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 948 254,600 10,554 - 266,102
Time brokerage fees - 479 - - 479
Corporate expenses, excluding
noncash compensation 14,879 - - - 14,879
Noncash compensation 4,418 1,472 - - 5,890
Depreciation and amortization 3,500 69,039 2,618 - 75,157
Restructuring fees and other 768 - - - 768
--- --- --- --- ----
Total operating expenses 24,513 325,590 13,172 - 363,275
------ ------- ------ --- -------
Operating income (loss) (23,058) 82,260 (1,288) - 57,914
------- ------ ------ --- ------
Other income (expense)
Interest expense (79,247) (181) (2,200) 501 (81,127)
Loss from unconsolidated affiliates - (3,462) - - (3,462)
Other income (expense), net (1,251) 2,309 55 (369) 744
------ ----- -- ---- ---
Total other income (expense) (80,498) (1,334) (2,145) 132 (83,845)
------- ------ ------ --- -------
Income (loss) before income taxes,
extraordinary loss and accounting change (103,556) 80,926 (3,433) 132 (25,931)
Provision (benefit) for income taxes (36,223) 30,501 - - (5,722)
-------- ------ ------ --- -------
Income (loss) before extraordinary loss
and accounting change (67,333) 50,425 (3,433) 132 (20,209)
Extraordinary item, net of tax (1,084) - - - (1,084)
Cumulative effect of accounting change,
net of tax - - - - -
Equity in earnings (loss) of subsidiaries 47,124 - - (47,124) -
--------- -------- -------- --------- ---------
Net income (loss) $ (21,293) $ 50,425 $ (3,433) $ (46,992) $ (21,293)
========= ======== ======== ========= =========
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
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
---- ---------- ---------- ------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (137,751) $ (73,069) $ (2,540) $ 75,609 $ (137,751)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Cumulative effect of accounting change 167,400 167,400 - (167,400) 167,400
Extraordinary item 2,889 - - - 2,889
Depreciation and amortization 5,863 42,000 2,157 - 50,020
Provision for bad debts - 3,189 - - 3,189
Provision (benefit) for deferred income taxes 22,235 - - - 22,235
Noncash compensation 13,200 4,400 - - 17,600
Gain on sale of assets - (8,900) - - (8,900)
Equity in earnings of subsidiaries (91,777) - - 91,777 -
Other (14) - (8,122) 14 (8,122)
Changes in assets and liabilities -
Accounts receivable - (22,799) 739 - (22,060)
Prepaid expenses and other current assets (873) (5,589) 62 - (6,400)
Other assets 2,353 3,685 266 - 6,304
Accounts payable and accrued liabilities (7,293) (2,228) 1,979 - (7,542)
Deferred liabilities - (402) - - (402)
Other liabilities (2,726) (16,039) (4,216) - (22,981)
------ ------- ------ ------ -------
Net cash provided (used) by investing activities (26,494) 91,648 (9,675) - 55,479
------- ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,488) (19,483) 936 - (21,035)
Proceeds from sale of assets - 135,500 - - 135,500
Other (1,087) - - - (1,087)
------ ------- --- --- -------
Net cash provided (used) by investing activities (3,575) 116,017 936 - 113,378
------ ------- --- --- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (238,102) - - - (238,102)
Proceeds from long-term debt 13,000 - - - 13,000
Intercompany 184,982 (133,592) 9,502 - 60,892
Debt related costs (2,754) - - - (2,754)
--------- -------- ------- --- -------
Net cash provided (used) by investing activities (42,874) (133,592) 9,502 - (166,964)
--------- -------- ------- --- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (72,943) 74,073 763 - 1,893
CASH AND CASH EQUIVALENTS:
Beginning of period - 4,970 1,392 - 6,362
--------- -------- ------- --- -------
End of period $ (72,943) $ 79,043 $ 2,155 $ - $ 8,255
========= ======== ======= === =======
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) $ 50,425 $ (3,433) $ (46,992) $ (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)
Noncash compensation 4,418 1,472 - - 5,890
Equity in earnings of subsidiaries (47,124) - - 47,124 -
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 liabilities - (1,805) - - (1,805)
Other liabilities 16,288 (19,268) 325 - (2,655)
------ ------- --- --- ------
Net cash provided (used) by investing activities (34,379) 73,764 736 - 40,121
------- ------ --- --- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,542) (23,913) (331) - (25,786)
Cash paid for acquisition - (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
Intercompany 98,500 87,538 984 - 187,022
Debt related costs (4,584) - - - (4,584)
------- ------ --- --- ------
Net cash provided (used) by investing activities (14,084) 87,538 984 - 74,438
------- ------ --- --- ------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (55,836) (3,357) 1,389 - (57,804)
CASH AND CASH EQUIVALENTS:
Beginning of period 55,175 4,018 706 - 59,899
------ ----- --- --- ------
End of period $ (661) $ 661 $ 2,095 $ - $ 2,095
====== ===== ======= === =======
[GRAPHIC OMITTED]
Note 8. Regulatory and Other Matters
----------------------------
We acquired KGMB-TV in Honolulu, Hawaii as part of the Lee acquisition
in October 2000. Because we 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 us from owning both stations. However, we received a
temporary waiver from the FCC that has allowed us to operate both stations (and
their related "satellite" stations). The FCC recently commenced an extensive
review of its ownership rules, including the rule that prohibits our ownership
of the two Hawaii stations, to determine whether the ownership restrictions
continue to serve the public interest. We have requested a stay of divestiture
until the FCC completes its review of the ownership rules and are currently
awaiting the FCC's decision on our request. No assurances can be given that the
FCC will grant us the stay of divestiture and we may need to sell one of the two
stations in Hawaii.
