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 November 30, 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 January 2, 2002, was:
42,245,548 Shares of Class A Common Stock, $.01 Par Value
5,250,127 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 January 2, 2002 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
nine months ended November 30, 2000 and 2001...............................................5
Condensed Consolidated Balance Sheets
as of February 28, 2001 and November 30, 2001..............................................6
Condensed Consolidated Statements of Cash Flows for the
nine months ended November 30, 2000 and 2001...............................................8
Emmis Operating Company and Subsidiaries:
Condensed Consolidated Statements of Operations for the three and
nine months ended November 30, 2000 and 2001..............................................11
Condensed Consolidated Balance Sheets
as of February 28, 2001 and November 30, 2001.............................................12
Condensed Consolidated Statements of Cash Flows for the
nine months ended November 30, 2000 and 2001..............................................14
Notes to Condensed Consolidated Financial Statements...............................................17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................35
Item 3. Quantitative and Qualitative Disclosures
about Market Risk.........................................................................41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................42
Item 6. Exhibits and Reports on Form 8-K............................................................42
Signatures ........................................................................................43
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 November 30, 2001, and the related condensed
consolidated statements of operations for the three-month and nine-month periods ended November 30, 2000 and
2001, and the condensed consolidated statements of cash flows for the nine-month periods ended November 30, 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
November 30, 2001, and the related condensed consolidated statements of operations for the three-month and
nine-month periods ended November 30, 2000 and 2001, and the condensed consolidated statements of cash flows for
the nine-month periods ended November 30, 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,
January 8, 2002.
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 Nine Months
Ended November 30, Ended November 30,
2000 2001 2000 2001
----------- ---------- ----------- -----------
GROSS REVENUES $ 168,475 $ 158,371 $ 414,419 $ 479,311
LESS: AGENCY COMMISSIONS 24,869 21,252 61,225 62,410
----------- ---------- ----------- -----------
NET REVENUES 143,606 137,119 353,194 416,901
Operating expenses 84,166 87,447 207,736 261,814
Corporate expenses 4,417 5,354 12,935 14,879
Depreciation and amortization 20,602 25,935 49,595 75,157
Time brokerage fee 3,670 - 4,784 479
Non-cash compensation 530 1,559 4,097 5,890
Restructuring fees and other 4,057 - 4,057 768
----------- ---------- ----------- -----------
OPERATING INCOME 26,164 16,824 69,990 57,914
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (23,711) (32,055) (41,303) (99,204)
Minority interest (income) (301) 20 292 132
Loss from unconsolidated affiliates 307 (1,366) (3) (3,462)
Other income (expense), net 19, 215 (26) 33,397 1,598
----------- ---------- ----------- -----------
Total other income (expense) (4,490) (33,427) (7,617) (100,936)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 21,674 (16,603) 62,373 (43,022)
PROVISION (BENEFIT) FOR INCOME TAXES 10,108 (4,905) 28,258 (11,777)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 11,566 (11,698) 34,115 (31,245)
EXTRAORDINARY LOSS, NET OF TAX - - - 1,084
----------- ---------- ----------- -----------
NET INCOME (LOSS) 11,566 (11,698) 34,115 (32,329)
----------- ---------- ----------- -----------
PREFERRED STOCK DIVIDENDS 2,246 2,246 6,738 6,738
----------- ---------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 9,320 $ (13,944) $ 27,377 $ (39,067)
=========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary item $ .20 $ (.29) $ .59 $ (.81)
Extraordinary item, net of tax - - - (.02)
----------- ---------- ----------- ----------
Net income (loss) available to common
shareholders $ .20 $ (.29) $ .59 $ (.83)
=========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Before extraordinary item $ .20 $ (.29) $ .57 $ (.81)
Extraordinary item, net of tax - - - (.02)
----------- ---------- ----------- ----------
Net income (loss) available to common
shareholders $ .20 $ (.29) $ .57 $ (.83)
=========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 46,959 47,415 46,746 47,322
Diluted 47,528 47,415 47,894 47,322
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, November 30,
2001 2001
--------------- -----------------
(Note 1) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 2,095
Accounts receivable, net 97,281 112,617
Prepaid expenses 17,096 16,553
Other 40,830 37,132
----------------- -----------------
Total current assets 215,106 168,397
Property and equipment, net 237,887 239,868
Intangible assets, net 1,981,097 2,105,339
Other assets, net 72,782 67,139
----------------- -----------------
Total assets $ 2,506,872 $ 2,580,743
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 41,715
Current portion of other
long-term debt 4,187 5,078
Current portion of TV program
rights payable 28,192 30,986
Accrued salaries and commissions 10,342 5,395
Accrued interest 17,038 8,164
Deferred revenue 17,418 15,613
Other 5,768 20,750
----------------- -----------------
Total current liabilities 117,151 127,701
Credit facility and senior
subordinated notes 1,380,000 1,272,000
Senior discount notes - 219,891
TV program rights payable, net of
current portion 47,567 42,420
Other long-term debt, net of
current portion 13,684 14,049
Other noncurrent liabilities 5,531 16,324
Deferred income taxes 135,468 116,672
----------------- -----------------
Total liabilities 1,699,401 1,809,057
----------------- -----------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
6
February 28, November 30,
2001 2001
------------------- --------------------
(Note 1) (Unaudited)
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S 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 November 30, 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 42,217,926 shares at November 30, 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 5,250,127 shares at November 30, 2001 52 53
Additional paid-in capital 830,299 840,016
Accumulated deficit (22,730) (61,797)
Accumulated other comprehensive loss (598) (7,037)
------------------- -----------------
Total shareholder's equity 807,471 771,686
------------------- -----------------
Total liabilities and
shareholder's equity $ 2,506,872 $ 2,580,743
=================== =================
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)
Nine Months
Ended November 30,
2000 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 34,115 $ (32,329)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item - 1,084
Depreciation and amortization 63,494 94,065
Accretion of interest on senior discount notes,
including amortization of related debt costs - 18,081
Provision for bad debts 3,381 2,782
Provision (benefit) for deferred income taxes 10,341 (11,777)
Non-cash compensation 4,097 5,890
Gain on exchange of assets (22,000) -
Other 1,497 726
Changes in assets and liabilities -
Accounts receivable (25,626) (18,272)
Prepaid expenses and other current assets (4,458) 4,185
Other assets 5,258 (11,700)
Accounts payable and accrued liabilities 13,048 (7,168)
Deferred revenue (1,705) (1,805)
Other liabilities (5,278) (2,655)
--------------- --------------
Net cash provided by operating activities 76,164 41,107
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (16,017) (25,786)
Cash paid for acquisitions (956,329) (140,746)
Other (26,548) (5,831)
--------------- --------------
Net cash used in investing activities (998,894) (172,363)
--------------- --------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
8
Nine Months
Ended November 30,
2000 2001
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (123,388) (113,000)
Proceeds from long-term debt 1,035,388 5,000
Proceeds from senior discount notes offering - 202,612
Proceeds from exercise of stock options 9,495 2,194
Preferred stock dividends paid (6,738) (6,738)
Debt related costs (4,758) (16,616)
---------------- ---------------
Net cash provided by financing activities 909,999 73,452
---------------- ---------------
DECREASE IN CASH AND CASH
EQUIVALENTS (12,731) (57,804)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,370 59,899
---------------- ---------------
End of period $ 4,639 $ 2,095
================ ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 35,422 $ 84,318
Income taxes 352 1,249
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,500 $ -
Cash paid 36,807 -
---------------- ---------------
Liabilities recorded $ 2,693 $ -
================ ===============
ACQUISITION OF KKFR AND KXPK:
Fair value of assets acquired $ 108,921 $ -
Cash paid 107,763 -
---------------- ---------------
Liabilities recorded $ 1,158 $ -
================ ===============
ACQUISITION OF TELEVISION PROPERTIES
FROM LEE ENTERPRISES, INC.:
Fair value of assets acquired $ 644,466 $ -
Cash paid 582,080 -
---------------- ---------------
Liabilities recorded $ 62,386 $ -
================ ===============
9
ACQUISITION OF KIHT, KXOK-FM, KPNT-FM,
WVRV-FM, WIL-FM AND WRTH-AM:
Fair value of assets acquired $ 229,679 $ -
Cash paid 229,679 -
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
ACQUISITION OF KZLA-FM:
Fair value of assets acquired $ 185,000 $ -
Basis in assets exchanged 163,000 -
Gain on exchange of assets 22,000 -
Cash paid - -
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
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.
