UNITED STATES
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, 2002
EMMIS COMMUNICATIONS CORPORATION EMMIS OPERATING COMPANY
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its 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
---- ----
The number of shares outstanding of each of Emmis Communications
Corporation's classes of common stock, as of January 3, 2003, was:
48,536,277 Shares of Class A Common Stock, $.01 Par Value
5,002,460 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 1, 2003 and all of these shares are owned by Emmis Communications
Corporation.
INDEX
Page
----
INDEPENDENT ACCOUNTANTS' REVIEW REPORT.......................................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, 2001 and 2002...........................5
Condensed Consolidated Balance Sheets
as of February 28, 2002 and November 30, 2002.....................6
Condensed Consolidated Statements of Cash Flows for the
nine months ended November 30, 2001 and 2002......................9
Emmis Operating Company and Subsidiaries:
Condensed Consolidated Statements of Operations for the three and nine
months ended November 30, 2001 and 2002.........................11
Condensed Consolidated Balance Sheets
as of February 28, 2002 and November 30, 2002...................12
Condensed Consolidated Statements of Cash Flows for the
nine months ended November 30, 2001 and 2002....................14
Notes to Condensed Consolidated Financial Statements....................16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................37
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..............................................50
Item 4. Controls and Procedures..........................................50
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................51
Item 6. Exhibits and Reports on Form 8-K.................................51
Signatures .............................................................52
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
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, 2002, and the related condensed consolidated statements of
operations for the three-month and nine-month periods ended November 30, 2002,
and the condensed consolidated statements of cash flows for the nine-month
period ended November 30, 2002. 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, 2002, and the related condensed consolidated
statements of operations for the three-month and nine-month periods ended
November 30, 2002, and the condensed consolidated statements of cash flows for
the nine-month period ended November 30, 2002. These financial statements are
the responsibility of the Companies' management. The condensed consolidated
balance sheet, statement of operations, and statement of cash flows of both
Emmis Communications Corporation and Subsidiaries and Emmis Operating Company
and Subsidiaries as of November 30, 2001, and for the three-month and nine-month
periods then ended, were reviewed by other accountants who have ceased
operations. Those accountants' report (dated January 8, 2002) stated that they
were not aware of any material modifications that should be made to those
statements for them to be in conformity with accounting principles generally
accepted in the United States.
We conducted our review 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,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated financial
statements as of November 30, 2002, and for the three-month and nine-month
periods then ended for them to be in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Indianapolis, Indiana
January 3, 2003
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 Ended Nine Months Ended
November 30, November 30,
2001 2002 2001 2002
---- ---- ---- ----
GROSS REVENUES $ 158,346 $179,064 $ 482,404 $501,270
LESS: AGENCY COMMISSIONS 20,057 23,520 61,215 65,698
--------- -------- --------- --------
NET REVENUES 138,289 155,544 421,189 435,572
OPERATING EXPENSES:
Station operating expenses, excluding noncash compensation 88,617 87,781 266,102 260,076
Time brokerage fees - - 479 -
Corporate expenses, excluding noncash compensation 5,354 5,571 14,879 15,750
Noncash compensation 1,559 6,470 5,890 17,600
Depreciation and amortization 25,935 10,738 75,157 32,090
Restructuring fees and other - - 768 -
------ ------ ------ ------
Total operating expenses 121,465 110,560 363,275 325,516
------- ------- ------- -------
OPERATING INCOME 16,824 44,984 57,914 110,056
------ ------ ------ -------
OTHER INCOME (EXPENSE):
Interest expense (32,055) (24,468) (99,204) (80,611)
Loss from unconsolidated affiliates (1,366) (128) (3,462) (4,208)
Gain on sale of assets - (33) - 8,900
Other income (expense), net (6) (385) 1,730 872
------- ------- ------- -------
Total other income (expense) (33,427) (25,014) (100,936) (75,047)
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
LOSS AND ACCOUNTING CHANGE (16,603) 19,970 (43,022) 35,009
PROVISION (BENEFIT) FOR INCOME TAXES (4,905) 9,156 (11,777) 15,808
------ ----- ------- ------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
ACCOUNTING CHANGE (11,698) 10,814 (31,245) 19,201
EXTRAORDINARY LOSS, NET OF TAXES - - (1,084) (11,117)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
NET OF TAXES OF $102,600 - - - (167,400)
------- ------ ------- ------
NET INCOME (LOSS) (11,698) 10,814 (32,329) (159,316)
PREFERRED STOCK DIVIDENDS 2,246 2,246 6,738 6,738
----- ----- ----- -----
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (13,944) $ 8,568 $ (39,067) $ (166,054)
========= ======= ========= ==========
See independent accountants' review report and accompanying notes.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
November 30, November 30,
2001 2002 2001 2002
---- ---- ---- ----
Basic net income (loss) available to common shareholders:
Before accounting change and extraordinary loss $ (0.29) $ 0.16 $ (0.81) $ 0.24
Extraordinary loss, net of tax - - (0.02) (0.21)
Cumulative effect of accounting change, net of tax - - - (3.16)
------- ------ ------- ------
Net income (loss) available to common shareholders $ (0.29) $ 0.16 $ (0.83) $ (3.13)
======= ====== ======= =======
Basic weighted average common shares outstanding 47,415 53,358 47,322 53,019
Diluted net income (loss) available to common shareholders:
Before accounting change and extraordinary loss $ (0.29) $ 0.16 $ (0.81) $ 0.23
Extraordinary loss, net of tax - - (0.02) (0.21)
Cumulative effect of accounting change, net of tax - - - (3.14)
------- ------ ------- ------
Net income (loss) available to common shareholders $ (0.29) $ 0.16 $ (0.83) $ (3.12)
======= ====== ======= =======
Diluted weighted average common shares outstanding 47,415 53,507 47,322 53,280
See independent accountants' review report and accompanying notes.
