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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Fiscal Year Ended February 28, 2001
[ ] 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.)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common
stock, $.01 par value; 6.25% Series A Cumulative Convertible Preferred Stock,
$.01 par value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part II I of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all documents and
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 aggregate market value of the voting stock held by non-affiliates of the
registrant, as of April 30, 2001, was approximately $1,054,247,000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of April 30, 2001, was:
42,067,639 Class A Common Shares, $.01 par value
5,230,396 Class B Common Shares, $.01 par value
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Proxy Statement for 2001 Annual Meeting Part III
1
EMMIS COMMUNICATIONS CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I ........................................................ 3
Item 1. Business...................................... 3
Item 2. Properties.................................... 19
Item 3. Legal Proceedings............................. 21
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 22
PART II ........................................................ 23
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters................... 23
Item 6. Selected Financial Data....................... 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation.. 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk................................... 34
Item 8. Financial Statements and Supplementary Data... 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ 80
PART III ........................................................ 81
Item 10. Directors and Executive Officers of the
Registrant.................................... 81
Item 11. Executive Compensation........................ 82
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................... 82
Item 13. Certain Relationships and Related Transactions 82
PART IV ........................................................ 82
Item 14. Exhibits and Reports on Form 8-K.............. 82
Signatures ........................................................ 85
2
PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television
broadcasting and magazine publishing operations. We operate the sixth largest
publicly traded radio portfolio in the United States based on total listeners.
The twenty FM radio stations and three AM radio stations we operate in the
United States serve the nation's three largest radio markets of New York City,
Los Angeles and Chicago, as well as Denver, Phoenix, St. Louis, Indianapolis and
Terre Haute, Indiana. The fifteen television stations we operate serve
geographically diverse mid-sized markets in the U.S. as well as the large
markets of Portland and Orlando and have a variety of television network
affiliations, including five with CBS, five with FOX, three with NBC, one with
ABC and one with WB.
Our strategy is to selectively acquire underdeveloped media properties in
desirable markets and then to create value by developing those properties to
increase their cash flow. We find such underdeveloped properties attractive
because they offer greater potential for revenue and cash flow growth than
mature properties. We have been successful in acquiring these types of radio
stations and improving their ratings, revenues and cash flow with our marketing
focus and innovative programming expertise. We have created top-performing radio
stations which rank, in terms of primary demographic target audience share,
among the top ten stations in the New York City, Los Angeles and Chicago radio
markets according to the Fall 2000 Arbitron Survey. We believe that our strong
large-market radio presence and diversity of station formats makes us attractive
to a diverse base of radio advertisers and reduces our dependence on any one
economic sector or specific advertiser.
More recently, we began applying our advertising sales and programming
expertise to our television stations. We view our entry into television as a
logical outgrowth of our radio business and as a platform for diversification.
Like the radio stations we previously acquired, our television stations are
underdeveloped properties located in desirable markets, which can benefit from
innovative, research-based programming and our experienced management team. We
believe we can further improve the ratings, revenues and broadcast cash flow of
our television stations with a more market-focused, research-based programming
approach, a focused sales effort and other related strategies, which have proven
successful with our radio properties.
In addition to our domestic broadcasting properties, we operate news and
agriculture information radio networks in Indiana, publish Texas Monthly, Los
Angeles, Atlanta, Indianapolis Monthly, Cincinnati, Country Sampler, Country
Marketplace and related magazines and Wildlife Journal, have a 59.5% interest in
a national radio station in Hungary and own 75% of one FM and one AM radio
station in Buenos Aires, Argentina. We also engage in various businesses
ancillary to our broadcasting business, such as consulting and broadcast tower
leasing.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting,
enhancing the performance of our broadcast and publishing properties, and
distinguishing ourselves through the quality of our operations. Our strategy has
the following principal components:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets
and innovative programming developed to target specific demographic groups are
the most important determinants of individual radio and television station
success. We conduct extensive market research to identify underserved segments
of the markets we serve or to assure that we are meeting the needs of our target
audience. Utilizing the research results, we concentrate on providing a focused
programming format carefully tailored to the demographics of our markets and our
audiences' preferences.
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EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and
national sales efforts based on advertiser demand and our programming compared
to the competitive formats within each market. We provide our sales force with
extensive training and the technology for sophisticated inventory management
techniques, which provide frequent price adjustments based on regional and
market conditions. We seek to maximize sources of non-traditional, non-spot
revenue and have led the industry in developing "vendor co-op" advertising
revenue. Although this source of advertising revenue is common in the newspaper
and magazine industry, we were among the first radio broadcasters to recognize
and take advantage of the potential of vendor co-op advertising.
DEVELOP STRONG LOCAL STATION IDENTITIES FOR OUR TELEVISION STATIONS. We
strive to create television stations with a strong local "brand" within the
station's market, allowing viewers and advertisers to identify with the station
while building the station's franchise value. We believe that aggressive
promotion and strong local station management, strategies which we have found
successful in our radio operations, are critical to the creation of strong local
television stations as well. Additionally, we believe that the production and
broadcasting of local news and events programming can be an important link to
the community and an aid to the station's efforts to expand its viewership.
Local news and events programming can provide access to advertising sources
targeted specifically to the local or regional community. We believe that strong
local news generates high viewership and results in higher ratings both for
programs preceding and following the news.
PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING
STATION PERFORMANCE. We have built our portfolio by selectively acquiring
underdeveloped media properties in desirable markets at reasonable purchase
prices where our experienced management team has been able to enhance value. We
intend to pursue acquisitions of radio stations, where we believe we can
increase broadcast cash flow, in our current markets. We will also consider
acquisitions of individual radio stations or groups of radio stations in new
markets where we expect we can achieve a leadership position. We believe that
continued consolidation in the radio broadcasting industry will create
attractive acquisition opportunities as the number of potential buyers for radio
assets declines due to government regulations on the number of stations a
company can own in one market. We believe that attractive acquisition
opportunities are also increasingly available in the television broadcasting
industry. We intend to evaluate acquisitions of international broadcasting
stations (typically in conjunction with strong local minority-interest partners)
and magazine publishing properties that present opportunities to capitalize on
our management expertise to enhance cash flow at attractive purchase price
multiples with minimal capital requirements.
ENCOURAGE AN ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that
broadcasting is primarily a local business and that much of its success is the
result of the efforts of regional and local management and staff. We have
attracted and retained an experienced team of broadcast professionals who
understand the viewing and listening preferences, demographics and competitive
opportunities of their particular market. Our decentralized approach to station
management gives local management oversight of station spending, long-range
planning and resource allocation at their individual stations, and rewards all
employees based on those stations' performance. In addition, we encourage our
managers and employees to own a stake in the company, and over 95% of all
full-time employees have an equity ownership position in Emmis. We believe that
our entrepreneurial management approach has created a distinctive corporate
culture, making Emmis a highly desirable employer in the broadcasting industry
and significantly enhancing our ability to attract and retain experienced and
highly motivated employees and management.
4
RADIO AND TELEVISION STATIONS
The following tables set forth certain information regarding our radio and
television stations and their broadcast markets.
RADIO STATIONS
In the following table, "Market Rank by Revenue" is the ranking of the market
revenue size of the principal radio market served by the station among all radio
markets in the United States. Market revenue and ranking figures are from
Duncan's Radio Market Guide (2000 ed.). We own a 40% equity interest in the
publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic
Target" is the ranking of the station among all radio stations in its market
based on the Fall 2000 Arbitron Survey. A "t" indicates the station tied with
another station for the stated ranking. "Station Audience Share" represents a
percentage generally computed by dividing the average number of persons over age
12 listening to a particular station during specified time periods by the
average number of such persons for all stations in the market area as determined
by Arbitron.
RANKING IN
STATION MARKET PRIMARY PRIMARY STATION
AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
LOS ANGELES, CA 1
KPWR-FM Contemporary Hit/Urban 12-24 1 4.3
KZLA-FM Country 25-54 11t 2.6
NEW YORK, NY 2
WQHT-FM Contemporary Hit/Urban 12-24 1 5.5
WRKS-FM Classic Soul/Smooth 25-54 4 3.8
R&B
WQCD-FM Contemporary Jazz 25-54 6 3.2
Chicago, IL 3
WKQX-FM Alternative Rock 18-34 3 2.9
Phoenix, AZ 14
KKFR-FM Contemporary Hit/Urban 18-34 2 4.9
KKLT-FM Soft 25-54 8 3.7
Adult/Contemporary
KTAR-AM News/Talk/Sports 35-64 5t 5.6
KMVP-AM Sports 25-54 20t 0.9
Denver, CO 15
KXPK-FM 80's Rock 18-34 9 3.3
KALC-FM Modern Rock 25-54 9 3.1
St. Louis, MO 18
KSHE-FM Album Oriented Rock 25-54 3t 4.4
WMLL-FM* 80's Rock 18-34 4 2.6
KPNT-FM Alternative Rock 18-34 3 3.3
KIHT-FM 70's Rock 25-54 6 3.9
KFTK-FM Talk 25-54 21 0.9
Indianapolis, IN 31
WENS-FM Adult Contemporary 25-54 3 5.5
WIBC-AM News/Talk/Sports 35-64 3t 9.1
WNOU-FM Contemporary Hit 18-34 7t 4.7
WYXB-FM** Soft 25-54 - -
Adult/Contemporary
Terre Haute, IN 172
WTHI-FM Country 25-54 1 22.3
WWVR-FM Classic Rock 25-54 2 12.2
* On September 17, 2000, Emmis changed the call letters of WXTM-FM to WMLL-FM
and changed the format to 80's Rock.
** On February 14, 2001, Emmis changed the call letters of WTLC-FM to WYXB-FM
and changed the format to Soft Adult/Contemporary.
5
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company
("Nielsen") as of January 2001. Rankings are based on the relative size of a
station's market among the 210 generally recognized Designated Market Areas
("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the
number of television stations ("Reportable Stations") designated by Nielsen as
"local" to the DMA, excluding public television stations and stations which do
not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience
of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to
midnight time period. "Station Rank" reflects the station's rank relative to
other Reportable Stations based upon the DMA rating as reported by Nielsen from
9:00 a.m. to midnight, Sunday through Saturday during November 2000. "Station
Audience Share" reflects an estimate of the share of DMA households viewing
television received by a local commercial station in comparison to other local
commercial stations in the market as measured from 9:00 a.m. to midnight, Sunday
through Saturday.
NUMBER OF STATION
TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE
- ---------- --------------- ------ ---------- ------------------- -------
WKCF-TV Orlando, FL 21 WB/18 6 5 6
KOIN-TV Portland, OR 23 CBS/6 6 3 9
WVUE-TV New Orleans, LA 42 Fox/8 6 3 10
KRQE-TV Albuquerque, NM 50 CBS/13 6 3 11
WSAZ-TV Huntington, WV-
Charleston, WV 61 NBC/3 4 1 19
WALA-TV Mobile,
AL-Pensacola, FL 62 Fox/10 5 3 10
KSNW-TV Wichita, KS 65 NBC/3 4 2 15
WLUK-TV Green Bay, WI 69 Fox/11 6 3t 9
KGUN-TV Tucson, AZ 71 ABC/9 6 1 15
KGMB-TV (1) Honolulu, HI 72 CBS/9 5 2 13
KHON-TV (1) Honolulu, HI 72 Fox/2 5 1t 14
KMTV-TV Omaha, NE 75 CBS/3 5 2t 14
WFTX-TV Fort Myers, FL 81 Fox/36 4 4 7
KSNT-TV Topeka, KS 138 NBC/27 4 2 12
WTHI-TV Terre Haute, IN 139 CBS/10 3 1 20
(1) We are required by FCC rules to sell one of these stations by October 1,
2001 and we are currently exploring various possibilities.
Emmis also owns and operates nine satellite stations that primarily
re-broadcast the signal of certain of our local stations. A local station and
its satellite station are considered one station for FCC and multiple ownership
purposes, provided that the stations are in the same market.
RADIO NETWORKS
In addition to our other radio broadcasting operations, we own and operate
two radio networks. Network Indiana provides news and other programming to
nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides
farm news, weather information and market analysis to radio stations across
Indiana.
6
PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Monthly
Paid Year
Circulation Acquired
Regional Magazines:
Texas Monthly 300,000 1998
Los Angeles 180,000 2000
Atlanta 65,000 1993
Indianapolis Monthly 45,000 1988
Cincinnati Magazine 22,000 1997
Specialty Magazines*:
Country Sampler 465,000 1999
Country Marketplace N/A 1999
* Our specialty magazines are circulated bimonthly.
INTERNET AND NEW TECHNOLOGIES
We believe that the development and explosive growth of the Internet present
not only a challenge, but an opportunity for broadcasters and publishers. The
challenge is, primarily, increased competition for the time and attention of our
listeners, viewers and readers. The opportunity is to further enhance the
relationships we already have with our listeners, viewers and readers by
expanding products and services offered by our stations and magazines. For that
reason, we worked with other media companies to put together a local media
internet venture (LMIV). The LMIV is premised on the idea that each station's or
magazine's website would be the entry way into a backbone of internet content
provided by a national, or even international, aggregation of media companies.
The goal of LMIV is to capitalize on the individual relationships between each
station or magazine and its listeners, viewers or readers by allowing each
station's or magazine's website to reflect the character of the station or
magazine. When fully implemented, the LMIV will also capitalize on the
potentially tremendous economies of scale provided by the stations' and
magazines' aggregated websites.
We believe that there are opportunities to improve and expand our television
operations utilizing new technologies such as those that capitalize on the
digital spectrum and the Internet. Along with several other major television
broadcasters and local stations, we have invested in iBlast Networks, the
nation's largest network for over-the-air distribution of digital content,
applications and services.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the
communities we serve. To that end, each of our stations participates in many
community programs, fundraisers and activities that benefit a wide variety of
organizations. Charitable organizations that have been the beneficiaries of our
marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, The March of Dimes, American Cancer Society, Riley Children's
Hospital and research foundations seeking cures for cystic fibrosis, leukemia
and AIDS and helping to fight drug abuse. In addition to our planned activities,
our stations and magazines take leadership roles in community responses to
natural disasters.
7
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry organizations.
Our senior managers have served in various capacities with industry
associations, including as directors of the National Association of
Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the
Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding
members of the Radio Operators Caucus. In addition, our managers have been voted
Radio President of the Year and General Manager of the Year, and at various
times we have been voted Most Respected Broadcaster in polls of radio industry
chief executive officers and managers.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (and, as amended by the Telecommunications Act of 1996 (the
"1996 Act"), the "Communications Act"). Television or radio broadcasting is
prohibited except in accordance with a license issued by the FCC upon a finding
that the public interest, convenience and necessity would be served by the grant
of such license. The FCC has the power to revoke licenses for, among other
things, false statements made in applications or willful or repeated violations
of the Communications Act or of FCC rules. In general, the Communications Act
provides that the FCC shall allocate broadcast licenses for television and radio
stations in such manner as will provide a fair, efficient and equitable
distribution of service throughout the United States. The FCC determines the
operating frequency, location and power of stations; regulates the equipment
used by stations; and regulates numerous other areas of television and radio
broadcasting pursuant to rules, regulations and policies adopted under authority
of the Communications Act. The Communications Act, among other things, prohibits
the assignment of a broadcast license or the transfer of control of an entity
holding such a license without the prior approval of the FCC. Under the
Communications Act, the FCC also regulates certain aspects of the operation of
cable television systems and other electronic media that compete with broadcast
stations.
The following is a brief summary of certain provisions of the Communications
Act and of specific FCC regulations and policies. Reference should be made to
the Communications Act as well as FCC rules, public notices and rulings for
further information concerning the nature and extent of federal regulation of
radio and television stations. Other legislation has been introduced from time
to time which would amend the Communications Act in various respects and the FCC
from time to time considers new regulations or amendments to its existing
regulations. We cannot predict whether any such legislation will be enacted or
new or amended FCC regulations will be adopted or what their effect would be on
Emmis.
8
LICENSE RENEWAL. Radio and television stations operate pursuant to broadcast
licenses that are ordinarily granted by the FCC for maximum terms of eight years
and are subject to renewal upon application to the FCC. Our licenses currently
have the following expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 2004
WKQX-FM (Chicago) December 1, 2004
KSHE-FM (St. Louis) February 1, 2005
KPWR-FM (Los Angeles) December 1, 2005
WQHT-FM (New York) June 1, 2006
WQCD-FM (New York) June 1, 2006
WIBC-AM (Indianapolis) August 1, 2004
WNOU-FM (Indianapolis) August 1, 2004
WRKS-FM (New York) June 1, 2006
WMLL-FM (St. Louis) December 1, 2004
WYXB-FM (Indianapolis) August 1, 2004
WTHI-FM (Terre Haute) August 1, 2004
WWVR-FM (Terre Haute) August 1, 2004
WTHI-TV (Terre Haute) August 1, 2005
WFTX-TV (Fort Myers) February 1, 2005
WALA-TV (Mobile) April 1, 2005
WVUE-TV (New Orleans) June 1, 2005
WLUK-TV (Green Bay) December 1, 2005
KHON-TV (Honolulu) February 1, 2007
KAII-TV (Maui) February 1, 2007
KHAW-TV (Hawaii) February 1, 2007
WKCF-TV (Orlando) February 1, 2005
KXPK-FM (Denver) April 1, 2005
KALC-FM (Denver) April 1, 2005
KZLA-FM (Los Angeles) December 1, 2005
KKLT-FM (Phoenix) October 1, 2005
KKFR-FM (Phoenix) October 1, 2005
KTAR-AM (Phoenix) October 1, 2005
KMVP-AM (Phoenix) October 1, 2005
KFTK-FM (St. Louis) February 1, 2005
KIHT-FM (St. Louis) February 1, 2005
KPNT-FM (St. Louis) February 1, 2005
KOIN-TV (Portland) February 1, 2007
KRQE-TV (Albuquerque) October 1, 2006
WSAZ-TV (Huntington) October 1, 2004
KSNW-TV (Wichita) June 1, 2006
KGMB-TV (Honolulu) February 1, 2007
KMTV-TV (Omaha) June 1, 2006
KGUN-TV (Tucson) October 1, 2006
KSNT-TV (Topeka) June 1, 2006
KREZ-TV (Durango) April 1, 2006
KBIM-TV (Roswell) October 1, 2006
KSNG-TV (Garden City) June 1, 2006
KSNC-TV (Great Bend) June 1, 2006
KSNK-TV (McCook-Oberlin) June 1, 2006
KGMD-TV (Hawaii) February 1, 2007
KGMV-TV (Maui) February 1, 2007
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Under the Communications Act, at the time an application is filed for renewal
for a station license, parties in interest, as well as members of the public,
may apprise the FCC of the service the station has provided during the preceding
license term and urge the denial of the application. If such a petition to deny
presents information from which the FCC concludes (or if the FCC concludes on
its own motion) that there is a "substantial and material" question as to
whether grant of the renewal application would be in the public interest under
applicable rules and policy, the FCC may conduct a hearing on specified issues
to determine whether the renewal application should be granted. The
Communications Act provides for the grant of a renewal application upon a
finding by the FCC that the licensee:
o has served the public interest, convenience and necessity;
o has committed no serious violations of the Communications Act or the FCC
rules; and
o has committed no other violations of the Communications Act or the FCC
rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny the renewal application,
and only then may the FCC consider competing applications for the same
frequency. In a vast majority of cases, the FCC renews a broadcast license even
when petitions to deny have been filed against the renewal application.
OWNERSHIP RESTRICTIONS. Under the FCC rules, with limited exceptions, the
number of radio stations that may be owned by one entity in a given radio market
is dependent upon the number of commercial radio stations in that market:
o if the market has 45 or more commercial radio stations, one entity may own up
to eight stations, not more than five of which may be in the same service (AM
or FM);
o if the market has between 30 and 44 commercial radio stations, one entity may
own up to seven stations, not more than four of which may be in the same
service;
o if the market has between 15 and 29 commercial radio stations, a single
entity may own up to six stations, not more than four of which may be in the
same service; and
o if the market has fourteen or fewer commercial radio stations, one entity may
own up to five stations, not more than three of which may be in the same
service, except that one entity may not own more than fifty percent of the
stations in the market.
Each of the markets in which our radio stations are located has at least 15
commercial radio stations.
Pursuant to the 1996 Act, the FCC substantially revised its local television
ownership rules (including its television "duopoly" rule and radio/television
cross-ownership rule) in an August 1999 decision, as modified by a January 2001
reconsideration order. The FCC's revised television duopoly rule permits an
entity to own two or more television stations in separate Designated Market
Areas ("DMAs"). The rule also permits an entity to own two or more television
stations in the same DMA if:
o the coverage areas of the stations do not overlap, or
o at least eight, independently-owned and -operated full-power non-commercial
and commercial operating stations will remain in the marker post-merger, and
one of the two commonly-owned stations is not among the top four television
stations in the market (based on audience share ratings).
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The Commission will consider permanent waivers of its revised television
duopoly rule where:
o one of the stations is a "failed station," i.e., off-air for more than
four months, or involved in an involuntary bankruptcy proceeding;
o one of the stations is a "failing station," i.e., having a low audience
share and financially struggling; or
o one of the stations is an unbuilt facility, where the permittee
has made substantial progress towards constructing the facility.
Our acquisition of the Lee Enterprises stations required a waiver of the
television duopoly rule because the signals of KHON-TV and KGMB-TV (one of the
Lee Enterprises stations) overlap, the stations serve the same market, and both
stations are rated among the top four in that market. In approving the
acquisition, the FCC granted a temporary waiver of the rule, ordering that an
application for divestiture of either KHON-TV or KGMB-TV (plus associated
"satellite" stations) be filed on or before April 1, 2001; that deadline was
subsequently extended at our request to October 1, 2001.
The FCC's revised radio/television cross-ownership rule generally permits the
common ownership of the following combinations in the same market, to the extent
permitted under the FCC's television duopoly rule:
o up to two commercial television stations and six commercial radio stations or
one commercial television station and seven commercial radio stations in a
market where at least 20 independent media voices will remain post-merger;
o up to two commercial television stations and four commercial radio stations
in a market where at least 10 independent media voices will remain
post-merger; and
o two commercial television stations and one commercial radio station in a
market regardless of the number of independent media voices that will remain
post-merger.
The Commission will consider permanent waivers of its revised radio/television
cross-ownership rule only if one of the stations is a "failed station."
Pursuant to the 1996 Act, the FCC also revised its restriction on the
national ownership of television stations in an August 1999 decision, as
reaffirmed by a January 2001 order. The revised FCC rules restrict the ownership
of television stations on a nationwide basis to stations serving, in the
aggregate, no more than 35 percent of the total national audience. Certain group
owners have filed comments with the FCC and/or appeals in the U.S. Court of
Appeals for the District of Columbia Circuit (the "D.C. Circuit") seeking
elimination, or at least relaxation, of this limit. In early April 2001, the
D.C. Circuit granted Viacom/CBS a stay of the May 2001 deadline that the FCC had
set for the network to divest certain of its television stations in order to
come into compliance with the 35 percent cap. It is anticipated that the stay
will remain in effect until the court rules on the merits of Viacom's challenge
to the ownership cap. We cannot predict the ultimate outcome of these
proceedings or the impact, if any, that they will have on our business.
