Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
(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, 1998
[ ] 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 BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA
(State or other jurisdiction of
incorporation or organization)
950 NORTH MERIDIAN STREET, SUITE 1200
INDIANAPOLIS, INDIANA
(Address of principal executive offices)
35-1542018
(I.R.S. Employer
Identification No.)
46204
(Zip Code)
317/266-0100
Registrant's Telephone Number
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
Title of Class
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 III 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 22, 1998, was approximately $420,963,138.
The number of shares outstanding of each of the registrant's classes of
common stock, as of April 22, 1998, was:
8,452,694 Class A Common Shares, $.01 par value
2,560,894 Class B Common Shares, $.01 par value
Documents Incorporated by Reference: See Page 2
================================================================================
2
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
--------- -------------------
Proxy Statement Dated May 21, 1998 Part III
2
3
EMMIS BROADCASTING CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I...................................................... 4
Item 1. Business....................................... 4
Item 2. Properties..................................... 22
Item 3. Legal Proceedings.............................. 24
Item 4. Submission of Matters to a Vote of Security
Holders........................................ 24
PART II..................................................... 25
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters.................... 25
Item 6. Selected Financial Data........................ 26
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation... 26
Item 8. Financial Statements and Supplementary Data.... 32
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure......... 54
PART III.................................................... 55
Item 10. Directors and Executive Officers of the
Registrant.................................... 55
Item 11. Executive Compensation........................ 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................... 55
Item 13. Certain Relationships and Related
Transactions.................................. 55
PART IV..................................................... 56
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................... 56
Signatures.................................................. 58
3
4
PART I
ITEM 1. BUSINESS.
GENERAL
Emmis Broadcasting Corporation (the "Company" or "Emmis") is a diversified
media company with radio broadcasting and magazine publishing operations and,
following the consummation of two pending acquisitions, television broadcasting
operations. In 1997 the Company ranked as the eighth largest radio broadcaster
in the United States based on total number of listeners and the ninth largest
radio broadcaster in the United States based on total revenue. The eleven FM
radio stations and two AM radio stations owned or operated by the Company in the
United States (collectively, the "Radio Stations") serve the nation's three
largest radio markets of New York City, Los Angeles and Chicago, as well as St.
Louis and Indianapolis. These markets accounted for approximately $1.7 billion
in radio advertising revenues in calendar year 1997 as reported in Duncan's
Radio Market Guide (1998 ed.). The Company has entered into agreements to
purchase six network-affiliated television stations (collectively, the
"Television Stations") located in New Orleans, Louisiana, Mobile, Alabama, Green
Bay, Wisconsin, and Honolulu, Hawaii (the "SF TV Stations"), and in Fort Myers,
Florida and Terre Haute, Indiana (the "Wabash Valley TV Stations"). All of the
Television Stations are VHF stations except the Fort Myers station, which is a
UHF station. The markets served by the Television Stations accounted for
approximately $360 million in television advertising revenue in calendar year
1997 as reported in BIA's Investing in Television Market Report (1998 ed.) (the
"1998 BIA Report"). The Company expects to complete the purchase of the
Television Stations in late 1998.
Through a combination of acquisitions and internal growth, the Company's
broadcast cash flow has grown from $15.3 million (when the Company owned five
radio stations) in fiscal 1993 to $81.4 million in fiscal 1998 (on a pro forma
basis after giving effect to the Acquisition Transactions, as defined below, and
the radio stations acquired by the Company during fiscal 1998). The Company has
successfully created top-performing radio stations that are ranked, in terms of
primary demographic target audience share, among the top ten stations in the New
York City, Los Angeles, Chicago, St. Louis and Indianapolis radio markets
according to the Winter 1998 Ratings (the "Winter 1998 Arbitron Survey")
published by The Arbitron Company ("Arbitron"). This success, along with awards
from organizations such as the National Association of Broadcasters and
Billboard and Rolling Stone magazines, has come primarily as a result of the
Company's ability to attract and retain an experienced team of broadcast
professionals who have focused on creating innovative programming and developing
effective marketing and advertising sales programs. In addition, the Company
believes that the location of its Radio Stations in large markets makes it
attractive to radio advertisers and that the diversity of its radio markets
reduces its dependence on any one economic sector or specific advertiser.
The Company's overall strategy is to acquire underdeveloped media
properties in desirable markets and then to create value for the Company's
shareholders by developing those properties to enhance their cash flow. The
Company has successfully implemented this strategy with radio broadcasting
stations and with city magazines. The Company believes that it will be able to
utilize its expertise in broadcast operations, programming and advertising sales
in applying this strategy to the Television Stations which, like the radio
stations previously acquired by the Company, are underdeveloped properties
located in desirable markets, which can benefit from innovative, research-based
programming and the Company's experienced management team. Each of the SF TV
Stations experienced ratings declines following a change in affiliation to the
Fox television network from affiliation with other networks. The Company
believes that the ratings and broadcast cash flow of the Television Stations can
be improved with a more market-focused, research-based programming approach and
other related strategies.
PENDING TRANSACTIONS
Effective March 30, 1998, the Company entered into a definitive agreement
to acquire the SF TV Stations, consisting of WVUE-TV, New Orleans, Louisiana;
WALA-TV, Mobile, Alabama; WLUK-TV, Green Bay, Wisconsin; and KHON-TV, Honolulu,
Hawaii, for approximately $307 million, with $257 million
4
5
payable in cash at closing, $25 million payable at closing in either cash or
Class A Common Stock at the Company's option, and $25 million with interest at
8% per annum payable one year after closing in either cash or Class A Common
Stock at the Company's option (the "SF Acquisition"). The Company currently
anticipates that it will pay all of the purchase price in cash.
Effective March 20, 1998, the Company entered into a definitive agreement
to acquire the Wabash Valley TV Stations, consisting of WFTX-TV, Fort Myers,
Florida and WTHI-TV, Terre Haute, Indiana, as well as radio stations WTHI-FM,
WTHI-AM and WWVR-FM in Terre Haute, Indiana, for approximately $90 million in
cash (the "Wabash Valley Acquisition").
Upon consummation of the purchase of the Television Stations, the Company
plans to create a separate television division. The Company has signed a letter
of intent with Greg Nathanson, President of Programming and Development at
Twentieth Television, to manage the Company's television division.
On May 15, 1997, the Company entered into an agreement to acquire radio
station WQCD-FM in New York City (the "WQCD Acquisition" and, together with the
SF Acquisition and the Wabash Valley Acquisition, the "Acquisition
Transactions"). Starting in July 1997 and until the purchase of the station is
completed, the Company has operated and will continue to operate the station
pursuant to a time brokerage agreement under which the Company pays the current
owner a monthly fee of approximately $700,000. As a result, the operating
results of WQCD-FM are included in the Company's operating results beginning
July 1, 1997. Under the acquisition agreement, the current owner had the option
to require the Company to purchase the station, which it exercised in December
1997. The current WQCD-FM owner also exercised its right under the acquisition
agreement to require the Company to purchase certain TV stations that are to be
transferred by the Company to the current WQCD-FM owner in exchange for WQCD-FM.
The purchase price for the WQCD Acquisition will be approximately $141 million
after adjustments. The Company anticipates that it will complete the acquisition
in mid-1998. There can be no assurance, however, with respect to the timing or
completion of the WQCD Acquisition, which is subject to certain conditions,
including the concurrent acquisition and exchange of the TV stations specified
by the current WQCD-FM owner and obtaining the necessary regulatory approvals.
RADIO STATIONS
The following table sets forth certain information regarding the Radio
Stations operated by the Company and their broadcast markets:
RANKING IN
STATION MARKET STATION PRIMARY PRIMARY
AND RANK BY AUDIENCE DEMOGRAPHIC DEMOGRAPHIC
MARKET REVENUE(1) SHARE(2) TARGET AGES FORMAT TARGET(3)
------- ---------- -------- ----------- ------ -----------
Los Angeles.................. 1
KPWR-FM................. 4.0 12-24 Dance/Contemporary Hit 1
New York..................... 2
WQHT-FM................. 5.5 12-24 Dance/Contemporary Hit 1
WRKS-FM................. 4.2 25-54 Classic Soul/Smooth R&B 3
WQCD-FM(4).............. 3.2 25-54 Contemporary Jazz 6t
Chicago...................... 3
WKQX-FM................. 3.0 18-34 New Rock 4
St Louis..................... 18
KSHE-FM................. 5.0 18-34 Album Oriented Rock 4
WKKX-FM................. 4.2 18-34 Country 5
WALC-FM................. 2.9 18-44 Modern Adult Contemporary 7t
5
6
RANKING IN
STATION MARKET STATION PRIMARY PRIMARY
AND RANK BY AUDIENCE DEMOGRAPHIC DEMOGRAPHIC
MARKET REVENUE(1) SHARE(2) TARGET AGES FORMAT TARGET(3)
------- ---------- -------- ----------- ------ -----------
Indianapolis................. 30
WENS-FM................. 5.5 25-54 Adult Contemporary 4
WIBC-AM................. 8.5 35-64 News/Talk 3
WNAP-FM................. 4.7 25-54 Classic Rock 5
WTLC-FM................. 5.5 25-34 Urban Contemporary 2
WTLC-AM................. 1.2 25-54 Solid Gold Soul, Gospel 18
and Talk
- - -------------------------
(1) "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 (1998 ed.). The Company owns a 40% equity interest in the
publisher of Duncan's Radio Market Guide.
(2) "Station Audience Share" is from the Winter 1998 Arbitron Survey. The
generally accepted method of measuring the relative size of a radio
station's audience is by reference to total persons, age 12 and older,
Monday -- Sunday, 6 a.m. -- Midnight Average Quarter Hour ("AQH") shares as
published by Arbitron. Arbitron periodically samples radio listeners in
defined market areas, principally through the use of diaries returned by
selected listeners. A station's AQH share is a percentage computed by
dividing the average number of persons listening to a particular station for
at least five minutes during an average quarter hour in a given time period
by the average number of such persons for all stations in the market area.
Arbitron compiles ratings data for various demographic groups as well as for
total persons age 12 and older.
(3) "Ranking in Primary Demographic Target" is the ranking of the station among
all radio stations in its market and is based on the station's AQH share in
the primary demographic target according to the Winter 1998 Arbitron Survey.
A "t" indicates the station tied with another station for the stated
ranking.
(4) This station is currently being operated by the Company under a time
brokerage agreement pending its purchase by the Company.
6
7
TELEVISION STATIONS
The following table sets forth certain information regarding the SF TV
Stations and the markets in which they operate:
NUMBER OF STATION LICENSE
TELEVISION METROPOLITAN AFFILIATION/ HOUSEHOLDS DMA STATIONS STATION AUDIENCE EXPIRATION
STATION AREA SERVED CHANNEL IN DMA(1) RANK(1) IN MARKET(2) RANK(3) SHARE(4) DATE
- - ---------- ------------ ------------ ---------- ------- ------------ ------- -------- ----------
WVUE-TV New Orleans, LA Fox/8 623,000 41 6 4 8 6/1/05
WALA-TV Mobile, AL-Pensacola, FL Fox/10 450,000 62 5 3 10 4/1/05
WLUK-TV(5) Green Bay, WI Fox/11 381,000 70 5 4 9 12/1/05
KHON-TV(5) Honolulu, HI Fox/2 380,000 71 6 2 15 2/1/99
- - -------------------------
(1) Estimated by the A. C. Nielsen Company ("Nielsen") as of January 1998.
Rankings are based on the relative size of a station's market among the 211
generally recognized Designated Market Areas ("DMAs"), as defined by
Nielsen.
(2) 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.
(3) 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 February 1998.
(4) 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.
(5) As part of the SF Acquisition, the Company will also acquire KAII-TV and
KHAW-TV, which operate as satellite stations of KHON-TV and primarily
re-broadcast the signal of KHON-TV. The stations are considered one station
for FCC multiple ownership purposes. Low power television translators W40AN
and K55D2 retransmit stations WLUK-TV and KHON-TV, respectively.
The following table sets forth certain information regarding the Wabash
Valley TV Stations and the markets in which they operate:
HOUSEHOLDS NUMBER OF STATION LICENSE
TELEVISION METROPOLITAN AFFILIATION/ IN DMA DMA STATIONS STATION AUDIENCE EXPIRATION
STATION AREA SERVED CHANNEL (1) BANK(1) IN MARKET(2) BANK(3) SHARE(4) DATE
---------- ------------ ------------ ---------- ------- ------------ ------- -------- ----------
Fort Myers,
WFTX-TV FL............. Fox/36 320,000 83 5 4 7 2/1/05
Terre Haute,
WTHI-TV IN............. CBS/10 157,000 140 3 1 29 8/1/05
- - -------------------------
(1) Estimated by Nielsen as of January 1998. Rankings are based on the relative
size of a station's market among the 211 generally recognized DMAs.
(2) Represents the number of television 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.
(3) 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 February 1998.
(4) 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.
Wabash Valley Radio Stations. The three radio stations included in the
Wabash Valley Acquisition are WTHI-FM, WTHI-AM and WWVR-FM in Terre Haute,
Indiana. WTHI-FM currently operates in a Country format and was the number one
station in the Terre Haute market, according to the Fall 1997
7
8
Ratings published by Arbitron (the "Fall 1997 Arbitron Survey"), which is the
most recent ratings information available for this market. WTHI-AM currently
operates in a Talk format and was tied for the number eight station overall in
the Terre Haute market according to the Fall 1997 Arbitron Survey. The combined
broadcast cash flow for WTHI-FM and WTHI-AM was approximately $555,000 in 1997.
WWVR-FM (which is now in the process of being acquired by the seller under the
Wabash Valley Acquisition agreement) currently operates in a Religious format
and was the number seven station overall in the Terre Haute market according to
the Fall 1997 Arbitron Survey. The Company does not expect WWVR-FM to have a
material effect on the Company's broadcast cash flow or net income in the near
term. The Company's ownership of these Terre Haute radio stations together with
television station WTHI-TV, will require a waiver of the FCC's multiple
ownership rules. The Company has applied for the waiver, but if not granted by
the FCC, the Company may be required to divest its ownership of one or more of
the Terre Haute radio stations. Terre Haute ranks 172nd by radio advertising
revenue according to Duncan's Radio Market Guide (1998 ed.).
BUSINESS STRATEGY
The Company is committed to maintaining its leadership positions in
broadcasting, enhancing the performance of its broadcast properties, and
distinguishing itself through the quality of its operations. The Company intends
to selectively grow through acquisition. The Company has a successful track
record of acquiring underperforming radio stations in attractive markets and
improving their ratings, revenues and broadcast cash flow by utilizing its
programming and marketing skills. The Company believes that its strategy of
acquiring underperforming radio broadcast properties and improving their
operational and financial performance is also applicable to television broadcast
properties.
RADIO BROADCASTING STRATEGY. The key components of the Company's radio
broadcasting strategy include the following:
Pursuit of Strategic Acquisitions. The Company believes that continued
consolidation in the broadcasting industry will result in attractive
acquisition opportunities as the number of potential buyers for radio
assets declines. The Company also expects additional stations to become
available as larger consolidators either sell broadcasting assets or are
not able to bid for properties due to in-market ownership limitations. The
Company will consider acquisitions of individual radio stations or groups
of radio stations in new markets where it expects that it can ultimately
achieve a leadership position. In addition, the Company intends to pursue
acquisitions of radio stations in those of its current markets where it
believes increases in broadcast cash flow are attainable. Generally, the
Company has targeted markets that feature both large revenue pools and a
relatively small number of stations with competitive signals, a combination
which allows the Company greater operating leverage to achieve high
margins. The Company believes that historically under-serviced markets,
such as the Indianapolis radio market, provide vehicles for the Company's
sustained future growth. In analyzing potential acquisitions in new
markets, the Company generally considers (i) the amount of money generated
through radio advertising each year in the relevant market and the growth
rate for this pool of revenue, (ii) the number of competitive stations in
the market, including whether there is a niche or whether one of the
competitors has a perceived vulnerability, (iii) whether the station
proposed to be acquired has a competitive signal, (iv) whether value can be
achieved through ownership of multiple stations in that market, and (v) the
minimum level of performance which can be expected from the station under
the Company's management.