In the three months ended November 30, 2001 and 2002, $1.6 million and
$4.8 million respectively, of our noncash compensation was attributable to our
stations, while $0 million and $1.7 million was attributable to corporate. In
the nine months ended November 30, 2001 and 2002, $5.0 million and $14.3 million
respectively, of our noncash compensation was attributable to our stations,
while $0.9 million and $3.3 million was attributable to corporate.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
February 28, November 30,
2002 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,362 $ 8,255
Accounts receivable, net 95,240 114,111
Prepaid expenses 14,847 17,798
Income tax refund receivable - 11,095
Other 23,657 26,467
Assets held for sale 123,416 -
------- -------
Total current assets 263,522 177,726
PROPERTY AND EQUIPMENT, NET 231,139 225,370
INTANGIBLE ASSETS (Note 3):
Indefinite lived intangibles 1,743,235 1,509,019
Goodwill 175,132 138,986
Other intangibles, net 34,964 26,222
------ ------
Total intangible assets 1,953,331 1,674,227
OTHER ASSETS, NET 62,077 57,454
------ ------
Total assets $ 2,510,069 $ 2,134,777
=========== ===========
See independent accountants' review report and accompanying notes.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
(In thousands, except share data)
February 28, November 30,
2002 2002
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 38,995 $ 39,620
Current maturities of long-term debt 7,933 14,602
Current portion of TV program rights payable 27,507 30,085
Accrued salaries and commissions 7,852 8,879
Accrued interest 14,068 6,619
Deferred revenue 16,392 15,990
Other 7,531 8,564
Credit facility debt to be repaid with assets held for sale 135,000 -
Liabilities associated with assets held for sale 63 -
----- -----
Total current liabilities 255,341 124,359
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,343,507 1,218,963
OTHER LONG-TERM DEBT, NET OF CURRENT MATURITIES 6,949 2,806
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 40,551 35,945
OTHER NONCURRENT LIABILITIES 26,966 20,236
DEFERRED INCOME TAXES 101,198 23,514
------- ------
Total liabilities 1,774,512 1,425,823
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series A cumulative convertible preferred stock, $0.01 par value;
$50.00 liquidation value; authorized 10,000,000 shares; issued and
outstanding 2,875,000 shares at February 28, 2002 and November 30, 2002 29 29
Class A common stock, $.01 par value; authorized 170,000,000 shares;
issued and outstanding 42,761,299 shares at February 28, 2002
and 48,438,046 shares at November 30, 2002 428 484
Class B common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 5,250,127 shares at February 28, 2002
and 5,002,460 shares at November 30, 2002 53 50
Additional paid-in capital 843,254 989,359
Accumulated deficit (95,822) (261,875)
Accumulated other comprehensive loss (12,385) (19,093)
------- -------
Total shareholders' equity 735,557 708,954
------- -------
Total liabilities and shareholders' equity $ 2,510,069 $ 2,134,777
=========== ===========
See independent accountants' review report and accompanying notes.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
November 30,
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (32,329) $ (159,316)
Adjustments to reconcile net loss to net cash
provided by operating activities
Cumulative effect of accounting change - 167,400
Extraordinary loss 1,084 11,117
Depreciation and amortization 94,065 50,020
Accretion of interest on senior discount notes, -
including amortization of related debt costs 18,081 19,789
Provision for bad debts 2,782 3,189
Provision (benefit) for deferred income taxes (11,777) 15,808
Noncash compensation 5,890 17,600
Gain on sale of assets - (8,900)
Other 726 (7,098)
Changes in assets and liabilities
Accounts receivable (18,272) (22,060)
Prepaid expenses and other current assets 4,185 (6,400)
Other assets (11,700) 6,281
Accounts payable and accrued liabilities (7,168) (7,542)
Deferred revenue (1,805) (402)
Other liabilities (2,655) (22,981)
------ -------
Net cash provided by operating activities 41,107 56,505
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (25,786) (21,035)
Cash paid for acquisitions (140,746) -
Proceeds from sale of assets, net - 135,500
Other (5,831) (1,087)
------ ------
Net cash provided by (used in) investing activities (172,363) 113,378
-------- -------
See independent accountants' review report and accompanying notes.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
Nine Months Ended
November 30,
2001 2002
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (113,000) (291,525)
Proceeds from long-term debt 5,000 13,000
Proceeds from senior discount notes offering 202,612 -
Proceeds from issuance of the Company's Class A common
stock, net of transaction costs - 120,239
Proceeds from exercise of stock options 2,194 6,466
Preferred stock dividends paid (6,738) (6,738)
Premium paid to redeem senior discount notes - (6,678)
Debt related costs (16,616) (2,754)
------- ------
Net cash provided by (used in) financing activities 73,452 (167,990)
------ --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (57,804) 1,893
CASH AND CASH EQUIVALENTS:
Beginning of period 59,899 6,362
------ -----
End of period $ 2,095 $ 8,255
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for
Interest $ 84,318 $ 55,371
Income taxes 1,249 630
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 $ -
=========
See independent accountants' review report and accompanying notes.
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
November 30, November 30,
2001 2002 2001 2002
---- ---- ---- ----
GROSS REVENUES $ 158,346 $179,064 $482,404 $501,270
LESS: AGENCY COMMISSIONS 20,057 23,520 61,215 65,698
------ ------ ------ ------
NET REVENUES 138,289 155,544 421,189 435,572
OPERATING EXPENSES:
Station operating expenses,
excluding noncash compensation 88,617 87,781 266,102 260,076
Time brokerage fees - - 479 -
Corporate expenses,
excluding noncash compensation 5,354 5,571 14,879 15,750
Noncash compensation 1,559 6,470 5,890 17,600
Depreciation and amortization 25,935 10,738 75,157 32,090
Restructuring fees and other - - 768 -
------- ------- ------- -------
Total operating expenses 121,465 110,560 363,275 325,516
------- ------- ------- -------
OPERATING INCOME 16,824 44,984 57,914 110,056
------ ------ ------ -------
OTHER INCOME (EXPENSE):
Interest expense (25,245) (18,589) (81,127) (60,847)
Loss from unconsolidated affiliates (1,366) (128) (3,462) (4,208)
Gain on sale of assets - (33) - 8,900
Other income (expense), net (17) (387) 744 872
------- ------- ------- -------
Total other income (expense) (26,628) (19,137) (83,845) (55,283)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND ACCOUNTING
CHANGE (9,804) 25,847 (25,931) 54,773
PROVISION (BENEFIT) FOR INCOME TAXES (2,536) 11,075 (5,722) 22,235
------ ------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY
LOSS AND ACCOUNTING CHANGE (7,268) 14,772 (20,209) 32,538
EXTRAORDINARY LOSS, NET OF TAXES - - (1,084) (2,889)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAXES OF $102,600 - - - (167,400)
-------- -------- --------- ----------
NET INCOME (LOSS) $ (7,268) $ 14,772 $ (21,293) $ (137,751)
======== ======== ========= ==========
See independent accountants' review report and accompanying notes.
In the three months ended November 30, 2001 and 2002, $1.6 million and
$4.8 million respectively, of our noncash compensation was attributable to our
stations, while $0 million and $1.7 million was attributable to corporate. In
the nine months ended November 30, 2001 and 2002, $5.0 million and $14.3 million
respectively, of our noncash compensation was attributable to our stations,
while $0.9 million and $3.3 million was attributable to corporate.
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except share data)
February 28, November 30,
2002 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,362 $ 8,255
Accounts receivable, net 95,240 114,111
Prepaid expenses 14,847 17,798
Income tax refund receivable - 11,095
Other 23,657 26,467
Assets held for sale 123,416 -
------- -------
Total current assets 263,522 177,726
PROPERTY AND EQUIPMENT, NET 231,139 225,370
INTANGIBLE ASSETS (NOTE 3):
Indefinite lived intangibles 1,743,235 1,509,019
Goodwill 175,132 138,986
Other intangibles, net 34,964 26,222
------ ------
Total intangible assets 1,953,331 1,674,227
OTHER ASSETS, NET 51,147 49,693
------ ------
Total assets $ 2,499,139 $ 2,127,016
=========== ===========
See independent accountants' review report and accompanying notes.