FCC regulations require all commercial television stations in the
United States to be currently broadcasting in digital format. Nine of our
television stations are currently broadcasting in digital format and we
requested waiver extensions until May 2003 for the remainder. Except for five of
our satellite stations on which the FCC has not yet ruled, the FCC granted all
of our waiver requests. We continue to work on the digital conversion for our
stations and expect the conversion of all but the five satellite stations for
which waivers have not been granted to be complete before the expiration of the
FCC waivers. With respect to the five satellite stations, we continue to believe
that the grant of waivers is appropriate because the delays are due to
conditions largely beyond our control. However, no assurances can be given that
such waivers will be granted. Based upon the FCC's treatment of certain
broadcasters who were not granted extensions to the original May 2002 deadline,
we believe that the FCC will issue a formal admonishment to any broadcaster
whose waiver request is denied and may issue a monetary forfeiture if the
station has not commenced digital broadcasting within six months of the date of
the FCC's admonishment. We cannot predict the extent, if any, of the monetary
fine, nor can we predict the other actions the FCC will take if the station does
not commence digital broadcasts within six months after the date of the fine.
During the third quarter, Emmis and CBS revised and extended the
affiliation agreements for all of our CBS-affiliated stations except our station
in Terre Haute, which extends through December 31, 2005. The revised agreements
will continue our affiliation with CBS through September 18, 2006. We are also
engaged in discussions with NBC and Fox on the modification, renewal or
extension of the affiliation agreements for our NBC and Fox affiliated stations.
We expect that these affiliation agreements will be modified or extended on
terms that will not have a material adverse effect on our results of operations.
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.
Note 9. Subsequent Event
----------------
In December 2002, Emmis reached an agreement with the Hungarian
broadcasting authority, the National Radio and Television Board (ORTT), that
resolved pending legal issues and extended the national license for Slager, its
subsidiary in Hungary, through 2009. Slager agreed to pay the fees due under the
original broadcast contract in installments through November 2004, the date the
contract was set to expire. The license has been extended an additional five
years with payment terms more reflective of the current Hungarian advertising
environment
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note: Certain statements included in this report or in the financial statements
contained herein 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 and demand for different types of advertising media; our
ability to service our outstanding debt; increased competition in our markets
and the broadcasting industry; our ability to attract and secure programming,
on-air talent, writers and photographers; 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, terrorist acts or political
instability; and other factors mentioned in other documents filed by the Company
in other filings 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 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. Specifically, 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. 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.
Broadcasting revenue is recognized as advertisements are aired. Publication
revenue is recognized in the month of delivery of the publication. The most
significant station operating expenses are employee salaries and commissions,
costs associated with programming, advertising and promotion, and station
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.
Critical Accounting Policies:
Critical accounting policies are defined as those that encompass
significant judgments and uncertainties, and potentially derive materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are those described below.
Impairment of Goodwill and Indefinite-lived Intangibles
The annual impairment tests for goodwill and indefinite-lived
intangibles under SFAS No. 142 require us to make certain assumptions in
determining fair value, including assumptions about the cash flow growth rates
of our businesses. Additionally, the fair values are significantly impacted by
macro-economic factors, including market multiples at the time the impairment
tests are performed. Accordingly, we may incur additional impairment charges in
future periods under SFAS No. 142 to the extent we do not achieve our expected
cash flow growth rates, or to the extent that market values decrease.
Allocations for Purchased Assets
We typically engage an independent appraisal firm to value assets
acquired in a material acquisition. We use the appraisal report to allocate the
purchase price of the acquisition. To the extent that purchased assets are not
allocated appropriately, depreciation and amortization expense could be
misstated.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts requires us to estimate losses
resulting from our customers' inability to make payments. We specifically review
historical write-off activity by market, large customer concentrations, and
changes in our customer payment patterns when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, then additional allowances may be required.
Results of Operations for the Three and Nine Months Ended November 30, 2002
Compared to November 30, 2001
In April 2002, we sold 4.6 million shares of Class A common stock,
raising $120.2 million in net proceeds. One half of the proceeds was used in
April 2002 to repay outstanding indebtedness under our credit facility and the
remaining half of the proceeds was used in July 2002 to redeem 22.6% of ECC's 12
1/2% senior discount notes due 2011. In May 2002, we sold KALC-FM to Entercom
Communications Corp. for $88.0 million and KXPK-FM to Entravision Communications
Corporation for $47.5 million. The proceeds from the sales were used to repay
outstanding term loans under our credit facility. These transactions impact the
comparability of operating results period over period.