10
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited, dollars in thousands)
Three Months Nine Months
Ended November 30, Ended November 30,
2000 2001 2000 2001
----------- ---------- ----------- -----------
GROSS REVENUES $ 168,475 $ 158,371 $ 414,419 $ 479,311
LESS: AGENCY COMMISSIONS 24,869 21,252 61,225 62,410
----------- ---------- ----------- -----------
NET REVENUES 143,606 137,119 353,194 416,901
Operating expenses 84,166 87,447 207,736 261,814
Corporate expenses 4,417 5,354 12,935 14,879
Depreciation and amortization 20,602 25,935 49,595 75,157
Time brokerage fee 3,670 - 4,784 479
Non-cash compensation 530 1,559 4,097 5,890
Restructuring fees and other 4,057 - 4,057 768
----------- ---------- ----------- -----------
OPERATING INCOME 26,164 16,824 69,990 57,914
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (23,711) (25,245) (41,303) (81,127)
Minority interest (income) (301) 20 292 132
Loss from unconsolidated affiliates 307 (1,366) (3) (3,462)
Other income (expense), net 19,215 (37) 33,397 612
----------- ---------- ----------- -----------
Total other income (expense) (4,490) (26,628) (7,617) (83,845)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 21,674 (9,804) 62,373 (25,931)
PROVISION (BENEFIT) FOR INCOME TAXES 10,108 (2,536) 28,258 (5,722)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 11,566 (7,268) 34,115 (20,209)
EXTRAORDINARY LOSS, NET OF TAX - - - 1,084
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ 11,566 $ (7,268) $ 34,115 $ (21,293)
=========== ========== =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
11
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except share data)
February 28, November 30,
2001 2001
--------------- -----------------
(Note 1) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 2,095
Accounts receivable, net 97,281 112,617
Prepaid expenses 17,096 16,553
Other 40,830 37, 132
----------------- -----------------
Total current assets 215,106 168,397
Property and equipment, net 237,887 239,868
Intangible assets, net 1,981,097 2,105,339
Other assets, net 72,782 55,905
----------------- -----------------
Total assets $ 2,506,872 $ 2,569,509
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 41,715
Current portion of other
long-term debt 4,187 5,078
Current portion of TV program
rights payable 28,192 30,986
Accrued salaries and commissions 10,342 5,395
Accrued interest 17,038 8,164
Deferred revenue 17,418 15,613
Other 5,768 19,627
----------------- -----------------
Total current liabilities 117,151 126,578
Credit facility and senior
subordinated notes 1,380,000 1,272,000
TV program rights payable, net of
current portion 47,567 42,420
Other long-term debt, net of
current portion 13,684 14,049
Other noncurrent liabilities 5,531 16,324
Deferred income taxes 135,468 122,727
----------------- -----------------
Total liabilities 1,699,401 1,594,098
----------------- -----------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
12
February 28, November 30,
2001 2001
------------------- --------------------
(Note 1) (Unaudited)
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value; authorized,
issued and outstanding 1,000 shares at
February 28, 2001 and November 30, 2001 830,799 1,032,086
Additional paid-in capital - -
Accumulated deficit (22,730) (49,638)
Accumulated other comprehensive loss (598) (7,037)
------------------- -----------------
Total shareholder's equity 807,471 975,411
------------------- -----------------
Total liabilities and
shareholder's equity $ 2,506,872 $ 2,569,509
=================== =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements
13
EMMIS OPERATING COMPANY AND SUBSIDIARIES
----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited, dollars in thousands)
Nine Months
Ended November 30,
2000 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 34,115 $ (21,293)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item - 1,084
Depreciation and amortization 63,494 93,263
Provision for bad debts 3,381 2,782
Provision (benefit) for deferred income taxes 10,341 (5,722)
Non-cash compensation 4,097 5,890
Gain on exchange of assets (22,000) -
Other 1,497 726
Changes in assets and liabilities -
Accounts receivable (25,626) (18,272)
Prepaid expenses and other current assets (4,458) 4,185
Other assets 5,258 (10,894)
Accounts payable and accrued liabilities 13,048 (7,168)
Deferred revenue (1,705) (1,805)
Other liabilities (5,278) (2,655)
--------------- --------------
Net cash provided by operating activities 76,164 40,121
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (16,017) (25,786)
Cash paid for acquisitions (956,329) (140,746)
Other (26,548) (5,831)
--------------- --------------
Net cash used in investing activities (998,894) (172,363)
--------------- --------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
14
Nine Months
Ended November 30,
2000 2001
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (123,388) (113,000)
Proceeds from long-term debt 1,035,388 5,000
Distributions to parent (6,738) (6,738)
Contributions from parent 9,495 193,760
Debt related costs (4,758) (4,584)
---------------- ---------------
Net cash provided by financing activities 909,999 74,438
---------------- ---------------
DECREASE IN CASH AND CASH
EQUIVALENTS (12,731) (57,804)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,370 59,899
---------------- ---------------
End of period $ 4,639 $ 2,095
================ ===============
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 35,422 $ 84,318
Income taxes 352 1,249
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,500 $ -
Cash paid 36,807 -
---------------- ---------------
Liabilities recorded $ 2,693 $ -
================ ===============
ACQUISITION OF KKFR AND KXPK:
Fair value of assets acquired $ 108,921 $ -
Cash paid 107,763 -
---------------- ---------------
Liabilities recorded $ 1,158 $ -
================ ===============
ACQUISITION OF TELEVISION PROPERTIES
FROM LEE ENTERPRISES, INC.:
Fair value of assets acquired $ 644,466 $ -
Cash paid 582,080 -
---------------- ---------------
Liabilities recorded $ 62,386 $ -
================ ===============
15
ACQUISITION OF KIHT, KXOK-FM, KPNT-FM,
WVRV-FM, WIL-FM AND WRTH-AM:
Fair value of assets acquired $ 229,679 $ -
Cash paid 229,679 -
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
ACQUISITION OF KZLA-FM:
Fair value of assets acquired $ 185,000 $ -
Basis in assets exchanged 163,000 -
Gain on exchange of assets 22,000 -
Cash paid - -
---------------- ---------------
Liabilities recorded $ - $ -
================ ===============
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.