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
(Dollars in thousands, except share data)
February 28, November 30,
2002 2002
---- ----
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 38,995 $ 39,620
Current maturities of long-term debt 7,933 14,602
Current portion of TV program rights payable 27,507 30,085
Accrued salaries and commissions 7,852 8,879
Accrued interest 14,068 6,619
Deferred revenue 16,392 15,990
Other 6,408 7,441
Credit facility debt to be repaid with assets held for sale 135,000 -
Liabilities associated with assets held for sale 63 -
------- -------
Total current liabilities 254,218 123,236
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,117,000 1,026,898
OTHER LONG-TERM DEBT, NET OF CURRENT MATURITIES 6,949 2,806
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 40,551 35,945
OTHER NONCURRENT LIABILITIES 26,966 20,236
DEFERRED INCOME TAXES 108,988 38,565
------- ------
Total liabilities 1,554,672 1,247,686
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value; authorized , issued and outstanding
1,000 shares at February 28, 2002 and November 30, 2002 1,027,221 1,027,221
Additional paid-in capital 8,108 94,168
Accumulated deficit (78,477) (222,966)
Accumulated other comprehensive loss (12,385) (19,093)
------- -------
Total shareholder's equity 944,467 879,330
------- -------
Total liabilities and shareholder's equity $ 2,499,139 $ 2,127,016
=========== ===========
See independent accountants' review report and accompanying notes.
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
November 30,
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,293) $ (137,751)
Adjustments to reconcile net loss to net cash
provided by operating activities
Cumulative effect of accounting change - 167,400
Extraordinary loss 1,084 2,889
Depreciation and amortization 93,263 50,020
Provision for bad debts 2,782 3,189
Provision (benefit) for deferred income taxes (5,722) 22,235
Noncash compensation 5,890 17,600
Gain on sale of assets - (8,900)
Other 726 (8,122)
Changes in assets and liabilities
Accounts receivable (18,272) (22,060)
Prepaid expenses and other current assets 4,185 (6,400)
Other assets (10,894) 6,304
Accounts payable and accrued liabilities (7,168) (7,542)
Deferred revenue (1,805) (402)
Other liabilities (2,655) (22,981)
------ -------
Net cash provided by operating activities 40,121 55,479
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (25,786) (21,035)
Cash paid for acquisitions (140,746) -
Proceeds from sale of assets, net - 135,500
Other (5,831) (1,087)
------ ------
Net cash provided by (used in) investing activities (172,363) 113,378
-------- -------
See independent accountants' review report and accompanying notes.
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
Nine Months Ended
November 30,
2001 2002
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (113,000) (238,102)
Proceeds from long-term debt 5,000 13,000
Distributions to parent (6,738) (6,738)
Contributions from parent 193,760 67,630
Debt related costs (4,584) (2,754)
------ ------
Net cash provided by (used in) financing activities 74,438 (166,964)
------ --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (57,804) 1,893
CASH AND CASH EQUIVALENTS:
Beginning of period 59,899 6,362
------ -----
End of period $ 2,095 $ 8,255
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for -
Interest $ 84,318 $ 55,371
Income taxes 1,249 630
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 $ -
======
See independent accountants' review report and accompanying notes.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2002
(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, "our," "us," "Emmis" or
the "Company") and by Emmis Operating Company and its subsidiaries (collectively
"EOC"). 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, 2002. 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, 2002 and the results of their operations for the three and nine months ended
November 30, 2001 and 2002 and their cash flows for the nine months ended
November 30, 2001 and 2002.
Note 2. Accounting Policies
-------------------
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, 2001 and 2002 consisted of stock options and the 6.25% Series A
cumulative convertible preferred stock. Neither the 6.25% Series A cumulative
convertible preferred stock nor the stock options are included in the
calculation of diluted net income per common share for the three and nine months
ended November 30, 2001 as the effect of their conversion to common stock would
be antidilutive. 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 and the conversion of stock
options amounted to approximately 3.8 million and 4.1 million shares for the
three and nine months ended November 30, 2001, respectively. The 6.25% Series A
cumulative convertible preferred stock was excluded from the calculation of
diluted net income per common share for the three and nine months ended November
30, 2002 as the effect of their conversion to common stock of 3.7 million shares
would be antidilutive.
EOC
Because EOC is a wholly-owned subsidiary of Emmis, disclosure of
earnings per share for EOC is not required.
Reclassifications
Certain reclassifications have been made to the November 30, 2001 and
February 28, 2002 financial statements to be consistent with the November 30,
2002 presentation. The reclassifications have no impact on net income or
retained earnings previously reported.
Advertising Costs
The Company defers major advertising campaigns for which future
benefits are demonstrated. These costs are amortized over the shorter of the
estimated period benefited (generally six months) or the remainder of the fiscal
year. The Company had deferred $2.2 million of these costs as of November 30,
2002 and a nominal amount as of November 30, 2001.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." Statement No. 141 addresses financial
accounting and reporting for business combinations and supersedes Accounting
Principle Board ("APB") Opinion No. 16, "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." Statement No. 141 is effective for all business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interest method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. Statement No. 141 also changes the
criteria to recognize intangible assets apart from goodwill. The Company adopted
this Statement on July 1, 2001. The Company has historically used the purchase
method to account for all business combinations and adoption of this Statement
did not have a material impact on the Company's financial position, cash flows
or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." See Note 3 for a discussion of Statement No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" that applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. Adoption of this Statement by the Company will be effective on March
1, 2003. The Company does not believe that the adoption of this Statement will
materially impact the Company's financial position, cash flows or results of
operations.
Effective March 1, 2002, the Company adopted SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it removes
certain assets such as deferred tax assets, goodwill and intangible assets not
being amortized from its scope and retains the requirements of SFAS No. 121
regarding the recognition of impairment losses on other long-lived assets held
for use. SFAS No. 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring events and Transactions" for the disposal of a segment of
a business. However, SFAS No. 144 retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. The adoption
of this statement did not have a material impact on the Company's financial
position, cash flows or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Statement No. 145 rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and an amendment of that Statement, and
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". Statement No. 145 also rescinds FASB Statement No. 44,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Statement No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Adoption of
this Statement by the Company will be effective on March 1, 2003. Upon adoption
of this statement, the Company believes future write-offs of deferred debt fees
resulting from extinguishments of debt will be recorded as interest expense and
not as an extraordinary charge.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Statement No. 146 supersedes
Emerging Issues Task Force Issue No. 94-3. Statement No. 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, not at the date of an entity's commitment to an
exit or disposal plan. The provisions of Statement No. 146 are effective for
exit or disposal activities initiated after December 31, 2002. The Company does
not anticipate that the adoption of Statement No. 146 will have a material
impact on its consolidated financial position, results of operations or cash
flows.
In December 2002, the FASB issued FASB No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Statement No. 148 amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition to Statement No. 123's fair value method of
accounting for stock-based employee compensation. Statement No. 148 also amends
the disclosure provisions of Statement No. 123 and APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. Adoption of this statement by
the Company will be effective March 1, 2003. The Company does not anticipate
that the adoption of Statement No. 148 will have a material impact on its
consolidated financial position, results of operations or cash flows.