Summary of Segment Operating Results
(Dollars in thousands)
Three Months Three Months
Ended Ended Increase/ Percentage
November 30, 2002 November 30, 2001 (Decrease) Change
----------------- ----------------- ---------- ------
Radio net revenues $ 65,710 $ 66,623 $ (913) -1.4%
Television net revenues 69,910 52,556 17,354 33.0%
Publishing net revenues 19,924 19,110 814 4.3%
------ ------ ---
Total net revenues 155,544 138,289 17,255 12.5%
Radio station operating expenses,
excluding noncash compensation 34,285 36,376 (2,091) -5.7%
Television station operating expenses,
excluding noncash compensation 37,752 35,959 1,793 5.0%
Publishing operating expenses,
excluding noncash compensation 15,744 16,282 (538) -3.3%
------ ------ ----
Total station operating expenses,
excluding noncash compensation 87,781 88,617 (836) -0.9%
Radio broadcast cash flow 31,425 30,247 1,178 3.9%
Television broadcast cash flow 32,158 16,597 15,561 93.8%
Publishing cash flow 4,180 2,828 1,352 47.8%
------ ------ ------
Total broadcast/publishing cash flow 67,763 49,672 18,091 36.4%
Radio broadcast cash flow margin 47.8% 45.4%
Television broadcast cash flow margin 46.0% 31.6%
Publishing cash flow margin 21.0% 14.8%
Total broadcast/publishing
cash flow margin 43.6% 35.9%
Summary of Segment Operating Results
(Dollars in thousands)
Nine Months Nine Months
Ended Ended Increase/ Percentage
November 30, 2002 November 30, 2001 (Decrease) Change
----------------- ----------------- ---------- ------
Radio net revenues $ 198,324 $ 206,868 $ (8,544) -4.1%
Television net revenues 182,493 159,417 23,076 14.5%
Publishing net revenues 54,755 54,904 (149) -0.3%
------ ------ ----
Total net revenues 435,572 421,189 14,383 3.4%
Radio station operating expenses,
excluding noncash compensation 103,793 111,223 (7,430) -6.7%
Television station operating expenses,
excluding noncash compensation 109,816 105,834 3,982 3.8%
Publishing operating expenses,
excluding noncash compensation 46,467 49,045 (2,578) -5.3%
------ ------ ------
Total station operating expenses,
excluding noncash compensation 260,076 266,102 (6,026) -2.3%
Radio broadcast cash flow 94,531 95,645 (1,114) -1.2%
Television broadcast cash flow 72,677 53,583 19,094 35.6%
Publishing cash flow 8,288 5,859 2,429 41.5%
----- ----- -----
Total broadcast/publishing cash flow 175,496 155,087 20,409 13.2%
Radio broadcast cash flow margin 47.7% 46.2%
Television broadcast cash flow margin 39.8% 33.6%
Publishing cash flow margin 15.1% 10.7%
Total broadcast/publishing
cash flow margin 40.3% 36.8%
Net revenues:
Radio net revenues for the three months ended November 30, 2002
decreased $0.9 million, or 1.4%, and decreased $8.5 million, or 4.1% for the
nine months ended November 30, 2002. On a pro forma basis (assuming the Denver
radio asset sales had occurred on March 1, 2001), radio net revenues for the
three months ended November 30, 2002 would have increased $2.1 million, or 3.3%,
and decreased $0.3 million, or 0.1% for the nine months ended November 30, 2002.
Radio net revenues were negatively impacted by the devaluation of the peso in
Argentina, as international radio net revenues for the three months ended
November 30, 2002 decreased $1.7 million, or 39.6%, and decreased $3.9 million,
or 32.7% for the nine months ended November 30, 2002. Domestic radio net
revenues were negatively impacted by a format change by one of our competitors
in the New York market. The negative impact in our New York market, which
represents approximately 30% of our radio net revenues, was offset by improved
performance in our other markets.
Television net revenues for the three months ended November 30, 2002
increased $17.4 million, or 33.0% and increased $23.1 million, or 14.5% for the
nine months ended November 30, 2002. This increase is due to our television
stations selling a higher percentage of their inventory and charging higher
rates due to ratings improvements, coupled with approximately $13.0 million and
$17.3 million of political advertising net revenues in the three and nine months
ended November 30, 2002, respectively.
Publishing revenues for the three months ended November 30, 2002
increased $0.8 million, or 4.3% and decreased $0.1 million, or 0.3% for the nine
months ended November 30, 2002. Publishing revenues have been essentially flat
for the year, as our publishing business has not seen the same level of recovery
in advertisement spending that, in general, our radio and television businesses
have experienced.
On a consolidated basis, net revenues for the three months ended
November 30, 2002 increased $17.3 million, or 12.5%, and increased $14.4
million, or 3.4% for the nine months ended November 30, 2002 due to the effect
of the items described above. On a pro forma basis, net revenues for the three
months ended November 30, 2002 increased $20.3 million, or 15.0%, and increased
$22.6 million, or 5.5% for the nine months ended November 30, 2002 due to the
effect of the items described above.
Station operating expenses, excluding noncash compensation:
Radio station operating expenses, excluding noncash compensation,
decreased $2.1 million, or 5.7% for the three months ended November 30, 2002,
and decreased $7.4 million, or 6.7% for the nine months ended November 30, 2002.
