10-Q 1 0001.txt THREE AND SIX MONTHS ENDED AUGUST 31, 2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number: 0-23264 EMMIS COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1542018 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE EMMIS PLAZA 40 MONUMENT CIRCLE SUITE 700 INDIANAPOLIS, INDIANA 46204 (Address of principal executive offices) (Zip Code) (317) 266-0100 (Registrant's Telephone Number, 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 the Registrant's classes of common stock, as of October 10, 2000, was: 41,702,821 Shares of Class A Common Stock, $.01 Par Value 5,230,396 Shares of Class B Common Stock, $.01 Par Value 1 INDEX Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS......................................3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements............................................4 Condensed Consolidated Statements of Operations for the three and six months ended August 31, 1999 and 2000................................4 Condensed Consolidated Balance Sheets as of February 29, 2000 and August 31, 2000...................5 Condensed Consolidated Statements of Cash Flows for the six months ended August 31, 1999 and 2000......................................7 Notes to Condensed Consolidated Financial Statements..........................................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................25 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................32 PART II - OTHER INFORMATION Item 1. Legal Proceedings..............................................32 Item 6. Exhibits and Reports on Form 8-K...............................33 Signatures..............................................................34 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Emmis Communications Corporation and Subsidiaries: We have reviewed the accompanying condensed consolidated balance sheet of Emmis Communications Corporation (an Indiana corporation) and Subsidiaries as of August 31, 2000, and the related condensed consolidated statements of operations for the three-month and six-month periods ended August 31, 1999 and 2000 and the condensed consolidated statements of cash flows for the six-month periods ended August 31, 1999 and 2000. These financial statements are the responsibility of the Company's management. 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, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Emmis Communications Corporation and Subsidiaries as of February 29, 2000 (not presented separately herein), and, in our report dated May 7, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 29, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Indianapolis, Indiana, October 6, 2000. 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, dollars in thousands, except per share data)
Three Months Six Months Ended August 31, Ended August 31, 1999 2000 1999 2000 --------------- ------------- ------------ ------------- GROSS REVENUES $ 95,233 $ 127,697 $ 180,154 $ 245,944 LESS: AGENCY COMMISSIONS 13,704 18,628 26,273 36,356 --------------- ------------ ------------ ------------- NET REVENUES 81,529 109,069 153,881 209,588 Operating expenses 47,659 61,714 93,122 123,570 International business development expenses 367 427 747 831 Corporate expenses 3,478 3,967 6,684 7,687 Depreciation and amortization 10,336 14,721 20,045 28,993 Time brokerage agreement fees - 1,114 - 1,114 Non-cash compensation 1,648 1,903 2,293 3,567 --------------- ------------ ------------ ------------- OPERATING INCOME 18,041 25,223 30,990 43,826 --------------- ------------ ------------ ------------- OTHER INCOME (EXPENSE): Interest expense (13,936) (9,180) (27,165) (17,592) Minority interest 466 69 1,525 593 Other income (expense), net (55) 14,086 (293) 13,872 --------------- ------------ ------------ ------------- Total other income (expense) (13,525) 4,975 (25,933) (3,127) --------------- ------------ ------------ ------------- INCOME BEFORE INCOME TAXES 4,516 30,198 5,057 40,699 PROVISION FOR INCOME TAXES 3,300 13,560 3,600 18,150 --------------- ------------ ------------ ------------- NET INCOME 1,216 16,638 1,457 22,549 --------------- ------------ ------------ ------------- PREFERRED STOCK DIVIDENDS - 2,246 - 4,492 --------------- ------------ ------------ ------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 1,216 $ 14,392 $ 1,457 $ 18,057 =============== ============ ============ ============= Basic net income per common share $ .04 $ .31 $ .05 $ .39 =============== ============ ============ ============= Diluted net income per common share $ .04 $ .30 $ .04 $ .38 =============== ============ ============ ============= Weighted average common shares outstanding: Basic 31,859 46,911 31,713 46,615 Diluted 32,876 48,172 32,612 48,039
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)
February 29, August 31, 2000 2000 ----------- ---------------- (Note 1) (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 17,370 $ 10,755 Accounts receivable, net 66,471 86,810 Prepaid expenses 10,053 14,982 Other 18,822 17,292 ----------------- ----------------- Total current assets 112,716 129,839 Property and equipment, net 128,904 139,955 Intangible assets, net 1,033,970 1,150,836 Other assets, net 51,716 92,573 ----------------- ----------------- Total assets $ 1,327,306 $ 1,513,203 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 22,957 $ 27,864 Current portion of other long-term debt 5,379 5,509 Current portion of TV program rights payable 16,816 16,636 Accrued salaries and commissions 8,162 8,051 Accrued interest 11,077 11,505 Deferred revenue 15,912 18,486 Income taxes payable - 417 Other 4,139 4,935 ---------- ------------ Total current liabilities 84,442 93,403 Credit facility and senior subordinated notes 300,000 442,000 TV program rights payable, net of current portion 58,585 50,158 Other long-term debt, net of current portion 14,607 14,377 Other noncurrent liabilities 5,408 4,906 Deferred income taxes 87,139 91,550 Minority interest 758 487 ----------------- ----------------- Total liabilities 550,939 696,881 ----------------- -----------------
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February 29, August 31, 2000 2000 ----------- ------------- (Note 1) (Unaudited) COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Series A cumulative convertible preferred stock, $.01 par value; authorized 10,000,000 shares; 2,875,000 shares issued and outstanding at February 29, 2000 and August 31, 2000 29 29 Class A common stock, $.01 par value; authorized 170,000,000 shares; issued and outstanding 41,232,811 shares at February 29, 2000 and 41,683,855 shares at August 31, 2000 412 417 Class B common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,738,582 shares at February 29, 2000 and 5,230,396 shares at August 31, 2000 47 52 Additional paid-in capital 804,820 825,959 Accumulated deficit (27,482) (9,425) Accumulated other comprehensive loss (1,459) (710) ------------------- ----------------- Total shareholders' equity 776,367 816,322 ------------------- ----------------- Total liabilities and shareholders' equity $ 1,327,306 $ 1,513,203 =================== =================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 6 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, dollars in thousands)
Six Months Ended August 31, 1999 2000 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,457 $ 22,549 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 23,730 35,498 Provision for bad debts 955 2,398 Provision for deferred income taxes 5,570 3,197 Non-cash compensation 2,293 3,567 Other (876) 866 Changes in assets and liabilities - Accounts receivable (10,247) (20,666) Prepaid expenses and other current assets (9,780) (2,281) Other assets (141) (1,262) Accounts payable and accrued liabilities 15,331 4,794 Deferred revenue 3,507 1,637 Other liabilities (25,667) 1,235 --------------- -------------- Net cash provided by operating activities 6,132 51,532 --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (20,831) (10,773) Cash paid for acquisitions (18,454) (144,283) Deposits on acquisitions and other (17,500) (47,000) --------------- -------------- Net cash used in investing activities (56,785) (202,056) --------------- --------------