Note 3. Intangible Assets and Goodwill
------------------------------
Effective March 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," which requires the Company to cease amortizing
goodwill and certain intangibles. Instead, these assets will be reviewed at
least annually for impairment, and will be written down and charged to results
of operations in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. On February 28, 2002, prior to the
adoption of SFAS No. 142, the Company reflected unamortized goodwill and
unamortized FCC licenses in the amounts of $175.1 million and $1,743.2 million,
respectively. FCC licenses are renewed every eight years for a nominal amount
and historically all of our FCC licenses have been renewed at the end of their
respective eight-year periods. Since we expect that all of our FCC licenses will
continue to be renewed in the future, we believe they have indefinite lives. The
Company had previously amortized these assets over the maximum period allowed of
40 years. Adoption of this accounting standard eliminated the Company's
amortization expense for goodwill and FCC licenses. For comparison purposes, for
the three and nine months ended November 30, 2001, the Company recorded
amortization expense for goodwill and FCC licenses of $15.3 million and $45.5
million, respectively.
The following unaudited pro forma summary presents the Company's
estimate of the effect of the adoption of Statement No. 142 as of the beginning
of the periods presented. Reported income (loss) before extraordinary loss and
accounting change and reported net loss available to common shareholder are
adjusted to eliminate the amortization expense recognized in those periods
related to goodwill and FCC licenses as these assets are not amortized under
this new accounting standard.
EMMIS
(Dollars in thousands, except per share data) Three months ended Nine months ended
November 30, November 30,
2001 2002 2001 2002
---- ---- ---- ----
Reported income (loss) before extraordinary loss
and accounting change $ (11,698) $ 10,814 $ (31,245) $ 19,201
Add back: amortization of goodwill, net of tax
provision of $898 and $2,193 for the three and nine
months ended November 30, 2001 1,174 - 3,579 -
Add back: amortization of FCC licenses,
net of tax provision of $5,873 and $15,087 for the three
and nine months ended November 30, 2001 7,505 - 24,616 -
--------- -------- --------- --------
Adjusted income (loss) before extraordinary loss
and accounting change $ (3,019) $ 10,814 $ (3,050) $ 19,201
======== ======== ======== ========
Reported net income (loss) available to common shareholders $ (13,944) $ 8,568 $ (39,067) $ (166,054)
Add back: amortization of goodwill, net of tax
provision of $898 and $2,193 for the three and nine
months ended November 30, 2001 1,174 - 3,579 -
Add back: amortization of FCC licenses,
net of tax provision of $5,873 and $15,087 for the three
and nine months ended November 30, 2001 7,505 - 24,616 -
-------- ------- --------- ----------
Adjusted net income (loss) available to common shareholders $ (5,265) $ 8,568 $ (10,872) $ (166,054)
======== ======= ========= ==========
Basic net loss available to common shareholders:
Reported net income (loss) available to common shareholders $ (0.29) $ 0.16 $ (0.83) $ (3.13)
Amortization of goodwill, net of taxes 0.02 - 0.08 -
Amortization of FCC licenses, net of taxes 0.16 - 0.52 -
------- ------ ------- -------
Adjusted net income (loss) available to common shareholders $ (0.11) $ 0.16 $ (0.23) $ (3.13)
======= ====== ======= =======
Diluted net loss available to common shareholders:
Reported net income (loss) available to common shareholders $ (0.29) $ 0.16 $ (0.83) $ (3.12)
Amortization of goodwill, net of taxes 0.02 - 0.08 -
Amortization of FCC licenses, net of taxes 0.16 - 0.52 -
Adjusted net income (loss) available to common shareholders $ (0.11) $ 0.16 $ (0.23) $ (3.12)
======= ====== ======= =======
Basic Shares 47,415 53,358 47,322 53,019
Diluted Shares 47,415 53,507 47,322 53,280
EOC
(Dollars in thousands) Three months ended Nine months ended
November 30, November 30,
2001 2002 2001 2002
---- ---- ---- ----
Reported income (loss) before extraordinary
loss and accounting change $ (7,268) $ 14,772 $ (20,209) $ 32,538
Add back: amortization of goodwill, net of tax
provision of $898 and $2,193 for the three and
nine months ended November 30, 2001 1,174 - 3,579 -
Add back: amortization of FCC licenses, net of
tax provision of $5,873 and $15,087 for the three and
nine months ended November 30, 2001 7,505 - 24,616 -
-------- -------- --------- --------
Adjusted income before extraordinary
loss and accounting change $ 1,411 $ 14,772 $ 7,986 $ 32,538
======= ======== ======= ========
Reported net income (loss) $ (7,268) $ 14,772 $ (21,293) $ (137,751)
Add back: amortization of goodwill, net of tax
provision of $898 and $2,193 for the three and
nine months ended November 30, 2001 1,174 - 3,579 -
Add back: amortization of FCC licenses, net of
tax provision of $5,873 and $15,087 for the three and
nine months ended November 30, 2001 7,505 - 24,616 -
------- -------- ------- ----------
Adjusted net income (loss) $ 1,411 $ 14,772 $ 6,902 $ (137,751)
======= ======== ======= ==========
Because EOC is a wholly-owned subsidiary of Emmis, per share data is excluded.
Indefinite-lived Intangibles
Under the guidance in Statement No. 142, the Company's FCC licenses are
considered indefinite-lived intangibles. These assets, which the Company
determined were its only indefinite-lived intangibles, are not subject to
amortization, but will be tested for impairment at least annually. As of
November 30, 2002 and February 28, 2002 (prior to the adoption of SFAS No. 142),
the carrying amounts of the Company's FCC licenses were $1,509.0 million and
$1,743.2 million, respectively.
In accordance with Statement No. 142, the Company tested these
indefinite-lived intangible assets for impairment as of March 1, 2002 by
comparing their fair value to their carrying value at that date. The Company
recognized impairment on its FCC licenses of approximately $145.0 million, net
of $88.8 million in tax benefit, which is recorded as a component of the
cumulative effect of accounting change during the three months ended May 31,
2002. Approximately $14.8 million of the charge, net of tax, related to our
radio segment and $130.2 million of the charge, net of tax, related to our
television segment. The fair value of our FCC licenses used to calculate the
impairment charge was determined by management, using an enterprise valuation
approach. Enterprise value was determined by applying an estimated market
multiple to the broadcast cash flow generated by each reporting unit. Market
multiples were determined based on information available regarding publicly
traded peer companies, recently completed or contemplated transactions within
the industry, and reporting units' competitive position in their respective
markets. Appropriate allocation was made to the tangible assets with the
residual amount representing the estimated fair value of our indefinite lived
intangible assets and goodwill. To the extent the carrying amount of the
indefinite-lived intangible exceeded its fair value, the difference was recorded
in the statement of operations, as described above. In the case of radio, the
Company determined the reporting unit to be all of our stations in a local
market, and in the case of television and publishing, the Company determined the
reporting unit to be each individual station or magazine. Throughout our fiscal
2002, unfavorable economic conditions persisted in the industries in which the
Company engages. These conditions caused customers to reduce the amount of
advertising dollars spent on the Company's media inventory as compared to prior
periods, adversely impacting the cash flow projections used to determine the
fair value of each reporting unit and public trading multiples of media stocks,
resulting in the write-off of a portion of the carrying amount of our FCC
licenses. The required impairment tests may result in future periodic
write-downs.