16
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
-------------------------------------------------
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
--------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
November 30, 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 November 30, 2001 and the results of their
operations for the three and nine months ended November 30, 2000 and 2001 and their cash flows for the nine
months ended November 30, 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.
17
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
Emmis
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 November 30, 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 nine
months ended November 30, 2000 and 2001 as the effect of its conversion to common stock would be antidilutive.
For the three and nine months ended November 30, 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 nine months ended November 30, 2000 and 2001.
EOC
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 calculated the
impairment loss expected to result 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", which establishes a single model to account for impairment of assets to be held or disposed,
incorporating guidelines for accounting and disclosure of discontinued operations . This statement supercedes
SFAS 121 and will be adopted by the Company on March 1, 2002. The Company has not yet determined the impact, if
any, of adopting SFAS 144.
18
Reclassifications
Certain reclassifications have been made to the November 30, 2000 and February 28, 2001 financial
statements to be consistent with the November 30, 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 $12.0 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. 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.
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
November 30, 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.
19
On November 30, 2001, EOC amended certain financial covenants of its credit facility through November
30, 2002. The total leverage ratio (debt divided by pro forma EBITDA, as defined) and senior leverage ratio
increased, while the interest coverage ratio and pro forma debt service coverage ratio decreased. The amendment
also provides for an extension of covenant relief through August 31, 2003, under certain conditions. Under the
amendment, total availability under the revolver decreased from $320 million to $220 million. Also, the margin
over the Eurodollar Rate or the alternative base rate increased from a maximum of 2.9% to a maximum of 3.5% under
Term B loans and from a maximum of 2.4% to a maximum of 3.3% under Term A loans and the revolver. In addition,
the margin over the Eurodollar Rate or the alternative base rate will increase by an additional .25% on each of
June 1, 2002, September 1, 2002 and December 1, 2002 unless the senior leverage ratio is reduced to below 5:1 for
two consecutive quarters. If any such .25% increase takes effect on June 1, 2002, September 1, 2002 and December
1, 2002 and the senior leverage ratio is subsequently reduced to below 5:1 for two consecutive quarters, the .25%
increase would be removed.
Based on current projections, by February 28, 2003, 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 believe we have access to various debt or equity markets or we could dispose of
certain assets to prevent or cure any violation. Based on these options, we do not expect any of our debt to be
called.
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 the leverage ratio under the senior subordinated notes exceeds 7:1. As a result, Emmis and EOC
are 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.
The terms of ECC's preferred stock provided for a quarterly dividend payment of $.78125 per share on
October 15, 2001. While Emmis had sufficient liquidity to declare and pay the dividend, it was not permitted to
do so because Emmis' leverage ratio under the senior discount notes indenture exceeded 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 made a payment of $.78125 per
share to each preferred shareholder of record on October 12, 2001. This subsidiary was 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.
Note 5. Pro Forma Financial Information
--------------------------------
Emmis
Unaudited pro forma summary information is presented below for the three and nine months ended November
30, 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,
20
(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.
Three Months Nine Months
Ended November 30, Ended November 30,
(Pro Forma) (Pro Forma)
2000 2001 2000 2001
------------- -------------- ------------- --------------
(In thousands, except per share data)
Net revenues $ 155,829 $ 137,119 $ 454,662 $ 416,901
============= ============== ============= ==============
Broadcast/publishing cash flow $ 64,551 $ 49,672 $ 182,833 $ 155,087
============= ============== ============= ==============
Net income (loss) before extraordinary
item $ 9,718 $ (11,698) $ 9,522 $ (31,197)
============= ============== ============= ==============
Net income (loss) available to common
shareholders before extraordinary
item $ 7,472 $ (13,944) $ 2,784 $ (37,935)
============= ============== ============= ==============
Net income (loss) per share available to
common shareholders before
extraordinary item:
Basic $ .16 $ (.29) $ .06 $ (.80)
============= ============== ============= ==============
Diluted $ .16 $ (.29) $ .06 $ (.80)
============= ============== ============= ==============
Weighted average shares outstanding:
Basic 46,959 47,415 46,746 47,322
Diluted 47,528 47,415 47,894 47,322
EOC
Unaudited pro forma summary information is presented below for the three and nine months ended November
30, 2000 and 2001, using the same assumptions as those described in the Emmis pro formas, except that interest
expense on ECC's senior discount notes 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.
21
Three Months Nine Months
Ended November 30, Ended November 30,
(Pro Forma) (Pro Forma)
2000 2001 2000 2001
------------- -------------- ------------- --------------
(In thousands)
Net revenues $ 155,829 $ 137,119 $ 454,662 $ 416,901
============= ============== ============= ==============
Broadcast/publishing cash flow $ 64,551 $ 49,672 $ 182,833 $ 155,087
============= ============== ============= ==============
Net income (loss) before extraordinary
item $ 13,744 $ (7,268) $ 21,836 $ (18,561)
============= ============== ============= ==============
Note 6. Comprehensive Income
--------------------
Emmis
Comprehensive income was comprised of the following for the three and nine months ended November 30,
2000 and 2001 (dollars in thousands):
Three Months Nine Months
Ended November 30, Ended November 30,
2000 2001 2000 2001
------------- -------------- ------------- --------------
Net income (loss) $ 11,566 $ (11,698) $ 34,115 $ (32,329)
Translation adjustment 496 (235) 1,245 (223)
Change in fair value of
derivative instruments,
net of associated tax benefit - (4,293) - (6,216)
------------- -------------- ------------- --------------
Total comprehensive
income (loss) $ 12,062 $ (16,226) $ 35,360 $ (38,768)
============= ============== ============= ==============
EOC
Comprehensive income was comprised of the following for the three and nine months ended November 30,
2000 and 2001 (dollars in thousands):
Three Months Nine Months
Ended November 30, Ended November 30,
2000 2001 2000 2001
------------- -------------- ------------- --------------
Net income (loss) $ 11,566 $ (7,268) $ 34,115 $ (21,293)
Translation adjustment 496 (235) 1,245 (223)
Change in fair value of
derivative instruments,
net of associated tax benefit - (4,293) - (6,216)
------------- -------------- ------------- --------------
Total comprehensive
income (loss) $ 12,062 $ (11,796) $ 35,360 $ (27,732)
============= ============== ============= ==============
22
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
nine months ended November 30, 2000 were $1.3 million and $4.5 million, respectively, while total revenues for
the three and nine months ended November 30, 2001 were $1.9 million and $5.0 million, respectively. Long lived
assets of this radio station as of November 30, 2000 and 2001 were $9.7 million and $7.9 million, respectively.