On a pro forma basis (assuming the Denver radio asset sales had occurred on
March 1, 2001), radio station operating expenses, excluding noncash
compensation, for the three and nine months ended November 30, 2002 would have
increased $0.1 million, or 0.3% and decreased $1.7 million, or 1.6%,
respectively. Increases in promotional spending for our radio stations were
offset by the implementation of our stock compensation program in December 2001,
whereby the salaries of our full-time employees were generally reduced by 10%
and supplemented with a corresponding stock grant.
Television station operating expenses, excluding noncash compensation,
for the three and nine months ended November 30, 2002 increased $1.8 million, or
5.0% and $4.0 million, or 3.8% respectively. This increase is due to higher
programming, promotion and sales-related costs, partially offset by the impact
of our stock compensation program.
Publishing operating expenses, excluding noncash compensation,
decreased $0.5 million, or 3.3% for the three months ended November 30, 2002 and
decreased $2.6 million, or 5.3% for the nine months ended November 30, 2002, due
to cost control measures and our stock compensation program.
On a consolidated basis, station operating expenses, excluding noncash
compensation, for three and nine months ended November 30, 2002 decreased $0.8
million, or 0.9%, and $6.0 million, or 2.3% respectively, due to the effect of
the items described above. On a pro forma basis, station operating expenses,
excluding noncash compensation, for three and nine months ended November 30,
2002 increased $1.4 million, or 1.6%, and decreased $0.3 million, or 0.1%
respectively, due to the effect of the items described above.
Noncash compensation expenses:
Noncash compensation expenses for the three months ended November 30,
2002 were $6.5 million compared to $1.6 million for the same period of the prior
year, an increase of $4.9 million or 315.0%. Noncash compensation expenses for
the nine months ended November 30, 2002 were $17.6 million compared to $5.9
million for the same period of the prior year, an increase of $11.7 million or
198.8%. Noncash compensation includes compensation expense associated with
restricted common stock issued under employment agreements, common stock
contributed to the Company's Profit Sharing Plan, common stock issued to
employees at our discretion and common stock issued to employees pursuant to our
stock compensation program. Our stock compensation program increased our noncash
compensation expense by approximately $5.1 million and $13.3 million for the
three and nine months ended November 30, 2002, respectively. Our stock
compensation program began December 2001; therefore, no expense related to this
program was recorded in the three and nine month periods ended November 30,
2001.
Corporate expenses, excluding noncash compensation:
Corporate expenses, excluding noncash compensation, for the three
months ended November 30, 2002 were $5.6 million compared to $5.4 million for
the same period of the prior year, an increase of $0.2 million or 4.1%.
Corporate expenses, excluding noncash compensation, for the nine months ended
November 30, 2002 were $15.8 million compared to $14.9 million for the same
period of the prior year, an increase of $0.9 million or 5.9%. These costs
increased due to higher professional fees associated with financing and other
transactions, health care costs and increases in training and personnel
development, partially offset by benefits from our stock compensation program.
Depreciation and amortization:
Radio depreciation and amortization expense for the three months ended
November 30, 2002 was $2.0 million compared to $8.6 million for the same period
of the prior year, a decrease of $6.6 million or 77.0%. Radio depreciation and
amortization expense for the nine months ended November 30, 2002 was $6.0
million compared to $25.1 million for the same period of the prior year, a
decrease of $19.1 million or 76.0%. The decrease was mainly attributable to our
adoption on March 1, 2002 of SFAS No. 142, "Goodwill and Other Intangible
Assets," as described more fully in Note 3 to the condensed consolidated
financial statements. Adoption of this accounting standard had the impact of
eliminating our amortization expense for goodwill and FCC licenses. For
comparison purposes, for the three and nine month periods ended November 30,
2001, we recorded radio amortization expense for goodwill and FCC licenses of
$7.0 million and $20.5 million, respectively.
Television depreciation and amortization expense for the three months
ended November 30, 2002 was $7.1 million compared to $13.9 million for the same
period of the prior year, a decrease of $6.8 million or 48.8%. Television
depreciation and amortization expense for the nine months ended November 30,
2002 was $21.1 million compared to $40.2 million for the same period of the
prior year, a decrease of $19.1 million or 47.5%. The decrease was also mainly
attributable to our adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." For comparison purposes, for the three and nine month periods ended
November 30, 2001, we recorded television amortization expense for goodwill and
FCC licenses of $7.0 million and $21.0 million, respectively.
Publishing depreciation and amortization expense for the three months
ended November 30, 2002 was $0.4 million compared to $2.1 million for the same
period of the prior year, a decrease of $1.7 million or 78.8%. Publishing
depreciation and amortization expense for the nine months ended November 30,
2002 was $1.5 million compared to $6.4 million for the same period of the prior
year, a decrease of $4.9 million or 76.5%. The decrease was also mainly
attributable to our adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." For comparison purposes, for the three and nine month periods ended
November 30, 2001, we recorded publishing amortization expense for goodwill of
$1.3 million and $4.0 million, respectively.
On a consolidated basis, depreciation and amortization expense for the
three months ended November 30, 2002 was $10.7 million compared to $25.9 million
for the same period of the prior year, a decrease of $15.2 million or 58.6%.