Goodwill
Statement No. 142 requires the Company to test goodwill for impairment
at least annually using a two-step process. The first step is a screen for
potential impairment, while the second step measures the amount of impairment.
The Company completed the two-step impairment test during the quarter ended May
31, 2002. As a result of this test, the Company recognized impairment of
approximately $22.4 million, net of $13.8 million in tax benefit, as a component
of the cumulative effect of an accounting change during the three months ended
May 31, 2002. Approximately $18.5 million of the charge, net of tax, related to
our television segment and $3.9 million of the charge, net of tax, related to
our publishing segment. Consistent with the Company's approach to determining
the fair value of our FCC licenses, the enterprise valuation approach was used
to determine the fair value of each of the Company's reporting units, and a
portion of the carrying value of our goodwill was written-off due to reductions
in cash flow and public trading multiples of media stocks resulting from the
unfavorable economic conditions that reduced advertising expenditures throughout
our fiscal 2002. As of November 30, 2002 and February 28, 2002 (prior to the
adoption of SFAS No. 142), the carrying amount of the Company's goodwill was
$139.0 million and $175.1 million, respectively. The required impairment tests
may result in future periodic write-downs.
Definite-lived intangibles
The Company has definite-lived intangible assets recorded that continue
to be amortized in accordance with Statement No. 142. These assets consist
primarily of foreign broadcasting licenses, subscription lists, lease rights,
customer lists and non-compete agreements, all of which are amortized over the
period of time the assets are expected to contribute directly or indirectly to
the Company's future cash flows. In accordance with the transitional
requirements of Statement No. 142, the Company reassessed the useful lives of
these intangibles and determined that no changes to their useful lives were
necessary. The following table presents the gross carrying amount and
accumulated amortization for each major class of definite-lived intangible asset
at February 28, 2002 and November 30, 2002 (dollars in thousands):
February 28, 2002
-----------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Foreign Broadcasting Licenses $ 22,542 $ 8,694 $ 13,848
Subscription Lists 12,189 11,077 1,112
Lease Rights 11,502 407 11,095
Customer Lists 7,371 1,734 5,637
Non-Compete Agreements 5,738 5,561 177
Other 4,335 1,240 3,095
----- ----- -----
TOTAL $ 63,677 $ 28,713 $ 34,964
======== ======== ========
November 30, 2002
-----------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Foreign Broadcasting Licenses $ 18,731 $ 10,229 $ 8,502
Subscription Lists 12,189 11,968 221
Lease Rights 11,502 623 10,879
Customer Lists 7,371 3,686 3,685
Non-Compete Agreements 5,738 5,590 148
Other 4,211 1,424 2,787
----- ----- -----
TOTAL $ 59,742 $ 33,520 $ 26,222
======== ======== ========
Total amortization expense from definite-lived intangibles for the
three and nine months ended November 30, 2002 was $1.8 million and $5.3 million,
respectively, and for the year ended February 28, 2002 was $7.6 million. Foreign
currency exchange rate differences reduced the carrying value of the foreign
broadcasting licenses and related accumulated amortization as of November 30,
2002 by $3.8 million and $0.4 million, respectively. The following table
presents the Company's estimate of amortization expense for each of the five
succeeding fiscal years for definite-lived intangibles recorded on our books as
of February 28, 2002 (dollars in thousands):
FISCAL YEAR ENDED FEBRUARY,
2003 $ 4,454
2004 3,434
2005 1,862
2006 903
2007 873
Note 4. Significant Events
------------------
Equity Issuance
In April 2002, ECC completed the sale of 4.6 million shares of its
Class A common stock at $26.80 per share resulting in total proceeds of $123.3
million. The net proceeds of $120.2 million were contributed to EOC and 50% of
the net proceeds were used in April 2002 to repay outstanding obligations under
our credit facility. The remainder was invested, and in July 2002 distributed to
ECC and used to redeem approximately 22.6% of ECC's outstanding 12 1/2% senior
discount notes (see below).
In addition, during the three months ended May 31, 2002, 300,000 shares
of Class B common stock were converted to Class A shares.
Dispositions
Effective May 1, 2002 Emmis completed the sale of substantially all of
the assets of KALC-FM in Denver, Colorado to Entercom Communications Corp. for
$88.0 million. Proceeds from the sale were used to repay outstanding term loans
under our credit facility. In connection with the sale, Emmis recorded a loss on
sale of assets of $1.3 million. On February 12, 2002, Emmis entered into a
definitive agreement to sell KALC-FM to Entercom and Entercom began operating
KALC-FM under a time brokerage agreement on March 16, 2002. Entercom paid Emmis
approximately $0.5 million under the time brokerage agreement, which is included
in net revenues in the accompanying condensed consolidated statements of
operations. The assets of KALC-FM were reflected as held for sale in the
accompanying condensed consolidated balance sheets as of February 28, 2002. The
$87.7 million of credit facility debt repaid with the net proceeds of the sale
was reflected as a current liability in the accompanying condensed consolidated
balance sheets as of February 28, 2002.
Effective May 1, 2002 Emmis completed the sale of substantially all of
the assets of KXPK-FM in Denver, Colorado to Entravision Communications
Corporation for $47.5 million. Proceeds were used to repay outstanding term
loans under our credit facility. In connection with the sale, Emmis recorded a
gain on sale of assets of $10.2 million. Emmis entered into a definitive
agreement to sell KXPK-FM to Entravision on February 12, 2002. The assets of
KXPK-FM were reflected as held for sale in the accompanying condensed
consolidated balance sheets as of February 28, 2002. The $47.3 million of credit
facility debt repaid with the net proceeds of the sale was reflected as a
current liability in the accompanying condensed consolidated balance sheets as
of February 28, 2002.
Credit Facility Amendment
On June 21, 2002, EOC amended its credit facility to (1) issue a $500.0
million new Term B Loan which was used to repay amounts outstanding under the
existing $552.1 million Term B loan, (2) reset financial covenants for the
remaining term of the credit facility, and (3) permit EOC to make a one time
cash distribution to ECC for the purpose of redeeming a portion of its 12 1/2%
senior discount notes.
The existing Term B Loan was repaid, in full, with the proceeds from
the new Term B Loan and borrowings under the credit facility's revolving line of
credit (Revolver). The new Term B Loan has the same terms as the existing Term B
loan except that the applicable margin over the Eurodollar Rate Loan decreased
from a maximum of 3.5% to a maximum of 2.5%. In connection with the repayment of
the existing Term B Loan, the Company recorded a $0.5 million extraordinary
charge, net of taxes of $0.3 million, relating to the write off of deferred debt
fees.