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Six Months Ended August 31, 1999 2000 ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (48,500) (93,388) Proceeds from long-term debt 90,500 235,388 Proceeds from exercise of stock options 5,597 6,401 Preferred stock dividends paid - (4,492) ---------------- --------------- Net cash provided by financing activities 47,597 143,909 ---------------- --------------- DECREASE IN CASH AND CASH EQUIVALENTS (3,056) (6,615) CASH AND CASH EQUIVALENTS: Beginning of period 6,117 17,370 ---------------- --------------- End of period $ 3,061 $ 10,755 ================ =============== SUPPLEMENTAL DISCLOSURES: Cash paid for- Interest $ 12,642 $ 14,411 Income taxes 5,181 251 ACQUISITION OF COUNTRY SAMPLER: Fair value of assets acquired $ 25,608 $ - Cash paid 18,454 - --------------- --------------- Liabilities recorded $ 7,154 $ - ================ =============== ACQUISITION OF LOS ANGELES MAGAZINE: Fair value of assets acquired $ - $ 39,456 Cash paid - 36,763 ---------------- --------------- Liabilities recorded $ - $ 2,693 ================ ================ ACQUISITION OF KKFR and KXPK: Fair value of assets acquired $ - $ 108,728 Cash paid - 107,520 ---------------- --------------- Liabilities recorded $ - $ 1,208 ================ ===============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 8 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS August 31, 2000 (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 and its subsidiaries (collectively, "Emmis" or the "Company"). 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/A for the year ended February 29, 2000. On an interim basis, the Company defers major advertising campaigns for which future benefits can be demonstrated. These costs are amortized over the shorter of the estimated period benefited or the remainder of the fiscal year. In the opinion of the registrant, 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 at August 31, 2000 and the results of its operations for the three and six months ended August 31, 1999 and 2000 and its cash flows for the six months ended August 31, 1999 and 2000. 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. Note 2. Significant Events On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazines Holding Company, Inc. for approximately $36.8 million in cash plus liabilities recorded of $2.7 million. Los Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The acquisition was accounted for as a purchase and was financed through additional borrowings under Emmis' credit facility. The excess of the purchase price over the estimated fair value of identifiable assets was $35.9 million, which is included in intangible assets in the accompanying condensed consolidated balance sheet and is being amortized over 15 years. 9 In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia. Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000, the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the right of first refusal on August 31, 2000. On June 5, 2000, Emmis entered into an option agreement to acquire the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. ("Hearst") for $160.0 million in cash. Under the terms of the option agreement, Hearst has up to three years to identify a suitable television property, which Emmis will then purchase and immediately exchange with Hearst for the radio stations. During this three year period, Emmis will program and sell advertising time on the radio stations under a time brokerage agreement. If Hearst is unable to locate a suitable television property by the end of the three years, Emmis will have the option to purchase the radio stations for $160.0 million. To the extent that the identified station is acquired for a price in excess of our option price, Hearst will provide the necessary funds to complete the transaction. Recently, Hearst announced that it had selected WMUR-TV in Manchester, New Hampshire. Emmis began programming and selling advertising on the radio stations on August 1, 2000. When Emmis signed the option agreement, Emmis made an escrow payment of $20.0 million, paid for with borrowings under its credit facility. This escrow payment will be used to offset the option price. Management expects to complete the transaction by March 2001. On August 24, 2000, Emmis acquired the assets of radio stations KKFR-FM in Phoenix, Arizona and KXPK-FM in Denver, Colorado from AMFM, Inc. for a cash purchase price of $108.0 million. Emmis financed the acquisition through borrowings under its credit facility. The acquisition was accounted for as a purchase. Note 3. Pro Forma Acquisitions Unaudited pro forma summary information is presented below for the three and six months ended August 31, 1999 and 2000, assuming the acquisition of (i) KKFR-FM and KXPK-FM in August 2000, (ii) Los Angeles Magazine in March 2000, (iii) two radio stations in Argentina in November 1999, (iv) WKCF-TV in October 1999 and (v) Country Sampler Magazine in April 1999 and the operation of radio stations KZLA-FM, KKLT-FM, KTAR-AM and KMVP-AM under time brokerage agreements and the use of proceeds from the Company's common and preferred stock offerings in October 1999 and the investment from an affiliate of Liberty Media Corporation in November 1999 to reduce outstanding borrowings all had occurred on the first day of the pro forma periods presented below. 10 Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company's management. The pro forma summary information presented below is not necessarily indicative of the results that actually would have occurred if the transactions indicated above had been consummated at the beginning of the periods presented, and is not intended to be a projection of future results.
Three Months Six Months Ended August 31, Ended August 31, (Pro Forma) (Pro Forma) ---------------------------------- ----------------------------- (Dollars in thousands, except per share data) 1999 2000 1999 2000 -------------- ---------------- ----------- ----------- Net revenues $ 107,394 $ 116,981 $ 206,730 $ 229,556 ============== ================ =========== =========== Broadcast/publishing cash flow $ 43,745 $ 49,766 $ 78,751 $ 92,162 ============== ================ =========== =========== Net income $ 4,784 $ 14,884 $ 6,172 $ 19,437 ============== ================ =========== =========== Net income available to common shareholders $ 2,538 $ 12,638 $ 1,680 $ 14,945 ============== ================ =========== =========== Basic net income per common share $ 0.06 $ 0.27 $ 0.04 $ 0.32 ============== ================ =========== =========== Diluted net income per common share $ 0.05 $ 0.26 $ 0.04 $ 0.31 ============== ================ =========== =========== Weighted average shares outstanding: Basic 45,243 46,911 45,097 46,615 ============== ================ =========== =========== Diluted 46,260 48,172 45,996 48,039 ============== ================ =========== ===========
Note 4. Basic and Diluted Net Income Per Share Basic net income per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at August 31, 1999 consisted solely of stock options. Potentially dilutive securities at August 31, 2000 consisted of stock options and the 6.25% Series A cumulative convertible preferred stock. The 6.25% Series A cumulative convertible preferred stock is not included in the calculation of diluted net income per common share for the three and six months ended August 31, 2000 as the effect of its conversion to common stock would be antidilutive. Thus, for the three and six months ended August 31, 1999 and 2000, the difference between the weighted-average shares outstanding used to compute basic and diluted EPS is attributable 11 to dilution caused by stock options. Weighted average shares excluded from the calculation of diluted net income per share that would result from the conversion of the 6.25% Series A cumulative convertible preferred stock amounted to approximately 3.7 million for the three and six months ended August 31, 2000. Note 5. Comprehensive Income Comprehensive income was comprised of the following for the three and six months ended August 31, 1999 and 2000 (dollars in thousands):
Three Months Six Months Ended August 31, Ended August 31, 1999 2000 1999 2000 ------------ ------------- ------------ ------------ Net income $ 1,216 $ 16,638 $ 1,457 $ 22,549 Translation adjustment 119 425 (856) 749 ------------ ------------- ------------ ------------ Total comprehensive income $ 1,335 $ 17,063 $ 601 $ 23,298 ============ ============= ============ ============
Note 6. Segment Information The Company's operations are aligned into four business segments: Radio, Television, Publishing and Interactive. These business segments are consistent with the Company's management of these businesses and its financial reporting structure. Corporate represents expense not allocated to reportable segments. The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. Total revenues of the radio station in Hungary during the three and six months ended August 31, 1999 were $2.1 million and $3.2 million, respectively. Total revenues of the radio station in Hungary for the three and six months ended August 31, 2000 were $1.8 million and $3.2 million, respectively. Total assets of this radio station as of August 31, 1999 and 2000 were $19.5 million and $14.8 million, respectively. Emmis acquired a 75% interest in two radio stations in Buenos Aires, Argentina in November 1999. Total revenues of these stations for the three and six months ended August 31, 2000 were $1.8 million and $3.1 million, respectively. Total assets of these stations as of August 31, 2000 were $22.4 million. 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 12 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 Unites States, and should be viewed as a supplement to, and not a substitute for, our results of operations presented on the basis of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising inventory. Interactive derives revenue from the sale of advertisements on the websites of the Company's stations. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing a magazine, and general and administrative costs. Significant interactive operating expenses are employee salaries and general and administrative costs. The accounting policies as described in the summary of significant accounting policies included in the Company's Annual Report filed on Form 10-K/A for the year ended February 29, 2000, are applied consistently across segments.