Moreover, current FCC rules prohibit common ownership of a daily newspaper
and a radio or television station in the same market. The FCC is expected to
initiate a proceeding in the near future proposing to eliminate, or at least
relax, this restriction. FCC rules also currently prohibit common ownership of a
television station and a cable television system in the same market.
Under the 1996 Act, the FCC is required to review all of its broadcast
ownership rules every two years to determine whether the public interest
dictates that such rules be repealed or modified. We cannot predict the outcome
of any future biennial reviews of the FCC's broadcast ownership rules or the
impact they may have on our business.
11
ALIEN OWNERSHIP RESTRICTIONS. Under the Communications Act, no FCC license
may be held by a corporation if more than one-fifth of its capital stock is
owned or voted by aliens or their representatives, a foreign government or
representative thereof, or an entity organized under the laws of a foreign
country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act
provides that no FCC license may be granted to an entity directly or indirectly
controlled by another entity of which more than one-fourth of its capital stock
is owned or voted by Non-U.S. Persons if the FCC finds that the public interest
will be served by the denial of such license. The FCC staff has interpreted this
provision to require an affirmative public interest finding to permit the grant
or holding of a license, and such a finding has been made only in limited
circumstances. The foregoing restrictions on alien ownership apply in modified
form to other types of business organizations, including partnerships and
limited liability companies. Our Amended and Restated Articles of Incorporation
and Code of By-Laws authorize the Board of Directors to prohibit such restricted
alien ownership, voting or transfer of capital stock as would cause Emmis to
violate the Communications Act or FCC regulations.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC
requires the "attribution" of broadcast licenses held by a broadcasting company
to certain of the company's stockholders, officers or directors, such that there
would be a violation of FCC regulations where such a stockholder, officer or
director and the broadcasting company together held more than the permitted
number of stations or a prohibited combination of media outlets in the same
market. The FCC's attribution rules generally deem the following relationships
and interests to be attributable for purposes of the FCC's ownership
restrictions:
o all officers and directors of a licensee and its (in)direct parent(s);
o voting stock interests of at least five percent;
o stock interests of at least 20 percent, if the holder is a passive
institutional investor (i.e., investment companies, insurance companies,
banks);
o any equity interest in a limited partnership or limited liability company
where the limited partner or member is "materially involved" in the
media-related activities of the LP or LLC;
o equity and/or debt interests which, in the aggregate, exceed 33 percent of
the total asset value of a station or other media entity (the "equity/debt
plus policy"), if the interest holder supplies more than 15 percent of the
station's total weekly programming (usually pursuant to a time brokerage,
local marketing or network affiliation agreement) or is a same-market media
entity (i.e., broadcast company, cable operator or newspaper).
To assess whether a voting stock interest in a direct or indirect parent
corporation of a broadcast licensee is attributable, the FCC uses a "multiplier"
analysis in which non-controlling voting stock interests are deemed
proportionally reduced at each non-controlling link in a multi-corporation
ownership chain. Emmis' Amended and Restated Articles of Incorporation and
By-Laws authorize the Board of Directors to prohibit any ownership, voting or
transfer of its capital stock which would cause Emmis to violate the
Communications Act or FCC regulations.
In the January 2001 attribution reconsideration order, the FCC eliminated its
"single majority shareholder exemption" from attribution which theretofore had
provided that, in cases where one person or entity (such as Jeffrey H. Smulyan
in the case of Emmis) held more than 50 percent of the combined voting power of
the common stock of a broadcasting company, a minority shareholder of the
company generally would not be deemed to hold an attributable interest in the
company. Although the FCC eliminated the single majority shareholder exemption,
it grandfathered minority interests in broadcasting companies with single
majority shareholders where the interests were acquired prior to December 4,
2000 (the adoption date of the January 2001 reconsideration order). Accordingly,
any minority interests in Emmis acquired on or after December 4, 2000 will not
be exempt from attribution, despite Mr. Smulyan's majority interest; however,
any such interests acquired
12
prior to this date (i.e., grandfathered minority interests) will remain
exempt from attribution so long as Mr. Smulyan continues to hold more than 50
percent of the combined voting power of Emmis' common stock. In the event that
Mr. Smulyan no longer holds more than 50 percent of the voting power, the
interests of grandfathered minority shareholders which had theretofore been
considered nonattributable would become attributable, such that any other media
interests held by these shareholders would be combined with Emmis' media
interests for purposes of determining compliance with FCC ownership rules. Mr.
Smulyan's level of voting control could decrease to or below 50 percent as a
result of transfers of common stock pursuant to agreement or conversion of the
Class B Common Stock into Class A Common Stock. In the event of noncompliance
with the FCC's attribution rules, steps required to achieve compliance could
include divestitures by either the shareholder or Emmis, as the situation
dictates. Further, an attributable interest of any shareholder (including
grandfathered minority interests) in another broadcast station or other media
entity in a market where Emmis owns or seeks to acquire a station is still
subject to review by the FCC under its "equity/debt plus policy," and could
result in Emmis being unable to obtain one or more FCC authorizations needed to
conduct its broadcast business or FCC consents necessary for future
acquisitions. Conversely, Emmis' media interests could operate to restrict other
media investments by shareholders having or acquiring an interest in Emmis.
ASSIGNMENTS AND TRANSFERS OF CONTROL. The Communications Act prohibits the
assignment of a broadcast license or the transfer of control of a broadcast
licensee without the prior approval of the FCC. In determining whether to grant
such approval, the FCC considers a number of factors, including compliance with
the various rules limiting common ownership of media properties, the "character"
of the licensee and those persons holding attributable interests therein,
compliance with the Communications Act's limitations on alien ownership as well
as other statutory and regulatory requirements. When evaluating an assignment or
transfer of control application, the FCC is prohibited from considering whether
the public interest might be served by an assignment of the broadcast license or
transfer of control of the licensee to a party other than the assignee or
transferee specified in the application.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it developed to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. However, licensees continue to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. Federal law
prohibits the broadcast of obscene material and regulates the broadcast of
indecent material, which is subject to enforcement action by the FCC. Complaints
from listeners concerning a station's programming often will be considered by
the FCC when it evaluates the licensee's renewal applications, although such
complaints may be filed by concerned parties and considered by the FCC at any
time. Stations also must pay regulatory and application fees and follow various
rules promulgated under the Communications Act that regulate, among other
things, political advertising, sponsorship identification, contest and lottery
advertisements, and technical operations, including limits on radio frequency
radiation.
In 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"). Certain provisions of this law,
such as signal carriage and retransmission consent, have a direct effect on
television broadcasting.
In April 1997, the FCC adopted rules that require television broadcasters
to provide digital television ("DTV") to consumers. The FCC also adopted a table
of allotments for DTV, which assigns eligible broadcasters a second channel on
which to provide DTV service. The FCC's DTV allotment plan is based on the use
of a "core" DTV spectrum between channels 2-51. Although the Communications Act
mandates that each television station return one of its two channels to the FCC
by the end of 2006, the Balanced Budget Act of 1997 may effectively extend the
transition deadline in some markets by allowing broadcasters to keep both their
analog and digital licenses until at least 85 percent of television households
in their respective markets can receive a digital signal. Local zoning laws
13
and the lack of qualified tall-tower builders to construct the facilities
necessary for DTV operations, among other factors, including the pace of DTV
production and sales, may cause delays in the DTV transition. The FCC has
announced that it will review the progress of DTV every two years and make
adjustments to the 2006 target date, if necessary.
Television broadcasters are allowed to use their DTV channels according to
their best business judgment, provided that they continue to offer at least one
free programming service that is at least comparable to today's analog service.
Digital services and programming can include multiple standard definition
program channels, data transfer, subscription video, interactive materials, and
audio signals (so-called "ancillary" services). The FCC has imposed a fee of
five percent of the annual gross revenues for television broadcasters' use of
the DTV spectrum to offer ancillary services (i.e., subscription services). The
form and amount of these fees may have a significant effect on the profitability
of such services. Broadcasters will not be required to air "high definition"
programming or, initially, to simulcast their analog programming on the digital
channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets
were required to be on the air with a digital signal by May 1, 1999, and
affiliates of those networks in markets 11-30, including KOIN-TV, were required
to be on the air with a digital signal by November 1, 1999; KOIN-TV complied
with this deadline. The remaining commercial stations, including all other
television stations owned by Emmis, were required to file DTV construction
permit applications by November 1, 1999 and are required to be on the air with a
digital signal by May 1, 2002. Emmis timely filed DTV construction permit
applications for all of its television stations.
In January 2001, the FCC issued a further order on DTV transition issues,
setting a number of deadlines for commercial broadcasters. By the end of
December 2003, commercial stations with both analog and digital channel
assignments within the DTV core spectrum (channels 2-51) must elect the channel
they will use for broadcasting after the transition is complete. By the end of
December 2004, commercial broadcasters not replicating their existing analog
service areas will lose interference protection in those portions of their
existing service areas not covered by their digital signals. Also by the end of
December 2004, commercial broadcasters must provide a stronger digital signal to
their communities of license than was previously required.
In December 1999, the FCC initiated a proceeding to determine the extent of
television broadcasters' public interest obligations during and after the
transition to DTV service. In October 2000, the Commission furthered this
proceeding by requesting comment on specific proposals to "standardize and
enhance" public interest disclosure requirements for analog and digital
broadcast licensees during and after the DTV transition. The FCC sought comment
on a proposal which would require broadcasters to use a standardized form to
provide information on how their stations serve the public interest and on a
proposal which would require broadcasters to make the contents of a station's
public inspection file available on a web site. In October 2000, the FCC also
solicited comment on the implementation of broadcasters' children's television
programming obligations during and after the DTV transition and on whether
broadcasters should be required to provide quarterly reports of their children's
programming activities on a web site. These proceedings remain pending at the
Commission, and we cannot predict the outcomes or what impact, if any, the
outcomes will have on our business.
The FCC currently is considering cable operators' obligations to carry the
digital signals of broadcast television stations, including the obligations that
should exist during the DTV transition period, when broadcasters' analog and
digital signals will be operating simultaneously. In January 2001, the FCC
resolved a number of technical and legal issues concerning cable must carry
rights of digital broadcast signals, including a determination that digital-only
television stations are entitled to carriage of a single programming stream. The
FCC also tentatively concluded, however, that the dual carriage of both a
broadcaster's analog and digital signals will not be required during the DTV
transition. The Commission currently is seeking further comment on this issue.
We cannot predict whether the FCC will adopt "must carry" requirements for both
analog and digital
14
Television signals during the DTV transition period or the effect of such
an FCC decision on our television stations.
Responding to the potential problems that DTV allotments posed to low-power
television ("LPTV") broadcasters (which must "yield" to full-power television
stations), Congress enacted the Community Broadcasters Protection Act of 1999
("CBPA") in November 1999. CBPA allows qualifying LPTV stations to receive a new
type of television station license called a "Class A" license. An LPTV station
holding a Class A license will no longer be required to yield to full-power
stations; rather, it will be protected from interference from such stations.
However, full-service television stations were permitted to file applications to
"maximize" (expand the coverage of) their DTV facilities by filing a notice of
intent to maximize with the FCC on or before December 31, 1999, and filing a
bona fide application to maximize on or before May 1, 2000. Stations meeting
those requirements will have their "maximized" DTV facilities protected from
interference by Class A stations. Emmis timely filed a Notice of Intent for each
of its television stations and "maximization applications" in those cases where
it was deemed appropriate.
The FCC has authorized the provision of video programming directly to home
subscribers through high-powered direct broadcast satellites ("DBS"). DBS
systems currently are capable of broadcasting over 500 channels of digital
television service directly to subscribers' equipment with 18-inch receiving
dishes and decoders. At this time, several entities provide DBS service to
consumers throughout the country. Other entities hold DBS licenses, but have not
yet commenced service. DBS operators may not import distant network signals into
local television markets unless the individual household that would receive the
distant network signal is not capable of receiving a sufficiently strong
"over-the-air" signal of the local affiliate of the given network. In November
1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which
authorizes DBS companies to provide local television signals to their
subscribers. During the first six months following enactment of the law, the
local television signal could be provided without the consent of the station.
Following the initial six-month period, DBS companies have been permitted to
provide the signals of local television stations to their subscribers only
pursuant to a retransmission consent agreement with the station. In March 2000,
the FCC adopted regulations governing the statutory requirements for "good
faith" negotiations and non-exclusive agreements in retransmission consent
contracts between broadcasters (and all MVPDs). Broadcasters are required to
negotiate non-exclusive retransmission consent agreements in good faith until
January 1, 2006; however, the law explicitly provides that broadcasters may
enter into agreements with competing DBS carriers on different terms. Moreover,
effective January 1, 2002, local television stations will be entitled to
"must-carry" rights on a DBS system if the system is providing any local
television station(s) to its subscribers. SHVIA also "grandfathered" delivery of
the signals of television stations via DBS to certain subscribers who may have
been receiving such signals in violation of prior law. In November 2000, the FCC
adopted rules to implement SHVIA provisions regarding "local-into-local"
satellite service, must-carry election cycle rules and related policies for
satellite carriage of broadcast signals. Under the new FCC rules, a broadcast
television station must affirmatively elect must-carry status to require a DBS
operator to carry its station; the first elections are due July 1, 2001. A case
currently is pending in the D.C. Circuit in which DBS operators are challenging
SHVIA's must-carry requirements.
There are FCC rules and policies, and rules and policies of other federal
agencies, that regulate matters such as the use of auctions to resolve
completing application requests, network-affiliate relations, the ability of
stations to obtain exclusive rights to air syndicated programming, cable
systems' carriage of syndicated and network programming on distant stations,
political advertising practices, application procedures and other areas
affecting the business or operations of broadcast stations.
Failure to observe FCC rules and policies can result in the imposition of
various sanctions, including monetary fines, the grant of "short" (less than the
maximum term) license renewal terms or, for particularly egregious violations,
the denial of a license renewal application or the revocation of a license.
15
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission adopted rules
implementing a new low power FM ("LPFM") service. A case is pending in the D.C.
Circuit which seeks to prohibit the FCC from going forward with LPFM, citing
potential interference to existing broadcasters and the lack of a proper
cost/benefit analysis of the new service. We cannot predict whether any LPFM
stations will interfere with the coverage of our radio stations.
The FCC has also authorized satellite delivery of digital audio radio service
("SDARS") on a nationwide basis. This solicited comment on a proposal to permit
SDARS to be supplemented by terrestrial "repeating" transmitters designed to
fill "gaps" in satellite coverage. In late 2000 and early 2001, the SDARS
licensees submitted to the FCC successful test results for various U.S. cities;
nationwide commercial operation is expected to commence in mid-2001. The FCC has
not yet adopted rules governing the installation and use of terrestrial
"repeating" transmitters. We cannot predict the impact of SDARS on our radio
stations' listenership.
In November 1999, the Commission released proposed rules for terrestrial
digital audio broadcasting ("DAB"). The proposed rules would permit existing AM
and FM stations to operate on their current frequencies in either full analog
mode, full digital mode, or a combination of both (at reduced power). DAB
technology is still evolving, and it is not yet certain whether DAB transmission
as proposed will be feasible.
Congress and the FCC have under consideration, and may in the future consider
and adopt, new laws, regulations and policies regarding a wide variety of
matters that could, directly or indirectly, affect the operation, ownership and
profitability of our broadcast stations, result in the loss of audience share
and advertising revenues for our broadcast stations and/or affect our ability to
acquire additional broadcast stations or finance such acquisitions. Such matters
include, but are not limited to:
o proposals to impose spectrum use or other fees on FCC licensees;
o proposals to repeal or modify some or all of the FCC's multiple ownership
rules and/or policies;
o proposals to change rules relating to political broadcasting;
o technical and frequency allocation matters;
o AM stereo broadcasting;
o proposals to permit expanded use of FM translator stations;
o proposals to restrict or prohibit the advertising of beer, wine and other
alcoholic beverages on to tighten safety guidelines relating to radio
frequency radiation exposure; and radio;
o proposals permitting FM stations to accept formerly impermissible
interference;
o proposals to reinstate holding periods for licenses;
o changes to broadcast technical requirements, including those relative to the
implementation of SDARS and DAB;
o proposals to limit the tax deductibility of advertising expenses by
advertisers.
We cannot predict whether any proposed changes will be adopted, what other
matters might be considered in the future, or what impact, if any, the
implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference should be made to
the Communications Act as well as FCC regulations, public notices and rulings
for further information concerning the nature and extent of federal regulation
of broadcast stations.
16
ADVERTISING SALES
Our stations derive their advertising revenue from local and regional
advertising in the marketplaces in which they operate, as well as from the sale
of national advertising. Local and most regional sales are made by a station's
sales staff. National sales are made by firms specializing in such sales which
are compensated on a commission-only basis. We believe that the volume of
national advertising revenue tends to adjust to shifts in a station's audience
share position more rapidly than does the volume of local and regional
advertising revenue.
We have led the industry in developing "vendor co-op" advertising revenue
(i.e., revenue from a manufacturer or distributor which is used to promote its
particular goods together with local retail outlets for those goods). Although
this source of advertising revenue is common in the newspaper and magazine
industry, we were among the first radio broadcasters to recognize, and take
advantage of, the potential of vendor co-op advertising. Our Revenue Development
Systems division has established a network of radio stations which share
information about sources of vendor co-op revenue. In addition, each of our
stations has a salesperson devoted exclusively to the development of cooperative
advertising. We also use this approach at our television stations. In March
1999, we acquired substantially all of the assets of the Co-Opportunities
division of Jefferson-Pilot Communications. We believe that the business of
Co-Opportunities (which focuses more on co-op advertising for television
stations and cable systems) provides an excellent complement to Revenue
Development Systems.
COMPETITION
Radio and television broadcasting stations compete with the other
broadcasting stations in their respective market areas, as well as with other
advertising media such as newspapers, magazines, outdoor advertising, transit
advertising, the Internet and direct mail marketing. Cable systems generally do
not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that otherwise would have been
offered to local television stations. Competition within the broadcasting
industry occurs primarily in individual market areas, so that a station in one
market (e.g., New York) does not generally compete with stations in other
markets (e.g., Chicago). In each of our markets, our stations face competition
from other stations with substantial financial resources, including stations
targeting the same demographic groups. In addition to management experience,
factors which are material to competitive position include the station's rank in
its market in terms of the number of listeners or viewers, authorized power,
assigned frequency, audience characteristics, local program acceptance and the
number and characteristics of other stations in the market area. We attempt to
improve our competitive position with programming and promotional campaigns
aimed at the demographic groups targeted by our stations, and through sales
efforts designed to attract advertisers that have done little or no broadcast
advertising by emphasizing the effectiveness of radio and television advertising
in increasing the advertisers' revenues. Changes in the policies and rules of
the FCC permit increased joint ownership and joint operation of local stations.
Those stations taking advantage of these joint arrangements (including our New
York, Los Angeles, Denver, Phoenix, St. Louis, Indianapolis and Terre Haute
clusters) may in certain circumstances have lower operating costs and may be
able to offer advertisers more attractive rates and services. Although we
believe that each of our stations can compete effectively in its market, there
can be no assurance that any of our stations will be able to maintain or
increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, some barriers to
entry exist. The operation of a broadcasting station in the United States
requires a license from the FCC, and the number of stations that can operate in
a given market is limited by the availability of the frequencies that the FCC
will license in that market, as well as by the FCC's multiple ownership rules
regulating the number of stations that may be owned and controlled by a single
entity.
17
The broadcasting industry historically has grown in terms of total revenues
despite the introduction of new technology for the delivery of entertainment and
information, such as cable television, The Internet, satellite television, audio
tapes and compact discs. We believe that radio's portability in particular makes
it less vulnerable than other media to competition from new methods of
distribution or other technological advances. There can be no assurance,
however, that the development or introduction in the future of any new media
technology will not have an adverse effect on the radio or television
broadcasting industry.
EMPLOYEES
As of February 28, 2001 Emmis had approximately 2,628 full-time employees and
approximately 515 part-time employees. We have approximately 268 employees at
various radio and television stations represented by unions. We consider
relations with our employees to be good.
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one
national radio station located in Hungary and two radio stations located in
Argentina. The following tables summarize relevant financial information by
geographic area:
For the year ended February 28 (29),
1999 2000 2001
----------- ---------- -----------
(In Thousands)
Net Revenues:
Domestic $ 229,582 $ 316,454 $ 456,040
International 3,254 8,811 14,578
----------- ---------- -----------
Total 232,836 325,265 470,618
=========== ========== ===========
As of February 28 (29),
1999 2000 2001
----------- ---------- -----------
(In Thousands)
Noncurrent Assets:
Domestic $ 925,161 $1,181,640 $ 2,263,796
International 18,588 32,950 27,970
----------- ---------- -----------
Total 943,749 1,214,590 2,291,766
=========== ========== ===========
18
ITEM 2. PROPERTIES.
The following table sets forth information as of February 28, 2001 with
respect to Emmis' offices and studios and its broadcast tower locations.