Depreciation and amortization expense for the nine months ended November 30,
2002 was $32.1 million compared to $75.2 million for the same period of the
prior year, a decrease of $43.1 million or 57.3%. The decrease was also mainly
attributable to our adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." For comparison purposes, for the three and nine month periods ended
November 30, 2001, we recorded amortization expense for goodwill and FCC
licenses of $15.3 million and $45.5 million, respectively.
Operating income:
Radio operating income for the three months ended November 30, 2002 was
$29.4 million compared to $21.6 million for the same period of the prior year,
an increase of $7.8 million or 36.2%. Radio operating income for the nine months
ended November 30, 2002 was $88.5 million compared to $70.1 million for the same
period of the prior year, an increase of $18.4 million or 26.3%. Substantially
all of the increase was attributable to our adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets," as described more fully in Note 3 to the condensed
financial statements. Adoption of this accounting standard had the impact of
eliminating our radio amortization expense for goodwill and FCC licenses, which
totaled $7.0 million in the three months ended November 30, 2001 and $20.5
million in the nine months ended November 30, 2001.
Television operating income for the three months ended November 30,
2002 was $25.0 million compared to $2.7 million for the same period of the prior
year, an increase of $22.3 million or 841.9%. Television operating income for
the nine months ended November 30, 2002 was $51.6 million compared to $13.4
million for the same period of the prior year, an increase of $38.2 million or
285.2%. These increases were driven by higher revenues, as previously described,
and our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
Adoption of this accounting standard had the impact of eliminating our
television amortization expense for goodwill and FCC licenses, which totaled
$7.0 million in the three months ended November 30, 2001 and $21.0 million in
the nine months ended November 30, 2001.
Publishing operating income for the three months ended November 30,
2002 was $3.7 million compared to $0.7 million for the same period of the prior
year, an increase of $3.0 million or 420.5% Publishing operating income for the
nine months ended November 30, 2002 was $6.8 million compared to a loss of $0.5
million for the same period of the prior year, an increase of $7.3 million or
1,455.5%. The increase was primarily attributable to the implementation of our
stock compensation program and our adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." Adoption of this accounting standard had the impact of
eliminating our publishing amortization expense for goodwill, which totaled $1.3
million in the three months ended November 30, 2001 and $4.0 million in the nine
months ended November 30, 2001.
On a consolidated basis, operating income for the three months ended
November 30, 2002 was $45.0 million compared to $16.8 million for the same
period of the prior year, an increase of $28.2 million or 167.4%. Operating
income for the nine months ended November 30, 2002 was $110.1 million compared
to $57.9 million for the same period of the prior year, an increase of $52.2
million or 90.0%. These increases resulted from better operating performance at
our stations, as described above, and our adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets." Adoption of this accounting standard had the
impact of eliminating our amortization expense for goodwill and FCC licenses,
which totaled $15.3 million in the three months ended November 30, 2001 and
$45.5 million in the nine months ended November 30, 2001.
Interest expense:
With respect to Emmis, interest expense for the three months ended November
30, 2002 was $24.5 million compared to $32.1 million for the same period of the
prior year, a decrease of $7.6 million or 23.7%. Interest expense for the nine
months ended November 30, 2002 was $80.6 million compared to $99.2 million for
the same period of the prior year, a decrease of $18.6 million or 18.7%. This
decrease is attributable to a decrease in the interest rates we pay on amounts
outstanding under our credit facility, which is variable rate debt and
repayments of amounts outstanding under our credit facility. The decreased
interest rates reflected both a decrease in the base interest rate for our
credit facility due to a lower overall interest rate environment, and a decrease
in the margin applied to the base rate resulting from the June 2002 credit
facility amendment. In the quarter ended May 31, 2002, we repaid amounts
outstanding under our credit facility with the proceeds of our Denver radio
asset sales in May 2002 and a portion of the proceeds from our equity offering
in April
2002, with the remaining portion being used to reduce amounts outstanding under
our senior discount notes in the quarter ended November 30, 2002. With respect
to EOC, interest expense for the three months ended November 30, 2002 was $18.6
million compared to $25.2 million for the same period of the prior year, a
decrease of $6.6 million or 26.4%. Interest expense for the nine months ended
November 30, 2002 was $60.8 million compared to $81.1 million for the same
period of the prior year, a decrease of $20.3 million or 25.0%. This decrease is
also primarily attributable to a decrease in the interest rates we pay on
amounts outstanding under our credit facility, and repayments of amounts
outstanding under our credit facility. 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 results of
operations of EOC.