The amendment also decreased the total and senior leverage ratios (debt
divided by pro forma EBITDA, as defined in the credit agreement) during the
initial periods subsequent to the amendment and increased the total and senior
leverage ratios in future periods. The interest coverage ratio requirement
increased immediately following the effective date of the amendment but
decreased in future periods, as compared to the previous requirements. The pro
forma fixed charge coverage ratio requirement increased for the term of the
credit facility. These changes to the financial covenants are applicable to the
Revolver, Term A Loan and new Term B Loan.
Discount Notes Redemption
On July 1, 2002, ECC redeemed approximately 22.6% of its $370.0
million, face value, 12 1/2% Senior Discount Notes due 2011. Approximately $60.1
million of the proceeds from the Company's April 2002 equity offering were used
to repay approximately $53.4 million of the carrying value of the discount notes
at July 1, 2002 and pay approximately $6.7 million for a redemption premium. The
redemption premium and approximately $1.6 million of deferred debt fees related
to the discount notes, net of taxes of $0.8 million, were recorded as an
extraordinary charge in our quarter ended August 31, 2002 in the accompanying
condensed consolidated statements of operations.
Discontinuation of LMIV
In the quarter ended August 31, 2002, the Company and other partners in
the local media internet venture (LMIV) agreed to dissolve the joint venture.
Consequently, in addition to recording our share of LMIV's losses for the
quarter, the Company recorded a $2.1 million charge to write off our investment
in LMIV. This charge is reflected in loss from unconsolidated affiliates in the
accompanying condensed consolidated statements of operations. The Company will
continue an internet presence independent of LMIV.
Acquisition of WBPG-TV
On November 13, 2002, Emmis entered into a definitive agreement with
Pegasus Broadcast Television, Inc. to purchase substantially all of the assets
of WBPG-TV, the WB affiliate in the Mobile, AL - Pensacola, FL market for $11.5
million. The acquisition will be accounted for as a purchase and is subject to
obtaining various regulatory and other approvals prior to closing. We currently
operate the Fox affiliate in this market.
Lease Agreements
During the quarter ended November 30, 2002, the Company commenced
payments under a new operating lease for its studio facilities in Los Angeles
and under a new operating lease for a Company airplane. Required future minimum
lease payments under these new leases will total $6.9 million over the next five
years, including $1.4 million in fiscal 2004.
Note 5. Comprehensive Income (Loss)
---------------------------
EMMIS
Comprehensive income (loss) was comprised of the following for the
three and nine month periods ended November 30, 2001 and 2002 (dollars in
thousands):
Three Months Nine Months
Ended November 30, Ended November 30,
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss) $ (11,698) $ 10,814 $ (32,329) $ (159,316)
Translation adjustment (235) 397 (223) (8,122)
Change in fair value of derivative
instruments, net of associated tax benefit (4,293) 1,447 (6,216) 1,414
------ ----- ------ -----
Total comprehensive income (loss) $ (16,226) $ 12,658 $ (38,768) $ (166,024)
========= ======== ========= ==========
The majority of the translation adjustment for the nine months ended November
30, 2002 relates to the foreign currency devaluation in Argentina, where we have
a 75% ownership interest in two radio stations.
EOC
Comprehensive income (loss) was comprised of the following for the
three and nine month periods ended November 30, 2001 and 2002 (dollars in
thousands):
Three Months Nine Months
Ended November 30, Ended November 30,
2001 2002 2001 2002
---- ---- ---- ----
Net income (loss) $ (7,268) $ 14,772 $ (21,293) $ (137,751)
Translation adjustment (235) 397 (223) (8,122)
Change in fair value of derivative
instruments, net of associated tax benefit (4,293) 1,447 (6,216) 1,414
------ ----- ------ -----
Total comprehensive income (loss) $ (11,796) $ 16,616 $ (27,732) $ (144,459)
========= ======== ========= ==========
The majority of the translation adjustment for the nine months ended November
30, 2002 relates to the foreign currency devaluation in Argentina, where we have
a 75% ownership interest in two radio stations.
Note 6. Segment Information
-------------------
The Company's operations are aligned into three business segments:
Radio, Television, and Publishing and Other. 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 months ended
November 30, 2001 and 2002 were $1.9 million and $2.0 million, respectively, and
total revenues for the nine months ended November 30, 2001 and 2002 were $5.0
million and $6.4 million, respectively. The carrying value of long lived assets
of this radio station as of November 30, 2001 and 2002 was $7.9 million and $5.7
million, respectively. Total revenues of our two radio stations in Buenos Aires,
Argentina for the three months ended November 30, 2001 and 2002 were $2.5
million and $0.7 million, respectively, and total revenues for the nine months
ended November 30, 2001 and 2002 were $6.8 million and $1.6 million,
respectively. The carrying value of long lived assets of these radio stations as
of November 30, 2001 and 2002 was $17.9 million and $4.4 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. Thus, our calculation of these non-GAAP
measures may not be comparable to such non-GAAP measures calculated by other
companies. Emmis defines BCF and PCF as revenues net of agency commissions and
station operating expenses, excluding noncash compensation. The primary source
of broadcast advertising revenues is the sale of advertising time to local and
national advertisers. Publishing entities derive revenue from subscriptions,
newsstand sales and the sale of print advertising.
The most significant station operating expenses, excluding noncash
compensation are employee salaries and commissions, costs associated with
programming, advertising and promotion, costs associated with producing a
magazine, and station 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, 2002 and in Note 2 to these condensed
consolidated financial statements, are applied consistently across segments.
Unless otherwise noted, all information pertaining to segments applies to
Emmis and EOC.
Three Months Ended Publishing
November 30, 2002 Radio Television and Other Corporate Consolidated
- ----------------- ----- ---------- --------- --------- ------------
(Unaudited, dollars in thousands)
Net revenues 65,710 69,910 19,924 - $ 155,544
Station operating expenses,
excluding noncash compensation 34,285 37,752 15,744 - 87,781
------ ------ ------ ------
Broadcast/publishing cash flow 31,425 32,158 4,180 - 67,763
Corporate expenses, excluding
noncash compensation - - - 5,571 5,571
Noncash compensation - - - 6,470 6,470
Depreciation and amortization (See Note 3) 1,989 7,141 448 1,160 10,738
----- ----- --- ----- ------
Operating income (loss) $ 29,436 $ 25,017 $ 3,732 $ (13,201) $ 44,984
======== ======== ======= ========= ========
Total assets $ 897,797 $ 1,060,321 $ 81,385 $ 95,274 $ 2,134,777
========= =========== ======== ======== ===========
With respect to EOC, the above information would be identical, except corporate
total assets would be $87,513 and consolidated total assets would be $2,127,016.