Management believes that the properties are in good condition and are suitable
for Emmis' operations.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
- ------------------------- ------------ --------- --------
Corporate and Publishing 1998 Owned --
Headquarters/
WENS-FM/ WIBC-AM/WNOU-FM/
WYXB-FM/ Indianapolis Monthly
One Emmis Plaza
40 Monument Circle
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNOU-FM Tower 1979 Owned --
WIBC-AM Tower 1966 Owned --
WYXB-FM Tower 1965 Leased Month-to-month
KSHE-FM 1986 Leased September 2007
700 St. Louis Union Station
St. Louis, Missouri
KSHE-FM Tower 1985 Leased April 2009
WMLL-FM/KFTK-FM/KIHT-FM/KPNT-FM 1998 Leased December 2007
800 St. Louis Union Station
St. Louis, Missouri
WMLL-FM Tower 1984 Owned --
KFTX-FM Tower 1987 Leased August 2009 with option to
March 2023
KIHT-FM Tower 1995 Leased September 2005 with two
5-year
options to September 2015
KPNT-FM Tower 1987 Owned --
KPWR-FM 1988 Leased February 2003(1)
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased October 2002
WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1988 Leased January 2010
WRKS-FM Tower 1984 Leased November 2005
WQCD-FM Tower 1984 Leased February 2007
WKQX-FM 2000 Leased August 2015 (one 5 year
extension option)
230 Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 2009
Atlanta Magazine Office 1997 Leased July 2003
1360 Peachtree Street
Atlanta, Georgia
Cincinnati Magazine 1996 Leased November 2006
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2009
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1999 Owned --
88 Piikoi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2008
WALA-TV 1952 Leased May 2002
210 Government Street
Mobile, AL
WALA-TV Tower 1962 Owned --
19
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1987 Owned --
WLUK-TV 1966 Owned --
787 Lombardi Avenue
Green Bay, WI
WLUK-TV Tower 1961 Owned --
WTHI-TV/FM/WWVR-FM 1954 Owned --
918 Ohio Street
Terre Haute, IN
WTHI-TV Tower 1965 Owned --
WTHI-FM Tower 1954 Owned --
WWVR-FM Tower 1954 Owned --
WVUE-TV 1972 Owned --
1025 South Jefferson Davis Highway
New Orleans, LA
WVUE-TV Tower 1963 Owned --
WKCF-TV 1998 Owned --
31 Skyine Drive
Lake Mary, FL
WKCF-TV Tower 1991 Leased September 2006
Los Angeles Magazine 2000 Leased November 2010
5900 Wilshire Blvd., Suite 1000
Los Angeles, CA 90036
Country Sampler 1988 Owned --
707 Kautz Road
St. Charles, IL 60174
RDS/Co-Opportunities 1989 Leased December 2003
324 Campus Lane, Suite B
Suisun, CA 94585
Emmis West (Corporate) 1999 Leased January 2004
15821 Ventura Blvd., #685
Encino, CA 91436
Slager Radio 1998 Leased December 2004
Szabadsag Ut 117 (Atronyx Bldg. B)
H-2040 Budaors, Hungary
Slager Tower 1998 Leased December 2001(2)
KOIN-TV 1984 Leased Expires in June 2083 with
222 S.W. Columbia St. right to renew for an
Portland, OR 97221 additional 99 years
KOIN-TV Tower 1953 Owned --
KSNT-TV 1967 Owned --
6835 N.W. U.S. Hwy 24
Topeka, KS 66618
KSNT-TV Tower 1967 Owned --
WSAZ-TV 1971 Owned --
645 5th Avenue
Huntington, WV 25701
WSAZ-TV Tower 1954 Owned --
KZLA-FM 1997 Owned --
7755 Sunset Blvd.
Los Angeles, CA 90045
KZLA-FM Tower 1991 Leased June 30, 2003
KGMB-TV 1952 Owned --
1534 Kapiolani Blvd.
Honolulu, HI 96814
KGMB-TV Tower 1962 Owned --
KMTV-TV 1978 Owned --
10714 Mockingbird Dr.
Omaha, NE 68127
KMTV-TV Tower 1967 Owned --
20
KGUN-TV 1990 Owned --
7280 E. Rosewood
Tucson, AZ 85710
KGUN-TV Tower 1956 Owns July 2016
Tower,
Leases
Land
KXPK-FM/KALC-FM KXPK - 1999 Leased December 2005
1200 17th St., Suite 2300 KALC - 1985
Denver, CO 80202
KXPK-FM Tower 1994 Leased April 2024
KALC-FM Tower 1982 Leased October 2004
KRQE-TV 1953 Owned --
13 Broadcast Plaza S.W.
Albuquerque, NM 87104
KRQE-TV Tower 1959 Owned --
KKFR-FM 1989 Owned --
631 N. First Ave.
Phoenix, AZ 85012
KKFR-FM Tower 1998 Leased April 2003
KTAR-AM/KMVP-AM/KKLT-FM 1994 Owned --
5300 N. Central Ave.
Phoenix, AZ 85012
KTAR-AM Tower 1958 Owned --
KMVP-AM Tower (tower) 1971 Owned --
KMVP-AM Tower (land only) 1996 Leased December 2008
KKLT-FM Tower 1965 Owned --
KSNW-TV 1955 Owned --
833 N. Main St.
Wichita, KS 67203
KSNW-TV Tower 1955 Owned --
Argentina 1996 Owned --
Uriarte 1899 (1414) Capital
Federal
Buenos Aires, Argentina
Argentina Tower 1996 Owned --
- --------------
(1) The lease provides for one renewal option of ten years following the
expiration date. Emmis also owns a tower site which it placed in service
in 1984 and currently uses as a back-up facility and on which it leases
space to other broadcasters.
(2) The lease provides for annual renewal options.
ITEM 3. LEGAL PROCEEDINGS.
Emmis currently and from time to time is involved in litigation incidental to
the conduct of its business, but Emmis is not currently a party to any lawsuit
or proceeding which, in the opinion of management, is likely to have a material
adverse effect on the financial position or results of operations of Emmis.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of shareholders of the Company held on January 10,
2001, the following matters received the following votes:
MATTER DESCRIPTION VOTES FOR VOTES AGAINST ABSTAINING
- ------------------ --------- ------------- ----------
Election of Directors:
Jeffrey H. Smulyan 85,262,658 - 2,548,432
Doyle L. Rose 85,207,458 - 2,603,632
Greg Nathanson 85,261,521 - 2,549,569
Gary L. Kaseff 85,263,281 - 2,547,809
Lawrence B. Sorrel 80,842,898 - 6,968,192
Richard A. Leventhal 85,262,349 - 2,548,741
Frank V. Sica* 28,486,308 - 7,020,822
Susan B. Bayh* 32,962,259 - 2,544,871
* Class A Director
Approval of Employee Stock
Purchase Plan 80,990,916 2,988,451 13,053
Approval of Appointment
of Auditors 87,747,615 12,644 50,831
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Emmis' Class A common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System under the symbol EMMS.
The following table sets forth the high and low sale prices of the Class A
common stock for the periods indicated. No dividends were paid during any such
periods.
QUARTER ENDED HIGH* LOW*
May 1999 25.13 19.50
August 1999 29.56 22.00
November 1999 42.38 27.25
February 2000 62.34 35.63
May 2000 47.38 27.00
August 2000 49.13 31.38
November 2000 34.25 17.38
February 2001 37.88 22.13
*All prices adjusted for the two-for-one stock split on February 24,
2000.
At April 30, 2001, there were 3,571 record holders of the Class A common
stock, and there were two record holders, but only one beneficial owner, of the
Class B common stock.
Emmis intends to retain future earnings for use in its business and does not
anticipate paying any dividends on shares of its common stock in the foreseeable
future.
On October 25, 1999 Emmis sold 2,700,000 shares of its Class A Common Stock
(5,400,000 shares after the subsequent stock split) to Liberty EMMS, Inc., a
wholly owned subsidiary of Liberty Media Corporation, in a transaction not
registered under the Securities Act of 1933. The cash purchase price of the
stock was $148,500,000. The sale was exempt from registration under Section 4(2)
of the Securities Act. Liberty Media Group holds interests in a broad range of
video programming, communications, technology and internet businesses in the
United States, Europe, South America and Asia. Its common stock is traded on the
New York Stock Exchange.
23
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
----------------------------------------------------------
(Dollars in thousands, except share data)
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
OPERATING DATA:
Net revenues $ 113,720 $ 140,583 $ 232,836 $ 325,265 $ 470,618
Operating expenses 62,433 81,170 143,348 199,818 296,405
International business
development expenses 1,164 999 1,477 1,558 1,553
Corporate expenses 5,929 6,846 10,427 13,872 16,048
Time brokerage fees - 5,667 2,220 - 7,344
Depreciation and amortization 5,481 7,536 28,314 44,161 74,018
Non-cash compensation 3,465 1,482 4,269 7,357 5,400
Corporate restructuring fees
and other (1) - - - 896 4,057
Operating income 35,248 36,883 42,781 57,603 65,793
Interest expense 9,633 13,772 35,650 51,986 72,444
Loss on donation of radio
station - 4,833 - 956 -
Other income, net (2) 325 6 1,914 4,203 38,037
Income before income taxes
and extraordinary item 25,940 18,284 9,045 8,864 31,386
Income before extraordinary
item 15,440 11,084 2,845 1,989 13,736
Net income (loss) 15,440 11,084 1,248 (33) 13,736
Net income (loss) available to
common shareholders 15,440 11,084 1,248 (3,177) 4,752
Net income (loss) per share available to common shareholders:
Basic $ 0.71 $ 0.51 $ 0.04 $ (0.09) $ $0.10
Diluted $ 0.68 $ 0.49 $ 0.04 $ (0.09) $ $0.10
Weight average common shares Outstanding (3):
Basic 21,886 21,806 28,906 36,156 46,869
Diluted 22,582 22,724 29,696 36,156 47,940
FEBRUARY 28 (29),
(Dollars in thousands)
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash $ 1,191 $ 5,785 $ 6,117 $ 17,370 $ 59,899
Working capital 15,463 21,635 1,249 28,274 97,955
Net intangible assets 131,743 234,558 802,307 1,033,970 1,981,097
Total assets 189,716 333,388 1,014,831 1,327,306 2,506,872
Credit facility and senior
subordinated debt 115,000 215,000 577,000 300,000 1,380,000
Shareholders' equity 34,422 43,910 235,549 776,367 807,471
YEAR ENDED FEBRUARY 28 (29),
(Dollars in thousands)
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
OTHER DATA:
Broadcast/publishing cash
flow (4) $ 51,287 $ 59,413 $ 89,488 $ 125,447 $ 174,213
EBITDA before certain
charges (4) 44,194 51,568 77,584 110,017 156,612
Cash flows from (used in):
Operating activities 21,362 22,487 35,121 26,360 97,730
Investing activities (13,919) (116,693) (541,470) (271,946) (1,110,755)
Financing activities (7,470) 98,800 506,681 256,839 1,055,554
Capital expenditures 7,559 16,991 37,383 29,316 26,225
(1) Year ended February 28, 2001 includes a $2.0 million asset impairment
charge and $2.1 million of professional fees associated with the
evaluation of structural alternatives.
(2) See Management's Discussion and Analysis of Financial Condition and
Results of operations for a description of the components of other income
in the year ended February 28, 2001.
(3) In February 2000, Emmis effected a 2 for 1 stock split of the outstanding
shares of common stock. Accordingly, all data shown has been retroactively
adjusted to reflect the stock split.
(4) Broadcast/publishing cash flow and EBITDA before certain charges 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 Emmis' results of operations
presented on the basis of accounting principles generally accepted in the
United States. See Management's Discussion and Analysis of Financial
Condition and Results of operations for a more detailed description of
broadcast/publishing cash flow and EBITDA before certain charges.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
Emmis ("the Company") generally evaluates the performance of its operating
entities based on broadcast cash flow (BCF) and publishing cash flow (PCF).
Management believes that BCF and PCF are useful because they provide a
meaningful comparison of operating performance between companies in the industry
and serve as an indicator of the market value of a group of stations or
publishing entities. BCF and PCF are generally recognized by the broadcast and
publishing industries as a measure of performance and are used by analysts who
report on the performance of broadcasting and publishing groups. BCF and PCF do
not take into account Emmis' debt service requirements and other commitments
and, accordingly, BCF and PCF are not necessarily indicative of amounts that may
be available for dividends, reinvestment in Emmis' business or other
discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance
with accounting principles generally accepted in the United States, and should
be viewed as a supplement to and not a substitute for our results of operations
presented on the basis of accounting principles generally accepted in the United
States. Moreover, BCF and PCF are not standardized measures and may be
calculated in a number of ways. Emmis defines BCF and PCF as revenues net of
agency commissions and operating expenses. The primary source of broadcast
advertising revenues is the sale of advertising time to local and national
advertisers. Publishing entities derive revenue from subscriptions and sale of
print advertising. 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 the magazine, and general and administrative
costs.
The Company's revenues are affected primarily by the advertising rates its
entities charge. These rates are in large part based on the entities' ability to
attract audiences/subscribers in demographic groups targeted by their
advertisers. Broadcast entities' ratings are measured principally four times a
year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen
Company for television stations. Because audience ratings in a station's local
market are critical to the station's financial success, the Company's strategy
is to use market research and advertising and promotion to attract and retain
audiences in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically
exchange advertising time for goods or services which can be used by the station
in its business operations. The Company generally confines the use of such trade
transactions to promotional items or services for which the Company would
otherwise have paid cash. In addition, it is the Company's general policy not to
pre-empt advertising spots paid for in cash with advertising spots paid for in
trade.
ACQUISITIONS, DISPOSITIONS, DONATIONS AND INVESTMENTS
During the three year period ended February 28, 2001, we acquired and
retained thirteen radio stations, fifteen television stations and three magazine
publications for an aggregate cash purchase price of $1.8 billion. A recap of
the transactions completed is summarized hereafter. These transactions impact
the comparability of operating results year over year.
25
Subsequent to year-end, Emmis completed its acquisition of substantially all
of the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona
from Hearst-Argyle Television, Inc. for $160.0 million in cash. 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 the Company's March 2001 Senior Discount Notes
Offering. The acquisition was accounted for as a purchase. Emmis began
programming and selling advertising on the radio stations on August 1, 2000
under a time brokerage agreement.
On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the
intellectual property of WTLC-FM (both located in Indianapolis, Indiana) to
Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and
the AM sale occurred on April 25, 2001. Emmis retained the FCC license at 105.7
and reformatted the station as WYXB-FM.
On January 17, 2001, Emmis completed its acquisition of substantially all of
the assets of radio station KALC-FM in Denver, Colorado from Salem
Communications Corporation for $98.8 million in cash plus a commitment fee of
$1.2 million and transaction related costs of $0.9 million (the "Salem
Acquisition"). The acquisition, which was accounted for as a purchase, was
financed through borrowings under the credit facility. Emmis began operating the
station under a time brokerage agreement in October 2000. The total purchase
price was allocated to property and equipment and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM,
WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as KFTK-FM) and KIHT-FM in St.
Louis, Missouri from Sinclair Broadcast Group, Inc. for $220.0 million in cash,
plus transaction related costs of $10.9 million (the "Sinclair Acquisition").
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 acquisition was financed through borrowings under Emmis' credit
facility and was accounted for as a purchase. The total purchase price was
allocated to property and equipment and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
On October 6, 2000, Emmis acquired certain assets of KZLA-FM (the "KZLA
Acquisition") 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). Since the fair value of
WKKX exceeded the book value of the station at the date of the exchange, Emmis
recorded a gain on exchange of assets of $22.0 million. This gain is included in
other income, net in the accompanying consolidated statements of operations.
From August 1, 2000 through the date of acquisition, Emmis operated KZLA-FM
under a time brokerage agreement. The exchange was accounted for as a purchase.
The total purchase price of $185.0 million was allocated to property and
equipment and broadcast licenses based on a preliminary appraisal. Broadcast
licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight
network-affiliated and seven satellite television stations from Lee Enterprises,
Inc. for $559.5 million in cash, the payment of $21.3 million for working
capital and transaction related costs of $2.2 million (the "Lee Acquisition").
In connection with the acquisition, Emmis recorded $31.3 million of deferred tax
liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a
severance related liability of $1.8 million and the entire amount remained
outstanding as of February 28, 2001. Emmis expects the remaining amount to be
fully utilized during the year ended February 28, 2002. This transaction was
financed through borrowings under Emmis' credit facility and was accounted for
as a purchase. The Lee Acquisition consisted of the following stations:
26
- - 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.
The total purchase price was allocated to property and equipment, television
program rights, working capital related items and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
As a result of the Lee Acquisition, Emmis owns more television stations in
the Hawaiian market than is currently permitted by FCC regulations. Emmis is
currently operating the stations under an FCC waiver that requires Emmis to file
an application to sell one of its Hawaiian television stations by October 1,
2001. Emmis is currently exploring various possibilities.
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 $108.0
million in cash, less purchase price adjustments of $1.0 million, plus
liabilities recorded of $1.2 and transaction related costs of $0.9 million (the
"AMFM Acquisition"). Emmis financed the acquisition through borrowings under its
credit facility. The acquisition was accounted for as a purchase. The total
purchase price was allocated to property and equipment and broadcast licenses
based on a preliminary appraisal. Broadcast licenses are included in intangible
assets in the accompanying consolidated balance sheets and are being amortized
over 40 years.
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, which is included in other
income in the accompanying consolidated statements of operations.
On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los
Angeles Magazine Holding Company, Inc. for approximately $36.8 million in cash
plus liabilities recorded of $2.7 million (the "Los Angeles Magazine
Acquisition"). 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 its credit facility. The excess of the purchase price over the
estimated fair value of identifiable assets was $36.0 million, which is included
in intangible assets in the accompanying consolidated balance sheets and is
being amortized over 15 years.
27
On December 14, 1999, the Company completed its acquisition of substantially
all of the assets of Country Marketplace and related publications from H&S
Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of
approximately $.6 million. The acquisition was accounted for as a purchase and
was financed through borrowings under the credit facility. The excess of the
purchase price over the estimated fair value of identifiable assets was $2.3
million, which is included in intangible assets in the accompanying consolidated
balance sheets and is being amortized over 15 years.
On November 16, 1999, Emmis purchased an interest in BuyItNow.com L.L.C. for
$5.0 million in cash, which represented an original investment of 2.49% of the
outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the
carrying value of its investment in BuyItNow.com from $5.0 million to zero as
the decline in the value of the investment was deemed to be other than
temporary.
On November 9, 1999, the Company completed its acquisition of 75% of the
outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in
cash plus liabilities recorded of $5.6 million. Additional consideration of up
to $2.2 million will be paid if certain conditions are met. Votionis owns one FM
and one AM radio station located in Buenos Aires, Argentina (the "Votionis
Acquisition"). The acquisition was accounted for as a purchase and was financed
with proceeds from the Company's October 1999 Common and Preferred Equity
Offerings. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets. This broadcast license is being
amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially
all of the assets of television station WKCF in Orlando, Florida ( the "WKCF
Acquisition") from Press Communications, L.L.C. for approximately $197.1 million
in cash. The purchase price included the purchase of land and a building for
$2.2 million. The Company financed the acquisition through a $12.5 million
advance payment borrowed under the credit facility and proceeds from the
Company's October 1999 Common and Preferred Equity Offerings. In connection with
the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was
allocated to property and equipment, television program rights and broadcast
licenses based on an appraisal. Broadcast licenses are included in intangible
assets and are being amortized over 40 years. WKCF is an affiliate of the WB
Television Network. As part of the WKCF Acquisition, the Company entered into an
agreement with the WB Television Network which, among other things, extends the
existing network affiliation agreement through December 2009.
On April 1, 1999, the Company completed its acquisition of substantially all
of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for
approximately $20.9 million plus liabilities recorded of approximately $4.7
million. The purchase price was payable with $18.5 million in cash at closing,
which was financed through additional borrowings under the credit facility, $2.0
million payable under a contract with the principal shareholder through April
2003, and $.5 million paid in October 1999. The acquisition was accounted for as
a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in
the accompanying consolidated balance sheets and is being amortized over 15
years.
Effective October 1, 1998, the Company completed its acquisition of
substantially all of the assets of Wabash Valley Broadcasting Corporation (the
"Wabash Acquisition") for a cash purchase price of $88.9 million (including
transaction costs), plus liabilities recorded of approximately $12.2 million.
The Company financed the acquisition through borrowings under the credit
facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated
television station in Ft. Myers, Florida, WTHI-TV, a CBS network affiliated
television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio
stations located in the Terre Haute, Indiana area. In December 1999, the Company
donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million
net book value of the station at the time of donation was recognized as a loss
on donation of radio station.
28
On July 16, 1998, the Company completed its acquisition of substantially all
of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc.
and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price
of $287.3 million (including transaction costs), a $25.0 million promissory note
due to the former owner, plus liabilities recorded of approximately $34.7
million. The Company financed the acquisition through a $25.0 million promissory
note and borrowings under the credit facility. The promissory note was paid in
full in February 1999. The SF Acquisition consists of four Fox network
affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New
Orleans, Louisiana, WALA-TV in Mobile, Alabama and KHON-TV in Honolulu, Hawaii
(including satellite stations KAII-TV, Wailuku, Hawaii and KHAW-TV, Hilo,
Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station
WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio,
Inc. for a cash purchase price of $141.6 million (including transaction costs)
less approximately $13.0 million for cash purchase price adjustments relating to
taxes, plus $20.0 million of net current tax liabilities, $52.5 million of
deferred tax liabilities and $0.3 million of liabilities associated with the
acquisition. The acquisition was accounted for as a purchase and was financed
through borrowings under the credit facility. Effective July 1, 1997 through the
date of closing, the Company operated WQCD-FM under a time brokerage agreement.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 2001 COMPARED TO YEAR ENDED FEBRUARY 29, 2000. Net
revenues for the year ended February 28, 2001 were $470.6 million compared to
$325.3 million for the same period of the prior year, an increase of $145.3
million or 44.7%. The increase in net revenues for the year ended February 28,
2001 is primarily the result of the Country Sampler Acquisition, WKCF
Acquisition, Argentina Acquisition, Los Angeles Magazine Acquisition, AMFM
Acquisition, Lee Acquisition, KZLA Acquisition, Sinclair Acquisition, Salem
Acquisition and our operation of radio stations KKLT-FM, KTAR-AM and KMVP-AM
under time brokerage agreements which we collectively refer to as our "Fiscal
2000-2001 Transactions." Excluding these transactions, net revenues for the year
ended February 28, 2001 would have increased $14.7 million or 4.8%. The
remaining increase in net revenues is due to our ability to realize higher
advertising rates resulting from higher ratings at certain broadcasting
properties, increases in general radio spending in the markets in which we
operate and our ability to sell more advertising in our publications.
Operating expenses for the year ended February 28, 2001 were $296.4 million
compared to $199.8 million for the same period of the prior year, an increase of
$96.6 million or 48.3%. The increase in operating expenses for the year ended
February 28, 2001 is primarily the result of our Fiscal 2000-2001 Transactions.
Excluding these transactions, operating expenses for the year ended February 28,
2001 would have increased $3.6 million or 1.9%. This increase is principally due
to higher advertising and promotional spending at certain of our properties as
well as an increase in sales related costs.
Broadcast/publishing cash flow for the year ended February 28, 2001 was
$174.2 million compared to $125.4 million for the same period of the prior year,
an increase of $48.8 million or 38.9%. The increase in broadcast/publishing cash
flow for the year ended February 28, 2001 is primarily the result of our Fiscal
2000-2001 Transactions. Excluding these transactions, broadcast/publishing cash
flow for the year ended February 28, 2001 would have increased $11.1 million or
9.4%. This increase is due to increased net revenues partially offset by
increased operating expenses as discussed above.
Corporate expenses for the year ended February 28, 2001 were $16.0 million
compared to $13.9 million for the same period of the prior year, an increase of
$2.1 million or 15.7%. These increases are due to an increase in the number of
corporate employees in all departments as a result of the growth of the Company.
29
EBITDA before certain charges is defined as broadcast/publishing cash flow
less corporate and international development expenses. EBITDA before certain
charges for the year ended February 28, 2001 was $156.6 million compared to
$110.0 million for the same period of the prior year, an increase of $46.6
million or 42.4%. This increase was principally due to the increase in
broadcast/publishing cash flow partially offset by an increase in corporate
expenses.
Interest expense was $72.4 million for the year ended February 28, 2001
compared to $52.0 million for the same period of the prior year, an increase of
$20.4 million or 39.4%. Included in interest expense for the twelve months ended
February 28, 2001 is $3.4 million for the amortization of debt fees related to
our Bridge Loan. The remaining increase reflects higher outstanding debt due to
the Fiscal 2000-2001 Transactions.