Strategic Grouping of Stations. Emmis organizes its operations within each
market to optimize operational performance and best position the properties
within that market to establish and maintain leadership positions.
Management concentrates on providing a focused programming format tailored
to its advertisers and the audiences they seek. This focus has resulted in
Emmis operating more than one radio station in certain markets so that
complementary programming formats may be offered to advertisers. In other
markets, management considers various opportunities to increase the number
of radio stations owned, and will only acquire other radio stations if they
are deemed appropriate for Emmis and its goals in that market at that time.
8
9
Innovative Programming. Historically, Emmis has been able to improve the
ratings, revenue and cash flow of its developing properties with increased
marketing and innovative programming. For example, in New York City Emmis
acquired WRKS-FM in 1994, the direct competitor of WQHT-FM, a station it
already owned. By changing the format of WRKS-FM to appeal to an older
demographic target and refocusing WQHT-FM to target the younger end of the
Contemporary Hit spectrum, the Company allowed the stations to complement
one another, captured a larger audience share and increased the combined
cash flow of the stations by approximately 133% over the three years ended
February 28, 1997. The Company expects its acquisition of WQCD-FM to round
out this group of stations in New York City by adding a third complementary
music format. The Company believes it can achieve similar success with its
television properties.
Focused Marketing Strategy. Emmis designs its local and national sales
efforts based on advertiser demand and the competitive formats within each
market. Since radio advertising revenues have generally grown at a more
rapid rate than total advertising sales, the Company has tailored its
programming in each market to appeal to specific demographic groups. For
example, in 1984 Emmis took over KPWR-FM in Los Angeles and changed its
format from adult contemporary to the nation's first Rhythmic Top 40's
station. This format appealed directly to the Latino population (the
fastest-growing segment of the population in Los Angeles) and made the
station an overnight success. KPWR-FM has been the number one station for
12 to 24 year old listeners for the past 10 years.
Entrepreneurial Management Approach. Each of the Company's stations is
managed by a team of experienced broadcasters who understand the musical
tastes, demographics and competitive opportunities of their particular
market. The Company uses an entrepreneurial management approach involving
decentralized station operations by local management which oversees and
controls station spending, long-range planning, company policies and
resource allocation at its individual station and is rewarded based on that
station's performance. In addition, the Company encourages its managers and
employees to own a stake in the Company, and over 79% of all full-time
employees own Emmis shares (or options to purchase shares), except for
full-time employees hired in connection with acquisitions since October
1997. The Company believes that this entrepreneurial management approach
has given Emmis a distinctive corporate culture, making it a highly
desirable employer in the broadcasting industry and significantly enhancing
the Company's ability to attract and retain experienced and highly
motivated employees and management.
TELEVISION BROADCASTING STRATEGY. The key components of the Company's
television broadcasting strategy include the following:
Pursuit of Strategic Acquisitions. The Company believes that attractive
acquisition opportunities are becoming increasingly available in the
television broadcasting industry, particularly in mid-sized markets. In
many cases, such television stations have suffered ratings and revenue
declines due to management inattention, improper programming strategies or
inadequate sales and marketing efforts. The Company intends to pursue
acquisitions of underperforming television stations which offer the
potential for significant improvement in ratings and broadcast cash flow
from more focused, research-based programming and application of the
Company's sales and marketing experience.
Programming Strategy. Emmis believes that innovative programming and
knowledge of local markets are the most important determinants of
individual station success. Familiarity with the local market is
particularly important to the Fox stations to be acquired by the Company
because of the significant programming flexibility resulting from
relatively low levels of network-originated programming. While major
networks may provide as much as 70% of the total programming aired by their
affiliated stations, Fox generally provides closer to 30%. Therefore, in
order to develop the Television Stations successfully, the Company has
identified television veteran Greg Nathanson to head its television
division. Mr. Nathanson has over 30 years of television broadcasting
experience and has had extensive independent programming experience as
President of Programming and Development for Twentieth Television and
President of Fox Television Stations. In addition, the Company expects to
conduct specific market research in order to effectively target the local
audience.
9
10
Maximize Advertising Inventory Value. Emmis intends to develop
complementary programming and organize the programming schedule at its
television stations to maximize the value of its advertizing spot inventory
by scheduling complementary programming around its most successful
programs. For example, the Company intends to leverage the popularity of
football programming in a market such as Green Bay or New Orleans by
developing and scheduling football-related programming for which higher
advertising revenue can be obtained.
Entrepreneurial Management Approach. The Company intends to extend its
successful entrepreneurial management approach to its television stations
through decentralized station operations by experienced local managers at
each station who understand the programming tastes, demographics and
competitive opportunities of their particular market and will be rewarded
based on their station's performance. Senior management of the Company will
work closely with local station management to implement the Company's
programming and marketing strategies and help enhance each station's
ratings and broadcast cash flow. The Company will also encourage the
managers and employees of its television stations to own a stake in the
Company and will include them in its various option, share purchase and
other share ownership programs open to its employees generally.
COMMUNITY INVOLVEMENT
The Company believes that to be successful, it must be integrally involved
in the communities it serves. To that end, each of the Company's stations
participates in many community programs, fundraisers and activities that benefit
a wide variety of organizations. Charitable organizations that have been the
beneficiaries of the Company's 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 its planned activities, the Company's stations take
leadership roles in community responses to natural disasters.
INDUSTRY INVOLVEMENT
The Company has an active leadership role in a wide range of industry
organizations. The Company's 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 and
the Arbitron Advisory Council and as founding members of the Radio Operators
Caucus. In addition, managers of the Company have been voted Radio President of
the Year and General Manager of the Year, and at various times the Company was
voted Most Respected Broadcaster in polls of radio industry chief executive
officers and managers.
ADVERTISING SALES
Virtually all of the revenue of a radio or television station is derived
from local, regional and national advertising. In the case of television
stations, additional revenue is sometimes derived from fees received from the
affiliated television networks in exchange for broadcasting network programming
and associated network advertising. Advertising rates charged by a station are a
function of the station's ability to attract audiences in the demographic groups
which advertisers wish to reach, and the number of stations competing in the
market area. A station's audience is reflected in rating service surveys of the
size of the audience tuned to the station and the time spent listening or
viewing.
The Company's 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. The Company believes
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.
The Company has 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
10
11
those goods). Although this source of advertising revenue is common in the
newspaper and magazine industry, the Company was among the first radio
broadcasters to recognize, and take advantage of, the potential of vendor co-op
advertising. The Company's 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 the Company's stations has a salesperson
devoted exclusively to the development of cooperative advertising. The Company
intends to expand this approach to the Television Stations.
In the broadcasting industry, stations often utilize trade (or barter)
agreements to exchange advertising time for goods or services (such as other
media advertising, travel or lodging), in lieu of cash. In order to preserve
most of its on-air inventory for cash advertising, the Company generally enters
into trade agreements only if the goods or services bartered to the Company will
be used in the Company's business. The Company has minimized its use of trade
agreements and in fiscal 1996, 1997 and 1998 sold approximately 95% of its
advertising time for cash. In addition, it is the Company's general policy not
to preempt advertising spots paid for in cash with advertising spots paid for in
trade.
RADIO NETWORKS
In addition to its other radio broadcasting operations, the Company owns
and operates 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.
PUBLISHING OPERATIONS
The Company publishes four magazines which were acquired beginning in 1988.
Indianapolis Monthly. The Company has published Indianapolis Monthly
magazine since September 1988. Indianapolis Monthly covers local personalities,
homes and lifestyles and currently has a paid monthly circulation of
approximately 45,000. Despite a nationwide downturn in the city and regional
magazine business, Indianapolis Monthly continues to perform well. The Company
believes this is due to a large advertising base and a popular editorial focus.
Competition comes from other local publications, although Indianapolis Monthly
is now the only general interest magazine focusing on the Indianapolis area.
Atlanta. The Company acquired and began publishing Atlanta magazine on
August 1, 1993. Atlanta covers area personalities, issues and style and
currently has a paid monthly circulation of approximately 65,000. The magazine
was unprofitable for several years before it was acquired by the Company for a
nominal investment. Certain initiatives, including downsizing staff, increasing
sales efforts and repositioning editorial focus, have contributed to improving
profitability.
Cincinnati. The Company acquired Cincinnati magazine in October 1997.
Cincinnati magazine was founded by the Greater Cincinnati Chamber of Commerce in
1967 and under its most recent owner before the Company grew to a paid monthly
circulation of approximately 22,000. The Company has repositioned the editorial
product to an up-to-date city/regional magazine covering people and
entertainment in Cincinnati, has doubled the existing sales staff and is
marketing the newly designed magazine to the Cincinnati area.
Texas Monthly. The Company acquired Texas Monthly magazine in February
1998. The critically acclaimed magazine, which has received eight National
Magazine Awards, has a paid monthly circulation of approximately 300,000 and is
believed by the Company to be read by more than 2,436,000 people. It marked its
25th anniversary with the publication of the February 1998 issue, which set a
single issue advertising record. The Company plans to increase Texas Monthly's
operating efficiencies while leaving the highly regarded editorial product
intact.
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, compact discs, music videos, the internet and direct mail
marketing. Competition within the broadcasting industry occurs primarily in
individual market areas, so that a station in one market does not generally
compete with stations in other market areas. In each of its markets, the
11
12
Company's 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, authorized power, assigned
frequency, audience characteristics, local program acceptance and the number and
characteristics of other stations in the market area. The Company attempts to
improve its competitive position with programming and promotional campaigns
aimed at the demographic groups targeted by its 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. Recent 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 may in
certain circumstances have lower operating costs and may be able to offer
advertisers more attractive rates and services. Although the Company believes
that each of its stations can compete effectively in its market, there can be no
assurance that any of the Company's 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. The FCC's multiple ownership rules have changed significantly as a
result of the 1996 Act.
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, audio tapes and compact discs. The
Company believes 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, 1998 the Company had approximately 663 full-time
employees and approximately 237 part-time employees. The Company's on-air
employees at its New York and Chicago radio stations, totaling approximately 62
persons, are covered by a union contract with the American Federation of
Television and Radio Artists. The Company considers relations with its employees
to be excellent.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction and
regulation of the Federal Communications Commission ("FCC") under the
Communications Act of 1934, as amended (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 television and radio
licenses in such manner as will provide a fair, efficient and equitable
distribution of service throughout the United States. The FCC determines the
location of stations, regulates the apparatus 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 a corporation holding 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 Telecommunications Act of 1996 (the "1996 Act"), which amended the
Communications Act, significantly changed both the process for renewal of
broadcast station licenses and the broadcast ownership rules. Among other
things, the 1996 Act established a "two-step" renewal process that limits the
FCC's discretion to consider applications filed in competition with an
incumbent's renewal application. The 1996 Act
12
13
also substantially liberalized broadcast ownership restructure by eliminating
the limits on the ownership of radio stations nationally, easing the national
restrictions on TV ownership, relaxing local radio ownership restrictions, and
requiring periodic review of other FCC broadcast ownership regulations,
including local television ownership restrictions. This new regulatory
flexibility has engendered aggressive local, regional, and national acquisition
campaigns. Removal of previous station ownership limitations on leading
incumbents (i.e., existing networks and major station groups) in many instances
has increased sharply the competition for and prices of attractive 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. The Company
cannot predict whether any such legislation will be enacted or new or amended
FCC regulations adopted or what their effect would be on the Company.
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, FCC rules and the public notices and
rulings of the FCC for further information concerning the nature and extent of
federal regulation of radio and television stations.
Grants and Renewals of Licenses. Radio and television stations operate
pursuant to broadcasting licenses that are ordinarily granted by the FCC for
maximum terms of eight years and are subject to renewal upon application to the
FCC. The Company's 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, 1997*
WQHT-FM (New York)........................................ June 1, 1998*
WQCD-FM (New York)........................................ June 1, 1998*
WIBC-AM (Indianapolis).................................... August 1, 2004
WNAP-FM (Indianapolis).................................... August 1, 2004
WRKS-FM (New York)........................................ June 1, 1998*
WKKX-FM (St. Louis)....................................... December 1, 2004
WALC-FM (St. Louis)....................................... December 1, 2004
WTLC-AM (Indianapolis).................................... August 1, 2004
WTLC-FM (Indianapolis).................................... August 1, 2004
WTHI-AM (Terre Haute)..................................... August 1, 2004
WTHI-AM (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, 1999
KAII-TV (Maui)............................................ February 1, 1999
KHAW-TV (Hawaii).......................................... February 1, 1999
- - -------------------------
* The asterisk denotes a license renewal application pending at the FCC. The
Communications Act provides that a broadcast station license with a renewal
application pending remains in effect until the FCC acts on the renewal
application, notwithstanding the expiration of the stated term.
Under the Communications Act, at the time an application is filed for
renewal for a station license, parties in interest, which may include members of
the public in the station's service area, may apprise the FCC of the service the
station has provided during the preceding license term and petition the FCC to
deny the renewal. If such a petition to deny presents information from which the
FCC concludes (or if the FCC concludes on its own) that there is a "substantial
and material" question 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 renewal should be granted. A competing
application for authority to
13
14
operate a station and replace the incumbent licensee may not be filed against a
renewal application or considered by the FCC in deciding whether to grant a
renewal application. The 1996 Act modified the license renewal process to
provide for the grant of a renewal application upon a finding by the FCC that
the licensee (i) has served the public interest, convenience and necessity; (ii)
has committed no serious violations of the Communications Act or the FCC's
rules; and (iii) has committed no other violations of the Communications Act or
the FCC's rules which would constitute a pattern of abuse. If the FCC cannot
make such a finding, it may deny a renewal application. Only after it has denied
the renewal application may the FCC accept other applications to operate the
station of the former licensee. Historically, the FCC has renewed most broadcast
licenses without a hearing even when petitions to deny have been filed against
broadcast license renewal applications.
On July 1, 1996, the National Rainbow Coalition and Operation Push filed
with the FCC a petition to deny renewal of the licenses of WENS-FM, WNAP-FM and
WIBC-AM for alleged deficiencies in minority hiring practices. The Company
opposed the petition. The Company and the petitioners subsequently entered into
an agreement as a result of which the petition was withdrawn. Notwithstanding
the withdrawal of the petition and pursuant to its long-time policy, the FCC
considered the allegations of the petition. In August 1997, the FCC renewed the
license for each station. The FCC determined that neither WENS-FM nor WNAP-FM
had violated its minority hiring practice rules. The FCC concluded that WIBC-AM
had not maintained complete minority hiring records, imposed a fine of $10,000,
and imposed certain annual reporting conditions. The Company has appealed the
imposition of the fine.
In response to recent legislation mandating the use of auctions to award
commercial broadcast authorizations, the FCC has initiated a rulemaking
proceeding to consider the use of competitive bidding procedures (auctions) to
award licenses or construction permits for new broadcast stations to the highest
bidder, and may also subject to auction certain other pending and future
applications by licensees to improve or otherwise modify their existing
facilities, where such applications would be mutually exclusive with other
licensees' applications. Pending the adoption of new auction rules, the FCC has
imposed a temporary freeze on the filing of applications for new facilities or
major modifications to existing facilities.
Station Classes. The FCC classifies each AM and FM station. An AM station
operates on either a clear channel, regional channel or local channel. A clear
channel is one on which AM stations are assigned to serve wide areas. AM
stations operating on clear channels are classified as follows: Class A
stations, which operate on an unlimited time basis and are designated to render
primary and secondary service over an extended area; Class B stations, which
operate on an unlimited time basis and are designed to render service only over
a primary service area; and Class D stations, which operate either during
daytime hours only, during limited times only or on an unlimited time basis with
low nighttime power. A regional channel is one on which Class B and Class D AM
stations may operate and serve primarily a principal center of population and
the rural areas contiguous to it. A local channel is one on which AM stations
operate on an unlimited time basis and serve primarily a community and the
immediately contiguous suburban and rural areas. Class C AM stations operate on
a local channel and are designed to render service only over a primary service
area that may be reduced as a consequence of interference.