Income (loss) before income taxes, extraordinary loss and accounting change:
With respect to Emmis, income (loss) before income taxes, extraordinary
loss and accounting change increased to $20.0 million for the three months ended
November 30, 2002 from a loss before income taxes, extraordinary loss and
accounting change of $16.6 million for the same period of the prior year. Income
(loss) before income taxes, extraordinary loss and accounting change increased
to $35.0 million for the nine months ended November 30, 2002 from a loss before
income taxes, extraordinary loss and accounting change of $43.0 million for the
same period of the prior year. The increase in the income before income taxes,
extraordinary loss and accounting change for the three and nine months ended
November 30, 2002 is mainly attributable to: (1) better operating results at our
stations, (2) the elimination of our amortization expense for goodwill and
broadcasting licenses of $15.3 million and $45.5 million, respectively, (3) a
reduction in interest expense as a result of the factors described above under
interest expense, and (4) in the case of the nine months ended November 30,
2002, the gain on sale of our Denver radio assets of $8.9 million. With respect
to EOC, income (loss) before income taxes, extraordinary loss and accounting
change increased to $25.8 million for the three months ended November 30, 2002
from a loss before income taxes, extraordinary loss and accounting change of
$9.8 million for the same period of the prior year. Income (loss) before income
taxes, extraordinary loss and accounting change increased to $54.8 million for
the nine months ended November 30, 2002 from a loss before income taxes,
extraordinary loss and accounting change of $25.9 million for the same period of
the prior year. The increase in the income before income taxes, extraordinary
loss and accounting change is mainly attributable to: (1) better operating
results at our stations, (2) the elimination of our amortization expense for
goodwill and broadcasting licenses of $15.3 million and $45.5 million,
respectively, (3) a reduction in interest expense as a result of the factors
described above under interest expense, and (4) in the case of the nine months
ended November 30, 2002, the gain on sale of our Denver radio assets of $8.9
million.
Net loss:
With respect to Emmis, net income was $10.8 million for the three
months ended November 30, 2002 compared to a loss of $11.7 million for the same
period of the prior year. The increase in net income is mainly attributable to
better operating results, the elimination of amortization expense and decreased
interest expense, each described above, and each net of taxes. Net loss
increased to $159.3 million for the nine months ended November 30, 2002 from
$32.3 million for the same period of the prior year. The increase in net loss is
mainly attributable to (1) a $167.4 million impairment charge, net of a deferred
tax benefit, under the cumulative effect of accounting change as an accumulated
transition adjustment attributable to the adoption on March 1, 2002 of SFAS No.
142, "Goodwill and Other Intangible Assets." (2) a $11.1 million extraordinary
loss, net of a deferred tax benefit, relating to the premium paid on the
redemption of our discount notes and the write-off of deferred debt fees
associated with debt repaid during the nine months, and (3) better operating
results, the elimination of amortization expense, the gain on asset sales and
the reduction in interest expense, all described above, and all net of taxes;
With respect to EOC, net income was $14.8 million for the three months ended
November 30, 2002 compared to a net loss of $7.3 million for the same period of
the prior year. The increase in net income is mainly attributable to better
operating results, the elimination of amortization expense, and the
decrease in interest expense, each described above, and each net of taxes. Net
loss increased to $137.8 million for the nine months ended November 30, 2002
from $21.3 million for the same period of the prior year. The increase in net
loss is mainly attributable to (1) a $167.4 million impairment charge, net of a
deferred tax benefit, under the cumulative effect of accounting change as an
accumulated transition adjustment attributable to the adoption on March 1, 2002
of SFAS No. 142, "Goodwill and Other Intangible Assets;" (2) a $2.9 million
extraordinary loss, net of a deferred tax benefit, relating to the write-off of
deferred debt fees associated with debt repaid during the nine months, and (3)
better operating results, the elimination of amortization expense, the gain on
asset sales and the reduction in interest expense, all described above, and all
net of taxes.
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operations and
cash available through revolver borrowings under our credit facility. 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. Since we manage
cash on a consolidated basis, any cash needs of a particular segment or
operating entity are met by intercompany transactions. See Investing Activities
below for discussion of specific segment needs.
At November 30, 2002, we had cash and cash equivalents of $8.3 million
and net working capital for Emmis and EOC of $53.4 million and $54.5 million,
respectively. At February 28, 2002, we had cash and cash equivalents of $6.4
million and net working capital for Emmis and EOC of $19.8 million and $21.0
million, respectively, excluding assets held for sale and associated
liabilities. The economic stimulus package passed by Congress in March 2002
allowed Emmis to offset recent years' taxable losses against taxable income
generated up to five years ago. As a result, Emmis has recorded a tax refund
receivable of $11.1 million as of November 30, 2002. The remaining increase in
net working capital primarily relates to accounts receivable increasing more
than the increase in current liabilities.
Operating Activities
With respect to Emmis, net cash flows provided by operating activities
were $56.5 million for the nine months ended November 30, 2002 compared to $41.1
million for the same period of the prior year. With respect to EOC, net cash
flows provided by operating activities were $55.5 million for the nine months
ended November 30, 2002 compared to net cash flows provided by operating
activities of $40.1 million for the same period of the prior year. The increase
in cash flows provided by operating activities for the nine months ended
November 30, 2002 as compared to the same period in the prior year is due to our
increase in net revenues less station operating expenses and corporate expenses,
partially driven by cash savings generated by our stock compensation program. We
experienced a significant increase in cash flows provided by operating
activities in our third fiscal quarter of the current year. The third quarter of
the prior year reflected the immediate impacts of the events of September 11,
2001. Cash flows provided by operating activities are historically the highest
in our third and fourth fiscal quarters as a significant portion of our accounts
receivable collections is derived from revenues recognized in our second and
third fiscal quarters, which are our highest revenue quarters.