Total revenues of our two radio stations in Buenos Aires, Argentina for the three and nine months ended November
30, 2000 were $2.3 million and $5.4 million, respectively, while total revenues for the three and nine months
ended November 30, 2001 were $2.5 million and $6.8 million, respectively. Long lived assets of these radio
stations as of November 30, 2000 and 2001 were $19.0 million and $17.9 million, respectively.
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.
23
Three Months Ended Publishing
November 30, 2001 Radio Television and Other Interactive Corporate Consolidated
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 65,512 $ 52,333 $ 19,016 $ 258 $ - $ 137,119
Operating expenses 35,086 35,736 16,188 437 - 87,447
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 30,426 16,597 2,828 (179) - 49,672
Corporate expenses - - - - 5,354 5,354
Depreciation and
amortization 8,640 13,941 2,111 2 1,241 25,935
Time brokerage fee - - - - - -
Non-cash compensation - - - - 1,559 1,559
Restructuring fees and other - - - - - -
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 21,786 $ 2,656 $ 717 $ (181) $ (8,154) $ 16,824
=========== =========== ========== ========== ============ ==============
Total assets $ 1,078,037 $ 1,305,392 $ 90,764 $ 329 $ 106,221 $ 2,580,743
=========== =========== ========== ========== =========== ==============
With respect to EOC, the above information would be identical, except corporate total assets would be $94,987 and
consolidated total assets would be $ 2,569,509.
Nine Months Ended Publishing
November 30, 2001 Radio Television and Other Interactive Corporate Consolidated
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 202,965 $ 158,608 $ 54,775 $ 553 $ - $ 416,901
Operating expenses 106,737 105,025 48,916 1,136 - 261,814
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 96,228 53,583 5,859 (583) - 155,087
Corporate expenses - - - - 14,879 14,879
Depreciation and
amortization 25,091 40,200 6,360 6 3,500 75,157
Time brokerage fee 479 - - - - 479
Non-cash compensation - - - - 5,890 5,890
Restructuring fees and other - - - - 768 768
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 70,658 $ 13,383 $ (501) $ (589) $ (25,037) $ 57,914
=========== =========== ========== ========== =========== ==============
Total assets $ 1,078,037 $ 1,305,392 $ 90,764 $ 329 $ 106,221 $ 2,580,743
=========== =========== ========== ========== =========== ==============
With respect to EOC, the above information would be identical, except corporate total assets would be $94,987 and
consolidated total assets would be $2,569,509.
Three Months Ended Publishing
November 30, 2000 Radio Television and Other Interactive Corporate Consolidated
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 68,045 $ 55,667 $ 19,859 $ 35 $ - $ 143,606
Operating expenses 38,087 29,846 16,028 205 - 84,166
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 29,958 25,821 3,831 (170) - 59,440
Corporate expenses - - - - 4,417 4,417
Depreciation and
amortization 6,344 9,511 3,748 1 998 20,602
Time brokerage fee 3,670 - - - - 3,670
Non-cash compensation - - - - 530 530
Restructuring fees and other 2,000 - - - 2,057 4,057
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 17,944 $ 16,310 $ 83 $ (171) $ (8,002) $ 26,164
=========== =========== ========== ========== =========== ==============
Total assets $ 838,963 $ 1,342,156 $ 100,866 $ 23 $ 87,663 $ 2,369,671
=========== =========== ========== ========== =========== ==============
24
Nine Months Ended Publishing
November 30, 2000 Radio Television and Other Interactive Corporate Consolidated
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net revenue $ 185,554 $ 110,228 $ 57,344 $ 68 $ - $ 353,194
Operating expenses 96,173 62,098 48,992 473 - 207,736
----------- ----------- ---------- ---------- ----------- --------------
Broadcast/publishing
cash flow 89,381 48,130 8,352 (405) - 145,458
Corporate expenses - - - - 12,935 12,935
Depreciation and
amortization 14,206 21,198 11,304 3 2,884 49,595
Time brokerage fee 4,784 - - - - 4,784
Non-cash compensation - - - - 4,097 4,097
Restructuring fees and other 2,000 - - - 2,057 4,057
----------- ----------- ---------- ---------- ----------- --------------
Operating income (loss) $ 68,391 $ 26,932 $ (2,952) $ (408) $ (21,973) $ 69,990
=========== =========== ========== ========== =========== ==============
Total assets $ 838,963 $ 1,342,156 $ 100,866 $ 23 $ 87,663 $ 2,369,671
=========== =========== ========== ========== =========== ==============
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
November 30, 2001, subsidiaries holding EOC's interest in its radio stations in Hungary and Argentina, as well as
certain other subsidiaries (such as those 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 November 30, 2001 and for the three and nine months ended November 30,
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.