The minimum and maximum facilities requirements for an FM station are
determined by its class. FM class designations depend upon the geographic zone
in which the transmitter of the FM station is located. In general, commercial FM
stations are classified as follows, in order of increasing power and antenna
height: Class A, B1, C3, B, C2, C1 and C.
Local Marketing Agreements. Over the past few years, a number of radio
stations, including certain of the Company's stations, have entered into what
commonly are referred to as "local marketing agreements" or "time brokerage
agreements" (together, "LMAs"). These agreements take various forms. Separately
owned and licensed stations may agree to function cooperatively in terms of
programming, advertising sales and other matters, subject to compliance with the
antitrust laws and the FCC's rules and policies, including the requirement that
the licensee of each station maintains independent control over the programming
and other operations of its own station.
14
15
A radio station that brokers substantial time on another station in its
market or engages in an LMA with a radio station in the same market will be
considered to have an attributable ownership interest in the brokered station
for purposes of the FCC's ownership rules, discussed below. As a result, a radio
broadcast station may not enter into an LMA that allows it to program more than
15% of the broadcast time, on a weekly basis, on another local radio station
that it could not own under the FCC's local multiple ownership rules. Under
present rules, time brokerage arrangements among television broadcast stations
do not create additional attributable interests. FCC rules also prohibit a radio
broadcast licensee from simulcasting more than 25% of its programming on another
station in the same broadcast service (i.e., AM-AM or FM-FM) where the two
stations service substantially the same geographical area, and where the
licensee owns those stations or owns one and programs the other through an LMA
arrangement. The FCC does not consider LMAs to be contrary to the Communications
Act provided that the licensee of the station that is being substantially
programmed by another entity maintains complete responsibility for, and control
over, programming and operations of its broadcast station and assures compliance
with applicable FCC rules and policies.
Joint Sales Agreements. Another example of a cooperative agreement between
differently owned radio stations in the same market is a joint sales agreement
("JSA"), whereby one station sells advertising time in combination, both on
itself and on a station under separate ownership. In the past the FCC has
determined that issues concerning joint advertising sales should be left to
antitrust enforcement. Currently JSAs are not deemed by the FCC to be
attributable. However, the FCC has outstanding a notice of proposed rule making,
which, if adopted, could require the Company to terminate any JSA it might have
with a radio station with which the Company could not have an LMA.
Ownership Matters. The FCC regulates the common ownership of radio,
television, cable television, and daily newspaper properties. The FCC generally
applies these limitations to so-called "attributable interests" in these media
held by an individual, corporation, partnership or other entity. The holder of
an attributable interest is generally treated as if it owned the media property
in applying the ownership restrictions. In the case of corporations holding
broadcast licenses, the interests of officers, directors and those who, directly
or indirectly, have a right to vote five percent or more of the corporation's
stock are generally treated as attributable, as are positions of an officer or
director of a corporate parent of a licensee. The FCC treats all partnership
interests as attributable, except for those limited partnership interests that
are insulated from material involvement in the partnership under policies
specified by the FCC. Insurance companies, certain regulated investment
companies, and bank trust departments holding stock only for investment purposes
do not acquire attributable interests unless their ownership exceeds a ten
percent direct or indirect voting stock interest in a broadcast licensee, cable
television system or daily newspaper. The FCC's rules specify several exceptions
to the general principles for attribution. 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. The Company's Amended and Restated
Articles of Incorporation and Code of By-Laws authorize the Board of Directors
to prohibit any ownership, voting or transfer of its capital stock which would
cause the Company to violate the Communications Act or FCC regulations.
In cases where one person or entity (such as Jeffrey H. Smulyan in the case
of the Company) holds more than 50% of the combined voting power of the common
stock of a broadcasting company, a minority shareholder of the company generally
would not acquire an "attributable" interest in the company. However, any
attributable interest by any such substantial shareholder in another broadcast
station or other media in a market where such company owns, or seeks to acquire,
a station could still be subject to review by the FCC under its "cross-interest"
policy, discussed below, and could result in the company's being unable to
obtain from the FCC one or more authorizations needed to conduct its broadcast
business or being unable to obtain FCC consents for future acquisitions.
Furthermore, in the event that a majority shareholder of a company (such as Mr.
Smulyan in the case of the Company) were no longer to hold more than 50% of the
combined voting power of the common stock of the company, the interests of
minority shareholders which had theretofore been nonattributable could become
attributable, with the result that any other media interests independently held
by such shareholders would have to be considered together with the media
interests attributed to them by reason of their interest or position in such
company for purposes of determining
15
16
compliance with FCC ownership rules. In the case of the Company, Mr. Smulyan's
level of voting control could decrease to or below 50% 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 any noncompliance, steps required to
achieve compliance could include divestitures by either the shareholder or the
affected company. Furthermore, other media interests of shareholders having or
acquiring an attributable interest in such a company could result in the
company's being unable to obtain from the FCC one or more authorizations needed
to conduct its broadcast station business or being unable to obtain FCC consents
for future acquisitions. Conversely, a company's media interests could operate
to restrict other media investments by shareholders having or acquiring an
interest in the Company.
In determining whether the Company is in compliance with the FCC multiple
ownership and cross-ownership limits, the FCC will consider both whether the
Company's own media holdings comport with the applicable ownership rules and
whether media interests independently held by the Company's officers, directors
and attributable stockholders would, combined with the interests of the Company
attributable to them, place any of them in violation of the FCC's ownership
rules. Accordingly, any attributable broadcast or other regulated media
interests independently held by the Company's officers and directors also may
limit the number of radio or television stations or other media properties the
Company may acquire or own.
The 1996 Act eliminated restrictions on the number of radio stations that
may be owned by one entity nationwide, and relaxed the ceilings for local radio
ownership. Under the 1996 Act, with limited exceptions, the number of radio
stations that may be owned by one entity in a given radio market is dependent on
the number of commercial stations in the "market" that includes the station. For
this purpose, the FCC defines "market" based upon the principal community
service contours of the stations to be commonly owned. As a result, determining
the number of radio broadcast stations in a "market" generally requires an
engineering analysis. If the market has 45 or more stations, one entity may own
not more than eight stations, of which not more than five may be in one service
(AM or FM); if the market has between 30 and 44 stations, one entity may not own
more than seven stations, of which not more than four may be in one service; if
the market has between 15 and 29 stations, a single entity may own not more than
six stations, of which not more than four may be in one service; and if the
market has fourteen or fewer stations, one entity may own not more than five
stations, of which not more than three may be in one service, except that in
such a market one entity may not own more than fifty percent of the stations in
the market. Each of the five markets in which the Company's Radio Stations are
located has at least 15 commercial radio stations.
For purposes of the local radio ownership rules, a radio broadcast licensee
also is considered to have an attributable interest in another radio broadcast
station in the same market if the first station provides the programming for
more than 15% of the broadcast time, on a weekly basis, of a second station. As
a result, if a combination of radio broadcast stations may not be commonly owned
under FCC rules, they may not enter into such programming arrangements. At
present, the FCC's one-to-a-market and cross-ownership rules do not apply to
LMAs, and LMA arrangements in television do not create attributable interests.
As part of its attribution rulemaking, however, the FCC has proposed to treat
LMA arrangements as creating attributable ownership interests under additional
rule provisions. If such a rule were adopted, the Company could not provide
programming to a radio station pursuant to an LMA if the Company or an
individual or an entity holding an attributable ownership interest in the
Company already owns a television station or a daily newspaper in the same
market.
The FCC's rules also impose limits on the number of television broadcast
stations that an entity may own nationally. No single entity or person may hold
attributable interests in television stations that, in the aggregate, would
serve more than 35% of the nation's television households. In addition, the FCC,
under its so-called "duopoly" rule for television prohibits a person or entity
from holding an attributable interest in televisions stations with overlapping
Grade B contours, a standard that prohibits ownership of more than one
television station in a local market. The Grade B contour is a predicted signal
strength contour that generally approximates the area within which a viewer can
receive off-the-air a signal adequate for normal viewing. The FCC is now
considering whether to change the rule, and the FCC has granted waivers
contingent on the outcome of the rulemaking proceeding to permit greater overlap
than the present rule otherwise would permit. The FCC's rules also provide for
waivers of the television duopoly rules in certain circumstances for so-called
"satellite" stations that rebroadcast a primary television station. In
connection with the consideration of the
16
17
application for approval of the SF Acquisition, the FCC must make a specific
finding that continued operation of KAII-TV and KHAW-TV as satellite stations of
KHON-TV would serve the public interest. The Company believes that the FCC will
make such a finding. However, in the event that the FCC were not to make such a
finding, the Company's ability to obtain FCC approval to acquire KAII-TV could
be adversely affected because of signal overlap with KHON-TV.
The FCC's cross-ownership rules prohibit the common ownership of
attributable interests in certain combinations of media outlets serving the same
geographic area. Under these rules, a single entity may not have an attributable
interest in any of the following combinations, absent a waiver or other
exception: (i) both a radio station and a television station that serve
specified overlapping areas under the FCC's so-called "one-to-a-market" rule;
(ii) a daily newspaper and either a radio station or a television station that
serve specified overlapping areas; (iii) a television station and a cable
television system that serve specified overlapping areas. Although the 1996 Act
deleted the statutory prohibition on a single entity owning both a television
station and a cable television system in the same market, it did not require the
FCC to change its rule that imposes this restriction. In March 1998, the FCC
initiated a rulemaking proceeding to determine whether the cable
television/broadcast cross-ownership ban is necessary or should be eliminated.
The 1996 Act directed the FCC to apply a liberal waiver policy to permit common
ownership of a radio station and a television station in any of the nation's 50
largest television markets. Under current policy, the FCC will grant a permanent
waiver of the newspaper cross-ownership rule (whether involving radio or
television) only in those circumstances where the effects of applying the rule
would be "unduly harsh," i.e., the newspaper is unable to sell the commonly
owned station or the sale would be at an artificially depressed price, or the
local community could not support a separately-owned newspaper and broadcast
station. The FCC has pending a notice of inquiry requesting comment on possible
changes to its policy for waiving the rule including, among other possible
changes: (a) whether waivers should only be available in markets of a particular
size; (b) whether any weight should be given to a newspaper's or broadcast
station's economic presence or market penetration; and (c) whether there should
be limits on the number of broadcast stations or other media outlets that could
be co-owned with a newspaper in the same market. The Company has requested a
waiver of the one-to-a-market rule to permit its common ownership of WTHI-AM,
WTHI-FM, WWVR-FM and WTHI-TV. There is no guarantee that the FCC will waive its
rules to permit the Company's common ownership of these stations. If no waiver
is granted, the Company will be required to divest itself of the radio stations.
Cross-Interest Policy. Under its "cross-interest" policy, the FCC considers
certain "meaningful" relationships among competing media outlets in the same
market, even if the ownership rules do not specifically prohibit the
relationship. Under the cross-interest policy, the FCC in certain instances may
prohibit one party from acquiring an attributable interest in one media outlet
and a substantial non-attributable economic interest in another media outlet in
the same market. Under this policy, the FCC may consider significant equity
interests combined with an attributable interest in a media outlet in the same
market, joint ventures, and common key employees among competitors. The
cross-interest policy does not necessarily prohibit all of these interests, but
requires that the FCC consider whether, in a particular market, the "meaningful"
relationships between competitors could have a significant adverse effect upon
economic competition and program diversity. Heretofore, the FCC has not applied
its cross-interest policy to LMAs and JSAs between broadcast stations. In its
ongoing rulemaking proceeding concerning the attribution rules described below,
the FCC has sought comment on, among other things, (i) whether the
cross-interest policy should be applied only in smaller markets and (ii) whether
non-equity financial relationships such as debt, when combined with multiple
business interrelationships such as LMAs and JSAs, raise concerns under the
cross-interest policy.
Alien Ownership Restrictions. Under the Communications Act, no FCC license
may be held by a corporation of which more than one-fifth of its capital stock
is owned of record or voted by aliens or their representatives or by a foreign
government or representative thereof, or by any corporation 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 any
corporation directly or indirectly controlled by any other corporation of which
more than one-fourth of its capital stock is owned of record or voted by
Non-U.S. Persons if the FCC finds the public interest will be served by the
refusal of such license. The FCC has interpreted this provision to require an
affirmative public interest finding to permit the grant or holding of a
17
18
license, and such a finding has been made only in limited circumstances. The
restrictions on alien ownership apply in modified form to other forms of
business organization, including partnerships. The Company's Amended and
Restated Articles of Incorporation and Code of By-Laws authorize the Board of
Directors to prohibit such ownership, voting or transfer of its capital stock as
would cause the Company to violate the Communications Act or FCC regulations.
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, and compliance with
the Communications Act's limitations on alien ownership as well as compliance
with other FCC policies.
A transfer of control of a corporation controlling a broadcast license may
occur in various ways. For example, a transfer of control occurs if an
individual stockholder gains or loses "affirmative" or "negative" control of
such corporation through issuance, redemption or conversion of stock.
"Affirmative" control would consist of control of more than 50% of such
corporation's outstanding voting power and "negative" control would consist of
control of exactly 50% of such voting power. To obtain the FCC's prior consent
to assign or transfer control of a broadcast license, appropriate applications
must be filed with the FCC. If the application involves a "substantial change"
in ownership or control, the application must be placed on public notice for a
period of 30 days during which petitions to deny the application may be filed by
interested parties, including members of the public. If the application does not
involve a "substantial change" in ownership or control, it is considered a "pro
forma" application and is not subject to the filing of petitions to deny. The
"pro forma" application is nevertheless subject to having informal objections
filed against it. If the FCC grants an assignment or transfer application,
interested parties have 30 days from public notice of the grant to seek
reconsideration of that grant. Generally, parties that do not file initial
petitions to deny or informal objections against the application face a high
hurdle in seeking reconsideration of the grant. When a grant is made by FCC's
staff acting under delegated authority the full Commission may set aside such
grant on its own motion for a period of forty days after public notice of the
grant. (FCC rules for computation of time may cause some more variation in the
actual time for action and response.) When passing on an assignment or transfer
application, the FCC is prohibited from considering whether the public interest
might be served by an assignment or transfer of the broadcast license to any
party other than the assignee or transferee specified in the application.
Under the 1996 Act, the FCC is required to review all of its broadcast
ownership rules every other year to determine whether the public interest
dictates that such rules be repealed or modified. The FCC recently initiated a
biennial review and is considering a number of changes to its rules, including
changes to the newspaper cross-ownership rule, the local radio ownership rules,
and certain prohibitions on television/cable cross-ownership, as mentioned
above. The Company cannot predict the outcome of these proceedings. The adoption
of more restrictive ownership limits could adversely affect the Company's
ability to make future acquisitions.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970's, 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. Licensees continue, however, to be required to
present programming that is responsive to community problems, needs and
interests and to maintain certain records demonstrating such responsiveness.
Broadcast of obscene or indecent material is regulated by the FCC as well as by
state and federal law. Complaints from listeners concerning a station's
programming often will be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed 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 identifications, the advertisement of
contests and lotteries, and technical operations, including limits on radio
frequency radiation. In addition, present FCC rules require licensees to develop
and implement affirmative action programs designed to promote equal employment
opportunities ("EEO"), and to submit reports to the FCC with
18
19
respect to these matters on an annual basis and in connection with renewal
applications. The United States Court of Appeals for the District of Columbia
Circuit recently held that the FCC's equal employment opportunity policies
violate the Fifth Amendment. That decision, however, remains subject to appeal.
There are FCC rules and policies, and rules and policies of other federal
agencies, that regulate matters such as 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. Rules adopted by the
FCC to implement the Children's Television Act of 1990 (the "Children's
Television Act") limit the permissible amount of commercial matter in children's
programs and requires each television station to present "educational and
informational" children's programming. The FCC's renewal processing guidelines
effectively require television stations to broadcast an average of three hours
per week of children's educational programming. In addition, the FCC has adopted
rules that require television stations to broadcast, over an 8 to 10 year
transition period which commenced on January 1, 1998, increasing amounts of
closed captioned programming. The closed captioning rules are currently under
reconsideration at the FCC.
