goodwill and intangibles. However, impairment reviews may result in future periodic write-downs.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
that addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has
not yet determined the impact, if any, of adopting SFAS 144.
37
Regulatory Matters
Emmis acquired KGMB-TV in Honolulu, Hawaii as part of the Lee acquisition in October 2000. Because Emmis already
owned KHON-TV in Honolulu, and both KHON and KGMB were rated among the top four television stations in the Honolulu
market, FCC regulations prohibited Emmis from owning both stations. However, Emmis received a temporary waiver from the
FCC that has allowed Emmis to operate both stations (and their related "satellite" stations). This temporary waiver has
subsequently been extended to April 1, 2002.
FCC regulations require all commercial television stations in the United States to start broadcasting in digital
format by May, 2002 and to abandon their present analog format by 2006, although the FCC may extend these dates.
Currently, only 4 of our television stations, KOIN-TV, WKCF-TV, WFTX-TV and WALA-TV, broadcast in digital format. While
we timely filed all necessary digital television construction permit applications with the FCC, most of the rest of our
television stations are not likely to start broadcasting in digital format by the May 2002 deadline. We currently cannot
predict the implications of our stations' failure to do so.
Quantitative and Qualitative Disclosures About Market Risk
Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent
review, management has determined that there have been no material developments affecting market risk since the filing of
the Company's Annual Report on Form 10-K for the year ended February 28, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Discussion regarding these items is included in management's discussion and analysis of financial condition and
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings arising in the ordinary course of business. In the opinion
of management of the Company, however, there are no legal proceedings pending against the Company likely to have a
material adverse effect on the Company.
38
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the shareholders of ECC held on June 26, 2001, the following matters received the
following votes:
Votes Votes
Matter Description For Against Abstaining
------------------ --- ------- ----------
1. Election of Directors:
Jeffrey H. Smulyan................................83,061,040 3,733,113 7,577,446
Greg A. Nathanson.................................83,132,849 3,661,304 7,577,446
Walter Z. Berger..................................83,131,999 3,662,154 7,577,446
2. Approval of the 2001 Incentive Plan...............69,409,915 13,714,611 11,247,073
3. Ratification of the Appointment
of Auditors.......................................86,582,002 205,798 7,583,799
39
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed or incorporated by reference as a part of this report:
3.1 Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation,
incorporated by reference from Exhibit 3.1 to the Company's Form 10-K/A for the year ended
February 29, 2000, and amendment relating to Series A cumulative convertible preferred stock,
incorporated by reference from Exhibit 3.2 to the Company's registration statement on Form S-3
File No. 333-62172, as amended.
3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference
from Exhibit 3.2 to the Company's Form 10-K/A for the year ended February 29, 2000.
3.3 Articles of Incorporation of Emmis Operating Company, incorporated by reference from Exhibit 3.4
to the Company's Form S-3/A filed on June 21, 2001.
3.4 Bylaws of Emmis Operating Company, incorporated by reference from Exhibit 3.5 to the Company's Form
S-3/A filed on June 21, 2001.
15 Letter re: unaudited interim financial information
(b) Reports on Form 8-K
Neither ECC nor EOC filed reports on Form 8-K during the three months ended August 31, 2001.
40
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.
EMMIS COMMUNICATIONS CORPORATION
Date: October 15, 2001 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President (Authorized Corporate Officer),
Chief Financial Officer and Treasurer
41
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.
EMMIS OPERATING COMPANY
Date: October 15, 2001 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President (Authorized Corporate Officer),
Chief Financial Officer and Treasurer
42
Exhibit 15
October 15, 2001
Mr. Walter Z. Berger
Executive Vice President, Chief Financial Officer and Treasurer
Emmis Communications Corporation
One Emmis Plaza
40 Monument Circle Suite 700
Indianapolis, Indiana 46204
Dear Mr. Berger:
We are aware that Emmis Communications Corporation has incorporated by reference in its Registration Statements Nos.
33-83890, 333-14657, 333-42878, 333-62172 and 333-62160 its Form 10-Q for the quarter ended August 31, 2001, which
includes our report dated September 26, 2001 covering the unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration
statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections
7 and 11 of the Act. It should be noted that we have not performed any procedures subsequent to September 26, 2001.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
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ARTHUR ANDERSEN LLP
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