25
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of November 30, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ - $ 2,095 $ - $ 2,095
Accounts receivable, net - 106,926 5,691 - 112,617
Current portion of TV program rights - 12,618 - - 12,618
Income tax refunds receivable 10,076 - - - 10,076
Prepaid expenses 693 15,408 452 - 16,553
Other 399 13,890 149 - 14,438
------------- ------------ ----------- ------------- --------------
Total current assets 11,168 148,842 8,387 - 168,397
Property and equipment, net 36,406 199,345 4,117 - 239,868
Intangible assets, net 9,644 2,075,894 19,801 - 2,105,339
Investment in affiliates 2,325,927 - - (2,325,927) -
Other assets, net 46,811 14,075 1,882 (6,863) 55,905
------------- ------------ ----------- ------------- --------------
Total assets $ 2,429,956 $ 2,438,156 $ 34,187 $ (2,332,790) $ 2,569,509
============= ============ =========== ============= ==============
CURRENT LIABILITIES:
Accounts payable $ 22,597 $ 12,975 $ 6,143 $ - $ 41,715
Current portion of other
long-term debt 34 11 5,033 - 5,078
Current portion of TV
program rights payable - 30,986 - - 30,986
Accrued salaries and
commissions 113 4,759 523 - 5,395
Accrued interest 7,667 - 497 - 8,164
Deferred revenue - 15,613 - - 15,613
Other 13,305 6,322 - - 19,627
------------- ------------ ----------- ------------- --------------
Total current liabilities 43,716 70,666 12,196 - 126,578
Credit facility and senior
subordinated notes 1,272,000 - - - 1,272,000
Senior discount notes - - - - -
TV program rights payable,
net of current portion - 42,420 - - 42,420
Other long-term debt, net of
current portion 41 446 20,425 (6,863) 14,049
Other noncurrent liabilities 15,240 569 515 - 16,324
Deferred income taxes 122,727 - - - 122,727
------------- ------------ ----------- ------------- --------------
Total liabilities 1,453,724 114,101 33,136 (6,863) 1,594,098
Shareholder's equity
Common stock 1,032,086 - - - 1,032,086
Additional paid-in capital - - 4,393 (4,393) -
Subsidiary investment - 1,927,842 17,783 (1,945,625) -
Retained earnings/
(accumulated deficit) (49,638) 396,213 (20,304) (375,909) (49,638)
Accumulated other
comprehensive loss (6,216) - (821) - (7,037)
------------- ------------ ----------- ------------- --------------
Total shareholder's equity 976,232 2,324,055 1,051 (2,325,927) 975,411
------------- ------------ ----------- ------------- ---------------
Total liabilities and
shareholder's equity $ 2,429,956 $ 2,438,156 $ 34,187 $ (2,332,790) $ 2,569,509
============= ============ =========== ============= ==============
26
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
Shareholder's 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 shareholder's equity 808,069 2,164,499 4,505 (2,169,602) 807,471
------------- ------------ ----------- -------------- -------------
Total liabilities and
shareholder's equity $ 2,348,975 $ 2,299,112 $ 35,306 $ (2,176,521) $ 2,506,872
============= ============ =========== ============== =============
27
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Three Months Ended November 30, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 353 $ 132,382 $ 4,384 $ - $ 137,119
Operating expenses 232 83,510 3,705 - 87,447
Corporate expenses 5,204 150 - - 5,354
Depreciation and amortization 1,241 23,721 973 - 25,935
Time brokerage fee - - - - -
Non-cash compensation 1,170 389 - - 1,559
Restructuring fees and other - - - - -
------------- ----------- ----------- ----------- -------------
Operating income (loss) (7,494) 24,612 (294) - 16,824
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (24,765) (36) (609) 165 (25,245)
Minority interest - - - 20 20
Other income (expense), net (2,468) 1,112 118 (165) (1,403)
------------- ----------- ----------- ----------- -------------
Total other income (expense) (27,233) 1,076 (491) 20 (26,628)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (34,727) 25,688 (785) 20 (9,804)
Provision (benefit) for income taxes (12,298) 9,762 - - (2,536)
------------- ----------- ----------- ----------- -------------
(22,429) 15,926 (785) 20 (7,268)
Extraordinary item, net of tax - - - - -
Equity in earnings (loss) of
subsidiaries 15,161 - - (15,161) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ (7,268) $ 15,926 $ (785) $ (15,141) $ (7,268)
============= =========== =========== =========== =============
28
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Nine Months Ended November 30, 2001
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,455 $ 403,562 $ 11,884 $ - $ 416,901
Operating expenses 948 250,312 10,554 - 261,814
Corporate expenses 14,218 661 - - 14,879
Depreciation and amortization 3,500 69,039 2,618 - 75,157
Time brokerage fee - 479 - - 479
Non-cash compensation 4,418 1,472 - - 5,890
Restructuring fees and other 768 - - - 768
------------- ----------- ----------- ----------- -------------
Operating income (loss) (22,397) 81,599 (1,288) - 57,914
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (79,247) (181) (2,200) 501 (81,127)
Minority interest - - - 132 132
Other income (expense), net (1,251) (1,153) 55 (501) (2,850)
------------- ----------- ----------- ----------- -------------
Total other income (expense) (80,498) (1,334) (2,145) 132 (83,845)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (102,895) 80,265 (3,433) 132 (25,931)
Provision (benefit) for income taxes (36,223) 30,501 - - (5,722)
------------- ----------- ----------- ----------- -------------
(66,672) 49,764 (3,433) 132 (20,209)
Extraordinary item, net of tax (1,084) - - - (1,084)
Equity in earnings (loss) of
subsidiaries 46,463 - - (46,463) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ (21,293) $ 49,764 $ (3,433) $ (46,331) $ (21,293)
============= =========== =========== =========== =============
29
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Three Months Ended November 30, 2000
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 464 $ 139,527 $ 3,615 $ - $ 143,606
Operating expenses 392 79,940 3,834 - 84,166
Corporate expenses 3,948 469 - - 4,417
Depreciation and amortization 1,033 18,722 847 - 20,602
Time brokerage fee - 3,670 - - 3,670
Non-cash compensation 398 132 - - 530
Restructuring fees and other 2,057 2,000 - - 4,057
------------- ----------- ----------- ----------- -------------
Operating income (loss) (7,364) 34,594 (1,066) - 26,164
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (22,948) (61) (872) 170 (23,711)
Minority interest - - - (301) (301)
Other income (expense), net (4,079) 24,030 (259) (170) 19,522
------------- ----------- ----------- ----------- -------------
Total other income (expense) (27,027) 23,969 (1,131) (301) (4,490)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (34,391) 58,563 (2,197) (301) 21,674
Provision (benefit) for income taxes (12,146) 22,254 - - 10,108
------------- ----------- ----------- ----------- -------------
(22,245) 36,309 (2,197) (301) 11,566
Equity in earnings (loss) of
subsidiaries 33,811 - - (33,811) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ 11,566 $ 36,309 $ (2,197) $ (34,112) $ 11,566
============= =========== =========== =========== =============
30
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Nine Months Ended November 30, 2000
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,512 $ 341,796 $ 9,886 $ - $ 353,194
Operating expenses 1,052 196,836 9,848 - 207,736
Corporate expenses 11,635 1,300 - - 12,935
Depreciation and amortization 2,982 43,992 2,621 - 49,595
Time brokerage fee - 4,784 - - 4,784
Non-cash compensation 3,073 1,024 - - 4,097
Restructuring fees and other 2,057 2,000 - - 4,057