Failure to observe these or other 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.
Digital Television. The FCC has adopted rules that will allow television
broadcasters to provide digital television ("DTV") to consumers. The proposed
DTV service is intended to provide higher technical quality of television
service and to facilitate to provision of other related digital services and
even multi-channel services through use of an over-the-air television channel.
In April, 1997, the FCC adopted a table of allotments for DTV that provided
eligible existing broadcasters with a second channel on which to provide DTV
service during a lengthy transition period.
On February 23, 1998, in response to numerous petitions for
reconsideration, the FCC affirmed, with some modifications, the FCC's April 1997
decisions. The FCC's DTV allotment plan is based on the use of a "core" DTV
spectrum between channels 2-51. Ultimately, the FCC plans to recover the
channels currently used for analog broadcasting and will decide at a later date
the use of the spectrum ultimately recovered. Uses of the DTV channels may
include multiple standard definition program channels, data transfer,
subscription video, interactive materials, and audio signals, so-called
"ancillary services," although broadcasters will be required to provide a free
digital video programming service that is at least comparable to today's analog
service. The FCC has recently instituted a rulemaking proceeding to determine a
formula for assessing fees for television broadcasters' use of DTV spectrum to
offer ancillary services (i.e., services other than free, over-the-air,
advertiser-supported television). 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 will be
required to be on the air with a digital signal by May 1, 1999. Affiliates of
those networks in markets 11-30 will be required to be on the air with digital
signals by November 1, 1999, and the remaining commercial broadcasters will be
required to be on the air with digital signals by May 1, 2002. The cost of
conversion to DTV will be high and may require the Company to incur substantial
expenses for new equipment and other transition expenses. Furthermore, the
Company cannot predict the market response to DTV.
The FCC has stated that broadcasters will remain public trustees and that
it will issue a notice to determine the extent of broadcasters' future public
interest obligations. The Company cannot predict the final determination of the
FCC regarding broadcasters' future public interest obligations, nor can it judge
in advance what impact, if any, the implementation of these changes might have
on business.
Must-Carry Provisions. The mandatory signal carriage, or "must carry,"
provisions of the Cable Television Consumer Protection and Competition Act of
1992 ("1992 Cable Act") require cable operators to carry the signals of local
commercial and non-commercial television stations and certain low power
television
19
20
stations within the same television market as the cable system. Systems with 12
or fewer usable activated channels and more than 300 subscribers must carry the
signals of at least three local commercial television stations. A cable system
with more than 12 usable activated channels, regardless of the number of
subscribers, must carry the signals of all local commercial television stations,
up to one-third of the aggregate number of usable activated channels of such a
system. The 1992 Cable Act also includes a retransmission consent provision that
prohibits cable operators and other multi-channel video programming distributors
("MVPDs") from carrying broadcast signals without obtaining the station's
consent in certain circumstances. The "must carry" and retransmission consent
provisions are related in that a local television broadcaster, on a cable
system-by-cable systems basis, must make a choice once every three years whether
to proceed under the "must carry" rules or to waive the right to mandatory but
uncompensated carriage and negotiate a grant of retransmission consent to permit
the cable system to carry the station's signal, in most cases in exchange for
some form of consideration from the cable operator. Cable systems and other
MVPDs must obtain retransmission consent to carry all distant commercial
stations other than "super stations" delivered via satellite.
On March 31, 1997, in a 5-4 decision, the U.S. Supreme Court upheld the
constitutionality of the must-carry provisions of the 1992 Cable Act. As a
result, the regulatory scheme promulgated by the FCC to implement the must-carry
provisions of the 1992 Cable Act will remain in effect. Whether and to what
extent such must-carry rights will extend to the new digital television signals
(see above) to be broadcast by licensed television stations (including those to
be owned by the Company following consummation of the Acquisition Transactions)
over the next several years is still a matter to be determined in a rulemaking
proceeding that the FCC may initiate later in 1998.
Political Broadcasting Requirements. During designated pre-election periods
- - -- 45 days before a primary election and 60 days before a general or special
election -- broadcast stations may not charge legally qualified candidates who
"use" station facilities more than the Lowest Unit Charge for the same class and
amount of time for the same time period as its most favored commercial
advertisers. In general, if a candidate's identifiable voice or picture appears
in a broadcast, the advertisement constitutes a "use," even if the candidate's
appearance is limited to giving the sponsorship identification announcement. The
FCC requires broadcasters to disclose to candidates complete, detailed
information about the rates, discounts and other programming information that
are offered to commercial advertisers. In addition, the FCC requires that radio
and television broadcasters allow candidates equal opportunity to purchase
broadcast time to respond to their election opponents and requires that federal
candidates be afforded "reasonable access" to broadcast time. A number of bills
have been introduced into the U.S. House of Representatives and the U.S. Senate
regarding political advertising. At least one of these bills would require
broadcast stations to provide free advertising time to political candidates. The
Company cannot predict whether Congress will pass such legislation and what, if
any, effect such legislation might have on the Company's broadcasting
operations.
Recent Developments and Proposed Changes. The FCC in March 1992 initiated
an inquiry and rulemaking proceeding in which it solicited comment on whether it
should alter its ownership attribution rules, and initiated a further rulemaking
proceeding in December 1994 to solicit additional public comment on amending
those rules. Among the issues being explored in the proceeding are: (a) whether
the FCC should raise the benchmarks for determining voting stock interests to be
"attributable" from 5% to 10% for those stockholders other than passive
institutional investors, and from 10% to 20% for passive institutional
investors; (b) whether to consider non-voting stock interests to be attributable
under the multiple ownership rules (at present such interests are not
attributable); (c) whether to consider generally attributable voting stock
interests which account for a minority of the issued and outstanding shares of
voting stock of a corporate licensee, where the majority of the corporation's
voting stock is held by a single stockholder; (d) whether to relax, for
attribution purposes, the FCC's insulation standards for business development
companies and other widely-held limited partnerships; (e) whether to adopt an
equity threshold for non-insulated limited partnerships below which a limited
partner would not be considered to have an attributable interest in the
partnership, regardless of that partner's non-insulation from day-to-day
management and operations of the media enterprises of the partnership; (f) how
to treat limited liability companies and other new business forms for purposes
of the FCC's attribution rules; (g) the impact of limited liability companies on
broadcast
20
21
ownership opportunities for women and minorities; and (h) whether to adopt a new
attribution policy under which the FCC would scrutinize multiple
"cross-interests" or other significant business relationships, which are held in
combination among ostensibly arm's-length competing broadcasters in the same
market, to determine whether the combined interests, which individually would
not raise concerns as to potential diminution of competition and diversity of
viewpoints, would nonetheless raise such concerns in light of the totality of
the relationships among the parties (including, e.g., LMAs, JSAs, debt
relationships, holdings of non-attributable interests, or other relationships
among competing broadcasters in the same market).
In November 1996, the FCC issued a second further notice of proposed
rulemaking in which, in addition to the attribution proposals outlined above, it
requested comment on whether the FCC should modify its attribution rules by,
among other changes: (a) attributing ownership in situations where an entity (i)
holds a non-attributable equity or debt interest in a broadcast licensee that
exceeds a minimum threshold and (ii) either supplies programming to the licensee
or owns a daily newspaper, cable system or broadcast station in the same market
as the licensee ("Equity/Debt Plus Rule"); (b) the attribution of interests in
LMAs between television stations in the same market; and (c) the attribution of
interests in JSAs, under which a third party purchases the right to sell a
licensee's commercial time inventory, but the owner of the license continues to
program its station. With respect to application of the Equity/Debt Plus Rule,
if adopted, the Commission may grandfather equity/debt plus relationships that
were in existence as of December 15, 1994, or require parties to terminate such
relationships within a short period of time following the rule's adoption. The
Company cannot predict when or whether any of these attribution proposals will
ultimately be adopted by the FCC.
In April 1997, the FCC adopted rules authorizing delivery of digital audio
radio service on a nationwide basis by satellite ("satellite DARS" or "SDARS");
at the same time, the FCC requested comment on a proposal to permit SDARS to be
supplemented by terrestrial transmitters designed to fill "gaps" in satellite
coverage. The FCC has awarded two nationwide licenses for SDARS. It is
anticipated that SDARS, when implemented, will be capable of delivering multiple
channels of compact-disc quality sound which will be receivable through the use
of special receiving antennas. There is ongoing research exploring the
feasibility of additional delivery of digital audio broadcasting ("DAB") on a
local basis by terrestrial stations utilizing either existing broadcasting
frequencies or other frequencies.
In addition, the FCC has authorized an additional 100 kHz of bandwidth for
the AM band and has allotted frequencies in this new band to certain existing AM
station licensees that applied for migration to the expanded AM band prior to
the FCC's cut-off date, subject to the requirement that such licensees apply to
the FCC to implement operations on their expanded band frequencies. At the end
of a transition period, those licensees will be required to return to the FCC
either the license for their existing AM band station or the license for the
expanded AM band station. The delivery of information through the Internet also
could create a new form of competition.
In March, 1998, pursuant to various public proposals, the FCC sought
comment on whether it should institute a proceeding to establish a "microradio"
service. The service, as proposed, would consist of several classes of low power
radio stations licensed by the Commission, with licenses available to small
companies or individuals. The Company cannot predict at this time the outcome of
this proceeding, or what effect establishing a "microradio" service would have
on the Company's radio stations.
On March 13, 1998, the FCC approved a television programming rating system
developed by the television industry which will allow parents to "black-out"
programs that contain material they consider inappropriate for children. On
March 13, 1998, the FCC also adopted technical requirements for the
implementation of so-called "v-chip technology" which will enable parents to
program television sets so that certain programming will be inaccessible to
children.
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 as many as 175 channels of digital
television service directly to subscribers equipment with 18-inch receiving
dishes and decoders. Currently, several entities provide DBS service to
consumers throughout the country. Other DBS
21
22
operators hold licenses, but have not yet commenced service. Generally, the
signals of local television broadcast stations are not carried on DBS systems.
The radio and television broadcasting industries historically have grown
despite the introduction of new technologies for the delivery of entertainment
and information, such as cable television, audio tapes and compact discs. A
growing population and greater availability of radios, particularly car and
portable radios, have contributed to this growth. 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 and television
broadcasting industries. The Company cannot predict what other matters might be
considered in the future by the FCC, nor can it assess in advance what impact,
if any, the implementation of any of these proposals or changes might have on
its business.
The 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 the Company's broadcast stations, result in the loss of
audience share and advertising revenues for the Company's broadcast stations and
affect the ability of the Company to acquire additional broadcast stations or
finance such acquisitions. Such matters include: proposals to impose spectrum
use or other fees on FCC licensees; the FCC's equal employment opportunity rules
and other matters relating to minority and female involvement in the
broadcasting industry; proposals to repeal or modify some or all of the FCC's
multiple ownership rules and/or policies; proposals to increase the benchmarks
or thresholds for attributing ownership interests in broadcast media; proposals
to change rules relating to political broadcasting, including the reinstatement
of the so-called "fairness doctrine"; technical and frequency allocation
matters; AM stereo broadcasting; proposals to permit expanded use of FM
translator stations; proposals to restrict or prohibit the advertising of beer,
wine, and other alcoholic beverages on radio; changes in the FCC's alien
ownership, cross-interest, multiple ownership and cross-ownership policies;
proposals to reimpose holding periods for licenses; changes to broadcast
technical requirements, including those relative to the implementation of DAB,
SDARS, and AM stereo broadcasting; proposals to permit expanded use of FM
translator stations; proposals to tighten safety guidelines relating to radio
frequency radiation exposure; proposals to limit the tax deductibility of
advertising expenses by advertisers; and proposals to auction the right to use
the radio broadcast spectrum to the highest bidder, instead of granting FCC
licenses and subsequent license renewals without such bidding.
The Company cannot predict whether any proposed changes will be adopted nor
can it predict what other matters might be considered in the future, nor can it
judge in advance what impact, if any, the implementation of any of these
proposals or changes might have on its business.
The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference is made to the
Communications Act, FCC regulations and the public notices and rulings of the
FCC for further information concerning the nature and extent of federal
regulation of broadcast stations.
ITEM 2. PROPERTIES.
The following table sets forth information with respect to the Company's
offices and studios and its broadcast tower locations. Management believes that
the Company's properties are in good condition and are suitable for the
Company's operations.
YEAR PLACED OWNED OR EXPIRATION DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ----------- -------- ---------------
WENS-FM/WNAP-FM/Corporate Headquarters............. 1990 Leased February 2000(1)(4)
Indianapolis Monthly
950 North Meridian Street
Indianapolis, Indiana
WENS-FM Tower...................................... 1985 Owned --
WNAP-FM Tower...................................... 1981 Owned --
22
23
YEAR PLACED OWNED OR EXPIRATION DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ----------- -------- ---------------
KSHE-FM............................................ 1986 Leased September 2007
700 St. Louis Union Station........................ 1984 Leased May 2000(1)
St. Louis, Missouri
KSHE-FM Tower
KPWR-FM............................................ 1988 Leased February 2003(2)
2600 West Olive
Burbank, California
KPWR-FM Tower...................................... 1993 Leased March 2003(3)
WQHT-FM/WRKS-FM/WQCD-FM............................ 1988 Leased June, 2012(2)
395 Hudson Street
New York, New York
WQHT-FM Tower...................................... 1988 Leased April 1996(5)
WRKS-FM Tower...................................... 1984 Leased November 2005
WQCD-FM Tower...................................... 1992 Leased May 2007
WKQX-FM............................................ 1988 Leased July 1999
Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower...................................... 1988 Leased September 1999(2)
Atlanta Magazine Office............................ 1997 Leased July 2003(2)
1360 Peachtree Street
Atlanta, Georgia
WIBC-AM............................................ 1983 Leased November 1998(1)
9292 North Meridian Street
Indianapolis, Indiana
WIBC-AM Tower...................................... 1966 Owned --
WKKX-FM/WALC-FM.................................... 1996 Leased September 2007
800 St. Louis Union Station
St. Louis, Missouri
WKKX-FM Tower...................................... 1989 Leased September 2009
WALC-FM Tower...................................... 1988 Owned --
WTLC-FM/WTLC-FM.................................... 1975 Owned --
2126 North Meridian Street
Indianapolis, Indiana
WTLC-FM Tower...................................... 1988 Leased December 2000
WTLC-AM Tower...................................... 1981 Leased May 2021
- - -------------------------
(1) The lease provides for two renewal options of five years each following the
expiration date.
(2) The lease provides for one renewal option of five years following the
expiration date.
(3) The lease provides for one renewal option of ten years following the
expiration date. The Company 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.
(4) In August 1996, the Company announced its plan to build and own an office
building in downtown Indianapolis for its corporate office and its
Indianapolis operations. The project is expected to be completed in 1999.
(5) The lease expired in 1996 and the station is currently negotiating a new
long term lease at the same location. Payments are on a month to month
basis.
23
24
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business, but the Company is not a party to any
lawsuit or proceeding which, in the opinion of management, is likely to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to shareholders during the Company's fourth
quarter.
24
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's 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 1996........................................... 46.75 35.00
August 1996........................................ 52.50 41.25
November 1996...................................... 53.50 31.75
February 1997...................................... 39.50 30.00
May 1997........................................... 39.25 33.75
August 1997........................................ 49.75 36.50
November 1997...................................... 47.88 43.25
February 1998...................................... 49.50 44.00
At April 22, 1998, there were approximately 397 record holders of the Class
A Common Stock, and there was one holder of the Company's Class B Common Stock.
The Company 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.