Investing Activities
Cash flows provided by investing activities were $113.4 million for the
nine months ended November 30, 2002 compared to cash used in investing of $172.4
million in the same period of the prior year. This increase is primarily
attributable to our sales of radio stations in the nine months ended November
30, 2002 as opposed to our purchase of radio stations in the nine months ended
November 30, 2001, partially offset by a reduction in capital expenditures in
the nine months ended November 30, 2002 over the same period in the prior year.
Investment activities include capital expenditures and business acquisitions and
dispositions.
As discussed in results of operations above and in Note 4 to the
accompanying condensed consolidated financial statements, Emmis sold radio
stations KALC-FM and KXPK-FM in Denver, Colorado for $135.5 million in cash in
the quarter ended May 31, 2002. The net cash proceeds of $135.5 million were
used to repay outstanding borrowings under the credit facility. As disclosed in
the supplemental disclosures to the statements of cash flows, Emmis acquired
radio stations KKLT-FM, KTAR-AM and KMVP-AM, in Phoenix, Arizona, in the quarter
ended May 31, 2001 for cash of $140.7 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.
Emmis began programming and selling advertising on the radio stations on August
1, 2000 under a time brokerage agreement.
Capital expenditures primarily relate to leasehold improvements to
various office and studio facilities, broadcast equipment purchases, tower
upgrades and computer equipment replacements. In the nine month periods ended
November 30, 2002 and 2001, we had capital expenditures of $21.0 million and
$25.8 million, respectively. We incurred approximately $9.0 million of capital
expenditures relating to the construction of new operating facilities for
WALA-TV in Mobile, Alabama in the first nine months of the prior year. This
decrease is partially offset by capital expenditures associated with our
conversion to digital television. We anticipate that future requirements for
capital expenditures will include capital expenditures incurred during the
ordinary course of business, including approximately $11.0 million in fiscal
2003 for the conversion to digital television. Although we expect that
substantially all of our stations will broadcast a digital signal by the end of
our fiscal 2003, we will incur approximately $8 million of additional costs,
after fiscal 2003, to upgrade the digital signals of five of our local stations
and an indeterminable amount to upgrade the digital signals of our nine
satellite stations. We expect to fund such capital expenditures with cash
generated from operating activities and borrowings under our credit facility.
Financing Activities
Cash flows used in financing activities for Emmis and EOC were $168.0
million and $167.0 million, respectively, for the nine months ended November 30,
2002. Cash flows provided by financing activities for Emmis and EOC were $73.5
million and $74.4 million, respectively, for the same period of the prior year.
As discussed in Note 4 to the accompanying condensed consolidated
financial statements, 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
borrowings under our credit facility. The remainder was invested, and in July
2002 distributed to ECC to redeem approximately 22.6% of ECC's $370.0 million,
face value, senior discount notes (see discussion below). As indicated in
Investing Activities above, net proceeds of $135.5 million from the sale of two
radio stations in Denver were also used to repay outstanding indebtedness under
the credit facility during the nine months ended November 30, 2002.
On March 28, 2001, ECC received $202.6 million of proceeds from the
issuance of $370.0 million face value, 12 1/2% senior discount notes due 2011.
The net proceeds of $191.1 million, less $93.0 million held in escrow at ECC,
were distributed to EOC and used to fund the acquisition of the Phoenix radio
stations discussed in Investing Activities above. In June 2001, upon completion
of the Company's reorganization, the proceeds held in escrow were released and
used to reduce outstanding borrowings under the credit facility.
As of November 30, 2002, EOC had $1,026.9 million of corporate
indebtedness outstanding under our credit facility ($726.9 million) and senior
subordinated notes ($300.0 million), and an additional $17.4 million of other
indebtedness. As of November 30, 2002, total indebtedness outstanding for Emmis
included all of
EOC's indebtedness as well as $192.1 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, 2002, our weighted average borrowing rate under our credit
facility was approximately 5.6% and our overall weighted average borrowing rate,
after taking into account amounts outstanding under our senior subordinated
notes and senior discount notes, was approximately 7.3%. The overall weighted
average borrowing rate for EOC, which would exclude the senior discount notes,
was approximately 6.4%.
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 had sufficient liquidity to declare and pay
the dividends as they become due, it was not permitted to do so for the April
15, 2002 payment because Emmis' leverage ratio under the senior discount notes
indenture exceeded 8:1 and its leverage ratio under the senior subordinated
notes indenture exceeded 7:1. ECC's board of directors set a record date for the
April 15, 2002 payment, but did not declare the dividend. Instead, a
wholly-owned, unrestricted subsidiary of EOC made a payment of $.78125 per share
to each preferred shareholder of record. This subsidiary was permitted to make
the payment to the preferred shareholders under the senior discount notes and
senior subordinated notes indentures. Currently, Emmis meets its leverage ratio
requirements under both the senior discount notes indenture and the senior
subordinated notes indenture. On July 2, 2002, ECC's board of directors declared
the April 15, 2002 dividend, as well as dividends payable October 15, 2001 and
January 15, 2002, and deemed the obligation to pay each dividend to have been
discharged by the subsidiary's prior payment. On December 17, 2002, ECC's board
of directors declared the January 15, 2003 dividend.