------------- ----------- ----------- ----------- -------------
Operating income (loss) (19,287) 91,860 (2,583) - 69,990
------------- ----------- ----------- ----------- -------------
Other income (expense)
Interest expense (39,080) (183) (2,535) 495 (41,303)
Minority interest - - - 292 292
Other income (expense), net 13,299 21,052 (462) (495) 33,394
------------- ----------- ----------- ----------- -------------
Total other income (expense) (25,781) 20,869 (2,997) 292 (7,617)
------------- ----------- ----------- ----------- -------------
Income (loss) before income taxes (45,068) 112,729 (5,580) 292 62,373
Provision (benefit) for income taxes (14,579) 42,837 - - 28,258
------------- ----------- ----------- ----------- -------------
(30,489) 69,892 (5,580) 292 34,115
Equity in earnings (loss) of
subsidiaries 64,604 - - (64,604) -
------------- ----------- ----------- ----------- -------------
Net income (loss) $ 34,115 $ 69,892 $ (5,580) $ (64,312) $ 34,115
============= =========== =========== =========== =============
31
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended November 30, 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) $ (21,293) $ 49,764 $ (3,433) $ (46,331) $ (21,293)
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating
activities -
Extraordinary item 1,084 - - - 1,084
Depreciation and amortization 8,295 82,351 2,617 - 93,263
Provision for bad debts - 2,782 - - 2,782
Provision (benefit) for deferred
income taxes (5,722) - - - (5,722)
Non-cash compensation 4,418 1,472 - - 5,890
Equity in earnings of
subsidiaries (46,463) - - 46,463 -
Other 905 176 (223) (132) 726
Changes in assets and
liabilities -
Accounts receivable - (18,108) (164) - (18,272)
Prepaid expenses and other
current assets 6,766 (3,083) 502 - 4,185
Other assets (4,683) (6,211) - - (10,894)
Accounts payable and accrued
liabilities 6,687 (14,967) 1,112 - (7,168)
Deferred revenue - (1,805) - - (1,805)
Other liabilities 16,288 (19,268) 325 - (2,655)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
operating activities (33,718) 73,103 736 - 40,121
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (1,542) (23,913) (331) - (25,786)
Cash paid for acquisitions - (140,746) - - (140,746)
Other (5,831) - - - (5,831)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
investing activities (7,373) (164,659) (331) - (172,363)
----------- ----------- ----------- ----------- -------------
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 (6,738) - - - (6,738)
Contributions from parent 105,238 87,538 984 - 193,760
Debt related costs (4,584) - - - (4,584)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
financing activities (14,084) 87,538 984 - 74,438
----------- ----------- ----------- ----------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: (55,175) (4,018) 1,389 - (57,804)
Beginning of period 55,175 4,018 706 - 59,899
----------- ----------- ----------- ----------- -------------
End of period $ - $ - $ 2,095 $ - $ 2,095
=========== =========== =========== =========== =============
32
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended November 30, 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) $ 34,115 $ 69,892 $ (5,580) $ (64,312) $ 34,115
Adjustments to reconcile net
income (loss) to net cash provided
(used) by operating
activities -
Depreciation and amortization 6,680 54,193 2,621 - 63,494
Provision for bad debts - 3,381 - - 3,381
Provision for deferred income
taxes 10,341 - - - 10,341
Non-cash compensation 3,073 1,024 - - 4,097
Equity in earnings of
subsidiaries (64,604) - - 64,604 -
Gain on exchange of assets - (22,000) - - (22,000)
Other 544 - 1,245 (292) 1,497
Changes in assets and
liabilities -
Accounts receivable - (24,713) (913) - (25,626)
Prepaid expenses and other
current assets 4,465 (9,266) 343 - (4,458)
Other assets 9,376 (4,194) 76 - 5,258
Accounts payable and accrued
liabilities 6,652 6,184 212 - 13,048
Deferred revenue - (1,705) - - (1,705)
Other liabilities 10,101 (14,651) (728) - (5,278)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
operating activities 20,743 58,145 (2,724) - 76,164
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (2,427) (13,435) (155) - (16,017)
Cash paid for acquisitions - (956,329) - - (956,329)
Other (26,548) - - - (26,548)
----------- ----------- ----------- ----------- -------------
Net cash used by investing
activities (28,975) (969,764) (155) - (998,894)
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (123,388) - - - (123,388)
Proceeds from long-term debt 1,035,388 - - - 1,035,388
Distributions to parent (6,738) - - - (6,738)
Contributions from parent (892,720) 911,505 (9,290) - 9,495
Debt related costs (4,758) - - - (4,758)
----------- ----------- ----------- ----------- -------------
Net cash provided (used) by
financing activities 7,784 911,505 (9,290) - 909,999
----------- ----------- ----------- ----------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: (448) (114) (12,169) - (12,731)
Beginning of period 448 2,564 14,358 - 17,370
----------- ----------- ----------- ----------- -------------
End of period $ - $ 2,450 $ 2,189 $ - $ 4,639
=========== =========== =========== =========== =============
33
Note 9. Regulatory and International 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. We expect that seven of our television stations (KOIN-TV, KGUN-TV, KRQE-TV, WALS-TV, WFTX-TV, WKCF-TV,
WLUK-TV) will be broadcasting in digital format by the May 2002 deadline, with digital broadcasts on our
remaining television stations expected to commence by the end of the calendar year. While we will be requesting
waivers from the FCC, we currently cannot predict the implications of our stations' failure to meet the May 2002
deadline.
Instead of making a required license payment to the Hungarian government in November 2001, our 59.5% owned
national radio station in Hungary requested a modification of the broadcast contract and ultimately filed suit
in arbitration court seeking reformation of the contract and requesting that the payments be reduced. The Hungarian
government has notified the station of its intent to revoke the license based on nonpayment of the license fee.
This decision is not final and the station has until January 20, 2002 to file an appeal. The station plans to file
the appeal and pursue arbitration and settlement negotiations with the Hungarian government. Management cannot
predict the outcome of the litigation and does not plan to continue to operate the station under the present fee
arrangement. Management does not expect an adverse material financial impact to Emmis or EOC if the station does
not continue to operate.
Note 10. Subsequent Events
-----------------
The terms of ECC's preferred stock provide for a quarterly dividend payment of $.78125 per share on
January 15, 2002. While Emmis has sufficient liquidity to declare and pay the dividend, it is currently not permitted
to do so because Emmis' leverage ratio under the senior discount notes indenture exceeds 8:1 and its leverage ratio
under the senior subordinated notes indenture exceeds 7:1. ECC's board of directors set January 2, 2002 as the
record date for the January 15, 2002 dividend, but did not declare the dividend. Instead, on January 15, a
wholly-owned, unrestricted subsidiary of EOC will be making a payment of $.78125 per share to each preferred
shareholder of record on January 2, 2002. This subsidiary is permitted to make the payment to the preferred
shareholders under the senior discount notes indenture and the senior subordinated notes indenture. When ECC is
permitted to declare the January 15, 2002 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.