Three Months Ended Publishing
November 30, 2001 Radio Television and Other Corporate Consolidated
- ----------------- ----- ---------- --------- --------- ------------
(Unaudited, dollars in thousands)
Net revenues $ 66,623 $ 52,556 $ 19,110 $ - $ 138,289
Station operating expenses,
excluding noncash compensation 36,376 35,959 16,282 - 88,617
------ ------ ------ ------
Broadcast/publishing cash flow 30,247 16,597 2,828 - 49,672
Corporate expenses, excluding
noncash compensation - - - 5,354 5,354
Noncash compensation - - - 1,559 1,559
Depreciation and amortization (See Note 3) 8,642 13,941 2,111 1,241 25,935
----- ------ ----- ----- ------
Operating income (loss) $ 21,605 $ 2,656 $ 717 $ (8,154) $ 16,824
======== ======= ===== ======== ========
Total assets $ 1,078,366 $ 1,305,392 $ 90,764 $ 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, 2002 Radio Television and Other Corporate Consolidated
- ----------------- ----- ---------- --------- --------- ------------
(Unaudited, dollars in thousands)
Net revenues $ 198,324 $ 182,493 $ 54,755 $ - $ 435,572
Station operating expenses,
excluding noncash compensation 103,793 109,816 46,467 - 260,076
------- ------- ------ -------
Broadcast/publishing cash flow 94,531 72,677 8,288 - 175,496
Corporate expenes, excluding
noncash compensation - - - 15,750 15,750
Noncash compensation - - - 17,600 17,600
Depreciation and amortization (See Note 3) 6,012 21,120 1,497 3,461 32,090
----- ------ ----- ----- ------
Operating income (loss) $ 88,519 $ 51,557 $ 6,791 $ (36,811) $ 110,056
======== ======== ======= ========= =========
Total assets $ 897,797 $ 1,060,321 $ 81,385 $ 95,274 $ 2,134,777
========= =========== ======== ======== ===========
With respect to EOC, the above information would be identical, except corporate
total assets would be $87,513 and consolidated total assets would be $2,127,016.
Nine Months Ended Publishing
November 30, 2001 Radio Television and Other Corporate Consolidated
- ----------------- ----- ---------- --------- --------- ------------
(Unaudited, dollars in thousands)
Net revenues $ 206,868 $ 159,417 $ 54,904 $ - $ 421,189
Station operating expenses,
excluding noncash compensation 111,223 105,834 49,045 - 266,102
------- ------- ------ -------
Broadcast/publishing cash flow 95,645 53,583 5,859 - 155,087
Time brokerage fees 479 - - - 479
Corporate expenses, excluding
noncash compensation - - - 14,879 14,879
Noncash compensation - - - 5,890 5,890
Depreciation and amortization (See Note 3) 25,097 40,200 6,360 3,500 75,157
Restructuring fees and other - - - 768 768
------ ------ ----- ----- ------
Operating income (loss) $ 70,069 $ 13,383 $ (501) $ (25,037) $ 57,914
======== ======== ====== ========= ========
Total assets $ 1,078,366 $ 1,305,392 $ 90,764 $ 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.
Note 7. Financial Information for Subsidiary Guarantors
and Subsidiary Non-Guarantors of Emmis Operating Company
--------------------------------------------------------
The 8 1/8% 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,
2002 and November 30, 2002, 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, the Subsidiary Guarantors and the Subsidiary
Non-Guarantors as of February 28, 2002 and November 30, 2002 and for the three
and nine months ended November 30, 2001 and 2002. EOC uses the equity method
with respect to investments in subsidiaries.
Emmis Operating Company
As of November 30, 2002
Condensed Consolidating Balance Sheet
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
---- ---------- ---------- ------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,110 $ 4,990 $ 2,155 $ - $ 8,255
Accounts receivable, net - 110,854 3,257 - 114,111
Prepaid expenses 1,731 15,899 168 - 17,798
Income tax refund receivable 11,095 - - - 11,095
Other 25 26,412 30 - 26,467
Assets held for sale - - - - -
----------- ----------- -------- ------------ -----------
Total current assets 13,961 158,155 5,610 - 177,726
Property and equipment, net 34,984 189,064 1,322 - 225,370
Intangible assets, net 3,686 1,662,039 8,502 - 1,674,227
Investment in affiliates 1,894,247 - - (1,894,247) -
Other assets, net 40,021 14,617 261 (5,206) 49,693
----------- ----------- -------- ------------ -----------
Total assets $ 1,986,899 $ 2,023,875 $ 15,695 $ (1,899,453) $ 2,127,016
=========== =========== ======== ============ ===========
CURRENT LIABILITIES:
Accounts payable $ 14,050 $ 18,513 $ 7,057 $ - $ 39,620
Current maturities of other long-term debt 34 3 16,780 (2,215) 14,602
Current portion of TV program rights payable - 30,085 - - 30,085
Accrued salaries and commissions 1,115 7,570 194 - 8,879
Accrued interest 6,619 - - - 6,619
Deferred revenue - 15,990 - - 15,990
Other 4,197 3,244 - - 7,441
Credit facility debt to be repaid with assets held
for sale - - - - -
Liabilities associated with assets held for sale - - - - -
------ ------ ------ ------ -------
Total current liabilities 26,015 75,405 24,031 (2,215) 123,236
Long-term debt, net of current maturities 1,026,898 1,026,898
Other long-term debt, net of current maturities 41 213 5,543 (2,991) 2,806
TV program rights payable, net of current portion - 35,945 - - 35,945
Other noncurrent liabilities 16,050 4,186 - - 20,236
Deferred income taxes 38,565 - - - 38,565
--------- ------- ------ ------ ---------
Total liabilities 1,107,569 115,749 29,574 (5,206) 1,247,686
Shareholder's equity
Common stock 1,027,221 - - - 1,027,221
Additional paid-in capital 94,168 - 4,393 (4,393) 94,168
Subsidiary investment - 1,587,533 20,671 (1,608,204) -
Retained earnings/(accumulated deficit) (222,966) 320,593 (23,920) (296,673) (222,966)
Accumulated other comprehensive loss (19,093) - (15,023) 15,023 (19,093)
------- --------- ------- ---------- -------
Total shareholder's equity 879,330 1,908,126 (13,879) (1,894,247) 879,330
------- --------- ------- ---------- -------
Total liabilities and shareholder's equity $ 1,986,899 $ 2,023,875 $ 15,695 $ (1,899,453) $ 2,127,016
=========== =========== ======== ============ ===========
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 28, 2002
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
---- ---------- ---------- ------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 4,970 $ 1,392 $ - $ 6,362
Accounts receivable, net - 91,244 3,996 - 95,240
Prepaid expenses 612 14,049 186 - 14,847
Income tax refund receivable - - - - -
Other 271 23,312 74 - 23,657
Assets held for sale - 123,416 - - 123,416
--- ------- ----- -------
Total current assets 883 256,991 5,648 - 263,522
Property and equipment, net 35,957 192,690 2,492 - 231,139
Intangible assets, net 5,637 1,933,846 13,848 - 1,953,331
Investment in affiliates 2,274,321 - - (2,274,321) -
Other assets, net 43,428 12,655 527 (5,463) 51,147
------ ------ --- ------ ------