25
26
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY (29) 28,
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Net broadcasting revenues............... $50,311 $66,815 $99,830 $103,292 $125,855
Broadcasting operating expenses......... 29,368 38,794 53,948 52,839 67,646
Publication and other revenue, net of
operating expenses.................... 657 593 896 834 1,204
International business development
expense............................... -- 313 1,264 1,164 999
Corporate expense....................... 2,766 3,700 4,419 5,929 6,846
Time brokerage fee...................... -- -- -- -- 5,667
Depreciation and amortization........... 2,812 3,827 5,677 5,481 7,536
Noncash compensation.................... 1,724 600 3,667 3,465 4,882
Operating income........................ 14,298 20,174 31,751 35,248 33,483
Interest expense........................ 13,588 7,849 13,540 9,633 13,772
Loss on donation of radio station....... -- -- -- -- 4,883
Other income (expense), net............. (367) (170) (303) 325 6
Income before income taxes and
extraordinary item.................... 343 12,155 17,908 25,940 14,884
Income (loss) before extraordinary
item.................................. (957) 7,627 10,308 15,440 8,984
Net income (loss)....................... (4,365) 7,627 10,308 15,440 8,984
Net income (loss) available to common
shareholders.......................... (5,853) 7,627 10,308 15,440 8,984
Basic net income per share.............. $0.72 $0.96 $1.41 $0.82
Weighted average common shares
outstanding........................... 10,557,328 10,690,677 10,942,996 10,903,333
OTHER DATA:
Broadcast cash flow..................... $20,943 $28,021 $45,882 $ 50,453 $ 58,209
Operating cash flow..................... 18,836 24,601 41,095 44,194 51,568
Capital expenditures.................... 659 1,081 1,396 7,559 16,991
FEBRUARY (29) 28,
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash.................................... $ 1,607 $ 3,205 $ 1,218 $ 1,191 $ 5,785
Working capital......................... 6,210 10,088 14,761 15,463 23,083
Net intangible assets................... 30,751 139,729 135,830 131,743 234,558
Total assets............................ 57,849 183,441 176,566 189,716 333,388
Total debt.............................. 92,345 152,322 124,257 115,172 231,422
Redeemable preferred stock.............. 11,250 -- -- -- --
Shareholders' equity (deficit).......... (54,229) (2,661) 13,884 34,422 45,210
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The performance of a broadcast group, such as Emmis, is customarily
measured by the ability of its stations to generate broadcast cash flow.
Broadcast cash flow is not a measure of liquidity or of performance calculated
in accordance with generally accepted accounting principles, and should be
viewed as a supplement to and not as a substitute for the Company's results of
operations presented on the basis of generally accepted accounting principles.
26
27
The Company believes that broadcast cash flow is useful because it is
generally recognized by the broadcasting industry as a measure of performance
and is used by analysts who report on the performance of broadcasting companies.
Moreover, broadcast cash flow is not a standardized measure and may be
calculated in a number of ways. Emmis defines broadcast cash flow as advertising
revenues net of agency commissions and broadcast operating expenses. The primary
source of advertising revenues is the sale of advertising time to local and
national advertisers. The most significant broadcast operating expenses are
employee salaries and commissions, costs associated with programming,
advertising and promotion, and station general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its
radio stations charge. These rates are in large part based on the stations'
ability to attract audiences in demographic groups targeted by their
advertisers, as measured principally on a quarterly basis by Arbitron Radio
Market Reports. 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 listeners in
each station's chosen demographic target group.
In addition to the sale of advertising time for cash, radio 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.
SIGNIFICANT EVENTS
Effective March 30, 1998, the Company entered into an agreement to purchase
substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF
Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for
approximately $307 million. The purchase price will be paid a portion in cash
($257 million), either issuance of shares of Emmis' Class A Common Stock or
cash, at Emmis' option ($25 million), and a promissory note ($25 million)
bearing interest at 8%, with principal and interest due on the first anniversary
of the closing date which, at Emmis' option, may be paid with an equivalent
amount of Emmis' Class A Common Stock. In accordance with the asset purchase
agreement, Emmis made a $25 million escrow payment. 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 McHale Videofilm and satellite stations
KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii).
Effective March 20, 1998, the Company entered into an agreement to purchase
the majority of the assets of Wabash Valley Broadcasting Corporation, (the
"Wabash Valley Acquisition") for approximately $90 million in cash. The
acquisition consists of WTHI-TV, a CBS network affiliated television station,
WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana
area, and WFTX-TV, a Fox network affiliated television station in Ft. Myers,
Florida.
The Wabash Valley and SF Acquisitions (collectively the "TV Acquisitions")
are awaiting approval by the FCC. The Company will account for the TV
Acquisitions under the purchase method of accounting.
On February 1, 1998, the Company acquired all of the outstanding capital
stock of Mediatex Communications Corporation for approximately $37.4 million in
cash (the "Mediatex Acquisition"). Mediatex Communications Corporation owns and
operates Texas Monthly, a regional magazine. The acquisition was accounted for
as a purchase and was financed through additional bank borrowings.
On November 1, 1997, the Company acquired substantially all of the net
assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million
in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through
additional bank borrowings. The acquisition was accounted for as a purchase.
On November 1, 1997, the Company completed its acquisition of substantially
all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting,
L.P. for approximately $15.3 million in cash (the
27
28
"Indianapolis Acquisition"). Emmis financed the acquisition through additional
bank borrowings. The acquisition was accounted for as a purchase.
Emmis owns a 54% interest in a Hungarian subsidiary (Radio Hungaria Rt.,
d/b/a Slager Radio) which was formed in August 1997. In November 1997, Slager
Radio acquired a radio broadcasting license from the Hungarian government at a
cost of approximately $19.2 million, of which a cash payment of $7.3 million had
been made as of February 28, 1998. The broadcast license has an initial term of
seven years and is subject to renewal for an additional five years. Slager Radio
began broadcasting on February 16, 1998. Slager Radio's operating results
included in Emmis' results of operations for the year ended February 28, 1998
were not material.
On October 1, 1997, the Company acquired the assets of Network Indiana and
AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash
(the "Network Acquisition"). Emmis financed the acquisition through additional
bank borrowings. The acquisition was accounted for as a purchase.
On May 15, 1997, the Company entered into an agreement to purchase radio
station WQCD-FM in New York City. The purchase price, after adjustments, is
expected to be approximately $141 million. As part of the transaction therewith,
the Company issued an irrevocable letter of credit, to the current owner,
totaling $50 million as security for the Company's obligation under this
agreement. The acquisition will be financed through additional bank borrowings
and will be accounted for as a purchase upon closing. The acquisition is
currently awaiting FCC approval. The TV Acquisitions and the acquisition of
WQCD-FM are herein referred to as the Pending Acquisitions.
In connection with the agreement to acquire WQCD-FM, the Company entered
into a time brokerage agreement which permitted Emmis to begin operating the
station effective July 1, 1997 (herein referred to as the "Operation of
WQCD-FM"). This agreement expires upon the closing of the sale of the station to
the Company. In consideration for the time brokerage agreement, the Company pays
a monthly fee of approximately $700,000. Operating results of WQCD-FM are
reflected in the consolidated statement of operations for the period from July
1, 1997 through February 28, 1998.
On March 31, 1997, Emmis completed its acquisition of substantially all of
the assets of radio stations WALC-FM (formerly WKBQ-FM), WALC-AM (formerly
WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from Zimco, Inc.
for approximately $43.6 million in cash, plus an agreement to broadcast
approximately $1 million in trade spots, for Zimco, Inc., over a period of
years. The purchase price was financed through additional bank borrowings and
the acquisition was accounted for as a purchase. In February 1998, the Company
donated radio station WALC-AM in St. Louis to Northside Seventh Day Adventist
Church near St. Louis. The $4.8 million net book value of the station at the
time of donation was recognized as a loss on donation of radio station.
IMPACT OF THE YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 to remain functional. The Company is assessing the
internal readiness of its computer systems and the readiness of third parties
which interact with the Company's systems. The Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner. Costs associated with the year 2000 assessment and correction of
problems noted are expensed as incurred. Based on management's current
assessment, it does not believe that the cost of such actions will have a
material effect on the Company's results of operations or financial condition.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997. Net
broadcasting revenues for the year ended February 28, 1998 were $125.9 million
compared to $103.3 million for the same period of the prior year, an increase of
$22.6 million or 21.8%. This increase was principally due to the St. Louis
Acquisition, the Operation of WQCD-FM, and the ability to realize higher
advertising rates at the Company's
28
29
broadcasting properties, resulting from higher ratings at certain broadcasting
properties, as well as increases in general radio spending in the markets in
which the Company operates. On a pro forma basis, net broadcasting revenues
would have increased $8.5 million or 6.7% for the year. For purposes herein, pro
forma information assumes the Mediatex, Indianapolis, and St. Louis Acquisitions
and the Operation of WQCD-FM were effective on the first day of the year ended
February 28, 1997.
Broadcasting operating expenses for the year ended February 28, 1998 were
$67.6 million compared to $52.8 million for the same period of the prior year,
an increase of $14.8 million or 28.0%. This increase was principally
attributable to the St. Louis Acquisition, the Operation of WQCD-FM and
increased promotional spending at the Company's broadcasting properties. On a
pro forma basis, broadcasting operating expenses would have increased $4.9
million or 7.2% for the year.
Broadcast cash flow for the year ended February 28, 1998 was $58.2 million
compared to $50.4 million for the same period of the prior year, an increase of
$7.8 million or 15.4%. This increase was due to increased net broadcasting
revenues partially offset by increased broadcasting operating expenses as
discussed above. On a pro forma basis, broadcast cash flow would have increased
$3.6 million or 6.2% for the year.
Corporate expenses for the year ended February 28, 1998 were $6.8 million
compared to $5.9 million for the same period of the prior year, an increase of
$.9 million or 15.5%. This increase was primarily due to increased travel
expenses and other expenses related to potential acquisitions that were not
finalized and increased professional fees.
Operating cash flow consists of operating income, excluding the time
brokerage fee, noncash compensation and depreciation and amortization. Operating
cash flow for the year ended February 28, 1998 was $51.6 million compared to
$44.2 million for the same period of the prior year, an increase of $7.4 million
or 16.7%. This increase was principally due to the increase in broadcast cash
flow partially offset by an increase in corporate expenses. On a pro forma
basis, operating cash flow would have increased $4.0 million or 7.5% for the
year.
Interest expense was $13.8 million for the year ended February 28, 1998
compared to $9.6 million for the same period of the prior year, an increase of
$4.2 million or 43.0%. This increase reflected higher outstanding debt due to
the St. Louis Acquisition and the write-off of deferred financing costs
associated with refinancing of the Company's bank debt, offset by voluntary
repayments made thereunder and a rate decrease associated with the refinancing.
On a pro forma basis, interest expense would have increased $.8 million or 4.6%
for the year.
Publication and other revenues net of operating expenses for the year ended
February 28, 1998 were $1.2 million compared to $.8 million for same period of
the prior year, an increase of $.4 million or 44.4%. This increase was due to
the Mediatex Acquisition and increased tower rental revenue offset by an
increase in operating expenses at Atlanta magazine. On a pro forma basis,
publication and other revenues would have increased $1.1 million or 43.2%.
Depreciation and amortization expense for the year ended February 28, 1998
was $7.5 million compared to $5.5 million for the same period of the prior year,
an increase of $2.0 million or 37.5%. This increase was primarily due to the
Mediatex, Indianapolis, and St. Louis Acquisitions. On a pro forma basis,
depreciation and amortization expense would have increased $.1 million or .9%.
Noncash compensation expense for year ended February 28, 1998 was $4.9
million compared to $3.5 million for the same period of the prior year, an
increase of $1.4 million or 40.9%. Noncash 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 primarily to the increase in stock price
from the prior year.
Accounts receivable at February 28, 1998 were $32.1 million compared to
$20.8 million at February 28, 1997, an increase of $11.3 million or 54.2%. This
increase in accounts receivable was due primarily to the Mediatex, Cincinnati,
Indianapolis, Network, and St. Louis Acquisitions and Operation of WQCD-FM.
29
30
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29, 1996. Net
broadcasting revenues for the year ended February 28, 1997 were $103.3 million
compared to $99.8 million for the same period of the prior year, an increase of
$3.5 million or 3.5%. This increase was due to higher advertising rates at the
Company's broadcasting properties.
Total broadcasting operating expenses for the year ended February 28, 1997
were $52.8 million compared to $53.9 million for the same period of the prior
year, a decrease of $1.1 million or 2.1%. This decrease was principally due to
decreased promotional spending at the Company's broadcasting properties.
Publication and other revenues net of operating expenses for the year ended
February 28, 1997 were $.8 million compared to $.9 million for same period of
the prior year, a decrease of $.1 million or 6.9%. This decrease was principally
a result of an increase in operating expenses at Atlanta magazine.
Corporate expenses for the year ended February 28, 1997 were $5.9 million
compared to $4.4 million for the same period of the prior year, an increase of
$1.5 million or 34.2%. This increase was primarily due to increased
compensation.
Depreciation and amortization expense for the year ended February 28, 1997
was $5.5 million compared to $5.7 million for the same period of the prior year,
a decrease of $.2 million or 3.5%. This decrease was due to fully depreciated
assets at the Company's broadcasting properties.
Noncash compensation expense for the year ended February 28, 1997 was $3.5
million compared to $3.7 million for the same period of the prior year, a
decrease of $.2 million or 5.5%. Noncash 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 decrease was due primarily to the decrease in stock price
from a year ago.
Interest expense for the fiscal year ended February 28, 1997 was $9.6
million compared to $13.5 million for the same period of the prior year, a
decrease of $3.9 million or 28.9%. This decrease reflected lower outstanding
debt due to voluntary repayments made under the Company's credit facility.
Accounts receivable at February 28, 1997, were $20.8 million compared to
$19.2 million at February 29, 1996, an increase of $1.6 million or 8.7%. This
increase in accounts receivable was due primarily to increases in net
broadcasting revenues at the Company's broadcasting properties.
LIQUIDITY AND CAPITAL RESOURCES
On July 1, 1997, the Company entered into an amended and restated credit
facility comprised of a $250 million revolving credit facility, a $100 million
term note and a $150 million revolving credit facility/term note, a portion of
the proceeds of which were used to fund the Company's acquisitions and escrow
payments for Pending Acquisitions. The amended and restated credit facility is
available for general corporate purposes and acquisitions. In the fiscal year
ended February 28, 1998, the Company made voluntary payments of $24.3 million
under its credit facility. As of February 28, 1998, the Company had $235.0
million available for borrowing, under its credit facility. The Company is
negotiating and anticipates receiving a commitment from TD Securities (USA)
Inc., First Union Capital Markets and BankBoston, N.A. (together with any
additional lending institutions which may later provide a portion of the credit,
the "Lenders") for a $750 million credit facility (the "New Credit Facility"),
which may be increased up to $1.0 billion, with the consent of the Lenders. The
New Credit Facility consists of a $150 million senior secured 8-year revolving
credit facility, a $250 million senior secured 8-year amortizing term loan, a
$250 million 8.5-year amortizing term loan and a $100 million 8-year senior
secured acquisition revolving credit/term loan facility. The acquisition
facility commitment will terminate and convert to a term loan one year after
closing of the New Credit Facility. The New Credit Facility, which is expected
to close in mid-1998, will replace the Company's existing $500 million credit
facility and will be available for general corporate purposes and acquisitions.
Amounts borrowed under the New Credit Facility are expected to bear interest, at
the option of the Company, at a rate equal to the London Interbank Offered Rate
or a "base rate" equal to the higher of the Federal Funds rate or the prime
rate, plus a margin. The lenders' obligation to fund under the New Credit
Facility will be
30
31
subject to various conditions, including completion of an equity offering,
completion of loan documentation acceptable to the lenders and other customary
conditions for similar lines of credit.
In the fiscal years ended February 1998, 1997 and 1996, the Company had
capital expenditures of $17.0 million, $7.6 million and $1.4 million,
respectively. These capital expenditures primarily consisted of progress
payments in connection with the Indianapolis office facility project discussed
below, leasehold improvements to office and studio facilities in connection with
the consolidation of its New York broadcast properties to a single location, and
broadcast equipment purchases and tower upgrades, respectively.
The Company expects that cash flow from operating activities and borrowings
available under its credit facility will be sufficient to fund all debt service
for debt existing at February 28, 1998, working capital, capital expenditure
requirements for the next year, and the acquisition of WQCD-FM. To complete the
TV Acquisitions, the Company will increase its bank borrowings or issue equity
or debt securities, depending on market conditions and other factors.