Three Months Ended August 31, 2000 Radio Television Publishing Interactive Corporate Consolidated ------------------------------------------------------------------------------------------------------------------- Net revenues $ 62,654 $ 26,419 $ 19,963 $ 33 $ - $ 109,069 Operating expenses 28,933 15,444 17,189 148 - 61,714 ----------- ----------- ---------- ---------- ----------- -------------- Broadcast/publishing cash flow 33,721 10,975 2,774 (115) - 47,355 International business development expenses - - - - 427 427 Corporate expenses - - - - 3,967 3,967 Depreciation and amortization 4,225 5,745 3,788 2 961 14,721 Time brokerage agreement fees 1,114 - - - - 1,114 Non-cash compensation - - - - 1,903 1,903 ----------- ----------- ---------- ---------- ----------- -------------- Operating income (loss) $ 28,382 $ 5,230 $ (1,014) $ (117) (7,258) $ 25,223 =========== =========== ========== ========== =========== ============== Total assets $ 587,946 $ 694,097 $ 102,202 $ - $ 128,958 $ 1,513,203 =========== =========== ========== ========== =========== ==============
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Six Months Ended August 31, 2000 Radio Television Publishing Interactive Corporate Consolidated ------------------------------------------------------------------------------------------------------------------- Net revenues $ 117,509 $ 54,561 $ 37,485 $ 33 $ - $ 209,588 Operating expenses 58,086 32,252 32,964 268 - 123,570 ----------- ----------- ---------- ---------- ----------- -------------- Broadcast/publishing cash flow 59,423 22,309 4,521 (235) - 86,018 International business development expenses - - - - 831 831 Corporate expenses - - - - 7,687 7,687 Depreciation and amortization 7,862 11,687 7,556 2 1,886 28,993 Time brokerage agreement fees 1,114 - - - - 1,114 Non-cash compensation - - - - 3,567 3,567 ----------- ----------- ---------- ---------- ----------- -------------- Operating income (loss) $ 50,447 $ 10,622 $ (3,035) $ (237) (13,971) $ 43,826 =========== =========== ========== ========== =========== ============== Total assets $ 587,946 $ 694,097 $ 102,202 $ - $ 128,958 $ 1,513,203 =========== =========== ========== ========== =========== ==============
Three Months Ended August 31, 1999 Radio Television Publishing Interactive Corporate Consolidated ------------------------------------------------------------------------------------------------------------------- Net revenues $ 51,244 $ 16,992 $ 13,293 $ - $ - $ 81,529 Operating expenses 24,057 11,731 11,871 - - 47,659 ----------- ----------- ---------- ---------- ----------- -------------- Broadcast/publishing cash flow 27,187 5,261 1,422 - - 33,870 International business development expenses - - - - 367 367 Corporate expenses - - - - 3,478 3,478 Depreciation and amortization 4,118 3,605 1,749 - 864 10,336 Time brokerage agreement fees - - - - - - Non-cash compensation - - - - 1,648 1,648 ----------- ----------- ---------- ---------- ----------- -------------- Operating income (loss) $ 23,069 $ 1,656 $ (327) $ - (6,357) $ 18,041 =========== =========== ========== ========== =========== ============== Total assets $ 468,079 $ 454,088 $ 68,327 $ - $ 89,207 $ 1,079,701 =========== =========== ========== ========== =========== ==============
Six Months Ended August 31, 1999 Radio Television Publishing Interactive Corporate Consolidated ------------------------------------------------------------------------------------------------------------------- Net revenues $ 93,625 $ 35,046 $ 25,210 $ - $ - $ 153,881 Operating expenses 47,412 23,737 21,973 - - 93,122 ----------- ----------- ---------- ---------- ----------- -------------- Broadcast/publishing cash flow 46,213 11,309 3,237 - - 60,759 International business development expenses - - - - 747 747 Corporate expenses - - - - 6,684 6,684 Depreciation and amortization 8,129 6,985 3,263 - 1,668 20,045 Time brokerage agreement fees - - - - - - Non-cash compensation - - - - 2,293 2,293 ----------- ----------- ---------- ---------- ----------- -------------- Operating income (loss) $ 38,084 $ 4,324 $ (26) $ - $ (11,392) $ 30,990 =========== =========== ========== ========== =========== ============== Total assets $ 468,079 $ 454,088 $ 68,327 $ - $ 89,207 $ 1,079,701 =========== =========== ========== ========== =========== ==============
14 Note 7. Financial Information for Subsidiary Guarantors and Subsidiary Non-Guarantors Emmis conducts a significant portion of its business through subsidiaries. The Company's senior subordinated notes are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries (the "Subsidiary Guarantors"). As of February 29, 2000 and August 31, 2000, subsidiaries holding Emmis' interest in its radio stations in Hungary and Argentina, as well as certain other subsidiaries conducting joint ventures with third parties, did not guarantee the senior subordinated notes (the "Subsidiary Non-Guarantors"). Presented below is condensed consolidating financial information for the parent company only, the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of February 29, 2000 and August 31, 2000 and for the three and six months ended August 31, 1999 and 2000. Emmis uses the equity method with respect to investments in subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented based on management's determination that they do not provide additional information that is material to investors. 15 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of August 31, 2000 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CURRENT ASSETS: Cash and cash equivalents $ 4,988 $ 3,454 $ 2,313 $ - $ 10,755 Accounts receivable, net - 82,790 4,020 - 86,810 Current portion of TV program rights - 5,286 - - 5,286 Prepaid expenses 1,160 13,583 239 - 14,982 Other 2,060 9,933 13 - 12,006 ------------- ------------ ----------- ------------- -------------- Total current assets 8,208 115,046 6,585 - 129,839 Property and equipment, net 38,635 96,863 4,457 - 139,955 Intangible assets, net 133 1,127,178 23,525 - 1,150,836 Investment in affiliates 1,236,044 - - (1,236,044) - Other assets, net 84,937 10,740 2,625 (5,729) 92,573 ------------- ------------ ----------- ------------- -------------- Total assets $ 1,367,957 $ 1,349,827 $ 37,192 $ (1,241,773) $ 1,513,203 ============= ============ =========== ============= ============== CURRENT LIABILITIES: Accounts payable $ 4,000 $ 19,581 $ 4,283 $ - $ 27,864 Current portion of other long-term debt 34 159 5,316 - 5,509 Current portion of TV program rights payable - 16,636 - - 16,636 Accrued salaries and commissions 660 6,908 483 - 8,051 Accrued interest 11,363 - 142 - 11,505 Deferred revenue - 18,486 - - 18,486 Income taxes payable 50 367 - - 417 Other 1,231 3,704 - - 4,935 ------------- ------------ ----------- ------------- -------------- Total current liabilities 17,338 65,841 10,224 - 93,403 Credit facility and senior subordinated notes 442,000 - - - 442,000 TV program rights payable, net of current portion - 50,158 - - 50,158 Other long-term debt, net of current portion 37 409 19,660 (5,729) 14,377 Other noncurrent liabilities - 4,906 - - 4,906 Deferred income taxes 91,550 - - - 91,550 Minority interest - - 487 - 487 ------------- ------------ ----------- ------------- -------------- Total liabilities 550,925 121,314 30,371 (5,729) 696,881 Shareholders' equity Series A preferred stock 29 - - - 29 Class A common stock 417 - - - 417 Class B common stock 52 - - - 52 Additional paid-in capital 825,959 - 4,393 (4,393) 825,959 Subsidiary investment - 923,291 17,628 (940,919) - Retained earnings/ (accumulated deficit) (9,425) 305,222 (14,490) (290,732) (9,425) Accumulated other comprehensive loss - - (710) - (710) ------------- ------------ ----------- ------------- -------------- Total shareholders' equity 817,032 1,228,513 6,821 (1,236,044) 816,322 ------------- ------------ ----------- ------------- -------------- Total liabilities and shareholders' equity $ 1,367,957 $1,349,827 $ 37,192 $ (1,241,773) $ 1,513,203 ============= ============ =========== ============= ==============