Depreciation and amortization expense for the year ended February 28, 2001
was $74.0 million compared to $44.2 million for the same period of the prior
year, an increase of $29.8 million or 67.6%. Substantially all of the increase
in depreciation and amortization expense for the year ended February 28, 2001
relates to our Fiscal 2000-2001 Transactions.
Non-cash compensation expense for the year ended February 28, 2001 was $5.4
million compared to $7.4 million for the same period of the prior year, a
decrease of $2.0 million or 26.6%. Non-cash compensation includes compensation
expense associated with stock options granted, grants of restricted stock and
common stock contributed to the Company's Profit Sharing Plan. The decrease was
principally due to a decline in the Company's stock price as compared to the
prior year.
Other income for the twelve months ended February 28, 2001 was $38.0 million
compared to other income of $3.2 million for the same period of the prior year.
Other income for the twelve months ended February 28, 2001 includes a $22.0
million gain on exchange of assets, offset by valuation adjustments on certain
investments and a $17.0 million break-up fee received in connection with the
sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net of related expenses.
Our effective tax rate for the year ended February 28, 2001 was 56.2%,
compared to 77.5% for the same period of the prior year. The decrease in our
effective tax rate in the year ended February 28, 2001 primarily resulted from
the relative impact of the non-deductible tax items in relation to the change in
pre-tax income.
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999. Net
revenues for the year ended February 29, 2000 were $325.3 million compared to
$232.8 million for the same period of the prior year, an increase of $92.5
million or 39.7%. The increase in net revenues for the year ended February 29,
2000 is primarily the result of the SF, Wabash and WKCF Acquisitions (the
"Fiscal 1999-2000 TV Acquisitions")($44.1 million) and Country Sampler
Acquisition ($13.4 million). Excluding these transactions, net revenues for the
year ended February 29, 2000 would have increased $35.0 million or 15.0%.
Included in this increase is a decrease in political advertising revenue at our
television stations as our fiscal year ended February 29, 2000 was not a
significant year for political campaigns. The remaining increase in net revenues
is due to the ability to realize higher advertising rates resulting from higher
ratings at certain broadcasting properties, increases in general radio spending
in the markets in which the Company operates, the ability to sell more
advertising in our publications and an increase in single copy newsstand sales.
Operating expenses for the year ended February 29, 2000 were $199.8 million
compared to $143.3 million for the same period of the prior year, an increase of
$56.5 million or 39.4%. The increase in operating expenses for the year ended
February 29, 2000 is primarily the result of the Fiscal 1999-2000 TV
Acquisitions ($30.2 million) and Country Sampler Acquisition ($11.2 million).
Excluding these transactions, operating expenses for the year ended February 29,
2000 would have increased $15.1 million or 10.5%. This increase is principally
due to higher advertising and promotional spending at certain of the Company's
properties as well as an increase in sales related costs.
30
Broadcast/publishing cash flow for the year ended February 29, 2000 was
$125.4 million compared to $89.5 million for the same period of the prior year,
an increase of $35.9 million or 40.2%. The increase in broadcast/publishing cash
flow for the year ended February 29, 2000 is primarily the result of the Fiscal
1999-2000 TV Acquisitions ($13.9 million) and Country Sampler Acquisition ($2.2
million). Excluding these transactions, broadcast/publishing cash flow for the
year ended February 29, 2000 would have increased $19.8 million or 22.1%. This
increase is principally due to increased net revenues partially offset by
increased operating expenses as discussed above.
Corporate expenses for the year ended February 29, 2000 were $13.9 million
compared to $10.4 million for the same period of the prior year, an increase of
$3.5 million or 33.0%. These increases are due to costs associated with year
2000 compliance, analysis of potential acquisitions and an increase in the
number of corporate employees in all departments as a result of the growth of
the Company.
EBITDA before certain charges is defined as broadcast/publishing cash flow
less corporate and international development expenses. EBITDA before certain
charges for the year ended February 29, 2000 was $110.0 million compared to
$77.6 million for the same period of the prior year, an increase of $32.4
million or 41.8%. This increase was principally due to the increase in
broadcast/publishing cash flow partially offset by an increase in corporate
expenses.
Interest expense was $52.0 million for the year ended February 29, 2000
compared to $35.7 million for the same period of the prior year, an increase of
$16.3 million or 45.8%. This increase reflected higher outstanding debt due to
the Fiscal 1999-2000 TV Acquisitions, WQCD Acquisition, which was previously
operated under a time brokerage agreement, and Country Sampler Acquisition and a
higher rate of interest paid by the Company on outstanding debt.
Depreciation and amortization expense for the year ended February 29, 2000
was $44.2 million compared to $28.3 million for the same period of the prior
year, an increase of $15.9 million or 56.0%. The increase in depreciation and
amortization expense for the year ended February 29, 2000 is primarily the
result of the Fiscal 1999-2000 TV Acquisitions ($9.1 million), WQCD Acquisition
($2.2 million) and Country Sampler Acquisition ($2.3 million). The remaining
increase relates to depreciation of capital additions in recent years.
Non-cash compensation expense for the year ended February 29, 2000 was $7.4
million compared to $4.3 million for the same period of the prior year, an
increase of $3.1 million or 72.3%. 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. This increase was due to shares granted to certain executives
under employment agreements for which the fair market value of the shares at the
date of grant was higher than the fair market value of shares granted under
previous employment agreements due to the appreciation in the Company's stock
price.
Our effective tax rate for the year ended February 29, 2000 was 77.5%,
compared to 68.5% for the same period of the prior year. Our effective tax rate
was higher in the year ended February 29, 2000 due to a slight decrease in
pre-tax income coupled with an increase in nondeductible entertainment related
expenses.
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.
31
Emmis is constructing new operating facilities for WALA-TV in Mobile,
Alabama. The project is expected to be completed in December of 2001 for an
estimated cost of $11.3 million of which $1.9 million has been incurred through
February 28, 2001, and this project will be financed through cash flows from
operating activities and/or borrowings under the credit facility.
CAPITAL EXPENDITURES
In the fiscal years ended February 1999, 2000 and 2001, we had capital
expenditures of $37.4 million, $29.3 million and $26.2 million, respectively.
These capital expenditures primarily related to the Indianapolis office facility
project, the KHON operating facilities project, leasehold improvements to
various office and studio facilities, broadcast equipment purchases and tower
upgrades. We anticipate that future requirements for capital expenditures will
include capital expenditures incurred during the ordinary course of business,
including costs related to our conversion to digital television. We expect to
fund such capital expenditures with cash generated from operating activities and
borrowings under our credit facility.
DEBT SERVICE AND PREFERRED STOCK DIVIDEND REQUIREMENTS
As of February 28, 2001, we had $1.38 billion of corporate indebtedness
outstanding under our credit facility ($1.08 billion) and senior subordinated
notes ($0.3 billion), and an additional $17.9 million of other indebtedness. We
also had $143.8 million of our preferred stock outstanding. See Sources of
Liquidity for discussion of our senior discount notes offering in March 2001.
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, which ranges from 0% to 2.9%, varies based on our ratio of total
debt to operating cash flow). As of February 28, 2001, our weighted average
borrowing rate under our credit facility was approximately 8.0%.
Based on amounts currently outstanding under our senior subordinated notes
and convertible preferred stock, the debt service and preferred stock dividend
requirements for the next twelve month period are $24.4 million and $9.0
million, respectively.
SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash provided by operations and funds
available under our credit facility. At February 28, 2001, we had cash and cash
equivalents of $59.9 million and net working capital of $98.0 million. At
February 29, 2000, we had cash and cash equivalents of $17.4 million and net
working capital of $28.3 million. On March 27, 2001, we received $202.6 million
of proceeds from the issuance of senior discount notes due 2011, less
approximately $10.8 million of debt issuance costs. The notes accrete interest
at a rate of 12.5% per year, compounded semi-annually to an aggregate principle
amount of $370.0 million on March 15, 2006. Commencing on September 15, 2006,
interest is payable in cash on each March 15 and September 15. A portion of the
net proceeds were used to fund the acquisition of three radio stations in
Phoenix, Arizona and the remaining net proceeds (approximately $93.0 million)
were placed in escrow to ultimately reduce outstanding borrowings under the
credit facility. The senior discount notes will automatically be exchanged for
13.25% Exchangeable PIK Preferred Stock unless we can effect a corporate
reorganization by July 24, 2001. Under this reorganization, we will transfer all
of our assets, as well as our obligations under the credit facility and the
senior subordinated notes, to a wholly-owned subsidiary, Emmis Operating
Company. Emmis Communications Corporation will still be the issuer of our Class
A, Class B and Class C common stock, our convertible preferred stock and the
senior discount notes, and Emmis Operating Company will be the obligor of the
senior subordinated notes. We do not expect the reorganization, which should be
completed before the July 24, 2001 deadline, to materially affect our operations
because we currently conduct substantially all of our business through
subsidiaries. At April 30, 2001, we have $320.0 million available under our
credit facility, less $6.6 million in outstanding letters of credit. We expect
that cash flow from operating activities will be sufficient to fund all working
capital,
32
capital expenditures, debt service, and preferred stock dividend
requirements for the forseeable future.
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.
On March 28, 2001, we completed our acquisition of substantially all of the
assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from
Hearst-Argyle Television, Inc. for $160.0 million in cash. We financed the
acquisition through a $20.0 million advance payment borrowed under our credit
facility in June 2000 and the remainder with borrowings under the credit
facility and proceeds from our March 2001 senior discount notes offering. The
acquisition was accounted for as a purchase.
INTANGIBLES
At February 28, 2001, 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 the activities of our stations to ensure
they comply with all regulatory requirements. Historically, all of our licenses
have been renewed at the end of their respective eight-year periods, and we
expect that all licenses will continue to be renewed in the future.
SEASONALITY
Our results of operations are usually subject to seasonal fluctuations, which
result in higher second and third quarter revenues and broadcast cash flow. This
seasonality is due to the younger demographic composition of many of our
stations. Advertisers increase spending during the summer months to target these
listeners. In addition, advertisers generally increase spending during the
months of October and November, which are part of our third quarter, in
anticipation of the holiday season. Finally, revenues from political advertising
tend to be higher in even numbered calendar years.
INFLATION
The impact of inflation on our operations has not been significant to date.
However, there can be no assurance that a high rate of inflation in the future
would not have an adverse effect on our operating results.
FORWARD-LOOKING STATEMENTS
This report includes or incorporates forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. You
can identify these forward-looking statements by our use of words such as
"intend," "plan," "may," "will," "project," "estimate," "anticipate," "believe,"
"expect," "continue," "potential," "opportunity," and similar expressions,
whether in the negative or affirmative. We cannot guarantee that we actually
will achieve these plans, intentions or expectations. All statements regarding
our expected financial position, business and financing plans are
forward-looking statements.
33
Actual results or events could differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements we make. We have
included important facts in various cautionary statements in this report that we
believe could cause our actual results to differ materially from forward-looking
statements that we make. These include, but are not limited to, the following:
o the ability of our stations and magazines to attract and retain advertisers;
o the level of our capital expenditures and whether our programming
and other expenses increase at a rate faster than expected;
o whether any pending transactions are completed on the terms and at the
times set forth, if at all;
o financial community and rating agency perceptions of our business,
operations and financial condition and the industry in which we operate;
o the ability of our stations to attract programming and our magazines to
attract writers and photographers;
o uncertainty as to the ability of our stations to increase or sustain
audience share for their programs and our magazines to increase or sustain
subscriber demand;
o risks and uncertainties inherent in the radio and television broadcasting
magazine publishing businesses;
o material adverse changes in economic conditions in the markets of our
company;
o future regulatory actions and conditions in the operating areas of our
company; and
o competition from other media and the impact of significant competition for
advertising revenues from other media.
The forward-looking statements do not reflect the potential impact of any
future acquisitions, mergers or dispositions. We undertake no obligation to
update or revise any forward-looking statements because of new information,
future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERAL
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of Emmis due to adverse changes in
financial and commodity market prices and rates. Emmis is exposed to market risk
from changes in domestic and international interest rates (i.e. prime and LIBOR)
and foreign currency exchange rates. To manage this exposure Emmis periodically
enters into interest rate derivative agreements. Emmis does not use financial
instruments for trading and is not a party to any leveraged derivatives.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June of 2000 by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities." These
statements, which are effective for Emmis on March 1, 2001, establish accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. These statements require that every
derivative instrument be recorded in the balance sheet as either an asset or a
liability measured at its fair value. Changes in the fair value of derivatives
are to be recorded each period in earnings or comprehensive income, depending on
whether the derivative is designated and effective as part of a hedged
transaction, and on the type of hedge transaction. Gains or losses on derivative
instruments reported in the other comprehensive income must be reclassified as
earnings in the period in which earnings are affected by the underlying hedged
item, and the
34
ineffective portion of all hedges must be recognized in earnings in the
current period. These new standards will result in additional volatility in
reported assets, liabilities, earnings and other comprehensive income.
SFAS No. 133 requires that as of the date of initial adoption the
difference between the fair value of the derivative instruments to be recorded
on the balance sheet and the previous carrying amount of those derivatives be
reported in net income or other comprehensive income, as appropriate, as the
cumulative effect of a change in accounting principle in accordance with APB 20
"Accounting Changes."
On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No. 133
which resulted in an immaterial impact to the results of operations and the
financial position of Emmis.
SFAS No. 133 further requires that the fair value and effectiveness of each
hedging instrument must be measured quarterly. The result of each measurement
could result in fluctuations in reported assets, liabilities, other
comprehensive income and earnings as these changes in fair value and
effectiveness are recorded to the financial statements. Emmis anticipates, on an
ongoing basis, the fluctuations to the aforementioned areas will be immaterial
to the financial statements taken as a whole.
INTEREST RATES
At February 28, 2001, the entire outstanding balance under our credit
facility, or approximately 78% of our total outstanding debt (credit facility
and senior subordinated debt) bears interest at variable rates. Emmis currently
hedges a portion of its outstanding debt with interest rate swap arrangements
that effectively set the credit facility's underlying base rate at a weighted
average rate of 5.27% on the three-month LIBOR for agreements in place as of
February 28, 2001. The credit facility requires the Company to have fixed
interest rates for a two year period on at least 50% of its total outstanding
debt, as defined (including the senior subordinated debt), by June 27, 2001.
After the first two years, this ratio of fixed to floating rate debt must be
maintained if Emmis' total leverage ratio, as defined, is greater than 6:1 at
any quarter end. The notional amount of the interest rate swap agreements at
February 28, 2001 totaled $120.0 million, and the agreements expire February
2003.
Based on amounts outstanding at February 28, 2001, if the interest rate on
our variable debt were to increase by 1.0%, our annual interest expense would be
higher by $9.6 million.
FOREIGN CURRENCY
Emmis owns a 59.5% interest in a Hungarian subsidiary which is consolidated
in the accompanying financial statements. This subsidiary's operations are
measured in its local currency (forint). Emmis has a natural hedge since some of
the subsidiary's long-term obligations are denominated in Hungarian forints.
Emmis maintains no other derivative instruments to mitigate the exposure to
translation and/or transaction risk. However, this does not preclude the
adoption of specific hedging strategies in the future. It is estimated that a
10% change in the value of the U.S. dollar to the Hungarian forint would not be
material.
Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated
in the accompanying financial statements. This subsidiary's operations are
measured in its local currency (peso), which is tied to the U.S. dollar through
the Argentine government's convertibility plan. Emmis maintains no derivative
instruments to mitigate the exposure to translation and/or transaction risk.
However, this does not preclude the adoption of specific hedging strategies in
the future.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED FEBRUARY 28 (29),
---------------------------------------------
1999 2000 2001
------------ ------------ ------------
GROSS REVENUES $ 274,056 $ 380,995 $ 550,073
LESS AGENCY COMMISSIONS 41,220 55,730 79,455
------------ ------------ ------------
NET REVENUES 232,836 325,265 470,618
Operating expenses 143,348 199,818 296,405
International business
development expenses 1,477 1,558 1,553
Corporate expenses 10,427 13,872 16,048
Time brokerage fees 2,220 - 7,344
Depreciation and amortization 28,314 44,161 74,018
Non-cash compensation 4,269 7,357 5,400
Corporate restructuring fees
and other - 896 4,057
------------ ------------ ------------
OPERATING INCOME 42,781 57,603 65,793
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (35,650) (51,986) (72,444)
Loss on donation of radio station - (956) -
Other income, net 1,914 4,203 38,037
------------ ------------ ------------
Total other income (expense) (33,736) (48,739) (34,407)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 9,045 8,864 31,386
PROVISION FOR INCOME TAXES 6,200 6,875 17,650
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS 2,845 1,989 13,736
EXTRAORDINARY LOSS, NET OF TAX 1,597 2,022 -
------------ ------------ ------------
NET INCOME (LOSS) 1,248 (33) 13,736
PREFERRED STOCK DIVIDENDS - 3,144 8,984
------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 1,248 $ (3,177) $ 4,752
============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Before extraordinary item $ 0.10 $ (0.03) $ 0.10
Extraordinary item, net of tax (0.06) (0.06) -
------------ ------------ ------------
Net income (loss) available to common
shareholders $ 0.04 $ (0.09) $ 0.10
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Before extraordinary item $ 0.10 $ (0.03) $ 0.10
Extraordinary item, net of tax (0.06) (0.06) -
------------ ------------ ------------
Net income (loss) available to common
shareholders $ 0.04 $ (0.09) $ 0.10
============ ============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
36
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29),
-------------------------
2000 2001
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,370 $ 59,899
Accounts receivable, net of allowance for
doubtful accounts of $1,924 and $2,202, respectively 66,471 97,281
Current portion of TV program rights 5,452 12,028
Income tax refunds receivable 4,685 13,970
Prepaid expenses 10,053 17,096
Other 8,685 14,832
---------- ----------
Total current assets 112,716 215,106
---------- ----------
PROPERTY AND EQUIPMENT:
Land and buildings 52,789 84,983
Leasehold improvements 9,006 12,584
Broadcasting equipment 74,975 142,185
Office equipment and automobiles 30,270 45,000
Construction in progress 1,210 10,696
---------- ----------
168,250 295,448
Less- Accumulated depreciation and amortization 39,346 57,561
---------- ----------
Total property and equipment, net 128,904 237,887
---------- ----------
INTANGIBLE ASSETS:
Broadcast licenses 959,454 1,880,989
Excess of cost over fair value of net
assets of purchased businesses 131,013 189,462
Other intangibles 14,558 33,591
---------- ----------
1,105,025 2,104,042
Less- Accumulated amortization 71,055 122,945
---------- ----------
Total intangible assets, net 1,033,970 1,981,097
---------- ----------
OTHER ASSETS:
Deferred debt issuance costs, net of accumulated
amortization of $2,535 and $5,729, respectively 14,082 29,448
TV program rights, net of current portion 15,851 6,509
Investments 10,664 11,287
Deposits and other 11,119 25,538
---------- ----------
Total other assets, net 51,716 72,782
---------- ----------
Total assets $1,327,306 $2,506,872
=========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
37
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29),
-------------------------
2000 2001
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,957 $ 34,206
Current maturities of other long-term debt 5,379 4,187
Current portion of TV program rights payable 16,816 28,192
Accrued salaries and commissions 8,162 10,342
Accrued interest 11,077 17,038
Deferred revenue 15,912 17,418
Other 4,139 5,768
---------- ----------
Total current liabilities 84,442 117,151
CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 300,000 1,380,000
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 14,607 13,684
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 58,585 47,567
OTHER NONCURRENT LIABILITIES 6,166 5,531
DEFERRED INCOME TAXES 87,139 135,468
---------- ----------
Total liabilities 550,939 1,699,401
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
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 in 2000 and 2001 29 29
Class A common stock, $.01 par value; authorized
170,000,000 shares; issued and outstanding 41,232,811
shares and 41,900,315 shares in 2000 and 2001,
respectively 412 419
Class B common stock, $.01 par value; authorized
30,000,000 shares; issued and outstanding 4,738,582
shares and 5,230,396 shares in 2000 and 2001,
respectively 47 52
Additional paid-in capital 804,820 830,299
Accumulated deficit (27,482) (22,730)
Accumulated other comprehensive income (1,459) (598)
---------- ----------
Total shareholders' equity 776,367 807,471
---------- ----------
Total liabilities and shareholders' equity $1,327,306 $2,506,872
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
38
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 2001
Class A Class B Series A
Common Stock Common Stock Preferred Stock
----------------------- -------------------- ----------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
------------ ------- ----------- ------ ----------- ------
(Dollars in thousands, except share data)
BALANCE, FEBRUARY 28, 1998 16,861,320 $ 168 5,121,788 $ 52 - $ -
Issuance of Class A Common stock in
exchange for Class B common stock 15,258 - (15,258) - - -
Exercise of stock options and
related income tax benefits 249,356 3 58,000 - - -
Issuance of Class A common
stock to profit sharing plan 43,184 1 - - - -
Issuance of Class A common stock
to employees and officers and related
income tax benefits 11,296 - - - - -
Sale of Class A common stock, net
of costs incurred of $10,560 9,200,000 92 - - - -
Comprehensive Income:
Net income - - - - - -
Cumulative translation adjustment - - - - - -
Total comprehensive income - - - - - -
----------- ------- ----------- ----- ------------ ------
BALANCE, FEBRUARY 28, 1999 26,380,414 264 5,164,530 52 - -
----------- ------- ----------- ----- ------------ ------
Issuance of Class A Common stock in
exchange for Class B common stock 505,668 5 (505,668) (5) - -
Exercise of stock options and
related income tax benefits 886,496 9 79,720 - - -
Issuance of Class A common
stock to profit sharing plan 34,246 - - - - -
Issuance of Class A common stock
to employees and officers and related
income tax benefits 41,987 - - - - -
Sale of Class A common stock, net
of costs incurred of $14,430 13,384,000 134 - - - -
Sale of Series A cumulative
convertible preferred stock, net
of costs incurred of $5,341 - - - - 2,875,000 29
Preferred stock dividends paid - - - - - -
Comprehensive Income:
Net income - - - - - -
Cumulative translation adjustment - - - - - -
Total comprehensive income - - - - - -
----------- -------- ------------ ----- ------------ -------
BALANCE, FEBRUARY 29, 2000 41,232,811 412 4,738,582 47 2,875,000 29
----------- -------- ------------ ----- ------------ -------
Issuance of Class A Common stock in
exchange for Class B common stock 17,875 - (17,875) - - -
Exercise of stock options and
related income tax benefits 482,991 5 509,689 5 - -
Issuance of Class A common
stock to profit sharing plan 47,281 1 - - - -
Issuance of Class A common stock
to employees and officers and related
income tax benefits 82,688 1 - - - -
Sale of Class A common stock