In December 2001, Emmis instituted a 10% pay cut for substantially all of its non-contract employees
and also began a stock compensation program under its 2001 Equity Incentive Plan. All Emmis employees who were
affected by the pay cut are automatically eligible to participate in the stock compensation program and all
other employees are eligible to participate in the program by taking a voluntary pay cut. Each participant in
the program may elect to receive the portion of their compensation that was cut in the form of payroll stock that
is issued every two weeks or in the form of restricted stock that is issued after the end of the award year in
January 2003. The payroll stock is awarded based on the fair market value of Emmis' Class A Common Stock on
the date it is issued. The restricted stock is awarded based on a discount off the initial value of Emmis' Class A
34
Common Stock. During the first award year, we expect the stock compensation program to result in approximately a $14
million reduction in Emmis' cash compensation expense. No decisions have been made on whether or not to continue the
program in future years.
Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated in the accompanying
financial statements. Most of the assets and liabilities of this subsidiary are denominated in its local
currency (peso). However, the subsidiary has approximately $3.1 million of loans denominated in U.S. dollars.
On January 7, 2002, the Argentinean government devalued the peso. The Company has not yet assessed the impact,
if any, of the devaluation of the peso on its financial statements.
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, by this Note,
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 desired radio acquisitions; new or
changing regulations of the Federal Communications Commission or other governmental agencies; competition from
new or different technologies; 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.
35
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 Nine Months Ended November 30, 2001 Compared to November 30, 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 November 30, 2001 were $137.1 million compared to $143.6 million
for the same period of the prior year, a decrease of $6.5 million or 4.5%. Net revenues for the nine months
ended November 30, 2001 were $416.9 million compared to $353.2 million for the same period of the prior year, an
increase of $63.7 million, or 18.0%. On a pro forma basis (after giving effect to all acquisitions consummated
since March 1, 2000), net revenues for the three months ended November 30, 2001 decreased $18.7 million, or 12.0%
and decreased $37.8 million, or 8.3% for the nine months ended November 30, 2001. This pro forma decrease in net
revenues is generally due to a softening U.S. economy resulting in an overall decrease in advertisement sales,
coupled with the absence of political television advertisements in the three and nine months ended November 30,
2001 as compared to the same period of the prior year.
Operating expenses for the three months ended November 30, 2001 were $87.4 million compared to $84.2
million for the same period of the prior year, an increase of $3.3 million or 3.9%. Operating expenses for the
nine months ended November 30, 2001 were $261.8 million compared to $207.7 million for the same period of the
prior year, and increase of $54.1 million, or 26.0%. On a pro forma basis, operating expenses for the three
months ended November 30, 2001 decreased $3.8 million, or 4.2% and decreased $10.0 million, or 3.7% for the nine
months ended November 30, 2001. This pro forma 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. The Company has several cost savings initiatives that become
effective in the quarter ended February 28, 2002, including the previously announced 10% wage cut which will be
supplemented with a corresponding 10% Emmis stock award. This initiative is expected to reduce cash operating
expenses by approximately $14 million annually.
36
Broadcast/publishing cash flow for the three months ended November 30, 2001 was $49.7 million compared
to $59.4 million for the same period of the prior year, a decrease of $9.7 million or 16.4%.
Broadcast/publishing cash flow for the nine months ended November 30, 2001 was $155.1 million compared to $145.5
million for the same period of the prior year, and increase of $9.6 million, or 6.6%. On a pro forma basis,
broadcast/publishing cash flow for the three months ended November 30, 2001 decreased by $14.9 million, or 23.0%
and decreased $27.8 million, or 15.2% for the nine months ended November 30, 2001. This pro forma decrease is
due to decreased net revenues partially offset by decreased operating expenses as discussed above.
Corporate expenses for the three months ended November 30, 2001 were $5.4 million compared to $4.4
million for the same period of the prior year, an increase of $1.0 million or 21.2%. Corporate expenses for the
nine months ended November 30, 2001 were $14.9 million compared to $12.9 million for the same period of the prior
year, and increase of $2.0 million, or 15.0%. This increase is mostly due to an increase in the number of
corporate employees in all departments as a result of our recent growth and training investments we have made in
our personnel.
EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate expenses.
EBITDA before certain charges for the three months ended November 30, 2001 was $44.3 million compared to $55.0
million for the same period of the prior year, a decrease of $10.7 million or 19.5%. EBITDA for the nine months
ended November 30, 2001 was $140.2 million compared to $132.5 million for the same period of the prior year, and
increase of $7.7 million, or 5.8%. On a pro forma basis, EBITDA before certain charges for the three months
ended November 30, 2001 decreased $15.8 million, or 26.3% and decreased $29.7 million, or 17.5% for the nine
months ended November 30, 2001. This pro forma 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 November 30, 2001 was $25.9 million
compared to $20.6 million for the same period of the prior year, an increase of $5.3 million or 25.9%.
Depreciation and amortization for the nine months ended November 30, 2001 was $75.2 million compared to $49.6
million for the same period of the prior year, an increase of $25.6 million, or 51.5%. Substantially all of the
increase in depreciation and amortization expense for the three and nine months ended November 30, 2001 is due to
acquisitions consummated since March 1, 2000.
Non-cash compensation expense for the three months ended November 30, 2001 was $1.6 million compared to
$0.5 million for the same period of the prior year, an increase of $1.1 million or 194.2%. Non-cash compensation
for the nine months ended November 30, 2001 was $5.9 million compared to $4.1 million for the same period of the
prior year, an increase of $1.8 million, or 43.8%. 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 three and nine months ended November 30, 2001 was due to the payment of certain employee incentives with our
common stock.
With respect to Emmis, interest expense for the three months ended November 30, 2001 was $32.1 million
compared to $23.7 million for the same period of the prior year, an increase of $8.4 million or 35.2%. Interest
expense for the nine months ended November 30, 2001 was $99.2 million compared to $41.3 million for the same
period of the prior year, an increase of $57.9 million, or 140.2%. This increase reflects higher outstanding
debt due to acquisitions consummated since March 1, 2000, all of which were financed with debt (including our
12.5% senior discount notes issued March 2001), partially offset by lower interest rates on our floating rate
senior debt.