In August 1996, Emmis announced its plan to construct an office building in
downtown Indianapolis for its corporate office and its Indianapolis operations.
The project is expected to be completed in 1999 for an estimated cost of $30
million, net of reimbursable construction costs of $2 million. This amount
reflects an increase over the original amount due to the Indianapolis and
Network Acquisitions, as well as an increase in overall staffing. Certain
factors such as additional studio costs related to digital technology and
historical landmark requirements may cause the cost of this project to increase.
The Company is funding this project through cash flow from operating activities
and bank borrowings.
INFLATION
The impact of inflation on the Company's 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 the Company's
operating results.
31
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of EMMIS
BROADCASTING CORPORATION (an Indiana corporation) and Subsidiaries as of
February 28, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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 Broadcasting
Corporation and Subsidiaries as of February 28, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 1998 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 31, 1998.
32
33
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28,
----------------------
1997 1998
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,191 $ 5,785
Accounts receivable, net of allowance for doubtful
accounts of $820 and $1,346 at February 28, 1997 and
1998, respectively..................................... 20,831 32,120
Prepaid expenses.......................................... 2,376 4,900
Income tax refunds receivable............................. 2,482 4,968
Other..................................................... 1,867 3,379
-------- --------
Total current assets................................. 28,747 51,152
-------- --------
PROPERTY AND EQUIPMENT:
Land and buildings........................................ 1,009 2,192
Leasehold improvements.................................... 5,509 8,188
Broadcasting equipment.................................... 14,356 18,800
Furniture and fixtures.................................... 7,154 12,144
Construction in progress.................................. 1,363 13,091
-------- --------
29,391 54,415
Less-Accumulated depreciation and amortization............ 16,400 20,969
-------- --------
Total property and equipment, net.................... 12,991 33,446
-------- --------
INTANGIBLE ASSETS:
Broadcast licenses........................................ 126,116 195,400
Trademarks and organization costs......................... 1,073 1,022
Excess of cost over fair value of net assets of purchased
businesses............................................. 20,371 53,297
Other intangibles......................................... 1,277 5,567
-------- --------
148,837 255,286
Less-Accumulated amortization............................. 17,094 20,728
-------- --------
Total intangible assets, net......................... 131,743 234,558
-------- --------
OTHER ASSETS:
Deferred debt issuance costs and cost of interest rate cap
agreements, net of accumulated amortization of $3,625
and $692 at February 28, 1997 and 1998, respectively... 1,541 3,806
Investments............................................... 5,470 5,114
Deposits and other........................................ 9,224 5,312
-------- --------
Total other assets, net.............................. 16,235 14,232
-------- --------
Total assets......................................... $189,716 $333,388
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
33
34
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
FEBRUARY 28,
----------------------
1997 1998
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 2,868 $ 51
Book cash overdraft....................................... 1,942 --
Accounts payable.......................................... 3,687 13,140
Accrued salaries and commissions.......................... 1,561 2,893
Accrued interest.......................................... 174 2,421
Deferred revenue.......................................... 1,593 7,985
Other..................................................... 1,459 1,579
-------- --------
Total current liabilities............................ 13,284 28,069
-------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 112,304 231,371
OTHER NONCURRENT LIABILITIES................................ 436 604
MINORITY INTEREST........................................... -- 1,875
DEFERRED INCOME TAXES....................................... 29,270 26,259
-------- --------
Total liabilities.................................... 155,294 288,178
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value; authorized
34,000,000 shares; issued and outstanding 8,410,956
shares and 8,430,660 shares at February 28, 1997 and
1998, respectively..................................... 84 84
Class B common stock, $.01 par value; authorized 6,000,000
shares; issued and outstanding 2,574,470 shares and
2,560,894 shares at February 28, 1997 and 1998,
respectively........................................... 26 26
Additional paid-in capital................................ 70,949 72,753
Accumulated deficit....................................... (36,637) (27,653)
-------- --------
Total shareholders' equity........................... 34,422 45,210
-------- --------
Total liabilities and shareholders' equity........... $189,716 $333,388
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
34
35
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-YEAR PERIOD ENDED
FEBRUARY (29)28,
---------------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
GROSS BROADCASTING REVENUES................................. $117,562 $122,739 $149,406
LESS AGENCY COMMISSIONS..................................... 17,732 19,447 23,551
-------- -------- --------
NET BROADCASTING REVENUES................................... 99,830 103,292 125,855
Broadcasting operating expenses........................... 53,948 52,839 67,646
Publication and other revenue, net of operating
expenses............................................... 896 834 1,204
International business development expenses............... 1,264 1,164 999
Corporate expenses........................................ 4,419 5,929 6,846
Time brokerage fee........................................ -- -- 5,667
Depreciation and amortization............................. 5,677 5,481 7,536
Noncash compensation...................................... 3,667 3,465 4,882
-------- -------- --------
OPERATING INCOME............................................ 31,751 35,248 33,483
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (13,540) (9,633) (13,772)
Equity in loss of unconsolidated affiliate................ (3,111) -- --
Gain on sale of investment in Talk Radio U.K.............. 2,729 -- --
Loss on donation of radio station......................... -- -- (4,833)
Other income, net......................................... 79 325 6
-------- -------- --------
Total other income (expense)........................... (13,843) (9,308) (18,599)
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 17,908 25,940 14,884
PROVISION FOR INCOME TAXES.................................. 7,600 10,500 5,900
-------- -------- --------
NET INCOME.................................................. $ 10,308 $ 15,440 $ 8,984
======== ======== ========
Basic net income per share................................ $.96 $1.41 $.82
======== ======== ========
Diluted net income per share.............................. $.93 $1.37 $.79
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
35
36
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY (29)28, 1998
CLASS A CLASS B
COMMON STOCK COMMON STOCK
-------------------- -------------------- ADDITIONAL CUMULATIVE TOTAL
SHARES SHARES PAID-IN ACCUMULATED TRANSLATION SHAREHOLDERS
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT ADJUSTMENTS EQUITY
----------- ------ ----------- ------ ---------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE, FEBRUARY 28,
1995................... 7,997,692 $80 2,655,122 $27 $59,552 $(62,385) $65 $(2,661)
Issuance of Class A
Common Stock in
exchange for Class B
Common Stock......... 48,790 1 (48,790) (1) -- -- -- --
Exercise of stock
options and related
income tax
benefits............. 198,850 2 -- -- 2,633 -- -- 2,635
Compensation related to
granting of stock and
stock options........ -- -- -- -- 2,917 -- -- 2,917
Issuance of Class A
Common Stock to
profit sharing
plan................. 19,608 -- -- -- 750 -- -- 750
Translation
adjustments.......... -- -- -- -- -- -- (65) (65)
Net income............. -- -- -- -- -- 10,308 -- 10,308
--------- --- --------- --- ------- -------- --- -------
BALANCE, FEBRUARY 29,
1996................... 8,264,940 83 2,606,332 26 65,852 (52,077) -- 13,884
--------- --- --------- --- ------- -------- --- -------
Issuance of Class A
Common Stock in
exchange for Class B
Common Stock......... 31,862 -- (31,862) -- -- -- -- --
Exercise of stock
options and related
income tax
benefits............. 92,415 1 -- -- 1,632 -- -- 1,633
Compensation related to
granting of stock and
stock options........ -- -- -- -- 2,715 -- -- 2,715
Issuance of Class A
Common Stock to
profit sharing
plan................. 21,739 -- -- -- 750 -- -- 750
Net income............. -- -- -- -- -- 15,440 -- 15,440
--------- --- --------- --- ------- -------- --- -------
BALANCE, FEBRUARY 28,
1997................... 8,410,956 84 2,574,470 26 70,949 (36,637) -- 34,422
--------- --- --------- --- ------- -------- --- -------
Issuance of Class A
Common Stock in
exchange for Class B
Common Stock......... 13,576 -- (13,576) -- -- -- -- --
Exercise of stock
options and related
income tax
benefits............. 106,305 1 -- -- 2,966 -- -- 2,967
Compensation related to
granting of stock and
stock options........ -- -- -- -- 4,132 -- -- 4,132
Issuance of Class A
Common Stock to
profit sharing
plan................. 15,152 -- -- -- 750 -- -- 750
Issuance of Class A
Common Stock to
employees and
officers and related
income tax
benefits............. 79,115 1 -- -- 954 -- -- 955
Purchase of Class A
Common Stock......... (194,444) (2) -- -- (6,998) -- -- (7,000)
Net income............. -- -- -- -- -- 8,984 -- 8,984
--------- --- --------- --- ------- -------- --- -------
BALANCE, FEBRUARY 28,
1998................... 8,430,660 $84 2,560,894 $26 $72,753 $(27,653) $-- $45,210
========= === ========= === ======= ======== === =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
36
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-YEAR PERIOD ENDED
FEBRUARY (29)28,
-------------------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income............................................... $10,308.. $ 15,440 $ 8,984
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization of property and
equipment........................................... 1,636 1,639 2,580
Amortization of debt issuance costs and cost of
interest rate cap agreements........................ 1,742 1,071 2,183
Amortization of intangible assets..................... 4,041 3,842 4,956
Provision for bad debts............................... 834 726 802
Provision (benefit) for deferred income taxes......... 4,870 1,590 (1,824)
Gain on sale of TalkRadio UK.......................... (2,729) -- --
Compensation related to stock and stock options
granted............................................. 2,917 2,715 4,132
Contribution to profit sharing plan paid with common
stock............................................... 750 750 750
Equity in loss of unconsolidated affiliate............ 3,111 -- --
Loss on donation of radio station..................... -- -- 4,833
Other................................................. -- (195) 357
(Increase) decrease in certain current assets (net of
dispositions and acquisitions)--
Accounts receivable................................. (3,175) (2,385) (8,389)
Prepaid expenses and other current assets........... (751) (3,041) (4,760)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions)--
Accounts payable and book cash overdraft............ (569) 2,757 5,560
Accrued salaries and commissions.................... 830 (1,999) 1,332
Accrued interest.................................... (1,272) (146) 2,247
Deferred revenue.................................... (349) 395 292
Other current liabilities........................... 390 26 116
(Increase) decrease in deposits and other assets...... (108) (898) (1,832)
Increase (decrease) in other noncurrent liabilities... 745 (925) 168
-------- -------- ---------
Net cash provided by operating activities........ 23,221 21,362 22,487
-------- -------- ---------
INVESTING ACTIVITIES:
Costs incurred for WRKS-FM Acquisition................... (131) -- --
Acquisition of WALC-FM, WKBQ-AM and WKKX-FM.............. -- (6,600) (36,964)
Acquisition of WTLC-FM and WTLC-AM....................... -- -- (15,336)
Acquisition of Texas Monthly............................. -- -- (37,389)
Acquisition of Cincinnati Magazine....................... -- -- (1,979)
Acquisition of Network Indiana and AgriAmerica........... -- -- (709)
Purchases of property and equipment...................... (1,396) (7,559) (16,991)
Initial payment for purchase of Hungarian broadcast
license............................................... -- -- (7,325)
Investment in and advances to TalkRadio UK............... (980) -- --
Net proceeds from disposition of investment in TalkRadio
UK.................................................... 2,729 -- --
Other.................................................... -- 240 --
-------- -------- ---------
Net cash provided (used) by investing
activities..................................... 222 (13,919) (116,693)
-------- -------- ---------
37
38
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE THREE-YEAR PERIOD ENDED
FEBRUARY (29)28,
-------------------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
FINANCING ACTIVITIES:
Proceeds of long-term debt............................... 29,518 19,000 288,378
Payments on long-term debt............................... (57,583) (28,102) (183,928)
Payment of loan fees..................................... -- -- (4,291)
Purchase of the Company's Class A Common Stock........... -- -- (7,000)
Proceeds from exercise of stock options and income tax
benefits of certain equity transactions............... 2,635 1,632 3,922
Other.................................................... -- -- 1,719
-------- -------- ---------
Net cash provided (used) by financing activities.... (25,430) (7,470) 98,800
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (1,987) (27) 4,594
CASH AND CASH EQUIVALENTS:
Beginning of year........................................ 3,205 1,218 1,191
-------- -------- ---------
End of year.............................................. $ 1,218 $ 1,191 $ 5,785
======== ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for--
Interest.............................................. $ 13,112 $ 8,708 $ 9,655
Income taxes.......................................... 2,931 9,180 8,419
Noncash investing and financing transactions --
Fair value of assets acquired by incurring debt....... 17 17 32
ACQUISITION OF WALC-FM, WKBQ-AM AND WKKX-FM:
Fair value of assets acquired......................... -- -- $ 44,564
Cash paid............................................. -- -- 43,564
---------
Liabilities assumed................................... $ 1,000
ACQUISITION OF TEXAS MONTHLY:
Fair value of assets acquired......................... -- -- $ 45,421
Cash paid............................................. -- -- 37,389
---------
Liabilities assumed................................... $ 8,032
The accompanying notes to consolidated financial statements are an integral part
of these statements.
38
39
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Emmis Broadcasting Corporation owns and operates FM radio stations in Los
Angeles, New York City (2 stations owned and operated, 1 station operated),
Chicago, St. Louis (3 stations) and Indianapolis (3 stations), two AM radio
stations in Indianapolis, and a radio station which broadcasts in Hungary
(Slager Radio). Emmis Broadcasting Corporation also publishes Indianapolis
Monthly, Texas Monthly, Cincinnati Magazine, and Atlanta magazines, and engages
in certain businesses ancillary to its radio businesses, such as advertising,
program consulting and broadcast tower leasing.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Emmis
Broadcasting Corporation and its majority owned Subsidiaries. Unless the content
otherwise requires, references to Emmis or the Company in these financial
statements mean Emmis Broadcasting Corporation and its Subsidiaries. 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 issue.
D. PUBLICATION AND OTHER REVENUE, NET OF OPERATING EXPENSES
Publication revenue of $9,924,000, $10,428,000 and $14,776,000 for the
years ended February 1996, 1997 and 1998, respectively, is reflected net of
operating expenses in the consolidated statements of operations. Other revenues
of $703,000, $935,000 and $1,142,000 for the years ended February 1996, 1997 and
1998, respectively, are also reflected net of operating expenses in the
consolidated statements of operations.
E. INTERNATIONAL BUSINESS DEVELOPMENT EXPENSES
International business development expenses includes the cost of the
Company's efforts to identify, investigate and develop international broadcast
investments or other international business opportunities.
F. NONCASH COMPENSATION
Noncash 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. 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 7.
G. 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.
H. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are 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 for leasehold improvements, 5 to 7 years for broadcasting equipment and 7
years for furniture and fixtures. Maintenance, repairs and minor renewals are
expensed; improvements are capitalized.
39
40
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest is being capitalized in connection with the construction of the
Indianapolis office facility (Note 8). The capitalized interest is recorded as
part of the building cost, which is currently included in construction in
progress, and will be amortized over the building's estimated useful life. In
fiscal 1998 approximately $312,000 of interest was capitalized. No interest was
capitalized in fiscal 1997 and 1996. 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.
I. 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 (totaling approximately $20.8
million) is being amortized over the seven year initial term of the license. The
approximately $32.4 million of excess of cost over fair value of net assets
resulting from the purchase of Texas Monthly is being amortized over 15 years.
Other intangibles are amortized using the straight-line method over varying
periods, not in excess of 10 years.
On a continuing basis, the Company reviews the financial statement carrying
value of these assets for impairment. Specifically, this process includes a
comparison of the carrying amounts of the operating units to their estimated
fair values, an analysis of estimated future operating cash flows and an
evaluation as to whether an operating unit might be sold in the near future. If
this process were to result in the conclusion that the carrying value of an
intangible asset would not be recovered, a write-down of the operating unit's
assets would be recorded through a charge to operations.
J. INVESTMENTS
Emmis has a 50% ownership interest 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. This investment is reflected at cost of $5,114,000,
which approximates the equity method of accounting.