to employees 36,669 - - - - -
Preferred stock dividends paid - - - - - -
Comprehensive Income:
Net income - - - - - -
Cumulative translation adjustment - - - - - -
Total comprehensive income - - - - - -
----------- ------- ------------- ----- ------------- --------
BALANCE, FEBRUARY 28, 2001 41,900,315 $ 419 5,230,396 $ 52 2,875,000 $ 29
=========== ======= ============= ===== ============= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
39
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (CONTINUED)
FOR THE YEAR ENDED FEBRUARY 28, 2001
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Shareholders'
Capital Deficit Income Equity
----------- ---------- ----------- ----------
(Dollars in thousands, except share data)
BALANCE, FEBRUARY 28, 1998 $ 69,243 $ (25,553) $ - $ 43,910
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 4,127 - - 4,130
Issuance of Class A common
stock to profit sharing plan 999 - - 1,000
Issuance of Class A common stock
to employees and officers and related
income tax benefits 3,269 - - 3,269
Sale of Class A common stock, net
of costs incurred of $10,560 182,548 - - 182,640
Comprehensive Income:
Net income - 1,248 -
Cumulative translation adjustment - - (648)
Total comprehensive income - - - 600
----------- ---------- ----------- ----------
BALANCE, FEBRUARY 28, 1999 260,186 (24,305) (648) 235,549
----------- ---------- ----------- ----------
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 16,761 - - 16,770
Issuance of Class A common
stock to profit sharing plan 1,250 - - 1,250
Issuance of Class A common stock
to employees and officers and related
income tax benefits 4,807 - - 4,807
Sale of Class A common stock, net
of costs incurred of $14,430 383,436 - - 383,570
Sale of Series A cumulative
convertible preferred stock, net
of costs incurred of $5,341 138,380 - - 138,409
Preferred stock dividends paid - (3,144) - (3,144)
Comprehensive Income:
Net income - (33) -
Cumulative translation adjustment - - (811)
Totalcomprehensive income - - - (844)
----------- ---------- ----------- ----------
BALANCE, FEBRUARY 29, 2000 $ 804,820 $ (27,482) $ (1,459) $ 776,367
=========== ========== =========== ==========
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 18,707 - - 18,717
Issuance of Class A common
stock to profit sharing plan 1,250 - - 1,251
Issuance of Class A common stock
to employees and officers and related
income tax benefits 4,586 - - 4,587
Sale of Class A common stock to
employees 936 - - 936
Preferred stock dividends paid - (8,984) - (8,984)
Comprehensive Income:
Net income - 13,736 -
Cumulative translation adjustment - - 861
Total comprehensive income - - - 14,597
----------- ---------- ----------- ----------
BALANCE, FEBRUARY 28, 2001 $ 830,299 $ (22,730) $ (598) $ 807,471
=========== ========== =========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FEBRUARY 28 (29),
------------------------------------
1999 2000 2001
----------- ---------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 1,248 $ (33) $ 13,736
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item 1,597 2,022 -
Depreciation and amortization 32,158 53,818 94,454
Provision for bad debts 1,745 2,550 3,713
Provision for deferred income taxes 4,953 6,670 15,810
Non-cash compensation 4,269 7,357 5,400
Loss on donation of radio station - 956 -
Gain on exchange of assets - - (22,000)
Tax benefits of exercise of stock options 486 2,889 10,859
Other (1,143) (783) 1,464
Changes in assets and liabilities -
Accounts receivable (21,104) (13,319) (9,316)
Prepaid expenses and other current assets (727) (14,546) (24,627)
Other assets 3,435 (2,507) 12,099
Accounts payable and accrued liabilities 7,007 10,165 15,341
Deferred revenue (747) 4,332 569
Other liabilities 1,944 (33,211) (19,772)
----------- ---------- -----------
Net cash provided by operating activities 35,121 26,360 97,730
----------- ---------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (37,383) (29,316) (26,225)
Cash paid for acquisitions (504,748) (231,130) (1,060,681)
Deposits on acquisitions and other 661 (11,500) (23,849)
----------- ---------- -----------
Net cash used in investing activities (541,470) (271,946) (1,110,755)
----------- ---------- -----------
FINANCING ACTIVITIES:
Payments on long-term debt (723,500) (426,668) (1,051,549)
Proceeds from long-term debt 1,063,000 149,668 2,128,388
Proceeds from the issuance of the Company's Class A
common stock, net of transaction costs 182,640 383,570 -
Proceeds from the issuance the Company's Series A
cumulative convertible preferred stock, net of
transaction costs - 138,409 -
Proceeds from exercise of stock options
and employee stock purchases 4,130 13,881 8,794
Payments for debt related costs (19,589) - (21,095)
Preferred stock dividends - (2,021) (8,984)
----------- ---------- -----------
Net cash provided by financing activities 506,681 256,839 1,055,554
----------- ---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 332 11,253 42,529
CASH AND CASH EQUIVALENTS:
Beginning of period 5,785 6,117 17,370
----------- ---------- -----------
End of period $ 6,117 $ 17,370 $ 59,899
=========== ========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FEBRUARY 28 (29),
------------------------------------
1999 2000 2001
----------- ---------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 33,439 $ 41,735 $ 58,362
Income taxes 1,580 9,589 550
Non- cash investing and financing transactions-
Preferred stock dividends accrued - 1,123 -
ACQUISITION OF WQCD-FM:
Fair value of assets acquired $ 201,347
Cash paid 128,550
----------
Liabilities recorded $ 72,797
===========
ACQUISITION OF TELEVISION PROPERTIES
FROM SF BROADCASTING:
Fair value of assets acquired $ 346,952
Cash paid 287,293
-----------
Liabilities recorded $ 59,659
===========
ACQUISITION OF TELEVISION PROPERTIES
FROM WABASH VALLEY BROADCASTING:
Fair value of assets acquired $ 101,055
Cash paid 88,905
-----------
Liabilities recorded $ 12,150
===========
ACQUISITION OF COUNTRY SAMPLER:
Fair value of assets acquired $ 25,608
Cash paid 18,954
----------
Liabilities recorded $ 6,654
==========
ACQUISITION OF WKCF-TV:
Fair value of assets acquired $ 246,445
Cash paid 197,105
----------
Liabilities recorded $ 49,340
==========
ACQUISITION OF VOTIONIS, S.A:
Fair value of assets acquired $ 18,936
Cash paid 13,302
----------
Liabilities recorded $ 5,634
==========
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,520
Cash paid 36,827
-----------
Liabilities recorded $ 2,693
===========
ACQUISITION OF KKFR-FM AND KXPK-FM:
Fair value of assets acquired $ 110,210
Cash paid 109,052
-----------
Liabilities recorded $ 1,158
===========
ACQUISITION OF TELEVISION PROPERTIES
FROM LEE ENTERPRISES, INC:
Fair value of assets acquired $ 633,639
Cash paid 582,994
-----------
Liabilities recorded $ 50,645
===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FEBRUARY 28 (29),
------------------------------------
1999 2000 2001
----------- ---------- -----------
ACQUISITION OF KIHT-FM, KFTK-FM, KPNT-FM,
WVRV-FM, WIL-FM AND WRTH-AM:
Fair value of assets acquired $ 230,891
Cash paid 230,891
-----------
Liabilities recorded $ -
===========
EXCHANGE OF ASSETS FOR KZLA-FM:
Fair value of assets acquired $ 185,000
Basis in assets exchanged 163,000
Gain on exchange of assets 22,000
Cash paid -
-----------
Liabilities recorded $ -
===========
ACQUISITION OF KALC-FM:
Fair value of assets acquired $ 100,917
Cash paid 100,917
-----------
Liabilities recorded $ -
===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
43
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Emmis Communications Corporation is a diversified media company with radio
broadcasting, television broadcasting and magazine publishing operations. The
twenty FM radio stations and three AM radio stations Emmis Communications
Corporation operates in the United States serve the nation's three largest radio
markets of New York City, Los Angeles and Chicago, as well as Denver, Phoenix,
St. Louis, Indianapolis and Terre Haute, Indiana. The fifteen television
stations Emmis operates serve geographically diverse, mid-sized markets in the
U.S. as well as the large markets of Portland and Orlando and have a variety of
television network affiliations, including five with CBS, five with Fox, three
with NBC, one with ABC and one with WB. Emmis Communications Corporation also
publishes Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati,
Country Sampler, and Country Marketplace magazines, and has a 59.5% interest in
a national radio station in Hungary (Slager Radio), a 75% interest in one FM and
one AM radio station in Buenos Aires, Argentina (Votionis), and engages in
certain businesses ancillary to broadcasting, such as broadcast tower leasing
and advertising and program consulting.
b. Principles of Consolidation
The consolidated financial statements include the accounts of Emmis
Communications Corporation and its majority owned Subsidiaries. Unless otherwise
indicated, references to Emmis or the Company in these financial statements mean
Emmis Communications Corporation and its Subsidiaries. Emmis' foreign
subsidiaries report on a fiscal year ending December 31, which Emmis
consolidates into its fiscal year ending February 28 (29). All significant
intercompany balances and transactions have been eliminated.
c. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication
revenue is recognized in the month of delivery of the publication.
d. Allowance for Doubtful Accounts
A provision for doubtful accounts is recorded based on management's judgement
of the collectibility of receivables. The activity in the allowance for doubtful
accounts during the years ended February 1999, 2000 and 2001 was as follows:
Balance at Balance
Beginning At End
Of Year Provision Write-Offs Of Year
Year ended February 28, 1999 $ 1,346 $ 1,745 $(1,393) $ 1,698
Year ended February 29, 2000 1,698 2,550 (2,324) 1,924
Year ended February 28, 2001 1,924 3,713 (3,435) 2,202
44
e. Television Programming
Emmis has agreements with distributors for the rights to television
programming over contract periods which generally run from one to five years.
Each contract is recorded as an asset and a liability at an amount equal to its
gross contractual commitment when the license period begins and the program is
available for its first showing. The portion of program contracts which become
payable within one year is reflected as a current liability in the accompanying
consolidated balance sheet.
The rights to program materials are reflected in the accompanying
consolidated balance sheet at the lower of unamortized cost or estimated net
realizable value. Estimated net realizable values are based upon management's
expectation of future advertising revenues, net of sales commissions, to be
generated by the program material. Amortization of program contract costs is
computed under either the straight-line method over the contract period or based
on usage, whichever yields the greater amortization for each program on a
monthly basis. Program contract costs that management expects to be amortized in
the succeeding year are classified as current assets. Program contract
liabilities are typically paid on a scheduled basis and are not affected by
adjustments for amortization or estimated net realizable value. Certain program
contracts provide for the exchange of advertising air time in lieu of cash
payments for the rights to such programming. These contracts are recorded as the
programs are aired at the estimated fair value of the advertising air time given
in exchange for the program rights.
f. Time Brokerage Fees
The Company generally enters into time brokerage fees in connection with
acquisitions, pending regulatory approval of transfer of license assets. Under
the terms of these agreements, the Company makes specified periodic payments to
the owner-operator in exchange for the grant to the Company of the right to
program and sell advertising on a specified portion of the station's inventory
of broadcast time. Nevertheless, as the holder of the FCC license, the
owner-operator retains control and responsibility for the operation of the
station, including responsibility over all programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the
years ended February 1999, 2000 and 2001 are time brokerage fees of $2.2
million, $0 and $7.3 million, respectively.
g. International Business Development Expenses
International business development expenses include the cost of the Company's
efforts to identify, investigate, develop and support international broadcast
investments or other international business opportunities.
h. Non-cash Compensation
Non-cash compensation includes compensation expense associated with stock
option and restricted common stock grants, and common stock contributed to the
Company's Profit Sharing Plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Pro forma disclosure of net income
and earnings per share under SFAS No. 123 is presented in Note 9.
i. Cash and Cash Equivalents
Emmis considers time deposits, money market fund shares, and all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
45
j. Property and Equipment
Property and equipment are recorded at cost. Depreciation is generally
computed by the straight-line method over the estimated useful lives of the
related assets which are 31.5 years for buildings, not more than 32 years or the
life of the lease, whichever is lower for leasehold improvements, and 5 to 7
years for broadcasting equipment, office equipment and automobiles. Maintenance,
repairs and minor renewals are expensed; improvements are capitalized. Interest
was capitalized in connection with the construction of the Indianapolis office
facility and the KHON operating facility. The capitalized interest was recorded
as part of the buildings. In fiscal 1999 and 2000, approximately $1,591 and $420
of interest was capitalized, respectively. No interest was capitalized in fiscal
2001. On a continuing basis, the Company reviews the financial statement
carrying value of property and equipment for impairment. If events or changes in
circumstances were to indicate that an asset carrying value may not be
recoverable, a write-down of the asset would be recorded through a charge to
operations.
k. Intangible Assets
Intangible assets are recorded at cost. Generally, broadcast licenses,
trademarks and the excess of cost over fair value of net assets of purchased
businesses are being amortized using the straight-line method over 40 years. The
cost of the broadcast license for Slager Radio is being amortized over the seven
year initial term of the license. The cost of the broadcast license for the two
stations in Buenos Aires, Argentina is being amortized over the twenty-three
year term of the license. The excess of cost over fair value of net assets
resulting from the purchase of publications is being amortized over 15 years.
Other intangibles are amortized using the straight-line method over varying
periods, not in excess of 10 years.
Subsequent to the acquisition of an intangible asset, Emmis evaluates whether
later events and circumstances indicate the remaining estimated useful life of
that asset may warrant revision or that the remaining carrying value of such an
asset may not be recoverable. When factors indicate that an intangible asset
should be evaluated for possible impairment, Emmis uses an estimate of the
related asset's undiscounted future cash flows over the remaining life of that
asset in measuring recoverability. If separately identifiable cash flows are not
available for an intangible asset (as would generally be the case for the excess
of cost over fair value of purchased businesses), Emmis evaluates recoverability
based on the expected undiscounted cash flows of the specific business to which
the asset relates. If such an analysis indicates that impairment has in fact
occurred, Emmis writes down the remaining net book value of the intangible asset
to its fair value. For this purpose, fair value is determined using quoted
market prices (if available), appraisals or appropriate valuation techniques.
In fiscal 2001, the Company determined an intangible balance related to
WTLC-AM was impaired and as a result incurred a $2.0 million impairment charge
to record the intangible asset at its fair value. This impairment charge is
reflected in corporate restructuring fees and other in the accompanying
consolidated statements of operations.
l. Advertising and Subscription Acquisition Costs
Advertising and subscription acquisition costs are expensed the first time
the advertising takes place, except for certain direct-response advertising
related to the identification of new magazine subscribers, the primary purpose
of which is to elicit sales from customers who can be shown to have responded
specifically to the advertising and that results in probable future economic
benefits. These direct-response advertising costs are capitalized as assets and
amortized over the estimated period of future benefit, ranging from six months
to two years subsequent to the promotional event. 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 period benefited
or the remainder of the fiscal year.
46
m. Investments
Emmis has a 50% ownership interest (approximately $5,114 as of February 28,
2001) in a partnership in which the sole asset is land on which a transmission
tower is located. The other owner has voting control of the partnership. Emmis
has a 28% ownership interest (approximately $1,655 as of February 28, 2001) in a
local media internet venture. Emmis has a 25% ownership interest (approximately
$2,401 as of February 28, 2001) in a company that operates a tower site in
Portland, Oregon. Emmis has a 51% ownership interest (approximately $915 as of
February 28, 2001) in a company that operates crafting stores, but Emmis does
not control the operations of the entity. These investments are accounted for
using the equity method of accounting. During fiscal 2001, Emmis reduced the
carrying value of its investment in BuyItNow.com from $5.0 million to zero as
the decline in the value of the investment was deemed to be other than
temporary. This expense is reflected in other income in the accompanying
consolidated statements of operations.
n. Deferred Revenue and Barter Transactions
Deferred revenue includes deferred magazine subscription revenue and deferred
barter revenue. Deferred magazine subscription revenue is recognized when the
publication is shipped. Barter transactions are recorded at the estimated fair
value of the product or service received. Broadcast revenue from barter
transactions is recognized when commercials are broadcast. The appropriate
expense or asset is recognized when merchandise or services are used or
received. Barter revenues for the years ended February 1999, 2000 and 2001 were
$10.0 million, $10.2 million and $12.0 million, respectively, and barter
expenses were $8.9 million, $9.8 million and $12.0 million, respectively.
o. Foreign Currency Translation
The functional currency of Slager Radio is the Hungarian forint. Slager
Radio's balance sheet has been translated from forints to the U.S. dollar using
the current exchange rate in effect at the subsidiary's balance sheet date.
Slager Radio's results of operations have been translated using an average
exchange rate for the period. The translation adjustment resulting from the
conversion of Slager Radio's financial statements was $648, $811, and ($861) for
the years ended February 1999, 2000 and 2001, respectively. This adjustment is
reflected in shareholders' equity in the accompanying consolidated balance
sheet.
The functional currency of the two stations in Argentina is the Argentinean
peso. The peso is tied to the U.S. dollar through the Argentine government's
convertibility plan. Thus, translation adjustments resulting from the conversion
of these stations' financial statements were immaterial for the years ended
February 1999, 2000 and 2001.
p. Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the income statement for all entities with complex
capital structures. Basic EPS is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period (28,905,640, 36,155,982, and 46,869,050 shares for the years
ended February 28 (29), 1999, 2000 and 2001, respectively). Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted. Potentially dilutive securities
at February 28, 1999 consisted solely of stock options. Potentially dilutive
securities at February 28 (29), 2000 and 2001 consisted of stock options and the
6.25% Series A cumulative convertible preferred stock. The conversion of the
preferred stock is not included in the calculation of diluted net income per
common share for the years ended February (28) 29, 2000 and 2001 as the effect
of these conversions would be antidilutive. Additionally, the conversion of
stock options is not included in the calculation of diluted net income per
common share for the year ended February 29, 2000 as the effect of their
conversion would be antidilutive. Weighted average common equivalent shares
47
outstanding for the period for purposes of computing diluted EPS are 29,696,342,
36,155,982, and 47,940,265 for the years ended February 28 (29), 1999, 2000 and
2001, respectively. Excluded from the calculation of diluted net income per
share are 2.7 and 3.7 million weighted average shares that would result from the
conversion of the stock options and preferred shares for the years ended
February 28 (29), 2000 and 2001, respectively.
q. Stock Splits
In February 2000, the Company effected a 2 for 1 stock split of the
outstanding shares of common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect the stock split.
r. Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
s. Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. Except for the Senior Subordinated Notes, the carrying amounts of
long-term debt approximate fair value due to the variable interest rate on such
debt. The fair value of the Senior Subordinated Notes on February 28, 2001 was
approximately $286.9 million. Fair value estimates are made at a specific point
in time, based on relevant market information about the financial instrument.
t. Recent Accounting Pronouncement
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June of 2000 by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities." These
statements, which are effective for Emmis on March 1, 2001, establish accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. These statements require that every
derivative instrument be recorded in the balance sheet as either an asset or a
liability measured at its fair value. Changes in the fair value of derivatives
are to be recorded each period in earnings or comprehensive income, depending on
whether the derivative is designated and effective as part of a hedged
transaction, and on the type of hedge transaction. Gains or losses on derivative
instruments reported in the other comprehensive income must be reclassified as
earnings in the period in which earnings are affected by the underlying hedged
item, and the ineffective portion of all hedges must be recognized in earnings
in the current period. These new standards will result in additional volatility
in reported assets, liabilities, earnings and other comprehensive income.
SFAS No. 133 requires that as of the date of initial adoption the difference
between the fair value of the derivative instruments to be recorded on the
balance sheet and the previous carrying amount of those derivatives be reported
in net income or other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle in accordance with APB 20 "Accounting
Changes."
On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No. 133,
which resulted in an immaterial impact to the results of operations and the
financial position of Emmis.
48
SFAS No. 133 further requires that the fair value and effectiveness of each
hedging instrument must be measured quarterly. The result of each measurement
could result in fluctuations in reported assets, liabilities, other
comprehensive income and earnings as these changes in fair value and
effectiveness are recorded to the financial statements. Emmis anticipates, on an
ongoing basis, the fluctuations to the aforementioned areas will be immaterial
to the financial statements taken as a whole.
u. Reclassifications
Certain reclassifications have been made to the prior years financial
statements to be consistent with the February 28, 2001 presentation.
2. COMMON STOCK
Emmis has authorized 170,000,000 shares of Class A common stock, par value
$.01 per share, 30,000,000 shares of Class B common stock, par value $.01 per
share, and 30,000,000 shares of Class C common stock, par value $.01 per share.
The rights of these three classes are essentially identical except that each
share of Class A common stock has one vote with respect to substantially all
matters, each share of Class B common stock has 10 votes with respect to
substantially all matters, and each share of Class C common stock has no voting
rights with respect to substantially all matters. Class B common stock is owned
by the principal shareholder (Jeffrey H. Smulyan). All shares of Class B common
stock convert to Class A common stock upon sale or other transfer to a party
unaffiliated with the principal shareholder. At February 28 (29), 2000 and 2001,
no shares of Class C common stock were issued or outstanding. The financial
statements presented reflect the issuance of Class A and Class B common stock.
In June 1998, Emmis completed the sale of 9.2 million shares of its Class A
common stock at $21.00 per share resulting in total proceeds of $193.2 million.
Net proceeds from the offering were used to repay outstanding obligations under
the credit facility.
On October 29, 1999, Emmis completed the sale of 7.984 million shares of its
Class A common stock at $31.25 per share resulting in total proceeds of $249.5
million. Net proceeds of $238.3 million were used to fund the acquisition of
WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and
to repay certain outstanding obligations under the credit facility.
At the same time as its public sale of 7.984 million shares of Class A common
stock, Emmis entered into a stock purchase agreement with Liberty Media
Corporation (Liberty) and sold 5.4 million shares of the Company's Class A
common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of
$145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida,
two radio stations in Buenos Aires, Argentina, and to repay certain outstanding
obligations under the credit facility.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock, which may be
issued with such designations, preferences, limitations and relative rights as
Emmis' Board of Directors may authorize.
On October 29, 1999, the Company completed the sale of 2.875 million shares
of 6.25% Series A cumulative convertible preferred stock at $50 per share
resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million
were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio
stations in Buenos Aires, Argentina, and to repay certain outstanding
obligations under the credit facility.
49
The 6.25% Series A cumulative convertible preferred stock has a liquidation
preference of $50 per share and a par value of $.01 per share. Each preferred
share is convertible at the option of the holder into 1.28 shares of Class A
common stock, subject to certain events. Dividends are cumulative and payable
quarterly in arrears on January 15, April 15, July 15, and October 15 of each
year at an annual rate of $3.125 per preferred share.
The Company may not redeem the preferred stock prior to April 15, 2001. From
April 15, 2001 to October 15, 2002, the Company may redeem the preferred stock
at a redemption premium equal to 104.911% of the stated liquidation preference
(plus accumulated and unpaid dividends, if any) if certain conditions are met.