16 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 29, 2000 (Note 1, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CURRENT ASSETS: Cash and cash equivalents $ 448 $ 2,564 $ 14,358 $ - $ 17,370 Accounts receivable, net - 63,146 3,325 - 66,471 Prepaid expenses 1,197 8,434 422 - 10,053 Other 5,781 12,744 297 - 18,822 ------------- ------------ ----------- ------------- -------------- Total current assets 7,426 86,888 18,402 - 112,716 Property and equipment, net 38,611 85,587 4,706 - 128,904 Intangible assets, net 196 1,007,860 25,914 - 1,033,970 Investment in affiliates 1,098,183 - - (1,098,183) - Other assets, net 37,573 16,194 2,330 (4,381) 51,716 ------------- ------------ ----------- -------------- -------------- Total assets $ 1,181,989 $ 1,196,529 51,352 $ (1,102,564) $ 1,327,306 ============= ============ =========== ============ ============= CURRENT LIABILITIES: Accounts payable $ 2,973 $ 15,202 $ 4,782 $ - $ 22,957 Current portion of other long-term debt 34 17 5,328 - 5,379 Current portion of TV program rights payable - 16,816 - - 16,816 Accrued salaries and commissions 1,952 5,801 409 - 8,162 Accrued interest 10,995 - 82 - 11,077 Deferred revenue - 15,912 - - 15,912 Other 1,034 3,105 - - 4,139 ------------- ------------ ----------- ------------- -------------- Total current liabilities 16,988 56,853 10,601 - 84,442 Credit facility and senior subordinated notes 300,000 - - - 300,000 TV program rights payable, net of current portion - 58,585 - - 58,585 Other long-term debt, net of current portion 36 671 18,281 (4,381) 14,607 Other noncurrent liabilities - 5,408 - - 5,408 Deferred income taxes 87,139 - - - 87,139 Minority interest - - 758 - 758 ------------- ------------ ----------- ------------- -------------- Total liabilities 404,163 121,517 29,640 (4,381) 550,939 Shareholders' equity Series A preferred stock 29 - - - 29 Class A common stock 412 - - - 412 Class B common stock 47 - - - 47 Additional paid-in capital 804,820 - 4,393 (4,393) 804,820 Subsidiary investment - 803,373 29,885 (833,258) - Retained earnings / (accumulated deficit) (27,482) 271,639 (11,107) (260,532) (27,482) Accumulated other comprehensive loss - - (1,459) - (1,459) ------------- ------------ ----------- ------------- -------------- Total shareholders' equity 777,826 1,075,012 21,712 (1,098,183) 776,367 ------------- ------------ ----------- ------------- -------------- Total liabilities and shareholders' equity $ 1,181,989 $ 1,196,529 $ 51,352 $ (1,102,564) $ 1,327,306 ============= ============ =========== ============= ==============
17 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Three Months Ended August 31, 2000 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 656 $ 104,828 $ 3,585 $ - $ 109,069 Operating expenses 332 58,365 3,017 - 61,714 International business development expenses - 427 - - 427 Corporate expenses 3,967 - - - 3,967 Depreciation and amortization 1,024 12,825 872 - 14,721 Non-cash compensation 1,427 476 - - 1,903 Time brokerage agreement fees - 1,114 - - 1,114 ------------- ----------- ----------- ----------- ----------- Operating income (loss) (6,094) 31,621 (304) - 25,223 ------------- ----------- ----------- ----------- ----------- Other income (expense) Interest expense (8,586) (65) (694) 165 (9,180) Minority interest - - - 69 69 Other income (expense), net 17,213 (2,914) (48) (165) 14,086 ------------- ----------- ----------- ----------- ----------- Total other income (expense) 8,627 (2,979) (742) 69 4,975 ------------- ----------- ----------- ----------- ----------- Income (loss) before income taxes 2,533 28,642 (1,046) 69 30,198 Provision for income taxes 2,421 11,139 - - 13,560 ------------- ----------- ----------- ----------- ----------- 112 17,503 (1,046) 69 16,638 Equity in earnings of subsidiaries 16,526 - - (16,526) - ------------- ----------- ----------- ----------- ----------- Net income (loss) 16,638 17,503 (1,046) (16,457) 16,638 Less: Preferred stock dividends 2,246 - - - 2,246 ------------- ----------- ----------- ----------- ----------- Net income/(loss) available to common shareholders $ 14,392 $ 17,503 $ (1,046) $ (16,457) $ 14,392 ============= =========== =========== =========== ===========
18 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Six Months Ended August 31, 2000 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 1,048 $ 202,269 $ 6,271 $ - $ 209,588 Operating expenses 660 116,896 6,014 - 123,570 International business development expenses - 831 - - 831 Corporate expenses 7,687 - - - 7,687 Depreciation and amortization 1,949 25,270 1,774 - 28,993 Non-cash compensation 2,675 892 - - 3,567 Time brokerage agreement fees - 1,114 - - 1,114 ------------- ----------- ----------- ----------- ----------- Operating income (loss) (11,923) 57,266 (1,517) - 43,826 ------------- ----------- ----------- ----------- ----------- Other income (expense) Interest expense (16,132) (122) (1,663) 325 (17,592) Minority interest - - - 593 593 Other income (expense), net 17,378 (2,978) (203) (325) 13,872 ------------- ----------- ------------ ----------- ----------- Total other income (expense) 1,246 (3,100) (1,866) 593 (3,127) ------------- ----------- ----------- ----------- ----------- Income (loss) before income taxes (10,677) 54,166 (3,383) 593 40,699 Provision (benefit) for income taxes (2,433) 20,583 - - 18,150 ------------- ----------- ----------- ----------- ----------- (8,244) 33,583 (3,383) 593 22,549 Equity in earnings of subsidiaries 30,793 - - (30,793) - ------------- ----------- ----------- ----------- ----------- Net income (loss) 22,549 33,583 (3,383) (30,200) 22,549 Less: Preferred stock dividends 4,492 - - - 4,492 ------------- ----------- ----------- ----------- ----------- Net income/(loss) available to common shareholders $ 18,057 $ 33,583 $ (3,383) $ (30,200) $ 18,057 ============= =========== =========== =========== ===========
19 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Three Months Ended August 31, 1999 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 467 $ 78,981 $ 2,081 $ - $ 81,529 Operating expenses 326 45,824 1,509 - 47,659 International business development expenses - 367 - - 367 Corporate expenses 3,478 - - - 3,478 Depreciation and amortization 864 8,772 700 - 10,336 Non-cash compensation 1,236 412 - - 1,648 ------------- ----------- ----------- ----------- ----------- Operating income (loss) (5,437) 23,606 (128) - 18,041 ------------- ----------- ----------- ----------- ----------- Other income (expense) Interest expense (13,627) 124 (626) 193 (13,936) Minority interest - - - - - Other income (expense), net (1) 208 (69) 273 411 ------------- ----------- ----------- ----------- ----------- Total other income (expense) (13,628) 332 (695) 466 (13,525) ------------- ----------- ----------- ----------- ----------- Income (loss) before income taxes (19,065) 23,938 (823) 466 4,516 Provision (benefit) for income taxes (5,610) 8,857 53 - 3,300 ------------- ----------- ----------- ----------- ----------- (13,455) 15,081 (876) 466 1,216 Equity in earnings of subsidiaries 14,671 - - (14,671) - ------------- ----------- ----------- ----------- ----------- Net income (loss) 1,216 15,081 (876) (14,205) 1,216 Less: Preferred stock dividends - - - - - ------------- ----------- ----------- ----------- ----------- Net income/(loss) available to common shareholders $ 1,216 $ 15,081 $ (876) $ (14,205) $ 1,216 ============= =========== =========== =========== ===========