On November 7, 1995, Emmis sold its 24.5% interest in TalkRadio UK Limited
(TRUK) for approximately $3.0 million and recorded a gain on sale of
approximately $2.7 million.
K. DEPOSITS AND OTHER ASSETS
Deposits and other assets includes amounts due from officers, including
accrued interest, of $1,570,000 and $1,654,000 at February 28, 1997 and 1998,
respectively. Officer loans bear interest at the Company's borrowing rate of
approximately 6.625% and 6.60% at February 28, 1997 and 1998, respectively.
L. DEFERRED REVENUE AND BARTER TRANSACTIONS
Deferred revenue includes deferred magazine subscription revenue and
deferred barter revenue. 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.
M. INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." The liability method measures the expected tax
impact of future taxable income or deductions resulting from differences in the
tax and financial reporting bases of assets and liabilities reflected in the
consolidated balance sheets and the expected tax impact of carryforwards for tax
purposes.
40
41
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. 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 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 not significant for the year ended February 28,
1998.
The functional currency of TRUK is the pound sterling. The Company's
investment in and advances to TRUK have been translated from the pound sterling
to the U.S. dollar using current exchange rates in effect at the balance sheet
date. The Company's equity in the loss of TRUK has been translated using an
average exchange rate for the period. The applicable gains or losses, net of
deferred income taxes, resulting from the translation of the Company's
investment in and advances to TRUK is shown as cumulative translation
adjustments in shareholders' equity. As indicated above, Emmis sold its
investment in TRUK on November 7, 1995.
O. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share", was issued. This new statement supersedes APB Opinion
No. 15, "Earnings Per Share", and supersedes or amends other related accounting
pronouncements. SFAS No. 128 was adopted by the Company effective March 1, 1997
and all prior period earnings per share (EPS) data have been restated. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures like the
Company's. Basic EPS excludes dilution and is computed by dividing net income
available to common shareholders by the weighted-average number of common shares
outstanding for the period (10,942,996 and 10,903,333 shares for the years ended
February 28, 1997 and 1998, respectively). Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Weighted average
common equivalent shares outstanding for the period, considering the effect of
employee stock options, are 11,291,225 and 11,377,765 for the years ended
February 28, 1997 and 1998, respectively.
P. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Q. ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
Under this statement, the Company will report in its financial statements, in
addition to net income, comprehensive income and its components which includes
foreign currency items. The statement must be adopted by the Company in fiscal
1999. Implementation of this disclosure standard will not affect the financial
position or results of operations. Management has not yet determined the manner
in which comprehensive income will be displayed.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. This statement, which must be adopted by the
Company for the year ended February 28, 1999, establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates
41
42
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial information internally for making decisions and assessing performance.
It also requires related disclosures about the source of revenues for each
segment, geographic areas, and major customers. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations. Management has not yet determined the manner in which segment
information will be displayed.
R. RECLASSIFICATIONS
Certain reclassifications have been made to the February 28, 1997 financial
statements to be consistent with the February 28, 1998 presentation.
2. COMMON STOCK
Emmis has authorized 34,000,000 shares of Class A Common Stock, par value
$.01 per share, and 6,000,000 shares of Class B Common Stock, par value $.01 per
share. The rights of these two classes are essentially identical except that
each share of Class B Common Stock has 10 votes 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. The financial statements presented reflect the establishment of the
two classes of stock.
In June 1997, Emmis acquired 194,444 shares of its common stock from Morgan
Stanley, Dean Witter, Discover and Co. at $36 per share. The aggregate purchase
price of $7.0 million is reflected as a decrease to additional paid in capital
in the accompanying financial statements and was financed through additional
borrowings under the Company's existing 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. As of February 28, 1997 and 1998, no
shares of preferred stock are issued and outstanding.
4. LONG-TERM DEBT
Long-term debt was comprised of the following at February 28, 1997 and 1998
(dollars in thousands):
1997 1998
---- ----
Credit Facility:
Revolving Credit Facility................................. $ 6,000 $115,000
Term Note................................................. 40,000 100,000
Revolving Credit Facility/Term Note....................... 69,000 --
License Obligation -- Hungary............................... -- 11,800
Bonds Payable............................................... -- 2,996
Notes Payable............................................... -- 1,448
Other....................................................... 172 178
-------- --------
Total debt.................................................. 115,172 231,422
Less Current Maturities................................... 2,868 51
-------- --------
$112,304 $231,371
======== ========
On July 1, 1997, the Company entered into an amended and restated Credit
Facility. As a result of the early payoff of the refinanced debt, the Company
recorded a loss of approximately $1.3 million, related to unamortized deferred
debt issuance costs, which is recorded as interest expense in the accompanying
consolidated statement of operations. The amended and restated Credit Facility
matures on February 28, 2005
42
43
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and is comprised of (1) a $250 million revolving credit facility which is
subject to certain adjustments as defined in the credit facility and includes an
additional commitment for $100 million which may be requested by Emmis prior to
May 31, 1999, (2) a $100 million term note and (3) a $150 million revolving
credit facility/term note.
The amended and restated Credit Facility provides for Letters of Credit to
be made available to the Company not to exceed $50 million. The aggregate amount
of outstanding Letters of Credit and amounts borrowed under the Revolving Credit
Facility cannot exceed the Revolving Credit Facility commitment. At February 28,
1998, a $50 million Letter of Credit was outstanding.
All outstanding amounts under the Credit Facility bear interest, at the
option of Emmis, at a rate equal to the Eurodollar Rate (5.375% and 5.625% at
February 28, 1997 and 1998, respectively) 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 from time to time, depending on Emmis'
ratio of debt to earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined in the agreement. The interest rate on borrowings
outstanding under the Credit Facility at February 28, 1997 and 1998 was
approximately 6.625% and 6.60%, respectively. 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 maintain
interest rate protection agreements through July 2000. The notional amount
required varies based upon Emmis' ratio of adjusted debt to EBITDA, as defined
in the Credit Facility. The notional amount of the agreements required at
February 28, 1998 totaled $109 million. The agreements, which expire at various
dates ranging from April 2000 to February 2001, establish various ceilings
approximating 8% on the one-month LIBOR interest rate. The cost of these
agreements are being amortized over the lives of the agreements and the
amortization is included as a component of interest expense.
The aggregate amount of the Revolving Credit Facility reduces quarterly
beginning May 31, 2000. Amortization of the outstanding principal amount under
the Term Note and Revolving Credit Facility/Term Note is payable in quarterly
installments beginning May 31, 2000. The annual amortization and reduction
schedules as of February 28, 1998, assuming the entire $500 million Credit
Facility were outstanding prior to the scheduled amortization payments are as
follows:
SCHEDULED AMORTIZATION/REDUCTION OF
CREDIT FACILITY AVAILABILITY
(IN THOUSANDS)
REVOLVING
REVOLVING CREDIT FACILITY/
YEAR ENDED CREDIT FACILITY TERM NOTE TERM NOTE
FEBRUARY (29)28 AMORTIZATION AMORTIZATION AMORTIZATION TOTAL
--------------- --------------- ------------ ---------------- -----
2001..................................... $ 37,500 $ 15,000 $ 15,000 $ 67,500
2002..................................... 50,000 20,000 22,500 92,500
2003..................................... 50,000 20,000 22,500 92,500
2004..................................... 50,000 20,000 37,500 107,500
2005..................................... 62,500 25,000 52,500 140,000
-------- -------- -------- --------
Total.................................... $250,000 $100,000 $150,000 $500,000
======== ======== ======== ========
Commencing with the fiscal year ending February 28, 2001 and continuing
through February 29, 2004, in addition to the scheduled amortization/reduction
of the Credit Facility, within 60 days after the end of each fiscal year, the
Credit Facility is permanently reduced by 50% of the Company's excess cash flow
if the ratio of adjusted debt (as defined in the Credit Facility) to EBITDA
exceeds 5 to 1. Excess cash flow is generally defined as EBITDA reduced by cash
taxes, capital expenditures, required debt service, increases in working
43
44
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital (net of cash or cash equivalents), the fixed fees paid under the WQCD-FM
time brokerage agreement, and $3,000,000. The net proceeds from any sale of
certain assets must also be used to permanently reduce borrowings under the
Credit Facility. If the ratio of adjusted debt to EBITDA is less than 5.5 to 1
and certain other conditions are met, the Company will be permitted in certain
circumstances to reborrow the amount of the net proceeds within nine months
solely for the purpose of funding an acquisition.
The Credit Facility contains various financial and operating covenants and
other restrictions with which Emmis must comply, including, among others,
restrictions on additional indebtedness, engaging in businesses other than
broadcasting and publishing, paying cash dividends, redeeming or repurchasing
capital stock of Emmis and use of borrowings, as well as requirements to
maintain certain financial ratios. The Company was in compliance with these
covenants at February 28, 1997 and 1998. The Credit Facility also prohibits
Emmis, under certain circumstances, from making acquisitions and disposing of
certain assets without the prior consent of the lenders, and provides that an
event of default will occur if Jeffrey H. Smulyan ceases to maintain (i) a
significant equity investment in Emmis (as specified in the Credit Facility),
(ii) the ability to elect a majority of Emmis' directors or (iii) control of a
majority of shareholder voting power. Substantially all of Emmis' assets,
including the stock of Emmis' subsidiaries, are pledged to secure the Credit
Facility.
The License Obligation -- Hungary is payable, in Hungarian forints, by
Emmis' Hungarian subsidiary (see Note 5) to the Hungarian government in four
equal annual installments commencing November 2000. The license obligation of
$11.8 million, reflected net of unamortized discount of $1.7 million, is
non-interest bearing and thus has been discounted at an imputed rate of
approximately 3% to reflect the obligation at its fair value. 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 included in interest expense.
The Bonds and Notes Payable are payable by Emmis' Hungarian subsidiary to
the minority shareholders of the subsidiary. The Bonds are due on maturity at
November 2004 and bear interest at the Hungarian State Bill rate plus 3%
(approximately 23% at February 28, 1998). Interest is payable semiannually. The
Notes Payable and accrued interest are due on demand and bear interest at prime
plus 2% (approximately 10.5% at February 28, 1998).
5. ACQUISITIONS
On March 31, 1997, Emmis completed its acquisition of substantially all of
the assets of radio stations WALC-FM (formerly WKBQ-FM), WKBQ-AM and WKKX-FM in
St. Louis from Zimco, Inc. for approximately $43.6 million in cash, plus an
agreement to broadcast approximately $1.0 million in trade spots for Zimco,
Inc., over a period of years. In accordance with the asset purchase agreement,
Emmis made an escrow payment of $6.0 million and paid $600,000 in non-refundable
prepayments in December 1996. These payments are reflected in deposits and other
assets in the consolidated balance sheet as of February 28, 1997. Concurrent
with the signing of the asset purchase agreement, Emmis entered into a time
brokerage agreement which permitted Emmis to operate the acquired stations
effective December 1, 1996 through the date of closing. Operating results of
these stations are reflected in the consolidated statements of operations
commencing December 1, 1996. The purchase price was financed through additional
bank borrowings. The acquisition was accounted for as a purchase. In February
1998, the Company donated WKBQ-AM to a church. The $4.8 million net book value
of the station at the time of donation was reflected as a loss on donation of
radio station in the accompanying consolidated statement of operations.
On May 15, 1997, the Company entered into an agreement to purchase radio
station WQCD-FM in New York City. The purchase price, after adjustments, is
expected to be approximately $141 million. As part of the transaction therewith,
the Company issued an irrevocable letter of credit, to the current owner,
totaling $50 million as security for the Company's obligations under this
agreement. The acquisition will be financed
44
45
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through additional bank borrowings and will be accounted for as a purchase upon
closing. The acquisition is currently awaiting FCC approval.
In connection with the above agreement to acquire WQCD-FM, the Company
entered into a time brokerage agreement which permitted Emmis to begin operating
the station effective July 1, 1997. This agreement expires upon the closing of
the sale of the station to the Company. In consideration for the time brokerage
agreement, the Company pays a monthly fee of approximately $700,000. Operating
results of WQCD-FM are reflected in the consolidated statement of operations for
the period from July 1, 1997 through February 28, 1998.
On October 1, 1997, the Company acquired the assets of Network Indiana and
AgriAmerica from Wabash Valley Broadcast Corporation for $.7 million in cash.
Emmis financed the acquisition through additional bank borrowings. The
acquisition was accounted for as a purchase.
On November 1, 1997, the Company completed its acquisition of substantially
all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting,
L.P. for approximately $15.3 million in cash. Emmis financed the acquisition
through additional bank borrowings. The acquisition was accounted for as a
purchase.
On November 1, 1997, the Company acquired substantially all of the net
assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million
in cash. Emmis financed the acquisition through additional bank borrowings. The
acquisition was accounted for as a purchase.
Emmis owns a 54% interest in a Hungarian subsidiary (Radio Hungaria Rt.,
d/b/a Slager Radio) which was formed in August 1997. In November 1997, Slager
Radio acquired a radio broadcasting license from the Hungarian government at a
cost of approximately $19.2 million, of which a cash payment of $7.3 million had
been made as of February 28, 1998. The broadcast license has an initial term of
seven years and is subject to renewal for an additional five years. Slager Radio
began broadcasting on February 16, 1998. Slager Radio's operating results
included in Emmis' results of operations for the year ended February 28, 1998
were not material.
On February 1, 1998, the Company acquired all of the outstanding capital
stock of Mediatex Communications Corporation for approximately $37.4 million in
cash. Mediatex Communications Corporation owns and operates Texas Monthly, a
regional magazine. The acquisition was accounted for as a purchase and was
financed through additional bank borrowings.
6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
A pro forma condensed consolidated statement of operations is presented
below for the years ended February 28, 1997 and 1998, assuming the acquisitions
of WALC-FM, WKKX-FM, WTLC-FM and AM, and Texas Monthly and the operation of
WQCD-FM, under the Time Brokerage Agreement, all had occurred on the first day
of the year ended February 28, 1997. Pro forma results for the year ended
February 28, 1997, include pro forma adjustments for March through November,
actual revenues and operating expenses from December through February, operating
under the time brokerage agreement, and certain pro forma expense adjustments
for December through February for the acquisition of WALC-FM and WKKX-FM. In
addition, pro forma adjustments for March through February for the operation of
WQCD-FM under the time brokerage agreement, and the acquisition of WTLC-FM and
AM and Texas Monthly are included in pro forma results for fiscal 1997. Pro
forma results for the year ended February 28, 1998, include pro forma
adjustments for March and actual results for April through February for the
acquisition of WALC-FM and WKKX-FM, pro forma results for March through June and
actual results for July through February for the operation of WQCD-FM under the
time brokerage agreement, pro forma results for March through October and actual
results for November through February for the acquisition of WTLC- FM and AM,
and pro forma results for March through January and actual results for February
for the acquisition of Texas
45
46
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Monthly. Pro forma results for Cincinnati Magazine, Network Indiana and
AgriAmerica have been excluded as they are not significant to the consolidated
operating results of the Company. Pro forma interest expense, depreciation of
property and equipment and amortization expense related to the intangibles
resulting from the allocation of the purchase price for the above acquisitions
and pro forma time brokerage fees for the operation of WQCD-FM have been
included in the pro forma statements presented below (in thousands, except per
share data).
PRO FORMA
----------------------
1997 1998
---- ----
NET BROADCASTING REVENUES............................... $126,112 $134,603
Broadcasting operating expenses....................... 67,792 72,646
Publication and other revenue, net of operating
expenses........................................... 2,637 3,776
International business development expenses........... 1,164 999
Corporate expenses.................................... 5,929 6,846
Depreciation and amortization......................... 11,164 11,267
Noncash compensation.................................. 3,465 4,882
Time brokerage agreement fees......................... 8,500 8,500
-------- --------
OPERATING INCOME........................................ 30,735 33,239
-------- --------
OTHER INCOME (EXPENSE):
Interest expense...................................... (16,713) (17,485)
Equity in loss of unconsolidated affiliates........... -- (357)
Loss on donation of radio station..................... -- (4,833)
Other income (expense), net........................... 333 459
-------- --------
Total other income (expense)..................... (16,380) (22,216)
-------- --------
INCOME BEFORE INCOME TAXES.............................. 14,355 11,023
PROVISION FOR INCOME TAXES.............................. 5,740 4,410
-------- --------
NET INCOME.............................................. $ 8,615 $ 6,613
======== ========
Basic net income per share............................ $0.79 $0.61
======== ========
Diluted net income per share.......................... $0.76 $0.58
======== ========
The pro forma condensed consolidated statement of operations presented
above does not purport to be indicative of the results that actually would have
been obtained if the indicated transactions had been effective at the beginning
of the year presented, and is not intended to be a projection of future results
or trends.