Beginning on October 15, 2002, and each October 15 thereafter, the Company may
redeem the preferred stock for cash at the following redemption premiums (which
are expressed as a percentage of the liquidation preference per share), plus in
each case accumulated and unpaid dividends, if any, whether or not declared to
the redemption date:
Year Amount
---- --------
2002 103.571%
2003 102.679%
2004 101.786%
2005 100.893%
2006 and thereafter 100.000%
4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT
The credit facility and senior subordinated debt was comprised of the
following at February 28 (29), 2000 and 2001:
2000 2001
----------- ----------
Credit Facility
Revolver $ - $ -
Term Note A - 480,000
Term Note B - 600,000
8 1/8% Senior Subordinated Notes Due 2009 300,000 300,000
----------- ----------
Total Debt $ 300,000 $1,380,000
=========== ==========
Credit Facility
On December 29, 2000 the Company entered into an amended and restated credit
facility for $1.4 billion, which includes a provision allowing Emmis to increase
the commitment by $500.0 million under circumstances described in the credit
facility. The credit facility consists of a $320.0 million revolver, a $480.0
million term note A and a $600.0 million term note B. The revolver and term note
A mature February 28, 2009 and the term note B matures August 31, 2009. Net
deferred debt costs of approximately $22.0 million relating to the credit
facility are reflected in deposits and other in the accompanying consolidated
balance sheets as of February 28, 2001, and are amortized over the life of the
credit facility as a component of interest expense.
Prior to the existing credit facility, Emmis entered into a bridge financing
arrangement in October 2000 that provided up to $1.0 billion in capacity. The
bridge financing was replaced by the existing credit facility and accordingly
$3.4 million of fees associated with the bridge financing were amortized into
interest expense during the year ended February 28, 2001.
The amended and restated credit facility provides for letters of credit to be
made available to the Company not to exceed $100.0 million. The aggregate amount
of outstanding letters of credit and amounts borrowed under the revolver cannot
exceed the revolver commitment. At February 28, 2001, $6.6 million in letters of
credit were outstanding.
50
All outstanding amounts under the credit facility bear interest, at the
option of Emmis, at a rate equal to the Eurodollar Rate or an alternative base
rate (as defined in the credit facility) plus a margin. The margin over the
Eurodollar Rate or the alternative base rate varies (ranging from 0% to 2.9%),
depending on Emmis' ratio of debt to operating cash flow, as defined in the
agreement. The weighted-average interest rate on borrowings outstanding under
the credit facility at February 28, 2001 was approximately 8.0% and there were
no borrowings outstanding as of February 29, 2000. Interest is due on a calendar
quarter basis under the alternative base rate and at least every three months
under the Eurodollar Rate. The credit facility requires the Company to have
fixed interest rates for a two year period on at least 50% of its total
outstanding debt, as defined (including the senior subordinated debt), by June
27, 2001. Emmis plans to accomplish this by purchasing interest rate swap
agreements. After the first two years, this ratio of fixed to floating rate debt
must be maintained if Emmis' total leverage ratio, as defined, is greater than
6:1 at any quarter end. The notional amount of interest rate protection
agreements at February 28, 2001 totaled $120.0 million. The interest rate swap
agreements, which expire in February 2003, establish interest rates on the
credit facility's underlying base rate approximating a weighted average rate of
5.27% on the three-month LIBOR interest rate.
The aggregate amount of term notes A and B begin amortizing in December 2003.
The annual amortization and reduction schedules for debt outstanding as of
February 28, 2001, are as follows:
SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY
Year Ended Term Loan A Term Loan B Total
February 28 (29), Amortization Amortization Amortization
2002 $ - $ - $ -
2003 - - -
2004 20,400 1,500 21,900
2005 84,000 6,000 90,000
2006 88,800 6,000 94,800
2007 91,200 6,000 97,200
2008 96,000 6,000 102,000
2009 99,600 6,000 105,600
2010 - 568,500 568,500
-------- -------- ---------
Total $480,000 $600,000 $1,080,000
======== ======== ==========
Proceeds from raising additional equity, issuing additional subordinated
debt, or from asset sales, as well as excess cash flow beginning in February 29,
2004, may be required to repay amounts outstanding under the credit facility.
These mandatory repayment provisions may apply depending on Emmis' total
leverage ratio, as defined under the credit facility. Additionally, Emmis may
reborrow amounts paid in accordance with these provisions under certain
circumstances.
The credit facility contains various financial and operating covenants and
other restrictions with which Emmis must comply, including, among others,
restrictions on additional indebtedness, incurrence of liens, engaging in
businesses other than its primary business, paying cash dividends on common
stock, redeeming or repurchasing capital stock of Emmis, acquisitions and asset
sales, as well as requirements to maintain certain financial ratios. The Company
was in compliance with these covenants at February 28, 2001. The credit facility
provides that an event of default will occur if there is a change of control of
Emmis, as defined. A change of control includes, but is not limited to, Jeffrey
H. Smulyan or any beneficial holder ceasing to own at least 35% of the general
voting rights of the capital stock of Emmis. Substantially all of Emmis' assets,
including the stock of Emmis' wholly-owned subsidiaries, are pledged to secure
he credit facility.
51
SENIOR SUBORDINATED NOTES
On February 12, 1999, the Company issued $300 million of 8 1/8% senior
subordinated notes. The senior subordinated notes were sold at 100% of the face
amount. In March 1999, the Company filed an Exchange Offer Registration
Statement with the SEC to exchange the senior subordinated notes for new series
B notes ("the Notes") registered under the Securities Act. The terms of the new
series B notes are identical to the terms of the senior subordinated notes.
Prior to March 15, 2002, the Company may, at its option, use the net cash
proceeds of one or more Public Equity Offerings (as defined), to redeem up to
35% of the aggregate principal amount of the Notes at a redemption price equal
to 108.125% plus accrued and unpaid interest, provided that at least $195.0
million of the aggregate principal amount of the Notes originally issued remains
outstanding after such redemption. On or after March 15, 2004 and until March
14, 2007, the Notes may be redeemed at the option of the Company in whole or in
part at prices ranging from 104.063% to 101.354% plus accrued and unpaid
interest. On or after March 15, 2007, the Notes may be redeemed at 100% plus
accrued and unpaid interest. Upon a change of control (as defined), the Company
is required to make an offer to purchase the Notes then outstanding at a
purchase price equal to 101% plus accrued and unpaid interest. Interest on the
Notes is payable semi-annually. The Notes have no sinking fund requirements and
are due in full on March 15, 2009.
The Notes are guaranteed by certain subsidiaries of the Company and expressly
subordinated in right of payment to all existing and future senior indebtedness
(as defined) of the Company. The Notes will rank pari passu with any future
senior subordinated indebtedness (as defined) and senior to all subordinated
indebtedness (as defined) of the Company.
The indenture relating to the Notes contains covenants with respect to the
Company which include limitations of indebtedness, restricted payments,
transactions with affiliates, issuance and sale of capital stock of restricted
subsidiaries, sale/leaseback transactions and mergers, consolidations or sales
of substantially all of the Company's assets. The Company was in compliance with
these covenants at February 28, 2001.
5. OTHER LONG-TERM DEBT
Other long-term debt was comprised of the following at February 28 (29), 2000
and 2001:
2000 2001
----------- ----------
Hungary:
License Obligation $ 14,147 $ 10,605
Bonds Payable 2,497 2,207
Notes Payable 784 1,872
Other 2,558 3,187
----------- ----------
Total Other Long-Term Debt 19,986 17,871
Less: Current Maturities 5,379 4,187
Other Long-Term Debt, Net of
Current Maturities $ 14,607 $ 13,684
=========== ==========
The License Obligation is payable to the Hungarian government in Hungarian
forints, by Emmis' Hungarian subsidiary in four equal annual installments that
commenced in November 2000. The License Obligation of $10.6 million as of
February 28, 2001, is reflected net of an unamortized discount of $0.4 million.
The obligation is non-interest bearing; however, in accordance with the license
purchase agreement, a Hungarian cost of living adjustment is calculated annually
and is payable, concurrent with the principal payments, on the outstanding
obligation. The cost of living adjustment is estimated each reporting period and
is included in interest expense. Prevailing market interest rates in Hungary
exceed inflation by approximately 3%. Accordingly, the License Obligation has
been discounted at an imputed interest rate of approximately 3% to reflect the
obligation at its fair value.
52
The Hungarian Bonds and Notes Payable are payable by Emmis' Hungarian
subsidiary to the minority shareholders of the subsidiary. The Bonds, payable in
Hungarian forints, are due on maturity at November 2004 and bear interest at the
Hungarian State Bill rate plus 3% (approximately 17.5% and 13.7% at February 28
(29), 2000 and 2001, respectively). Interest is payable semi-annually. The Notes
Payable and accrued interest, payable in U.S. dollars, are due December 31, 2002
and bear interest at the prime rate plus 2%.
6. TV PROGRAM RIGHTS PAYABLE
Future payments required under TV program rights payable as of February 28,
2001, are as follows:
2002 $ 28,192
2003 14,260
2004 10,569
2005 9,252
2006 6,610
2007 and thereafter 6,876
-------------
75,759
Less: Current Portion of TV
Program Rights Payable 28,192
-------------
TV Program Rights Payable, Net
of Current Portion $ 47,567
=============
ACQUISITIONS, DISPOSITONS, DONATIONS AND INVESTMENTS
On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the
intellectual property of WTLC-FM (both located in Indianapolis, Indiana) to
Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and
the AM sale occurred on April 25, 2001. Emmis retained the FCC license at 105.7
and reformatted the station as WYXB-FM.
On January 17, 2001, Emmis completed its acquisition of substantially all of
the assets of radio station KALC-FM in Denver, Colorado from Salem
Communications Corporation for $98.8 million in cash plus a commitment fee of
$1.2 million and transaction related costs of $0.9 million. The acquisition,
which was accounted for as a purchase, was financed through borrowings under the
credit facility. Emmis began operating the station under a time brokerage
agreement in October 2000. The total purchase price was allocated to property
and equipment and broadcast licenses based on a preliminary appraisal. Broadcast
licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM,
WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as KFTK-FM) and KIHT-FM in St.
Louis, Missouri from Sinclair Broadcast Group, Inc. ("Sinclair") for $220.0
million in cash, plus transaction related costs of $10.9 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
acquisition was financed through borrowings under Emmis' credit facility and was
accounted for as a purchase. The total purchase price was allocated to property
and equipment and broadcast licenses based on a preliminary appraisal. Broadcast
licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
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). Since the fair value of WKKX exceeded the book value of the
station at the date of the exchange, Emmis recorded a gain on exchange of assets
of $22.0 million. This gain is included in other income, net in the accompanying
consolidated statements of operations. From August 1, 2000 through the date of
acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The
exchange was
53
accounted for as a purchase. The total purchase price of $185.0 million was
allocated to property and equipment and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight
network-affiliated and seven satellite television stations from Lee Enterprises,
Inc. for $559.5 million in cash, the payment of $21.3 million for working
capital and transaction related costs of $2.2 million (the "Lee Acquisition").
In connection with the acquisition, Emmis recorded $31.3 million of deferred tax
liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a
severance related liability of $1.8 million and the entire severance liability
remained outstanding as of February 28, 2001. Emmis expects the remaining amount
to be fully utilized during the year ended February 28, 2002. This transaction
was financed through borrowings under Emmis' credit facility 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.
The total purchase price was allocated to property and equipment, television
program rights, working capital related items and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
As a result of the Lee Acquisition, Emmis owns more television stations in
the Hawaiian market than is currently permitted by FCC regulations. Emmis is
currently operating the stations under an FCC waiver that requires Emmis to file
an application to sell one of its Hawaiian television stations by October 1,
2001. Emmis is currently exploring various possibilities.
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 $108.0
million in cash, less purchase price adjustments of $1.0 million, plus
liabilities recorded of $1.2 and transaction related costs of $0.9 million.
Emmis financed the acquisition through borrowings under its existing credit
facility. The acquisition was accounted for as a purchase. The total purchase
price was allocated to property and equipment and broadcast licenses based on a
preliminary appraisal. Broadcast licenses are included in intangible assets in
the accompanying consolidated balance sheets and are being amortized over 40
years.
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, which is included in other
income in the accompanying consolidated statements of operations.
54
On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los
Angeles Magazine Holding Company, Inc. for approximately $36.8 million in cash
plus liabilities recorded of $2.7 million (the "Los Angeles Magazine
Acquisition"). 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' existing credit facility. The excess of the purchase
price over the estimated fair value of identifiable assets was $36.0 million,
which is included in intangible assets in the accompanying consolidated balance
sheets and is being amortized over 15 years.
On December 14, 1999, the Company completed its acquisition of substantially
all of the assets of Country Marketplace and related publications from H&S
Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of
approximately $.6 million. The acquisition was accounted for as a purchase and
was financed through borrowings under the credit facility. The excess of the
purchase price over the estimated fair value of identifiable assets was $2.3
million, which is included in intangible assets in the accompanying consolidated
balance sheets and is being amortized over 15 years.
On November 16, 1999 Emmis purchased an interest in BuyItNow.com L.L.C. for
$5.0 million in cash, which represented an original investment of 2.49% of the
outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the
carrying value of its investment in BuyItNow.com from $5.0 million to zero as
the decline in the value of the investment was deemed to be other than
temporary.
On November 9, 1999, the Company completed its acquisition of 75% of the
outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in
cash plus liabilities recorded of $5.6 million. Additional consideration of up
to $2.2 million will be paid if certain conditions are met. Votionis consists of
one FM and one AM radio station located in Buenos Aires, Argentina (the
"Votionis Acquisition"). The acquisition was accounted for as a purchase and was
financed with proceeds from the Company's October 1999 Common and Preferred
Equity Offerings. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets. This broadcast license is being
amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially
all of the assets of television station WKCF in Orlando, Florida ( the "WKCF
Acquisition") from Press Communications, L.L.C. for approximately $197.1 million
in cash. The purchase price included the purchase of land and a building for
$2.2 million. The Company financed the acquisition through a $12.5 million
advance payment borrowed under the credit facility and proceeds from the
Company's October 1999 Common and Preferred Equity Offerings. In connection with
the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was
allocated to property and equipment, television program rights and broadcast
licenses based on an appraisal. Broadcast licenses are included in intangible
assets and are being amortized over 40 years. WKCF is an affiliate of the WB
Television Network. As part of the WKCF Acquisition, the Company entered into an
agreement with the WB Television Network which, among other things, extends the
existing network affiliation agreement through December 2009.
On April 1, 1999, the Company completed its acquisition of substantially all
of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for
approximately $20.9 million plus liabilities recorded of approximately $4.7
million. The purchase price was payable with $18.5 million in cash at closing,
which was financed through additional borrowings under the credit facility, $2.0
million payable under a contract with the principal shareholder through April
2003, and $.5 million paid in October 1999. The acquisition was accounted for as
a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in
the accompanying consolidated balance sheets and is being amortized over 15
years.
55
Effective October 1, 1998, the Company completed its acquisition of
substantially all of the assets of Wabash Valley Broadcasting Corporation (the
"Wabash Acquisition") for a cash purchase price of $88.9 million (including
transaction costs), plus liabilities recorded of approximately $12.2 million.
The Company financed the acquisition through borrowings under the credit
facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated
television station in Ft. Myers, Florida, WTHI-TV, a CBS network affiliated
television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio
stations located in the Terre Haute, Indiana area. In December 1999, the Company
donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million
net book value of the station at the time of donation was recognized as a loss
on donation of radio station.
On July 16, 1998, the Company completed its acquisition of substantially all
of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc.
and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price
of $287.3 million (including transaction costs), a $25.0 million promissory note
due to the former owner, plus liabilities recorded of approximately $34.7
million. The Company financed the acquisition through a $25.0 million promissory
note and borrowings under the credit facility. The promissory note was paid in
full in February 1999. The SF Acquisition consists of four Fox network
affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New
Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii
(including satellite stations KAII-TV, Wailuku, Hawaii and KHAW-TV, Hilo,
Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station
WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio,
Inc. for a cash purchase price of $141.6 million (including transaction costs)
less approximately $13.0 million for cash purchase price adjustments relating to
taxes, plus $20.0 million of net current tax liabilities, $52.5 million of
deferred tax liabilities and $0.3 million of liabilities associated with the
acquisition. The acquisition was accounted for as a purchase and was financed
through borrowings under the credit facility. Effective July 1, 1997 through the
date of closing, the Company operated WQCD-FM under a time brokerage agreement.
8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Unaudited pro forma summary information is presented below for the years
ended February 28 (29), 2000 and 2001, assuming the following events all had
occurred on the first day of the pro forma periods presented below: (a) the
acquisition of (i) KKLT-FM, KTAR-AM and KMVP-AM in March 2001, (ii) KALC-FM in
January 2001, (iii) KZLA-FM, eight network-affiliated television stations from
Lee Enterprises, Inc. and KPNT-FM, KXOK-FM AND KIHT-FM in October 2000, (iv)
KKFR-FM and KXPK-FM in August 2000, (v) Los Angeles Magazine in March 2000, (vi)
two radio stations in Argentina in November 1999, (vii) WKCF-TV in October 1999
and (viii) Country Sampler Magazine in April 1999; (b) the disposition of WKKX
in October 2000; (c) the refinancing of the credit facility and (d) 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.
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.
56
Pro Forma
2000 2001
-------------- --------------
Net revenues $ 545,849 $ 573,100
============== ==============
Broadcast/publishing cash flow $ 196,112 $ 211,733
============== ==============
Loss before extraordinary item $ (44,363) $ (15,638)(A)
============== ==============
Net loss available to common
shareholders before extraordinary
loss $ (53,347) $ (24,622)(A)
=============== ==============
Basic and diluted net loss available
to common shareholders before
extraordinary loss $ (1.48) $ (0.53)(A)
============== ===============
Weighted average shares outstanding:
Basic 36,155,982 46,869,050
Diluted 36,155,982 46,869,050
(A) Includes approximately $39 million of nonrecurring pre-tax other
income.
9. EMPLOYEE BENEFIT PLANS
a. 1994 Equity Incentive Plan
At the 1994 annual meeting, the shareholders of Emmis approved the 1994
Equity Incentive Plan. Under this Plan, awards equivalent to 2,000,000 shares of
common stock may be granted. The awards, which have certain restrictions, may be
for incentive stock options, nonqualified stock options, shares of restricted
stock, stock appreciation rights, performance units or limited stock
appreciation rights. Under this Plan, all awards are granted with an exercise
price equal to the fair market value of the stock except for shares of
restricted stock which may be granted with an exercise price at amounts greater
than or equal to the par value of the underlying stock. No more than 1,000,000
shares of Class B common stock are available for grant and issuance under this
Plan. The stock options under this Plan are generally not exercisable for one
year after the date of grant and expire not more than 10 years from the date of
grant. Under this Plan, awards equivalent to 218,000 shares of common stock are
available for grant at February 28, 2001.
b. 1995 Equity Incentive Plan
At the 1995 annual meeting, the shareholders of Emmis approved the 1995
Equity Incentive Plan. Under this Plan, awards equivalent to 1,300,000 shares of
common stock may be granted pursuant to employment agreements. Under the Plan,
awards equivalent to 200,000 shares of common stock are available for grant at
February 28, 2001. Certain stock options awarded remain outstanding as of
February 28 (29), 2000 and 2001.
c. Non-Employee Director Stock Option Plan
At the 1995 annual meeting, the shareholders of Emmis approved a Non-Employee
Director Stock Option Plan. Under this Plan, each non-employee director, as of
January 24, 1995, was granted an option to acquire 10,000 shares of the
Company's Class A common stock. Thereafter, upon election or appointment of any
non-employee director or upon a continuing director becoming a non-employee
director, such individual will also become eligible to receive a comparable
option. In addition, an equivalent option will be automatically granted on an
annual basis to each non-employee director. All awards are granted with an
exercise price equal to the fair market value of the stock on the date of grant.
Under this Plan, awards equivalent to 60,000 shares of Class A common stock are
available for grant at February 28, 2001. Certain stock options awarded remain
outstanding as of February 28 (29), 2000 and 2001.
57
d. 1997 Equity Incentive Plan
At the 1997 annual meeting, the shareholders of Emmis approved the 1997
Equity Incentive Plan. Under this plan, awards equivalent to 2,000,000 shares of
common stock may be granted. The awards, which have certain restrictions, may be
for incentive stock options, nonqualified stock options, shares of restricted
stock, stock appreciation rights or performance units. Under this Plan, all
awards are granted with an exercise price equal to the fair market value of the
stock except for shares of restricted stock which may be granted with an
exercise price at amounts greater than or equal to the par value of the
underlying stock. No more than 1,000,000 shares of Class B common stock are
available for grant and issuance under this Plan. The stock options under this
Plan are generally not exercisable for one year after the date of grant and
expire not more than 10 years from the date of grant. Under this Plan, awards
equivalent to 136,000 shares of common stock are available for grant at February
28, 2001. Certain stock options and restricted stock awarded remain outstanding
as of February 28 (29), 2000 and 2001.
e. 1999 Equity Incentive Plan
At the 1999 annual meeting, the shareholders of Emmis approved the 1999
Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares of
common stock may be granted. The awards, which have certain restrictions, may be
for incentive stock options, nonqualified stock options, shares of restricted
stock, stock appreciation rights or performance units. Under this Plan, all
awards are granted with an exercise price equal to the fair market value of the
stock except for shares of restricted stock which may be granted with an
exercise price at amounts greater than or equal to the par value of the
underlying stock. No more than 1,000,000 shares of Class B common stock are
available for grant and issuance under this Plan. The stock options under this
Plan are generally not exercisable for one year after the date of grant and
expire not more than 10 years from the date of grant. Under this Plan, awards
equivalent to 1,178,000 shares of common stock are available for grant at
February 28, 2001. Certain stock options and restricted stock awarded remain
outstanding as of February 28 (29), 2000 and 2001.
f. Other Disclosures Related to Stock Option and Equity Incentive Plans
The Company has historically accounted for its Stock Option Plans in
accordance with APB Opinion No. 25 ("APB 25"), under which compensation expense
is recognized only to the extent the exercise price of the option is less than
the fair market value of the share of stock at the date of grant. During 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123), which considers the stock options as compensation expense to the Company,
based on their fair value at the date of grant. Under this standard, the Company
has the option of accounting for employee stock option plans as it currently
does or under the new method. The Company has elected to continue to use the APB
25 method for accounting, but has adopted the disclosure requirements of SFAS
123. Accordingly, compensation expense reflected in non-cash compensation in the
consolidated statements of operations related to the plans summarized above was
$4,269, $7,357 and $5,400 for the years ended February 1999, 2000 and 2001,
respectively. Had compensation expense related to these plans been determined
based on fair value at date of grant, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
58
Year Ended February 28 (29),
1999 2000 2001
Net Income Available to Common Shareholders:
As Reported $ 1,248 $ (3,177) $ 4,752
Pro Forma $ (2,056) $ (8,741) $ 113
Basic EPS:
As Reported $ .04 $ (.09) $ .10
Pro Forma $ (.07) $ (.24) $ -
Diluted
As Reported $ .04 $ (.09) $ .10
Pro Forma $ (.07) $ (.24) $ -
Because the fair value method of accounting has not been applied to options
granted prior to March 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value of
each option granted is estimated on the date of grant using the Black-Scholes
option pricing model utilizing the following weighted average assumptions:
Year Ended February 28 (29),
1999 2000 2001
Risk-Free Interest Rate: 5.21% 6.12% 4.54%
Expected Life (Years): 8.0 5.2 6.4
Expected Volatility: 42.12% 44.31% 56.79%
Expected dividend yields were zero for fiscal 1999, 2000 and 2001.