20 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Six Months Ended August 31, 1999 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 883 $ 149,824 $ 3,174 $ - $ 153,881 Operating expenses 646 89,783 2,693 - 93,122 International business development expenses - 747 - - 747 Corporate expenses 6,684 - - - 6,684 Depreciation and amortization 1,668 16,927 1,450 - 20,045 Non-cash compensation 1,720 573 - - 2,293 ------------- ----------- ----------- ----------- ----------- Operating income (loss) (9,835) 41,794 (969) - 30,990 ------------- ----------- ----------- ----------- ----------- Other income (expense) Interest expense (26,007) 265 (1,806) 383 (27,165) Minority interest - - - - - Other income (expense), net 16 424 (350) 1,142 1,232 ------------- ----------- ----------- ----------- ----------- Total other income (expense) (25,991) 689 (2,156) 1,525 (25,933) ------------- ----------- ----------- ----------- ----------- Income (loss) before income taxes (35,826) 42,483 (3,125) 1,525 5,057 Provision (benefit) for income taxes (12,119) 15,719 - - 3,600 ------------- ----------- ----------- ----------- ----------- (23,707) 26,764 (3,125) 1,525 1,457 Equity in earnings of subsidiaries 25,164 - - (25,164) - ------------- ----------- ----------- ----------- ----------- Net income (loss) 1,457 26,764 (3,125) (23,639) 1,457 Less: Preferred stock dividends - - - - - ------------- ----------- ----------- ----------- ----------- Net income/(loss) available to common shareholders $ 1,457 $ 26,764 $ (3,125) $ (23,639) $ 1,457 ============= =========== =========== =========== ===========
21 Emmis Communications Corporation Condensed Consolidating Statement of Cash Flows For the Six Months Ended August 31, 2000 (Unaudited, dollars in thousands)
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 22,549 $ 33,583 $ (3,383) $ (30,200) $ 22,549 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation and amortization 2,891 30,833 1,774 - 35,498 Provision for bad debts - 2,398 - - 2,398 Provision for deferred income taxes 3,197 - - - 3,197 Non-cash compensation 2,675 892 - - 3,567 Equity in earnings of subsidiaries (30,793) - - 30,793 - Other 710 - 749 (593) 866 Changes in assets and liabilities - Accounts receivable - (19,971) (695) - (20,666) Prepaid expenses and other current assets 3,758 (6,506) 467 - (2,281) Other assets (1,306) 339 (295) - (1,262) Accounts payable and accrued liabilities 1,403 3,756 (365) - 4,794 Deferred revenue - 1,637 - - 1,637 Other liabilities 10,128 (9,989) 1,096 - 1,235 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 15,212 36,972 (652) - 51,532 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,026) (8,705) (42) - (10,773) Cash paid for acquisitions - (144,283) - - (144,283) Deposits on acquisitions and other (47,000) - - - (47,000) ----------- ----------- ----------- ----------- ------------ Net cash used in investing activities (49,026) (152,988) (42) - (202,056) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (93,388) - - - (93,388) Proceeds from long-term debt 235,388 - - - 235,388 Proceeds from exercise of stock options 6,401 - - - 6,401 Intercompany (105,555) 116,906 (11,351) - - Preferred stock dividends paid (4,492) - - - (4,492) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 38,354 116,906 (11,351) - 143,909 ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: 4,540 890 (12,045) - (6,615) Beginning of period 448 2,564 14,358 - 17,370 ----------- ----------- ----------- ----------- ----------- End of period $ 4,988 $ 3,454 $ 2,313 $ - $ 10,755 =========== =========== =========== =========== ===========
22 Emmis Communications Corporation Condensed Consolidating Statement of Cash Flows For the Six Months Ended August 31, 1999 (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) $ 1,457 $ 26,764 $ (3,125) $ (23,639) $ 1,457 Adjustments to reconcile net income (loss)to net cash provided by (used in) operating activities - Depreciation and amortization 2,845 19,435 1,450 - 23,730 Provision for bad debts - 955 - - 955 Provision for deferred income taxes 5,570 - - - 5,570 Non-cash compensation 1,720 573 - - 2,293 Equity in earnings of subsidiaries (25,164) - - 25,164 - Other 1,505 - (856) (1,525) (876) Changes in assets and liabilities - Accounts receivable - (10,089) (158) - (10,247) Deferred barter costs - (3,734) - - (3,734) Prepaid expenses and other current assets 2,300 (6,185) (2,161) - (6,046) Other assets (1,649) 2,011 (503) - (141) Accounts payable and accrued liabilities 9,854 5,959 (482) - 15,331 Deferred revenue - 3,507 - - 3,507 Other liabilities (4,659) (22,055) 1,047 - (25,667) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (6,221) 17,141 (4,788) - 6,132 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (7,007) (13,167) (657) - (20,831) Deposits on acquisitions and other (17,500) - - - (17,500) Acquisition of Country Sampler - (18,454) - - (18,454) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities (24,507) (31,621) (657) - (56,785) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (48,500) - - - (48,500) Proceeds from long-term debt 90,500 - - - 90,500 Proceeds from exercise of stock options 5,597 - - - 5,597 Intercompany (19,155) 13,850 5,305 - - Preferred stock dividends paid - - - - - ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities 28,442 13,850 5,305 - 47,597 ----------- ----------- ----------- ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS: (2,286) (630) (140) - (3,056) Beginning of period 2,286 3,146 685 - 6,117 ----------- ----------- ----------- ----------- ----------- End of period $ - $ 2,516 $ 545 $ - $ 3,061 =========== =========== =========== =========== ===========
23 Note 8. Subsequent Events On September 18, 2000, Emmis entered into an agreement with Salem Communications Corporation to acquire the assets of radio station KALC-FM in Denver, Colorado for a cash purchase price of $98.8 million. This acquisition is subject to approval by the FCC. Emmis has paid $1.2 million as a commitment fee and will begin operating the station under a time brokerage agreement in October 2000. Emmis expects to complete the purchase in the last quarter of its current fiscal year, and will account for it as a purchase. On October 1, 2000, Emmis purchased eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $559.5 million and the payment of $21.5 million for working capital (the "Lee Acquisition"). This transaction was financed through borrowings under Emmis' amended credit facility (described below) and was accounted for as a purchase. The Lee Acquisition consisted of the following stations: - KOIN-TV (CBS) in Portland, Oregon - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango, Colorado-Farmington, New Mexico) - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas and KSNK-TV, Oberlin, Kansas-McCook, Nebraska) - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii) - KGUN-TV (ABC) in Tucson, Arizona - KMTV-TV (CBS) in Omaha, Nebraska and - KSNT-TV (NBC) in Topeka, Kansas. As a result of the Lee Acquisition, Emmis will own more television stations in the Hawaiian market than is currently permitted by FCC regulations. Emmis may be required to sell one of its Hawaiian television stations to be in compliance with this regulatory requirement. Emmis has been granted a temporary waiver of this requirement and will assess alternatives during this time. On October 2, 2000, Emmis amended its existing credit facility. The amendment increased the borrowing capacity under the credit facility to $1.0 billion. Emmis has borrowed $921.0 million under the amended credit facility to fund its recent acquisitions of radio and television stations. In connection with the closing of pending acquisitions of radio stations from Hearst-Argyle Television, Inc. and Salem Communications Corporation, Emmis currently plans to refinance its credit facility with a new facility and increase borrowing capacity before the end of its current fiscal year. Emmis' management is currently evaluating proposals to permanently refinance the amended credit facility. 