At January 3, 2003, we had $197.9 million available under our credit
facility, less $6.9 million in outstanding letters of credit. 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, 2002, approximately 79% 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. 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 the 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" 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 at least 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. In connection with the adoption of SFAS 142 effective March 1,
2002, we recorded an impairment loss of $167.4 million, net of tax, reflected as
the cumulative effect of an accounting change in the accompanying condensed
consolidated statements of operations. The adoption of this accounting standard
reduced our amortization of goodwill and intangibles by approximately $15.3
million and $45.5 million in the three and nine months ended November 30, 2002,
respectively. However, our impairment reviews may result in future periodic
write-downs.
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, or 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" that 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 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. 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.
The Company has not assessed the impact, if any, that will result from the
adoption of Statement No. 145.
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.
Regulatory and Other Matters
We acquired KGMB-TV in Honolulu, Hawaii as part of the Lee acquisition
in October 2000. Because we 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 us from owning both stations. However, we received a
temporary waiver from the FCC that has allowed us to operate both stations (and
their related "satellite" stations). The FCC recently commenced an extensive
review of its ownership rules, including the rule that prohibits our ownership
of the two Hawaii stations, to determine whether the ownership restrictions
continue to serve the public interest. We have requested a stay of divestiture
until the FCC completes its review of the ownership rules and are currently
awaiting the FCC's decision on our request. No assurances can be given that the
FCC will grant us the stay of divestiture and we may need to sell one of the two
stations in Hawaii.
FCC regulations require all commercial television stations in the
United States to be currently broadcasting in digital format. Nine of our
television stations are currently broadcasting in digital format and we
requested waiver extensions until May 2003 for the remainder. Except for five of
our satellite stations on which the FCC has not yet ruled, the FCC granted all
of our waiver requests. We continue to work on the digital conversion for our
stations and expect the conversion of all but the five satellite stations for
which waivers have not been granted to be complete before the expiration of the
FCC waivers. With respect to the five satellite stations, we continue to believe
that the grant of waivers is appropriate because the delays are due
to conditions largely beyond our control. However, no assurances can be given
that such waivers will be granted. Based upon the FCC's treatment of certain
broadcasters who were not granted extensions to the original May 2002 deadline,
we believe that the FCC will issue a formal admonishment to any broadcaster
whose waiver request is denied and may issue a monetary forfeiture if the
station has not commenced digital broadcasting within six months of the date of
the FCC's admonishment. We cannot predict the extent, if any, of the monetary
fine, nor can we predict the other actions the FCC will take if the station does
not commence digital broadcasts within six months after the date of the fine.
During the third quarter, Emmis and CBS revised and extended the
affiliation agreements for all of our CBS-affiliated stations except our station
in Terre Haute, which extends through December 31, 2005. The revised agreements
will continue our affiliation with CBS through September 18, 2006. We are also
engaged in discussions with NBC and Fox on the modification, renewal or
extension of the affiliation agreements for our NBC and Fox affiliated stations.
We expect that these affiliation agreements will be modified or extended on
terms that will not have a material adverse effect on our results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Management monitors and evaluates changes in market conditions on a
regular basis. Based upon the most recent review, management has determined that
there have been no material developments affecting market risk since the filing
of the Company's Annual Report on Form 10-K for the year ended February 28,
2002.
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.
Item 4. Controls and Procedures
Based on their most recent evaluation, which was completed within 90
days of the filing of this Form 10-Q, the Company's Chief Executive Officer and
Chief Financial Officer believe the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) are effective. There were
not any significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings arising in the
ordinary course of business. In the opinion of management of the Company,
however, there are no legal proceedings pending against the Company likely to
have a material adverse effect on the Company.
In December 2002, Emmis reached an agreement with the Hungarian
broadcasting authority, the National Radio and Television Board (ORTT), that
resolved pending legal issues and extended the national license for Slager, its
subsidiary in Hungary, through 2009. Slager agreed to pay the fees due under the
original broadcast contract in installments through November 2004, the date the
contract was set to expire. The license has been extended an additional five
years with payment terms more reflective of the current Hungarian advertising
environment
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
December 13, 2001.
3.2 Amended and Restated Bylaws of Emmis Communications Corporation.
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.
15 Letter re: unaudited interim financial information.
99.1 Certification of CEO of Emmis Communications Corporation pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO of Emmis Communications Corporation pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.3 Certification of CEO of Emmis Operating Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.4 Certification of CFO of Emmis Operating Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Neither ECC nor EOC filed reports on Form 8-K during the three months
ended November 30, 2002.
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, 2003 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President
(Authorized Corporate Officer),
Chief Financial Officer and Treasurer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Jeffrey H. Smulyan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emmis Communications
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ JEFFREY H. SMULYAN
Jeffrey H. Smulyan
Chairman of the Board, President and
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Walter Z. Berger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emmis Communications
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President, Treasurer
and Chief Financial Officer
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, 2003 By: /s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President
(Authorized Corporate Officer),
Chief Financial Officer and Treasurer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Jeffrey H. Smulyan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emmis Operating
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ JEFFREY H. SMULYAN
Jeffrey H. Smulyan
Chairman of the Board, President and
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Walter Z. Berger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emmis Operating
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ WALTER Z. BERGER
Walter Z. Berger
Executive Vice President, Treasurer
and Chief Financial Officer