A summary of the status of options and restricted stock at February 1999,
2000 and 2001 and the related activity for the year, including the adoption of
the 1999 Equity Incentive Plan, is as follows:
1999 2000 2001
-------------------- --------------------- --------------------
Number of Weighted Number of Weighted Number of Weighted
Options/ Average Options/ Average Options/ Average
Restricted Exercise Restricted Exercise Restricted Exercise
Stock Price Stock Price Stock Price
Outstanding at
Beginning of Year 2,663,110 13.57 3,485,386 14.63 4,559,168 18.07
Granted 1,183,000 16.43 2,012,000 23.39 814,629 34.66
Exercised (290,724) 10.95 (922,298) 16.20 (1,092,688) 9.78
Lapsing of restricted stock (50,000) - - - (101,805) -
Expired and other (20,000) 8.00 (15,920) 18.57 (76,704) 20.32
Outstanding at
End of Year 3,485,386 14.87 4,559,168 18.07 4,102,600 23.25
Exercisable at
End of Year 2,570,536 13.32 2,537,168 13.92 2,008,680 19.26
Total Available for Grant 1,526,405 2,530,325 1,792,400
During the year ended February 1999, options were granted with an exercise
price equal to or less than fair market value of the stock on the date of grant.
During the years ended February 2000 and 2001, all options were granted with an
exercise price equal to fair market value of the stock on the date of grant. A
summary of the weighted average fair value and exercise price of options granted
during 1999, 2000 and 2001 is as follows:
59
1999 2000 2001
--------------------- --------------------- --------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Fair Exercise Fair Exercise Fair Exercise
Value Price Value Price Value Price
OPTIONS GRANTED WITH
AN EXERCISE PRICE:
Equal to Fair Market
Value of the Stock on
the Date of Grant $10.37 $18.39 $12.95 $26.59 $20.59 $34.66
Less Than Fair Market
Value of the Stock on
the Date of Grant $18.62 $ 7.75 $ - $ - $ - $ -
During fiscal 1999, 2000 and 2001, the Company entered into employment
agreements providing for grants of 10,000, 135,600 and 9,200 shares,
respectively, at a weighted average fair value of $22.38, $22.70 and $35.51,
respectively.
The following information relates to options outstanding and exercisable at
February 28, 2001:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number of Exercise Remaining Number of Exercise
Prices Options Price Contract Life Options Price
----------- ---------- ---------- ------------- --------- --------
40,800 $ 6.91 2.0 years 40,800 $ 6.91
$3.80-$7.60
7.60-11.40 221,520 7.83 2.0 years 221,520 7.83
11.40-15.20 53,170 14.44 3.0 years 53,170 14.44
15.20-19.00 598,793 16.58 4.7 years 598,793 16.58
19.00-22.80 1,279,837 21.38 4.0 years 706,437 22.23
22.80-26.60 187,960 24.63 4.0 years 187,960 24.63
26.60-30.40 1,040,000 28.20 8.5 years 200,000 28.25
30.40-34.20 - - - years - -
34.20-38.00 680,520 35.40 9.0 years - -
In addition to the benefit plans noted above, Emmis has the following
employee benefit plans:
g. Profit Sharing Plan
In December 1986, Emmis adopted a profit sharing plan that covers all
nonunion employees with one year of service. Contributions to the plan are at
the discretion of the Emmis Board of Directors and can be made in the form of
newly issued Emmis common stock or cash. Historically, all contributions to the
plan have been in the form of Emmis common stock. Contributions reflected in
non-cash compensation in the consolidated statements of operations for the years
ended February 1999, 2000 and 2001 were $1,000, $1,250, and $1,250 respectively.
h. 401(k) Retirement Savings Plan
Emmis sponsors two Section 401(k) retirement savings plans. One covers
substantially all nonunion employees age 18 years and older who have at least
six months of service and the other covers substantially all union employees
that meet the same qualifications. Employees may make pretax contributions to
the plans up to 15% of their compensation, not to exceed the annual limit
prescribed by the Internal Revenue Service. Emmis may make discretionary
matching contributions to the plans in the form of shares of the Company's Class
A common stock. Effective March 1, 1996, Emmis began to match 50% of employee
contributions up to $2 thousand. Emmis' contributions to the plans totaled $599,
$807 and $1,337 for the years ended February 1999, 2000 and 2001, respectively.
60
i. Defined Contribution Health and Retirement Plan
Emmis contributes to a multi-employer defined contribution health and
retirement plan for employees who are members of a certain labor union. Amounts
charged to expense related to the multi-employer plan were approximately $344,
$345, and $441 for the years ended February 1999, 2000 and 2001, respectively.
j. Employee Stock Purchase Plan
Effective March 1, 1995, the Company implemented an employee stock purchase
plan which permits employees to purchase, via payroll deduction, shares of the
Company's Class A common stock, at fair market value, up to an amount not to
exceed 10% of an employee's annual gross pay.
Effective March 1, 2000, the Company replaced its previous employee stock
purchase plan with a new plan that allows employees to purchase shares of the
Company's Class A common stock at the lesser of 90% of the fair value of such
shares at the beginning or end of each semi-annual offering period. Purchases
are subject to a maximum limitation of $22.5 annually per employee. The Company
will not record compensation expense pursuant to this plan as it is designed to
meet the requirements of Section 423(b) of the Internal Revenue Code.
10. COMMITMENTS AND CONTINGENCIES
a. Operating Leases
Emmis leases certain office space, tower space, equipment and automobiles
under operating leases expiring at various dates through December 2021. Some of
the lease agreements contain renewal options and annual rental escalation
clauses (generally tied to the Consumer Price Index or increases in the lessor's
operating costs), as well as provisions for payment of utilities and maintenance
costs.
The future minimum rental payments (exclusive of future escalation costs)
required by noncancelable operating leases, which have remaining terms in excess
of one year as of February 28, 2001, are as follows:
Payable in Year
Ending February, Payments
---------------- ------------
2002 $ 7,483
2003 6,891
2004 5,079
2005 4,576
2006 3,928
Thereafter 19,494
------------
$ 47,451
============
Minimum payments have not been reduced by minimum sublease rentals of
approximately $185 due in the future under noncancelable subleases.
Rent expense totaled $5,945, $4,404, and $6,457 for the years ended February
1999, 2000 and 2001, respectively. Rent expense for the years ended February
1999, 2000 and 2001 is net of sublease income of approximately $148 each year.
b. Radio Broadcast Agreements
Emmis has entered into agreements to broadcast certain syndicated programs
and sporting events. Future payments related to these radio broadcast rights are
summarized as follows: Year ended February 2002 - $2,556, 2003 - $674, 2004 -
$235, 2005 - $237, 2006 - $237 and thereafter - $723. Expense related to these
broadcast rights totaled $1,492, $1,780, and $2,376 for the years ended February
1999, 2000 and 2001, respectively.
61
In connection with reformatting one of its radio stations, the Company
terminated a syndicated program agreement in fiscal 2000. The contract required
continued payments in the event of termination, and these payments are included
in the future payments disclosed above. The discounted present value of these
payments of $896 is reflected in the accompanying consolidated statements of
operations as corporate restructuring fees and other.
c. Litigation
Emmis currently and from time to time is involved in litigation incidental to
the conduct of its business, but Emmis is not currently a party to any lawsuit
or proceeding which, in the opinion of management, is likely to have a material
adverse effect on the financial position or results of operations of Emmis.
d. Employment Agreements
The Company enters into employment agreements with certain officers and
employees. These agreements generally specify base salary, along with bonuses
and grants of stock and/or stock options based on certain criteria. At February
28, 2001, 41,199 shares of common stock and options to purchase 1,178,250 shares
of common stock have been granted in connection with current employment
agreements. Additionally, up to 79,000 shares and options to purchase up to
302,750 shares of common stock may be granted (or have been granted subject to
forfeiture) under the contracts in the next two years.
e. Construction of Office Building
Emmis is constructing new operating facilities for WALA-TV in Mobile,
Alabama. The project is expected to be completed in December of 2001 for an
estimated cost of $11.3 million of which $1.9 million has been incurred through
February 28, 2001.
11. INCOME TAXES
The provision for income taxes for the years ended February 1999, 2000 and
2001, consisted of the following:
1999 2000 2001
------- -------- ------
Current:
Federal $ 1,247 $ 105 $ 1,540
State - 100 300
------- -------- -------
1,247 205 1,840
------- -------- -------
Deferred:
Federal 3,953 6,010 14,360
State 1,000 660 1,450
------- -------- -------
4,953 6,670 15,810
------- -------- -------
Provision for
income taxes 6,200 6,875 17,650
Tax benefit of extraordinary
item 1,750 1,250 -
-------- -------- --------
Net provision for income
taxes $ 4,450 $ 5,625 $ 17,650
======== ======== ========
62
The provision for income taxes for the years ended February 1999, 2000 and
2001, differs from that computed at the Federal statutory corporate tax rate as
follows:
1999 2000 2001
------- -------- --------
Computed income taxes at 35% $ 3,166 $ 3,102 $ 10,985
State income tax 650 494 1,138
Nondeductible foreign losses 1,334 893 1,778
Nondeductible goodwill 1,324 1,394 1,537
Nondeductible donations - 363 172
Other (274) 629 2,040
------- -------- --------
Provision for income taxes $ 6,200 $ 6,875 $ 17,650
======= ======== ========
The accompanying balance sheet shows an income tax receivable of $4,685 and
$13,970 as of February 2000 and 2001, respectively, primarily attributable to
income tax benefits from the exercise of stock options.
The components of deferred tax assets and deferred tax liabilities at February
2000 and 2001 are as follows:
2000 2001
Deferred tax assets:
Capital loss carryforwards $ 147 $ -
Net operating loss carryforwards 1,394 2,183
Compensation relating to stock
options 2,356 3,373
Other 2,847 5,257
Valuation allowance (858) (1,506)
--------- ---------
Total deferred tax assets 5,886 9,307
--------- ---------
Deferred tax liabilities
Intangible assets (87,756) (136,526)
Other (5,269) (8,249)
--------- ---------
Total deferred tax liabilities (93,025) (144,775)
--------- ---------
Net deferred tax liability $ (87,139) $(135,468)
========= =========
In connection with the acquisition of WQCD-FM, the deferred tax liability was
decreased by $4,548 in 2000. In connection with the Lee Acquisition and L.A.
Magazine Acquisition, the deferred tax liability was increased by $31,305 and
$1,214, respectively, in 2001.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. A valuation allowance
has been provided for 100% of the capital loss carryforwards available as of
February 2000 and 2001 since these loss carryforwards can only be utilized to
offset future capital gains. Additionally, a valuation allowance has been
provided for the net operating loss carryforwards related to the Company's
foreign subsidiaries since these subsidiaries have not yet generated taxable
income against which the net operating losses could be utilized. The expiration
of net operating loss carryforwards, excluding those at the Company's Hungarian
subsidiary, which do not expire, approximate $1,177 in 2005, and $1,877
thereafter.
12. 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.
63
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 years ended February 1999, 2000
and 2001 were $3.3 million, $7.4 million and $6.2 million, respectively. This
station's long lived assets as of February 28 (29), 2000 and 2001 were $13.5
million and $9.6 million, respectively. Total revenues of the radio stations in
Argentina for the year ended February 28, 2001 were $8.4 million. Total revenues
for these stations were not material for the year ended February 29, 2000. Long
lived assets for these stations as of February 28 (29), 2000 and 2001 were $19.5
million and $18.4 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. 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.
64
YEAR ENDED FEBRUARY 28,2001 Radio Television Publishing Interactive Corporate Consolidated
Net revenues $ 239,590 $ 156,835 $ 74,088 $ 105 $ - $ 470,618
Operating expenses 132,918 97,327 65,538 622 - 296,405
--------- ----------- --------- --------- --------- -----------
Broadcast/publishing
cash flow 106,672 59,508 8,550 (517) - 174,213
International business
development expenses - - - - 1,553 1,553
Corporate expenses - - - - 16,048 16,048
Depreciation and
amortization 21,470 33,574 14,941 5 4,028 74,018
Time brokerage fees 7,344 - - - - 7,344
Non-cash compensation - - - - 5,400 5,400
Corporate restructuring
fee and other 2,000 - - - 2,057 4,057
--------- ----------- ---------- --------- ---------- ----------
Operating income (loss) $ 75,858 $ 25,934 $ (6,391) $ (522) $ ( 29,086) $ 65,793
========= =========== ========== ========= ========== ===========
Total assets $ 920,002 $ 1,312,270 $ 96,550 $ 26 $ 178,024 $ 2,506,872
========= =========== ========== ========= ========== ===========
YEAR ENDED FEBRUARY 29,2000 Radio Television Publishing Interactive Corporate Consolidated
Net revenues $ 189,000 $ 82,160 $ 54,105 $ - $ - $ 325,265
Operating expenses 100,184 53,178 46,456 - - 199,818
--------- ----------- ---------- --------- ---------- -----------
Broadcast/publishing
cash flow 88,816 28,982 7,649 - - 125,447
International business
development expenses - - - - 1,558 1,558
Corporate expenses - - - - 13,872 13,872
Depreciation and
amortization 16,694 17,138 6,934 - 3,395 44,161
Time brokerage fees - - - - - -
Non-cash compensation - - - - 7,357 7,357
Corporate restructuring
fee and other 896 - - - - 896
--------- ----------- ---------- --------- ---------- -----------
Operating income (loss) $ 71,226 $ 11,844 $ 715 $ - $ (26,182) $ 57,603
========= =========== ========== ========= ========== ===========
Total assets $ 474,403 $ 701,672 $ 68,927 $ - $ 82,304 $ 1,327,306
========= =========== ========== ========= ========== ===========
YEAR ENDED FEBRUARY 28,1999 Radio Television Publishing Interactive Corporate Consolidated
Net revenues $ 156,737 $ 39,623 $ 36,476 $ - $ - $ 232,836
Operating expenses 85,727 26,130 31,491 - - 143,348
--------- ----------- ---------- --------- ---------- -----------
Broadcast/publishing
cash flow 71,010 13,493 4,985 - - 89,488
International business
development expenses - - - - 1,477 1,477
Corporate expenses - - - - 10,427 10,427
Depreciation and
amortization 13,990 8,352 4,813 - 1,159 28,314
Time brokerage fees 2,220 - - - - 2,220
Non-cash compensation - - - - 4,269 4,269
Corporate restructuring
fee and other - - - - - -
--------- ----------- ---------- --------- ---------- -----------
Operating income (loss) $ 54,800 $ 5,141 $ 172 $ - $ (17,332) $ 42,781
========= =========== ========== ========= ========== ===========
Total assets $ 460,065 $ 439,279 $ 44,171 $ - $ 71,316 $ 1,014,831
========= =========== ========== ========= ========== ===========
65
13. RELATED PARTY TRANSACTIONS
Two officers of Emmis are partners in a law firm which provides legal
services to Emmis. Legal fees paid to this law firm were approximately $868,
$756 and $926 for the years ended February 1999, 2000 and 2001, respectively.
Emmis has made interest-bearing loans to various officers and employees. The
approximate amount of such indebtedness outstanding at February 28 (29), 2000
and 2001, was $1,834 and $1,072, respectively, net of an allowance of $0 and
$849, respectively. These loans bear interest at the Company's average borrowing
rate of approximately 7.5% and 8.0% for the years ended February 2000 and 2001.
During the year ended February 28, 2001, the Company purchased approximately
$140 in corporate gifts and specialty items from a company owned by the spouse
of Norman H. Gurwitz. Also during the last fiscal year, Emmis made payments of
approximately $320 to a company owned by Mr. Smulyan for use of an airplane to
transport employees to various trade shows and meetings. Furthermore, Emmis made
payments of $484 to a management company for an allocation of operating and
maintenance costs of the airplane.
14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY
NON-GUARANTORS
Emmis conducts a significant portion of its business through subsidiaries.
The senior subordinated notes are fully and unconditionally guaranteed, jointly
and severally, by certain direct and indirect subsidiaries (the "Subsidiary
Guarantors"). As of February 28, 2001, 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"). The claims of
creditors of Emmis subsidiaries have priority over the rights of Emmis to
receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the
Parent Company Only, the Subsidiary Guarantors and the Subsidiary Non-Guarantors
as of February 28 (29), 2000 and 2001 and for each of the three years in the
period ended February 28, 2001.
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.