24 On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. ("Sinclair") for a cash purchase price of $220.0 million. The agreement also included the settlement of outstanding lawsuits by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquistion was financed through borrowings under Emmis' amended credit facility and was accounted for as a purchase. On October 6, 2000, Emmis acquired certain assets of KZLA-FM in Los Angeles, California from Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). From August 1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. Note 9. Reclassifications Certain reclassifications have been made to the August 31, 1999 and February 29, 2000 financial statements to be consistent with the August 31, 2000 presentation. The reclassifications have no impact on net income or retained earnings previously reported. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Note: Certain statements included in this report which are not statements of historical fact, including but not limited to those identified with the words "expect," "will" or "look" are intended to be, and are, identified as "forward-looking statements," as defined in the Securities and Exchange Act of 1934, as amended, and involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future result, performance or achievement expressed or implied by such forward-looking statement. Such factors include, among others, general economic and business conditions; fluctuations in the demand for advertising; increased competition in the broadcasting industry; inability to obtain necessary approvals for purchases or sale transactions or to complete the transactions; changes in the costs of programming; inability to grow through suitable acquisitions, including the desired radio; tax and other regulatory or practical limitations on the Company's ability to effectively separate the Company's radio and television businesses; and other factors mentioned in other documents filed by the Company with the Securities and Exchange Commission. 25 GENERAL As of August 31, 2000, we owned and operated seventeen radio stations, seven television stations and seven magazine publishing operations in the United States. We also operated three radio stations in Phoenix and one radio station in Los Angeles under time brokerage agreements. Our radio stations consisted of seventeen FM and four AM stations serving New York City, Los Angeles, Chicago, Denver, Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. Our television stations consisted of five Fox affiliated stations serving New Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii and Fort Myers, Florida; one WB affiliated station serving Orlando, Florida; and one CBS affiliated station serving Terre Haute, Indiana. Our publishing operations consisted primarily of five city or regional monthly magazines and two special interest magazines, including Indianapolis Monthly, Atlanta, Cincinnati, LA Magazine, Texas Monthly, Country Sampler and Country Marketplace. In addition, we have a 59.5% interest in a national radio station in Hungary and a 75% interest in a company owning two radio stations in Buenos Aires, Argentina. Since August 31, 2000, we have added six radio stations in St. Louis, acquired the radio station in Los Angeles we had previously operated under a time brokerage agreement, acquired eight network-affiliated television stations and agreed to begin operating a radio station in Denver under a time brokerage agreement. In connection with the acquisition of the radio station in Los Angeles, we exchanged three of the radio stations we acquired in St. Louis and one radio station we already owned in St. Louis for the new station in Los Angeles. We are in the process of acquiring the remaining radio stations we currently operate under time brokerage agreements. In connection with the acquisition of the eight network-affiliated television stations, we may be required to sell one television station in Hawaii due to federal regulations. Once we have consummated our pending transactions, we will own and operate twenty-four radio stations, fifteen television stations and seven magazine publishing operations in the United States. We continue to evaluate the separation of our radio and television businesses. Through August 31, 2000, we had deferred $0.4 million of costs related to this separation plan and we estimate our costs to date to be approximately $3 million. To the extent we do not complete a separation plan that includes the issuance of equity, these costs will be an operating charge. Our broadcasting revenue is derived principally from the sale of advertising time on our radio and television stations. The sale of advertising time is affected primarily by the demand for advertising time by local, regional and national advertisers and the advertising rates charged by our radio and television stations. We derive a small portion of our broadcasting revenue from fees paid by the networks and program syndicators for the broadcast of programming. Our broadcast revenue is generally highest in our second and third fiscal quarters. Radio station advertising rates are based in part on a station's ability to attract audiences in the demographic groups that advertisers wish to reach and the number of stations competing in the market area, as well as local, regional and national economic conditions. A station's 26 audience is reflected in rating service surveys, which demonstrate the size and demographics of the audience tuned to the station and the time the audience spends listening to the station. Television station advertising is sold for placement in proximity to specific local or network programming and is priced primarily on the basis of a program's popularity with the audience advertisers seek to reach, as measured principally by quarterly audience surveys. In addition, the number of advertisers competing for the available time, the size and demographic makeup of the market areas served, and local, regional and national economic conditions are all factors in determining advertising rates. Our publishing revenue is derived principally from the sale of local, regional and national advertising pages in our magazines. Advertising sales and our advertising rates are determined in part by a publication's ability to attract audiences in the geographic and demographic groups which advertisers wish to reach and the number of magazines competing in the market area, as well as local, regional and national economic conditions. Our publications also derive revenue from the sale of subscriptions to our magazines and the sales of our magazines at retail locations such as newsstands, bookstores and shops. The primary operating expenses involved in owning and operating radio stations are employee salaries and commissions, programming, advertising and promotion. These are the same expenses involved with owning and operating television stations and magazines with the addition of syndicated program rights fees and news gathering costs for television stations and printing costs for magazines. Our net earnings also are impacted by depreciation, amortization and interest expenses associated with our acquisition of broadcasting and publishing operations. We evaluate the performance of our operating entities based on broadcast cash flow, which we refer to as BCF, and publishing cash flow, which we refer to as PCF. We believe 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 our 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 our 