37
With respect to EOC, interest expense for the three months ended November 30, 2001 was $25.2 million
compared to $23.7 million for the same period of the prior year, an increase of $1.5 million or 6.5%. Interest
expense for the nine months ended November 30, 2001 was $81.1 million compared to $41.3 million for the same
period of the prior year, an increase of $39.8 million, or 96.4%. This increase reflects higher outstanding debt
due to acquisitions consummated since March 1, 2000, partially offset by lower interest rates on our floating
rate senior debt. 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 November 30, 2001 was nominal, compared to $19.2 million for the
same period of the prior year. Other income for the nine months ended November 30, 2001 was $1.6 million
for Emmis and $0.6 million for EOC compared, to $33.4 million for the same period of the prior year. Other
income for the three months ended November 30, 2000 includes a $22.0 million gain on exchange of assets, offset
by valuation adjustments on certain investments. Other income for the nine months ended November 30, 2000
includes the $22.0 million gain on exchange of assets, offset by valuation adjustments on certain investments
and a $17.0 million break-up fee received in connection with the sale of WALR-FM in Atlanta, Georgia by Midwest
Broadcasting to Cox Radio, Inc., net of related expenses. The difference between other income for Emmis and EOC for
the nine months ended November 30, 2001 relates to interest income on $93.0 million of cash in escrow (see Note 4).
With respect to Emmis, our effective tax rate for the nine months ended November 30, 2001 was a benefit
of 27.4%, compared to a provision of 45.3% for the same period of the prior year. With respect to EOC, our
effective tax rate for the nine months ended November 30, 2001 was a benefit of 22.1%, compared to a provision of
45.3% 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 nine months ended November 30, 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 February of 2002 for an estimated cost of $11.3 million of which $9.0 million has been
incurred through November 30, 2001. This project will be financed through cash flows from operating activities
and/or borrowings under the credit facility.
38
Capital Expenditures
In the nine month periods ended November 30, 2000 and 2001, we had capital expenditures of $16.0 million
and $25.8 million, respectively. The capital expenditures in the period ended November 30, 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.
Debt Service and Preferred Stock Dividend Requirements
As of November 30, 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 $19.1 million of other
indebtedness. As of November 30, 2001, total indebtedness outstanding for Emmis included all of EOC's
indebtedness as well as $219.9 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 November 30,
2001, our weighted average borrowing rate under our credit facility was approximately 6.4% and our overall
weighted average borrowing rate, after taking into account amounts outstanding under our senior subordinated
notes and senior discount notes, was approximately 7.7%. The overall weighted average borrowing rate for EOC,
which would exclude the senior discount notes, was approximately 6.8%.
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 each January 15, April 15, July 15 and October 15. While Emmis has
sufficient liquidity to declare and pay the dividends as they become due, it is not currently permitted to do so
because Emmis' current leverage ratio under the senior discount notes indenture exceeds 8:1 and its current
leverage ratio under the senior subordinated notes indenture exceeds 7:1. For the October 15, 2001 dividend,
ECC's board of directors set October 12, 2001 as the record date, but did not declare the dividend. Instead, on
October 15, a wholly-owned, unrestricted subsidiary of EOC made a payment of $.78125 per share to each preferred
shareholder of record on October 12, 2001. This subsidiary was 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. For the January 15, 2002 dividend, a process similar to one outlined
above is being utilized.
Sources of Liquidity
Our primary sources of liquidity are cash provided by operations and funds available under our credit
facility. At November 30, 2001, we had cash and cash equivalents of $2.1 million and net working capital of
$40.7 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 January 2, 2002, we had $220.0 million available under our credit facility (subject to
restrictions discussed in the following paragraph), less $8.4 million in outstanding letters of credit. Based
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on current projections, by February 28, 2003, 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 believe we have access to various debt or equity markets or we could dispose of certain assets
to prevent or cure any violation. Based on these options, we do not expect any of our debt to be called.
Our indentures related to the senior discount notes and the senior subordinated notes contain leverage
ratio covenants (debt divided by pro forma EBITDA, as defined) of 8:1 and 7:1, respectively. Our leverage ratio
under the senior discount notes currently exceeds 8:1 and the leverage ratio under the senior subordinated notes
currently exceeds 7:1. As a result, Emmis and EOC are 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 November 30, 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 calculated the
impairment loss expected to result 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.
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In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", which establishes a single model to account for impairment of assets to be held or disposed,
incorporating guidelines for accounting and disclosure of discontinued operations. This statement supercedes
SFAS 121 and will be adopted by the Company on March 1, 2002. The Company has not yet determined the impact, if
any, of adopting SFAS 144.
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. We expect that seven of our television stations (KOIN-TV, KGUN-TV, KRQE-TV, WALS-TV, WFTX-TV, WKCF-TV,
WLUK-TV) will be broadcasting in digital format by the May 2002 deadline, with digital broadcasts on our
remaining television stations expected to commence by the end of the calendar year. While we will be requesting
waivers from the FCC, we currently cannot predict the implications of our stations' failure to meet the May 2002
deadline.
Quantitative and Qualitative Disclosures About Market Risk
Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated in the accompanying
financial statements. Most of the assets and liabilities of this subsidiary are denominated in its local
currency (peso). However, the subsidiary has approximately $3.1 million of loans denominated in U.S. dollars.
On January 7, 2002, the Argentinean government devalued the peso. The Company has not yet assessed the impact,
if any, of the devaluation of the peso on its financial statements.
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 other than the
one disclosed above.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Instead of making a required license payment to the Hungarian government in November 2001, our 59.5% owned
national radio station in Hungary requested a modification of the broadcast contract and ultimately filed suit
in arbitration court seeking reformation of the contract and requesting that the payments be reduced. The Hungarian
government has notified the station of its intent to revoke the license based on nonpayment of the license fee.
This decision is not final and the station has until January 20, 2002 to file an appeal. The station plans to file
the appeal and pursue arbitration and settlement negotiations with the Hungarian government. Management cannot
predict the outcome of the litigation and does not plan to continue to operate the station under the present fee
arrangement. Management does not expect an adverse material financial impact to Emmis or EOC if the station does
not continue to operate.
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.
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 an amendment thereto relating to certain
12.5% Senior Preferred Stock incorporated by reference from Exhibit 3.1 to the
Company's current report on Form 8-K filed 12/13/01.
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 File No. 333-62172 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 File No. 333-62172 filed on June 21, 2001.
10.1 Third Amendment to Fourth Amended and Restated Credit and Term Loan Agreement, incorporated
by reference from Exhibit 10 to Emmis Operating Company's Form 8-K filed on December 3, 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 November 30, 2001.
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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: January 14, 2002 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President (Authorized Corporate
Officer), Chief Financial Officer and Treasurer
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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: January 14, 2002 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President (Authorized Corporate
Officer), Chief Financial Officer and Treasurer
44
Exhibit 15
January 14, 2002
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 November 30,
2001, which includes our report dated January 8, 2002 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 January 8, 2002.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
- ----------------------------------------
ARTHUR ANDERSEN LLP
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