66
Emmis Communications Corporation
Condensed Consolidating Balance Sheet
As of February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
CURRENT ASSETS:
Cash and cash equivalents $ 55,175 $ 4,018 $ 706 $ - $ 59,899
Accounts receivable, net - 91,754 5,527 - 97,281
Current portion of TV
program rights - 12,028 - - 12,028
Income tax refunds receivable 13,970 - - - 13,970
Prepaid expenses 2,032 14,737 327 - 17,096
Other 1,932 12,124 776 - 14,832
---------- ---------- ---------- ----------- ----------
Total current assets 73,109 134,661 7,336 - 215,106
Property and equipment, net 38,151 195,404 4,332 - 237,887
Intangible assets, net - 1,959,341 21,756 - 1,981,097
Investment in affiliates 2,169,602 - - (2,169,602) -
Other assets, net 68,113 9,706 1,882 (6,919) 72,782
--------- ----------- ---------- ----------- -----------
Total assets $2,348,975 $ 2,299,112 $ 35,306 $(2,176,521) $ 2,506,872
========== =========== ========== =========== ===========
CURRENT LIABILITIES:
Accounts payable $ 6,908 $ 22,499 $ 4,799 $ - $ 34,206
Current portion of other
long-term debt 34 18 4,135 - 4,187
Current portion of TV
program rights payable - 28,192 - - 28,192
Accrued salaries and
commissions 1,410 8,482 450 - 10,342
Accrued interest 16,236 - 802 - 17,038
Deferred revenue - 17,418 - - 17,418
Income taxes payable - - - - -
Other 813 4,955 - - 5,768
---------- ----------- ---------- ----------- ----------
Total current liabilities 25,401 81,564 10,186 - 117,151
Credit facility and senior
subordinated notes 1,380,000 - - - 1,380,000
TV program rights payable,
net of current portion - 47,567 - - 47,567
Other long-term debt, net of
current portion 37 598 19,968 (6,919) 13,684
Other noncurrent liabilities - 4,884 647 - 5,531
Deferred income taxes 135,468 - - - 135,468
---------- ----------- ---------- ----------- ----------
Total liabilities 1,540,906 134,613 30,801 (6,919) 1,699,401
Shareholders' equity
Series A preferred stock 29 - - - 29
Class A common stock 419 - - - 419
Class B common stock 52 - - - 52
Additional paid-in capital 830,299 - 4,393 (4,393) 830,299
Subsidiary investment - 1,818,050 17,581 (1,835,631) -
Retained earnings /
(accumulated deficit) (22,730) 346,449 (16,871) (329,578) (22,730)
Accumulated other
comprehensive loss - - (598) - (598)
---------- ----------- ---------- ----------- ----------
Total shareholders' equity 808,069 2,164,499 4,505 (2,169,602) 807,471
---------- ----------- ---------- ----------- ----------
Total liabilities and
shareholders' equity $2,348,975 $ 2,299,112 $ 35,306 $(2,176,521) $2,506,872
========== =========== ========== =========== ==========
67
Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
Net revenues $ 1,876 $ 454,164 $ 14,578 $ - $ 470,618
Operating expenses 1,692 281,409 13,304 - 296,405
International business
development expenses - 1,553 - - 1,553
Corporate expenses 16,048 - - - 16,048
Depreciation and amortization 4,028 66,527 3,463 - 74,018
Non-cash compensation 4,050 1,350 - - 5,400
Time brokerage agreement fees - 7,344 - - 7,344
Corporate restructuring fees
and other 2,057 2,000 - - 4,057
----------- ----------- ---------- ----------- ----------
Operating income (loss) (25,999) 93,981 (2,189) - 65,793
----------- ----------- ---------- ----------- ----------
Other income (expense)
Interest income (expense) (69,608) (297) (3,221) 682 (72,444)
Minority interest - - - 124 124
Other income (expense), net 11,972 26,977 (354) (682) 37,913
----------- ----------- ---------- ----------- ----------
Total other income (expense) (57,636) 26,680 (3,575) 124 (34,407)
----------- ----------- ---------- ----------- ----------
Income (loss) before income
taxes (83,635) 120,661 (5,764) 124 31,386
Provision (benefit) for income
taxes (28,201) 45,851 - - 17,650
----------- ----------- ---------- ----------- ----------
(55,434) 74,810 (5,764) 124 13,736
Equity in earnings (loss) of
subsidiaries 69,170 - - (69,170) -
----------- ----------- ---------- ----------- ----------
Net income (loss) 13,736 74,810 (5,764) (69,046) 13,736
Less: Preferred stock dividends 8,984 - - - 8,984
----------- ----------- ---------- ----------- ----------
Net income/(loss) available to
common shareholders $ 4,752 $ 74,810 $ (5,764) $ (69,046) $ 4,752
=========== =========== ========== =========== ==========
68
Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 13,736 $ 74,810 $ (5,764) $ (69,046) $ 13,736
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Depreciation and amortization 9,758 81,233 3,463 - 94,454
Provision for bad debts - 3,713 - - 3,713
Provision for deferred income
taxes 15,810 - - - 15,810
Tax benefits of exercise of
stock options 10,859 - - - 10,859
Non-cash compensation 4,050 1,350 - - 5,400
Equity in earnings of
subsidiaries (69,170) - - 69,170 -
Gain on exchange of assets - (22,000) - - (22,000)
Other 379 348 861 (124) 1,464
Changes in assets and
liabilities -
Accounts receivable - (7,114) (2,202) - (9,316)
Prepaid expenses and other
current assets (12,716) (11,527) (384) - (24,627)
Other assets 10,435 1,216 448 - 12,099
Accounts payable and accrued
liabilities 9,070 5,493 778 - 15,341
Deferred revenue - 569 - - 569
Other liabilities (220) (23,096) 3,544 - (19,772)
---------- ----------- ---------- ----------- ---------
Net cash provided by (used in)
operating activities (8,009) 104,995 744 - 97,730
---------- ----------- ---------- ----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (3,683) (22,323) (219) - (26,225)
Cash paid for acquisitions - (1,060,681) - - (1,060,681)
Deposits on acquisitions
and other (23,849) - - - (23,849)
---------- ----------- ---------- ----------- ---------
Net cash used in investing
activities (27,532) (1,083,004) (219) - (1,110,755)
---------- ----------- ---------- ----------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (1,048,388) - (3,161) - (1,051,549)
Proceeds from long-term debt 2,128,388 - - - 2,128,388
Proceeds from issuance of
class A common stock, net of
transaction costs - - - - -
Proceeds from issuance of
Series A cumulative
convertible preferred stock,
net of transaction costs - - - - -
Proceeds from sale of Class A
common stock to Liberty Media
Corporation, net of
transaction costs - - - - -
Intercompany (968,447) 979,463 (11,016) - -
Preferred stock dividends (8,984) - - - (8,984)
Debt related costs (21,095) - - - (21,095)
Proceeds from exercise of
stock options 8,794 - - - 8,794
----------- ---------- ---------- ----------- ---------
Net cash provided by
financing activities 90,268 979,463 (14,177) - 1,055,554
----------- ---------- ---------- ----------- ---------
69
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 54,727 1,454 (13,652) - 42,529
CASH AND CASH EQUIVALENTS:
Beginning of period 448 2,564 14,358 - 17,370
----------- ---------- ---------- ----------- ---------
End of period $ 55,175 $ 4,018 $ 706 $ - $ 59,899
=========== ========== ========== =========== =========
70
Emmis Communications Corporation
Condensed Consolidating Balance Sheet
As of February 29, 2000
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
Current portion of TV
program rights - - - - -
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
Income taxes payable - - - - -
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 - 5,408 758 - 6,166
Deferred income taxes 87,139 - - - 87,139
----------- ---------- ---------- ----------- ----------
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
========== ========== ========== =========== ==========
71
Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 29, 2000
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
Net revenues $ 1,810 $ 314,644 $ 8,811 $ - $ 325,265
Operating expenses 1,252 191,666 6,900 - 199,818
International business
development expenses - 1,558 - - 1,558
Corporate expenses 13,872 - - - 13,872
Depreciation and amortization 3,395 37,733 3,033 - 44,161
Non-cash compensation 5,518 1,839 - - 7,357
Time brokerage agreement fees - - - - -
Programming restructuring cost - 896 - - 896
Corporate restructuring fees
and other - - - - -
--------- ------------ --------- ----------- ----------
Operating income (loss) (22,227) 80,952 (1,122) - 57,603
--------- ------------ --------- ----------- ----------
Other income (expense)
Interest income (expense) (49,257) (107) (3,363) 741 (51,986)
Minority interest - - - - -
Loss on donation of station - (956) - - (956)
Other income (expense), net 3,428 13 (502) 1,264 4,203
--------- ------------ --------- ----------- ----------
Total other income (expense) (45,829) (1,050) (3,865) 2,005 (48,739)
--------- ------------ --------- ----------- ----------
Income (loss) before income
taxes (68,056) 79,902 (4,987) 2,005 8,864
Provision (benefit) for income
taxes (22,689) 29,564 - - 6,875
--------- ------------ --------- ----------- ----------
(45,367) 50,338 (4,987) 2,005 1,989
Extraordinary item, net of tax (2,022) - - - (2,022)
Equity in earnings (loss) of
subsidiaries 47,356 - - (47,356) -
--------- ------------ --------- ----------- ----------
Net income (loss) (33) 50,338 (4,987) (45,351) (33)
Less: Preferred stock dividends 3,144 - - - 3,144
--------- ------------ --------- ----------- ----------
Net income/(loss) available to
common shareholders $ (3,177) $ 50,338 $ (4,987) $ (45,351) $ (3,177)
========= ============ ========= =========== ==========
72
Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 29, 2000
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (33) $ 50,338 $ (4,987) $ (45,351) $ (33)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Extraordinary item 2,022 - - - 2,022
Depreciation and amortization 5,805 44,980 3,033 - 53,818
Provision for bad debts - 2,550 - - 2,550
Provision for deferred income
taxes 6,670 - - - 6,670
Non-cash compensation 5,518 1,839 - - 7,357
Equity in earnings of
subsidiaries (47,356) - - 47,356 -
Gain on exchange of assets - - - - -
Tax benefits of exercise of
stock options 2,889 - - - 2,889
Loss on donation of radio station - 956 - - 956
Other 2,033 - (811) (2,005) (783)
Changes in assets and
liabilities -
Accounts receivable - (13,029) (290) - (13,319)
Prepaid expenses and other
current assets (1,258) (13,101) (187) - (14,546)
Other assets (8,393) 7,382 (1,496) - (2,507)
Accounts payable and accrued
liabilities (391) 9,255 1,301 - 10,165
Deferred revenue - 4,332 - - 4,332
Other liabilities (13,278) (19,933) - - (33,211)
-------- ----------- --------- ----------- ----------
Net cash provided by (used in)
operating activities (45,772) 75,569 (3,437) - 26,360
-------- ----------- --------- ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (8,124) (21,170) (22) - (29,316)
Cash paid for acquisitions - (217,828) (13,302) - (231,130)
Deposits on acquisitions
and other (5,000) (6,500) - - (11,500)
------- ------------- -------- ------------ ----------
Net cash used in investing
activities (13,124) (245,498) (13,324) - (271,946)
------- ------------- -------- ------------ ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (426,668) - - - (426,668)
Proceeds from long-term debt 149,668 - - - 149,668
Proceeds from issuance of
class A common stock, net of
transaction costs 383,570 - - - 383,570
Proceeds from issuance of
Series A cumulative
convertible preferred stock,
net of transaction costs 138,409 - - - 138,409
Intercompany (199,781) 169,347 30,434 - -
Preferred stock dividends (2,021) - - - (2,021)
Debt related costs - - - - -
Proceeds from exercise of
stock options 13,881 - - - 13,881
-------- ------------- --------- ------------ ----------
Net cash provided by
financing activities 57,058 169,347 30,434 - 256,839
-------- ------------- --------- ------------ ----------
73
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,838) (582) 13,673 - 11,253
CASH AND CASH EQUIVALENTS:
Beginning of period 2,286 3,146 685 - 6,117
--------- ------------- --------- ------------ ----------
End of period $ 448 $ 2,564 $ 14,358 $ - $ 17,370
========= ============= ========= ============ ==========
74
Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 1999
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
Net revenues $ 1,709 $ 227,873 $ 3,254 $ - $ 232,836
Operating expenses 820 138,581 3,947 - 143,348
International business
development expenses - 1,477 - - 1,477
Corporate expenses 10,427 - - - 10,427
Depreciation and amortization 1,159 24,336 2,819 - 28,314
Non-cash compensation 3,600 669 - - 4,269
Time brokerage agreement fees - 2,220 - - 2,220
Corporate restructuring fees
and other - - - - -
--------- ------------- -------- ------------- ----------
Operating income (loss) (14,297) 60,590 (3,512) - 42,781
--------- ------------- -------- ------------- ----------
Other income (expense)
Interest income (expense) (33,667) (102) (3,171) 1,290 (35,650)
Minority interest - - - - -
Other income (expense), net 74,865 (73,957) 421 585 1,914
--------- ------------- -------- ------------- ----------
Total other income (expense) 41,198 (74,059) (2,750) 1,875 (33,736)
--------- ------------- -------- ------------- ----------
Income (loss) before income
taxes 26,901 (13,469) (6,262) 1,875 9,045
Provision (benefit) for income
taxes 9,719 (3,377) (142) - 6,200
---------- ------------- -------- ------------- ----------
17,182 (10,092) (6,120) 1,875 2,845
Extraordinary item, net of tax (1,597) - - - (1,597)
Equity in earnings (loss) of
subsidiaries (14,337) - - 14,337 -
---------- ------------- -------- ------------- ----------
Net income (loss) 1,248 (10,092) (6,120) 16,212 1,248
Less: Preferred stock dividends - - - - -
---------- ------------- -------- ------------- ----------
Net income/(loss) available to
common shareholders $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248
========== ============= ======== ============ ==========
75
Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 28, 1999
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Extraordinary item 1,597 - - - 1,597
Depreciation and amortization 1,998 27,341 2,819 - 32,158
Provision for bad debts - 1,745 - - 1,745
Provision for deferred income
taxes 4,953 - - - 4,953
Non-cash compensation 3,600 669 - - 4,269
Equity in earnings of
subsidiaries 14,337 - - (14,337) -
Gain on exchange of assets - - - - -
Tax benefits of exercise of
stock options 486 - - - 486
Other 103 629 - (1,875) (1,143)
Changes in assets and
liabilities -
Accounts receivable 345 (21,835) 386 - (21,104)
Prepaid expenses and other
current assets (4,725) 4,070 (72) - (727)
Other assets 9,516 (6,408) 327 - 3,435
Accounts payable and accrued
liabilities 8,183 (1,519) (1,111) 1,454 7,007
Deferred revenue - (747) - - (747)
Other liabilities (2,515) 5,099 (640) - 1,944
--------- ----------- ---------- ------------ -----------
Net cash provided by (used in)
operating activities 39,126 (1,048) (4,411) 1,454 35,121
--------- ----------- ---------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (21,363) (13,654) (2,366) - (37,383)
Cash paid for acquisitions - (504,748) - - (504,748)
Deposits on acquisitions
and other 7 654 - - 661
--------- ----------- ---------- ------------ -----------
Net cash used in investing
activities (21,356) (517,748) (2,366) - (541,470)
--------- ----------- ---------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (723,500) - - - (723,500)
Proceeds from long-term debt 1,063,000 - - - 1,063,000
Proceeds from issuance of
class A common stock, net of
transaction costs 182,640 - - - 182,640
Proceeds from issuance of
Series A cumulative
convertible preferred stock,
net of transaction costs
Purchase of interest rate cap
agreements and other debt
related costs (19,589) - - - (19,589)
Intercompany (522,788) 521,699 2,543 (1,454) -
Preferred stock dividends - - - - -
Debt related costs - - - - -
Proceeds from exercise of
stock options 4,130 - - - 4,130
--------- ----------- --------- ------------- -----------
Net cash provided by
financing activities (16,107) 521,699 2,543 (1,454) 506,681
--------- ----------- --------- ------------- -----------
76
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,663 2,903 (4,234) - 332
CASH AND CASH EQUIVALENTS:
Beginning of period 623 243 4,919 - 5,785
-------- ---------- --------- --------------- ---------
End of period $ 2,286 $ 3,146 $ 685 $ - $ 6,117
======== ========== ========= =============== =========
77
15. SUBSEQUENT EVENTS - ACQUISITIONS
On March 28, 2001, Emmis completed its acquisition of substantially all of
the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona
from Hearst-Argyle Television, Inc. for $160.0 million in cash. 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 the Company's March 2001 Senior Discount Notes
Offering. The acquisition was accounted for as a purchase. Emmis began
programming and selling advertising on the radio stations on August 1, 2000
under a time brokerage agreement.
On March 27, 2001, Emmis received $202.6 million of proceeds from the
issuance of senior discount notes due 2011, less approximately $10.8 million of
debt issuance costs. The notes accrete interest at a rate of 12.5% per year,
compounded semi-annually to an aggregate principle amount of $370.0 million on
March 15, 2006. Commencing on September 15, 2006, interest is payable in cash on
each March 15 and September 15,. A portion of the net proceeds were used to fund
the acquisition of three radio stations in Phoenix, Arizona and the remaining
net proceeds (approximately $93 million) were placed in escrow to ultimately
reduce outstanding borrowings under the credit facility. The senior discount
notes will automatically be exchanged for 13.25% Exchangeable PIK Preferred
Stock unless Emmis can effect a corporate reorganization by July 24, 2001. Under
this reorganization, Emmis will transfer all of its assets, as well as its
obligations under the credit facility and the senior subordinated notes, to a
wholly-owned subsidiary, Emmis Operating Company. Emmis Communications
Corporation will still be the issuer of the Class A, Class B and Class C common
stock, the convertible preferred stock and the senior discount notes, and Emmis
Operating Company will be the obligor of the senior subordinated notes. Emmis
does not expect the reorganization, which should be completed before the July
24, 2001 deadline, to materially affect its operations because it currently
conducts substantially all of its business through subsidiaries.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
Full
May 31 Aug. 31 Nov. 30 Feb. 28 (29) Year
--------- ---------- --------- ----------- ---------
Year ended February 29, 2000
Net revenues $ 72,352 $ 81,529 $ 91,257 $ 80,127 $ 325,265
Operating income 12,949 18,041 20,929 5,684 57,603
Income (loss) before extraordinary
item 241 1,216 2,456 (1,924) 1,989
Net income (loss) available to common
shareholders 241 1,216 1,657 (6,291) (3,177)
Basic earnings per common share:
Before extraordinary item $ 0.01 $ 0.04 $ 0.05 $ (0.09) $ (0.03)
Net income (loss) available to
common Shareholders $ 0.01 $ 0.04 $ 0.05 $ (0.14) $ (0.09)
Diluted earnings per common share:
Before extraordinary item $ 0.01 $ 0.04 $ 0.04 $ (0.09) $ (0.03)
Net income (loss) available to
common Shareholders $ 0.01 $ 0.04 $ 0.04 $ (0.14) $ (0.09)
Year ended February 28, 2001
Net revenues $ 100,519 $ 109,069 $ 143,606 $117,424 $ 470,618
Operating income 18,603 25,223 26,164 (4,197) 65,793
Income (loss) before
extraordinary item 5,911 16,638 11,566 (20,379) 13,736
Net income (loss) available to
common Shareholders 3,665 14,392 9,320 (22,625) 4,752
Basic earnings per common share:
Before extraordinary item $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10
Net income (loss) available to
common Shareholders $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10
Diluted earnings per common share:
Before extraordinary item $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10
Net income (loss) available to
common Shareholders $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10
78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF EMMIS COMMUNICATIONS
CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of EMMIS
COMMUNICATIONS CORPORATION (an Indiana corporation) and Subsidiaries as of
February 28 (29), 2001 and 2000, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended February 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emmis Communications
Corporation and Subsidiaries as of February 28 (29), 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 29, 2001.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors or nominees
to be directors of Emmis is incorporated by reference from the section entitled
"Proposal No. 1: Election of Directors" in the Emmis 2001 Proxy Statement and
the section entitled "Compliance with Section 16(a) of the Securities Exchange
Act of 1934" in the Emmis 2001 Proxy Statement.
Listed below is certain information about the executive officers of Emmis or
its affiliates who are not directors or nominees to be directors.
AGE AT YEAR FIRST
FEBRUARY 28, ELECTED
NAME POSITION 2001 OFFICER
--------------- --------------------- --------- ---------
Randy Bongarten President - Emmis Television 51 2000
Richard F. Cummings Executive Vice 49 1984
President-Programming
Norman H. Gurwitz Executive Vice President- 53 1987
Human
Resources and Secretary
Set forth below is the principal occupation for the last five years of each
executive officer of the Company or its affiliates who is not also a director.
Randy Bongarten is employed as President of Emmis Television since October
2000 and President of Emmis International since June 1998. Mr.Bongarten has also
served as President of GAF Broadcasting and as Executive Vice President of
Operations for Emmis Radio Division.
Richard F. Cummings was the Program Director of WENS from 1981 to March
1984, when he became the National Program Director and a Vice President of
Emmis. He became Executive Vice President--Programming in 1988.
Norman H. Gurwitz currently serves as Executive Vice President -- Human
Resources, a position he assumed in 1998. Previously he served as Corporate
Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995.
He became Secretary of Emmis in 1989 and became an Executive Vice President in
1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott &
Gurwitz. Mr. Gurwitz is the brother-in-law of Richard A. Leventhal, a director
of the Company.
81
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Emmis 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
section entitled "Voting Securities and Beneficial Owners" in the Emmis 2001
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
section entitled "Certain Transactions" in the Emmis 2001 Proxy Statement.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
Financial Statements
The financial statements filed as a part of this report are set forth under
Item 8.
Reports on Form 8-K
On December 18, 2000, the Company filed a Form 8-K to disclose quarterly pro
forma financial information by business segment for the six quarters ended
August 31, 2000.
On January 24, 2001, the Company filed a Form 8-K to disclose quarterly pro
forma financial information by business segment for the seven quarters ended
November 30, 2000.
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 Emmis' Annual Report on Form 10-K/A for the fiscal 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 fiscal year ended February 29, 2000.
3.3 Form of stock certificate for Class A common stock, incorporated by
reference from Exhibit 3.5 to the 1994 Emmis Registration Statement on
Form S-1, File No. 33-73218, the "1994 Registration Statement".
4.1 Indenture dated February 12, 1999 among Emmis Communications
Corporation, certain subsidiary guarantors and IBJ Whitehall Bank and
Trust Company, as trustee, including as an exhibit thereto the form of
note, incorporated by reference to Exhibit 4.1 to Emmis' Registration
Statement on Form S-4, File No. 333-74377, as amended (the "1999
Registration Statement").
82
10.1 Emmis Communications Corporation Profit Sharing Plan, incorporated by
reference from Exhibit 10.4 to the 1994 Registration Statement.++
10.2 Emmis Communications Corporation 1994 Equity Incentive Plan,
incorporated by reference from Exhibit 10.5 to the 1994 Registration
Statement.++
10.3 The Emmis Communications Corporation 1995 Non-Employee Director Stock
Option Plan, incorporated by reference from Exhibit 10.15 to Emmis'
Annual Report on Form 10-K for the fiscal year ended February 28, 1995
(the "1995 10-K").++
10.4 The Emmis Communications Corporation 1995 Equity Incentive Plan
incorporated by reference from Exhibit 10.16 to the 1995 10-K.++
10.5 Emmis Communications Corporation 1997 Equity Incentive Plan,
incorporated by reference from Exhibit 10.5 to Emmis' Annual Report on
Form 10-K for the fiscal year ended February 28, 1998 (the "1998
10-K").++
10.6 Emmis Communications Corporation 1999 Equity Incentive Plan,
incorporated by reference from the Company's proxy statement dated May
26, 1999.++
10.7 Employment Agreement dated as of March 1, 1994, by and between Emmis
Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by
reference from Exhibit 10.13 to Emmis' Annual Report on Form 10-K for
the fiscal year ended February 28, 1994 and amendment to Employment
Agreement, effective March 1, 1999, between the Company and Jeffrey H.
Smulyan, incorporated by reference from Exhibit 10.2 to Emmis' Quarterly
Report on Form 10-Q for the quarter ended November 30, 1999.++
10.8 Employment Agreement dated as of March 1, 1999, by and between Emmis
Communications Corporation and Walter Z. Berger, incorporated by
reference from Exhibit 10.9 to Emmis' Annual Report on Form 10-K for the
fiscal year ended February 28, 1999.++
10.9 Fourth Amended and Restated Revolving Credit and Term Loan Agreement,
and First Amendment to Fourth Amended and Restated Revolving Credit and
Term Loan Agreement, incorporated by reference from Exhibits 10.1
and 10.2, respectively, to Emmis' Form 8-K filed on April 12, 2001.
10.10 Second Amendment to Fourth Amended and Restated Revolving Credit and
Term Loan Agreement.*
10.11 Stock Purchase Agreement dated October 25, 1999 by and between Liberty
Media Corporation and Emmis Communications Corporation with Registration
Rights Agreement as Exhibit A thereto, incorporated by reference from
Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter
ended November 30, 1999.
10.12 Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee
Enterprises, Incorporated, New Mexico Broadcasting Co. and Emmis
Communications Corporation, incorporated by reference from Exhibit 2.1
to Emmis' Form 8-K filed on October 16, 2000.
10.13 Asset Purchase Agreement, dated as of June 21, 2000, by and among
Sinclair Radio of St. Louis, Inc., Sinclair Radio of St. Louis
Licensee, LLC and Emmis Communications Corporation, incorporated by
reference from Exhibit 2.2 to Emmis' Form 8-K filed on October 16, 2000.
10.14 Asset Exchange Agreement, dated as of October 6, 2000, between Emmis
Communications Corporation, Emmis 106.5 FM Broadcasting Corporation of
St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and
Bonneville International
83
Corporation and Bonneville Holding Company, incorporated by reference
from Exhibit 2.3 to Emmis' Form 8-K filed on October 16, 2000.
10.15 Asset Purchase Agreement, dated as of June 19, 2000, by and among Emmis
Communications Corporation, AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM
Radio Licenses, LLC, incorporated by reference from Exhibit 10.2 to
Emmis' Form 8-K filed on October 16, 2000.
10.16 Asset Purchase Agreement dated June 3, 1999 between Emmis Communications
Corporation and Press Communications Corporation, incorporated by
reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for
the quarter ended August 31, 1999.
10.17 Asset Purchase Agreement by and between Emmis Broadcasting Corporation
and Wabash Valley Broadcasting Corporation, dated March 20, 1998,
incorporated by reference from Exhibit 10.15 to the 1998 10-K.
10.18 Asset Purchase Agreement by and among SF Broadcasting of Honolulu,
Inc., SF Honolulu License Subsidiary, Inc., SF Broadcasting of New
Orleans, Inc., SF New Orleans License Subsidiary, Inc., SF
Broadcasting of Mobile, Inc., SF Mobile License Subsidiary, Inc.,
SF Broadcasting of Green Bay, Inc., SF Green Bay License Subsidiary,
Inc. and Emmis Broadcasting Corporation, dated March 30, 1998,
incorporated by reference from Exhibit 10.16 to the 1998 10-K.
10.19 Asset Purchase Agreement by and among Emmis Communications Corporation,
Country Sampler, Inc. and Mark A. Nickel, dated as of February 23, 1999,
together with associated Consulting Agreement and Letter Agreement,
incorporated by reference from Exhibit 10.16 to Emmis' Annual Report on
Form 10-K for the fiscal year ended February 28, 1999.
21 Subsidiaries of Emmis.*
23 Consent of Accountants.*
24 Powers of Attorney.*
- ------------------------
* Filed with this report.
++ Management contract or compensatory plan or arrangement.
84
Signatures.
Pursuant to the requirements of Section 13 or 15(d) 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: May 18, 2001 By: /s/ Jeffrey H. Smulyan
-----------------------
Jeffrey H. Smulyan
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and on the dates indicated.
SIGNATURE TITLE
Date: May 18, 2001 /s/ Jeffrey H. Smulyan President, Chairman of the Board
----------------------
Jeffrey H. Smulyan and Director (Principal Executive
Officer)
Date: May 18, 2001 /s/ Walter Z. Berger Executive Vice President,
--------------------
Walter Z. Berger Treasurer And Chief Financial
Officer (Principal Accounting
Officer)
Date: May 18, 2001 Susan B. Bayh* Director
-------------
Susan B. Bayh
Date: May 18, 2001 Gary Kasseff* Executive Vice President, General
------------
Gary Kasseff Counsel and Director
Date: May 18, 2001 Richard A. Leventhal* Director
Richard A. Leventhal
Date: May 18, 2001 Greg A. Nathanson* Director
-----------------
Greg A. Nathanson
Date: May 18, 2001 Doyle L. Rose* Radio Division President and
-------------
Doyle L. Rose Director
Date: May 18, 2001 Frank V. Sica* Director
-------------
Frank V. Sica
Date: May 18, 2001 Lawrence B. Sorrel* Director
------------------
Lawrence B. Sorrel
*By: /s/ J. Scott Enright
J. Scott Enright
Attorney-in-Fact
85