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. We define BCF and PCF as revenue net of agency commissions and operating expenses. Our results are subject to seasonal fluctuations. Therefore, results shown on a quarterly basis are not necessarily indicative of results for a full year. 27 Results of Operations For the Three and Six Months Ended August 31, 2000 Compared to August 31, 1999 Net revenues for the three months ended August 31, 2000 were $109.1 million compared to $81.5 million for the same period of the prior year, an increase of $27.6 million or 33.8%. Net revenues for the six months ended August 31, 2000 were $209.6 million compared to $153.9 million for the same period of the prior year, an increase of $55.7 million or 36.2%. Approximately $18.6 million and $33.7 million of the increase in net revenues for the three and six month periods ended August 31, 2000 were the result of our acquisition of KKFR-FM and KXPK-FM in August 2000, Los Angeles Magazine in March 2000, interests in two radio stations in Argentina in November 1999, WKCF-TV in October 1999 and Country Sampler Magazine in April 1999 and our operation of radio stations KZLA-FM, KKLT-FM, KTAR-AM and KMVP-AM under time brokerage agreements effective August 1, 2000, which we refer to as our "Recent Transactions". Excluding the Recent Transactions, net revenues for the three and six months ended August 31, 2000 would have increased $8.9 million and $22.0 million, or 11.4% and 14.8%, respectively. These increases in net revenues are principally due to our ability to realize higher advertising rates at certain of our broadcasting properties, resulting from higher ratings at certain of our broadcasting properties, and increases in general radio spending in the markets in which we operate. Operating expenses for the three months ended August 31, 2000 were $61.7 million compared to $47.7 million for the same period of the prior year, an increase of $14.0 million or 29.5%. Operating expenses for the six months ended August 31, 2000 were $123.6 million compared to $93.1 million for the same period of the prior year, an increase of $30.5 million or 32.7%. Approximately $11.1 million and $21.3 million of the increase in operating expenses for the three and six month periods ended August 31, 2000 were the result of our Recent Transactions. Excluding the Recent Transactions, operating expenses for the three and six months ended August 31, 2000 would have increased $2.9 million and $9.2 million, or 6.6% and 10.4%, respectively. These increases were due to higher advertising and promotional spending at certain of our properties as well as an increase in programming and sales related costs. Broadcast/publishing cash flow for the three months ended August 31, 2000 was $47.4 million compared to $33.9 million for the same period of the prior year, an increase of $13.5 million or 39.8%. Broadcast/publishing cash flow for the six months ended August 31, 2000 was $86.0 million compared to $60.8 million for the same period of the prior year, an increase of $25.2 million or 41.6%. Approximately $7.5 million and $12.4 million of the increase in broadcast/publishing cash flow for the three and six month periods ended August 31, 2000 were the result of our Recent Transactions. Excluding the Recent Transactions, broadcast/publishing cash flow for the three and six months ended August 31, 2000 would have increased $6.0 million and $12.8 million, or 17.8% and 21.4%, respectively. These increases were principally due to increased net revenues partially offset by increased operating expenses as discussed above. 28 International business development expenses for the three months ended August 31, 1999 and 2000 were $0.4 million. International business development expenses for the six months ended August 31, 2000 were $0.8 million compared to $0.7 million for the same period of the prior year. These expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs. Corporate expenses for the three months ended August 31, 2000 were $4.0 million compared to $3.5 million for the same period of the prior year, an increase of $0.5 million or 14.1%. Corporate expenses for the six months ended August 31, 2000 were $7.7 million compared to $6.7 million for the same period of the prior year, an increase of $1.0 million or 15.0%. These increases were due to an increase in the number of corporate employees in all departments as a result of our growth. EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international business development expenses. EBITDA before certain charges for the three months ended August 31, 2000 was $43.0 million compared to $30.0 million for the same period of the prior year, an increase of $13.0 million or 43.1%. EBITDA before certain charges for the six months ended August 31, 2000 was $77.5 million compared to $53.3 million for the same period of the prior year, an increase of $24.2 million or 45.3%. These increases were due to the increases in broadcast/publishing cash flow partially offset by the increases in corporate expenses. Depreciation and amortization expense for the three months ended August 31, 2000 was $14.7 million compared to $10.3 million for the same period of the prior year, an increase of $4.4 million or 42.4%. Depreciation and amortization expense for the six months ended August 31, 2000 was $29.0 million compared to $20.0 million for the same period of the prior year, an increase of $9.0 million or 44.6%. Approximately $4.0 million and $8.2 million of the increase in depreciation and amortization expense for the three and six month periods ended August 31, 2000 were the result of our Recent Transactions. Excluding the Recent Transactions, depreciation and amortization expense for the three and six months ended August 31, 2000 would have increased $0.4 million and $0.8 million, or 4.0% and 4.1%, respectively, due to capital expenditures. Non-cash compensation expense for the three months ended August 31, 2000 was $1.9 million compared to $1.6 million for the same period of the prior year, an increase of $0.3 million or 15.5%. Non-cash compensation expense for the six months ended August 31, 2000 was $3.6 million compared to $2.3 million for the same period of the prior year, an increase of $1.3 million or 55.6%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. These increases were due to higher accruals for anticipated Profit Sharing Plan contributions due to additional employees and higher accruals for performance based compensation under employment agreements as the Company is on pace to meet or exceed various specified performance targets. 