Total assets $ 2,360,226 $ 2,396,182 $ 22,515 $ (2,279,784) $ 2,499,139
=========== =========== ======== ============ ===========
CURRENT LIABILITIES:
Accounts payable $ 15,646 $ 18,373 $ 4,976 $ - $ 38,995
Current maturities of other long-term debt 34 10 10,722 (2,833) 7,933
Current portion of TV program rights payable - 27,507 - - 27,507
Accrued salaries and commissions 214 7,363 275 - 7,852
Accrued interest 14,047 - 21 - 14,068
Deferred revenue - 16,392 - - 16,392
Other 2,813 3,595 - - 6,408
Credit facility debt to be repaid with assets held
for sale 135,000 - - - 135,000
Liabilities associated with assets held for sale - 63 - - 63
------- ------ ------ ------ -------
Total current liabilities 167,754 73,303 15,994 (2,833) 254,218
Long-term debt, net of current maturities 1,117,000 - - - 1,117,000
Other long-term debt, net of current maturities 41 366 9,172 (2,630) 6,949
TV program rights payable, net of current portion - 40,551 - - 40,551
Other noncurrent liabilities 21,976 4,403 587 - 26,966
Deferred income taxes 108,988 - - - 108,988
--------- ------- ------ ------ ---------
Total liabilities 1,415,759 118,623 25,753 (5,463) 1,554,672
Shareholder's equity
Common stock 1,027,221 - - - 1,027,221
Additional paid-in capital 8,108 - 4,393 (4,393) 8,108
Subsidiary investment - 1,883,897 20,650 (1,904,547) -
Retained earnings/(accumulated deficit) (78,477) 393,662 (21,380) (372,282) (78,477)
Accumulated other comprehensive loss (12,385) - (6,901) 6,901 (12,385)
------- --------- ------ ---------- -------
Total shareholder's equity 944,467 2,277,559 (3,238) (2,274,321) 944,467
------- --------- ------ ---------- -------
Total liabilities and shareholder's equity $ 2,360,226 $ 2,396,182 $ 22,515 $ (2,279,784) $ 2,499,139
=========== =========== ======== ============ ===========
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Three Months Ended November 30, 2002
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
---- ---------- ---------- ------- ------------
Net revenues $ 67 $ 152,829 $ 2,648 $ - $ 155,544
Operating expenses:
Station operating expenses,
excluding noncash compensation (25) 85,401 2,405 - 87,781
Corporate expenses, excluding
noncash compensation 5,571 - - - 5,571
Noncash compensation 4,852 1,618 - - 6,470
Depreciation and amortization 1,160 8,843 735 - 10,738
----- ----- --- --- ------
Total operating expenses 11,558 95,862 3,140 - 110,560
------ ------ ----- --- -------
Operating income (loss) (11,491) 56,967 (492) - 44,984
------- ------ ---- --- ------
Other income (expense)
Interest expense (18,337) (203) (210) 161 (18,589)
Loss from unconsolidated affiliates (3,702) 3,574 - - (128)
Other income (expense), net 198 214 (561) (271) (420)
--- --- ---- ---- ----
Total other income (expense) (21,841) 3,585 (771) (110) (19,137)
------- ----- ---- ---- -------
Income (loss) before income taxes,
extraordinary loss and accounting
change (33,332) 60,552 (1,263) (110) 25,847
Provision (benefit) for income taxes (11,935) 23,010 - - 11,075
------- ------ ------ ---- ------
Income (loss) before extraordinary loss
and accounting change (21,397) 37,542 (1,263) (110) 14,772
Extraordinary loss, net of tax - - - - -
Equity in earnings (loss) of subsidiaries 36,169 - - (36,169) -
-------- -------- -------- --------- --------
Net income (loss) $ 14,772 $ 37,542 $ (1,263) $ (36,279) $ 14,772
======== ======== ======== ========= ========
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 $ 133,552 $ 4,384 $ - $ 138,289
Operating expenses:
Station operating expenses,
excluding noncash compensation 232 84,680 3,705 - 88,617
Corporate expenses, excluding
noncash compensation 5,354 - - - 5,354
Noncash compensation 1,170 389 - - 1,559
Depreciation and amortization 1,241 23,721 973 - 25,935
------ ----- --- ---- ---
Total operating expenses 7,997 108,790 4,678 - 121,465
------ ----- --- ---- ---
Operating income (loss) (7,644) 24,762 (294) - 16,824
------ ----- --- ---- ---
Other income (expense)
Interest expense (24,765) (36) (609) 165 (25,245)
Loss from unconsolidated affiliates - (1,366) - - (1,366)
Other income (expense), net (2,468) 2,478 118 (145) (17)
------ ----- --- ---- ---
Total other income (expense) (27,233) 1,076 (491) 20 (26,628)
------- ----- ---- -- -------
Income (loss) before income taxes,
extraordinary loss and accounting
change (34,877) 25,838 (785) 20 (9,804)
Provision (benefit) for income taxes (12,298) 9,762 - - (2,536)
------- ------ ---- -- ------
Income (loss) before extraordinary loss
and accounting change (22,579) 16,076 (785) 20 (7,268)
Extraordinary loss, net of tax - - - - -
Equity in earnings (loss) of subsidiaries 15,311 - - (15,311) -
-------- -------- ------ --------- --------
Net income (loss) $ (7,268) $ 16,076 $ (785) $ (15,291) $ (7,268)
======== ======== ====== ========= ========
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Nine Months Ended November 30, 2002
(Unaudited, dollars in thousands)
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
---- ---------- ---------- ------- ------------
Net revenues $ 523 $ 427,052 $ 7,997 $ - $ 435,572
Operating expenses:
Station operating expenses,
excluding noncash compensation 347 252,396 7,333 - 260,076
Corporate expenses, excluding
noncash compensation 15,750 - - - 15,750
Noncash compensation 13,200 4,400 - - 17,600
Depreciation and amortization 3,461 26,473 2,156 - 32,090
----- ------ ----- ----- ------
Total operating expenses 32,758 283,269 9,489 - 325,516
------ ------- ----- ----- -------
Operating income (loss) (32,235) 143,783 (1,492) - 110,056
------- ------- ------ ----- -------
Other income (expense)
Interest expense (59,720) (656) (983) 512 (60,847)
Loss from unconsolidated affiliates (3,702) (506) - - (4,208)
Gain on sale of assets - 8,900 - - 8,900
Other income (expense), net 837 626 (65) (526) 872
--- --- --- ---- ---
Total other income (expense) (62,585) 8,364 (1,048) (14) (55,283)
------- ----- ------ --- -------
Income (loss) before income taxes,
extraordinary loss and accounting change (94,820) 152,147 (2,540) (14) 54,773
Provision (benefit) for income taxes (35,581) 57,816 - - 22,235
------- ------- ------ --- ------
Income (loss) before extraordinary loss
and accounting change (59,239) 94,331 (2,540) (14) 32,538
Extraordinary item, net of tax (2,889) - - - (2,889)
Cumulative effect of accounting change,
net of tax (167,400) (167,400) - 167,400 (167,400)
Equity in earnings (loss) of subsidiaries 91,777 - - (91,777) -
---------- --------- -------- -------- ----------
Net income (loss) $ (137,751) $ (73,069) $ (2,540) $ 75,609 $ (137,751)
========== ========= ======== ======== ==========
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 $ 407,850 $ 11,884 $ - $ 421,189
Operating expenses:
Station operating expenses,
excluding noncash compensation