29 Interest expense for the three months ended August 31, 2000 was $9.2 million compared to $13.9 million for the same period of the prior year, a decrease of $4.7 million or 34.1%. Interest expense for the six months ended August 31, 2000 was $17.6 million compared to $27.2 million for the same period of the prior year, a decrease of $9.6 million or 35.2%. These decreases reflect lower outstanding debt due to the paydown of debt with the proceeds from our common and preferred stock offerings in October 1999 and our investment from an affiliate of Liberty Media Corporation in November 1999. Other income for the three months ended August 31, 2000 was $14.1 million compared to other expense of $0.1 million for the same period of the prior year. Other income for the six months ended August 31, 2000 was $13.9 million compared to other expense of $0.3 million for the same period of the prior year. Other income for the three and six months ended August 31, 2000 includes a $17.0 million break-up fee received in connection with the sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net of related expenses and an asset valuation adjustment. Liquidity and Capital Resources Capital Requirements Our primary uses of capital have been historically, and are expected to continue to be, funding acquisitions, capital expenditures, working capital and debt and preferred stock service requirements. Acquisitions On August 24, 2000, we acquired the assets of radio stations KKFR-FM in Phoenix, Arizona and KXPK-FM in Denver, Colorado from AMFM, Inc. for $108.0 million as adjusted in accordance with the purchase agreement. Since August 31, 2000, we have completed three acquisitions. On October 2, 2000, we purchased eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $559.5 million in cash and paid $21.5 million for working capital. On October 6, 2000, we acquired the assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. for a cash purchase price of $220.0 million. We also settled outstanding lawsuits by and between Sinclair and us pursuant to the terms of the transaction agreement. On October 6, 2000, we also exchanged radio stations WIL-FM, WRTH-AM and WVRV-FM, which we acquired from Sinclair, as well as radio station WKKX-FM which we already owned (all in the St. Louis, Missouri market), for Bonneville International Corporation's radio station KZLA-FM located in Los Angeles, California. We accounted for each of these acquisitions using the purchase method of accounting. We financed each of these acquisitions through borrowings under our credit facility. We also have two pending acquisitions. On September 18, 2000, we entered into an agreement with Salem Communications Corporation to acquire the assets of radio station KALC-FM in Denver, Colorado for a cash purchase price of $98.8 million. When we signed the acquisition agreement, we paid an additional $1.2 million as a commitment fee and entered into a time brokerage agreement. We expect to begin operating KALC-FM under a time brokerage agreement in October 2000. On June 5, 2000, we entered into an 30 option agreement to acquire the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash. When we signed the option agreement, we made an escrow payment of $20.0 million, which was financed through borrowings under our credit facility. This escrow payment will be used to offset the option price. We began operating these stations on August 1, 2000. Under the terms of the option agreement, Hearst-Argyle has up to three years to identify a suitable television property, which we will then purchase and immediately exchange with Hearst-Argyle for the radio stations. If Hearst is unable to locate a suitable television property by the end of the three years, we have the option to purchase the radio station for $160.0 million in cash. To the extent that the identified station is acquired for a price in excess of our purchase price, Hearst-Argyle will provide the necessary funds to complete the transaction. Recently, Hearst-Argyle publicly announced that it has selected WMUR-TV in Manchester, New Hampshire as the station to be exchanged. Each of these pending acquisitions is subject to customary closing conditions, including approval by the FCC. We expect to complete these transactions by March 2001, and will account for each of them as a purchase. As described below, we plan to obtain additional bank financing to complete these acquisitions. Capital Expenditures Capital expenditures incurred for the six months ended August 31, 2000 were approximately $10.8 million. These capital expenditures primarily related to office and studio construction at certain of our broadcasting properties. Debt Service and Preferred Stock Dividend Requirements As of August 31, 2000, we had $442.0 million of corporate indebtedness outstanding, consisting of our credit facility and our senior subordinated notes, and $19.9 million of other indebtedness. We also had $143.8 million of our preferred stock outstanding. In connection with our recently completed acquisitions of eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. and six radio stations from Sinclair Broadcast Group, Inc., we increased the borrowing capability under our credit facility to $1.0 billion and borrowed an additional $779.0 million to fund the acquisitions. 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 (the margin varies based on our ratio of debt to EBITDA). As of August 31, 2000, our weighted average borrowing rate under our credit facility was approximately 7.3%. Based on amounts currently outstanding under our senior subordinated notes and convertible preferred stock, the debt service and preferred stock dividend requirements for a twelve month period is $24.4 million and $9.0 million, respectively. 31 Sources of Liquidity Our primary sources of liquidity are cash provided by operations and funds available under our credit facility. At August 31, 2000, we had cash and cash equivalents of $10.8 million and net working capital of $36.4 million. After giving effect to our recently completed acquisitions of eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. and six radio stations from Sinclair Broadcast Group, Inc., we have $73.5 million available under our amended credit facility. In connection with the closing of our pending acquisitions, we currently plan to refinance our credit facility with a new facility and increase our borrowing capacity before the end of our current fiscal year. We expect that cash flow from operating activities will be sufficient to fund all working capital, capital expenditures, debt service (including any indebtedness that may be incurred to fund our pending acquisitions), and preferred stock dividend requirements for at least the next twelve months. 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. 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/A for the year ended February 29, 2000. Item 3. Quantitative and Qualitative Disclosures About Market Risk Discussion regarding these items is included in management's discussion and analysis of financial condition and results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal proceedings arising in the ordinary course of business. In the opinion of management of the Company, however, there are no legal proceedings pending against the Company likely to have a material adverse effect on the Company. 32 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 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. * 3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference from Exhibit 3.2 to the Company's Form 10-K/A for the year ended February 29, 2000. * 10.1 Asset Purchase Agreement dated June 19, 2000 between Emmis Communications Corporation and AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM Radio Licenses, LLC, incorporated by reference from Exhibit 10.2 to Form 8-K filed on October 16, 2000. * 15 Letter re: unaudited interim financial information 27 Financial data schedule (Edgar version only) * Previously submitted (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the three months ended August 31, 2000. 33 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMMIS COMMUNICATIONS CORPORATION Date: October 16, 2000 By: /s/ WALTER Z. BERGER Walter Z. Berger Executive Vice President (Authorized Corporate Officer), Chief Financial Officer and Treasurer 34 Exhibit 15 October 16, 2000 Mr. Walter Z. Berger Chief Financial Officer Emmis Communications Corporation One Emmis Plaza 40 Monument Circle Suite 700 Indianapolis, Indiana 46204 Dear Mr. Berger: We are aware that Emmis Communications Corporation has incorporated by reference in its Registration Statements Nos. 33-83890, 333-14657, and 333-42878 its Form 10-Q for the six months ended August 31, 2000, which includes our report dated October 6, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ ARTHUR ANDERSEN LLP ------------------------ ARTHUR ANDERSEN LLP 35