7. EMPLOYEE BENEFIT PLANS
A. 1986 STOCK INCENTIVE PLAN AND 1992 NONQUALIFIED STOCK OPTION PLAN
These stock plans provide for incentive stock options, nonqualified stock
options and stock appreciation rights equivalent to 1,112,500 shares of common
stock. The options and stock appreciation rights are generally exercisable six
months after the date of grant and expire not more than 10 years from the date
the options or rights are granted. Stock appreciation rights provide for the
issuance of stock or the payment of cash equal to the appreciation in market
value of the allocated shares from the date of grant to the date of exercise.
When rights are issued with options, exercise of either the option or the right
results in the surrender of the other. As of February 28, 1997 and 1998, there
were no stock appreciation rights outstanding nor were there any stock
appreciation rights issued with options outstanding. Certain stock options
awarded remain outstanding as of February 28, 1997 and 1998.
46
47
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. 1994 EQUITY INCENTIVE PLAN
Effective March 1, 1994, the shareholders of Emmis approved the 1994 Equity
Incentive Plan (the Plan). Under the Plan, awards equivalent to 1,000,000 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 500,000
shares of Class B Common Stock are available for grant and issuance under the
Plan. As of February 28, 1997 and 1998, the only awards granted under this Plan
were for stock options and restricted shares of stock. Certain stock options
awarded remain outstanding as of February 28, 1997 and 1998. The stock options
under this Plan are generally exercisable one year after the date of grant and
expire not more than 10 years from the date of grant. The exercise price of
these options are at the fair market value of the stock on the grant date.
C. 1995 EQUITY INCENTIVE PLAN
Effective March 1, 1995, the shareholders of Emmis approved the 1995 Equity
Incentive Plan (the Plan). Under the Plan, awards equivalent to 650,000 shares
of common stock may be granted pursuant to employment agreements discussed in
Note 8.
D. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Effective June 29, 1995, Emmis implemented 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 5,000 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 85,000 shares of Class A Common Stock are available
for grant at February 28, 1998.
E. 1997 EQUITY INCENTIVE PLAN
Effective March 1, 1997, the shareholders of Emmis approved the 1997 Equity
Incentive Plan (the 1997 Plan). Under the 1997 Plan, awards equivalent to
1,000,000 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 the 1997 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 500,000 shares of Class B Common
Stock are available for grant and issuance under the 1997 Plan. As of February
28, 1998, there were no awards granted under this Plan. The stock options under
this Plan are generally exercisable one year after the date of grant and expire
not more than 10 years from the date of grant.
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
47
48
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 noncash
compensation in the consolidated statements of operations related to the plans
summarized above was $2,917,000, $2,715,000 and $4,132,000 for the years ended
February 1996, 1997 and 1998, 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:
YEAR ENDED FEBRUARY (29)28,
----------------------------------------
1996 1997 1998
---- ---- ----
Net Income:
As Reported............................ $10,308,000 $15,440,000 $8,984,000
Pro Forma.............................. $ 8,845,000 $11,545,000 $6,871,000
Basic EPS:
As Reported............................ $.96 $1.41 $.82
Pro Forma.............................. $.83 $1.06 $.63
Diluted EPS:
As Reported............................ $.93 $1.37 $.79
Pro Forma.............................. $.80 $1.02 $.60
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 (29)28,
----------------
1996 1997 1998
---- ---- ----
Risk Free Interest Rate............................... 6.47% 6.39% 5.78%
Expected Life (Years)................................. 6.8 7.1 8.1
Expected Volatility................................... 39.70% 41.56% 38.65%
Expected dividend yields were zero for fiscal 1996, 1997 and 1998.
A summary of the status of options at February 1996, 1997 and 1998 and the
related activity for the year is as follows:
1996 1997 1998
------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding at Beginning of
Year............................ 587,000 $ 9.37 893,888 $15.88 1,232,335 $23.42
Granted........................... 505,738 19.29 439,862 35.54 325,200 35.28
Exercised......................... (198,850) 6.63 (92,415) 10.01 (106,305) 21.09
Expired........................... -- -- (9,000) 33.96 (10,600) 42.47
Outstanding at End of Year........ 893,888 15.88 1,232,335 23.42 1,440,630 26.08
Exercisable at
End of Year....................... 517,900 11.99 737,223 16.71 1,155,430 22.14
Available for Grant............... 1,816,012 1,385,150 2,571,350
48
49
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended February 1996, 1997 and 1998 options were granted
with an exercise price equal to or less than 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 1996, 1997 and 1998 is as follows:
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE FAIR EXERCISE FAIR EXERCISE FAIR
PRICE VALUE PRICE VALUE PRICE VALUE
-------- -------- -------- -------- -------- --------
OPTIONS GRANTED WITH AN EXERCISE
PRICE:
Equal to Fair Market Value of the
Stock on the Date of Grant.......... $14.81 $26.03 $24.46 $42.66 $22.85 $41.20
Less Than Fair Market Value of the
Stock on the Date of Grant.......... $16.55 $15.50 $24.30 $15.50 $40.48 $15.50
During fiscal 1996 and 1997, 90,000 and 14,800 shares of nonvested stock
were granted at a weighted average grant date fair value of $17.36 and $37.20,
respectively, under employment agreements discussed in Note 8. No nonvested
stock was granted during fiscal 1998.
The following information relates to options outstanding and exercisable at
February 28, 1998:
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
-------- --------- -------- ------------- --------- --------
$3.75 60,375 $ 3.75 4.2 years 60,375 $ 3.75
10.00-13.25 76,450 12.43 5.7 years 76,450 12.43
15.13-17.125 644,393 15.61 8.0 years 644,393 15.61
28.875-42.25 297,362 34.01 8.1 years 206,862 33.42
44.125-48.75 362,050 44.79 9.0 years 167,350 44.40
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. Contributions to the plan 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 noncash compensation in the consolidated statements
of operations were $750,000 for each of the years ended February 1996, 1997 and
1998.
H. 401(K) RETIREMENT SAVINGS PLAN
Emmis sponsors a Section 401(k) retirement savings plan which covers
substantially all nonunion employees age 18 years and older who have at least
one year of service. Employees may make pretax contributions to the plan up to
10% of their compensation, not to exceed the annual limit prescribed by the
Internal Revenue Service. Emmis may make discretionary matching contributions to
the plan 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 $2,000.
Emmis' contributions to the plan totaled $129,000, $273,000 and $315,000 for the
years ended February 1996, 1997 and 1998, respectively.
49
50
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 labor union. Amounts charged
to expense related to the multi-employer plan were approximately $276,000,
$297,000 and $342,000 for the years ended February 1996, 1997 and 1998,
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.
8. COMMITMENTS AND CONTINGENCIES
A. OPERATING LEASES
Emmis leases certain office space, tower space, equipment and automobiles
under operating leases expiring at various dates through March 2013. 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, 1998, are as follows:
PAYABLE IN YEAR
ENDING FEBRUARY PAYMENTS
--------------- --------
(IN THOUSANDS)
1999.................................................. $ 3,139
2000.................................................. 2,710
2001.................................................. 2,085
2002.................................................. 1,961
2003.................................................. 2,024
Thereafter............................................ 11,618
-------
$23,537
=======
Minimum payments have not been reduced by minimum sublease rentals of
approximately $740,000 due in the future under noncancelable subleases. As
further discussed in e. below, in 1999 Emmis intends to move its corporate
office and Indianapolis operations to an office building being constructed in
downtown Indianapolis. Included in future minimum rentals above is approximately
$752,000 to be paid through 2000 relating to office space currently being leased
in Indianapolis which will no longer be used after the move. At this time Emmis
management believes that sublease income will be adequate to offset any rental
expense associated with the existing lease.
Rent expense totaled $4,437,000, $3,025,000 and $4,512,000 for the years
ended February 1996, 1997 and 1998, respectively. Rent expense for the year
ended February 1996 includes a loss recognized in connection with a remaining
lease obligation related to leased property no longer used for operating
purposes. During the year ended February 1997, the Company settled the
aforementioned lease obligation which resulted in a reduction to rent expense.
Rent expense for the year ended February 1998 is net of sublease income of
approximately $86,000.
50
51
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. BROADCAST AGREEMENTS
Emmis has entered into agreements to broadcast certain syndicated programs
and sporting events. Future payments related to these broadcast rights are
summarized as follows: Year ended February 1999 -- $1,584,000, 2000 --
$1,074,000, 2001 -- $1,100,000, 2002 -- $1,150,000, and 2003 -- $625,000.
Expense related to these broadcast rights totaled $1,260,000, $1,383,000 and
$1,400,000 for the years ended February 1996, 1997 and 1998.
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
Effective March 1, 1994, Emmis entered into an employment agreement with
its Chief Executive Officer that continues through February 28, 1999 and
provides for an annual base salary as specified in the agreement and an annual
bonus. In addition, for each year Emmis meets specified financial targets, the
Chief Executive Officer will be granted an option to acquire 100,000 shares of
Class B Common Stock. The options will have a five-year term and an exercise
price of $15.50 per share. The Chief Executive Officer was granted an option to
acquire 100,000 shares of Class B Common Stock in accordance with the terms of
this agreement for each of the years ended February 1996 and 1997. It is
expected that an option to acquire 100,000 shares of Class B Common Stock will
also be granted, under this employment agreement, for the year ended February
1998. Upon the termination or disability of the Chief Executive Officer,
specified levels of compensation may continue for five years from the date of
termination or disability. Upon the death of the Chief Executive Officer, lump
sum payments are payable to his estate.
Effective March 1, 1995, Emmis entered into employment agreements with two
other executive officers of the Company that continued through February 28, 1998
and provided for an annual base salary and certain bonuses as specified in the
agreements. Each executive officer received 12,000 shares of the Company's Class
A Common Stock for each year of the employment agreements. The shares vested
upon completion of the agreements. In addition, each executive officer was
granted an option to acquire 25,000 shares of Class A Common Stock during each
year of the employment agreements. The options became exercisable at the end of
the term of the employment agreements and have an exercise price of $15.50 per
share.
Effective March 1, 1995 and 1996, Emmis entered into employment agreements
with two additional executives of the Company that continue through February 28,
1999 and provide for an annual base salary and certain other bonuses as
specified in the agreements. Subject to certain conditions, the executives will
receive, in total, 27,000 shares of the Company's Class A Common Stock. Of the
total shares to be received 2,000, were awarded as of February 28, 1997 with the
remaining 25,000 to be awarded upon completion of the term of the agreements. In
addition, subject to certain conditions, during the term of the agreements, the
executives will be granted options to acquire shares of Class A Common Stock,
with an exercise price equal to the fair market value at the date of grant. Each
option becomes exercisable one year from the date of grant. Options to purchase
up to 89,806 shares of Class A Common Stock may be granted over the term of the
agreements. Through February 28, 1998, options to purchase 65,806 shares have
been granted under the agreements.
Effective March 1, 1995, Emmis entered into employment agreements with
certain station managers that continued through February 28, 1997 and provided
for an annual base salary and certain bonuses as specified in the agreements.
Effective March 1, 1997 new employment agreements were entered into, with
similar provisions, which continue through February 28, 1999. Subject to certain
conditions, each station manager will receive a prescribed number of shares, not
to exceed 1,500 shares, of the Company's Class A Common Stock
51
52
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
during each year of the employment agreements. Commencing with the initial
agreements through February 28, 1998, 10,050 shares have been granted under
these agreements.
E. CONSTRUCTION OF OFFICE BUILDING
In August 1996, Emmis announced its plan to build an office building in
downtown Indianapolis for its corporate office and its Indianapolis operations.
The project is expected to be completed in 1999 for an estimated cost of $30
million, net of reimbursable construction costs of $2 million. This amount
reflects an increase over the original amount due to the acquisition of WTLC-FM,
WTLC-AM, Network Indiana and AgriAmerica. Certain factors such as additional
studio costs related to digital technology and historical landmark requirements
may cause the cost of this project to increase. The Company plans to fund this
project through additional borrowings under the Credit Facility.
9. INCOME TAXES
The provision for income taxes for the years ended February 1996, 1997 and
1998, consisted of the following:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Current:
Federal................................................... $2,081 $ 7,535 $ 6,474
State..................................................... 649 1,375 1,250
------ ------- -------
2,730 8,910 7,724
------ ------- -------
Deferred:
Federal................................................... 4,572 1,328 (2,059)
State..................................................... 298 262 235
------ ------- -------
4,870 1,590 (1,824)
------ ------- -------
Provision for income taxes.................................. $7,600 $10,500 $ 5,900
====== ======= =======
The provision for income taxes for the years ended February 1996, 1997 and
1998, differs from that computed at the Federal statutory corporate tax rate as
follows:
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Computed income taxes at 35%.................... $6,268 $ 9,079 $5,209
State income tax................................ 616 1,064 965
Other........................................... 716 357 (274)
------ ------- ------
$7,600 $10,500 $5,900
====== ======= ======
52
53
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and deferred tax liabilities at
February 28, 1997 and 1998, are as follows:
1997 1998
---- ----
(IN THOUSANDS)
Deferred tax assets:
Capital loss carryforwards........................... $ 3,208 $ 2,914
Net operating loss carryforwards..................... -- 2,587
Compensation relating to stock options............... 2,435 3,543
Other................................................ 1,221 2,739
Valuation allowance.................................. (3,208) (2,914)
-------- --------
Total deferred tax assets......................... 3,656 8,869
-------- --------
Deferred tax liabilities:
Intangible assets.................................... (30,714) (33,166)
Other................................................ (2,212) (1,962)
-------- --------
Total deferred tax liabilities.................... (32,926) (35,128)
-------- --------
Net deferred tax liability........................ $(29,270) $(26,259)
======== ========
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 28, 1997 and 1998, since these loss carryforwards can only be utilized
to offset future capital gains with expiration of approximately $6,187,000 in
1999, $730,000 in 2001, and $368,000 in 2002. The expiration of net operating
loss carryforwards approximate $458,000 in 1999, $692,000 in 2000, $1,486,000 in
2003, $2,623,000 in 2004, $1,375,000 in 2005, and $758,000 in 2006.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments of Emmis is estimated below based
on the methods and assumptions discussed therein.
A. CASH AND CASH EQUIVALENTS
The carrying amounts approximate fair value because of the short maturity
of these instruments.
B. LONG-TERM DEBT
Based upon borrowing rates currently available to the Company for debt with
similar terms and the same remaining maturities, the fair value of long-term
debt approximated the carrying value at February 28, 1998.
C. INTEREST RATE CAP AGREEMENTS
The unamortized cost of interest rate cap agreements included in the
February 28, 1998 consolidated balance sheet totals $172,000. The carrying
amount of interest rate cap agreements approximate fair value given that the
majority of the interest rate caps were purchased in February 1998.
D. LETTER OF CREDIT
Fees paid for the Company's $50 million letter of credit approximate fair
value based on fees currently charged for similar arrangements.
53
54
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY TRANSACTIONS
Two officers of Emmis are partners in a law firm which provides legal
services to Emmis. Legal fees billed by this law firm were approximately
$188,000, $296,000 and $512,000 for the years ended February 1996, 1997 and
1998, respectively.
Affiliates of Morgan Stanley, Dean Witter, Discover and Co. are
shareholders of Emmis. No fees were paid to Morgan Stanley, Dean Witter,
Discover & Co. and affiliates for the years ended February 1996, 1997 and 1998.
12. SUBSEQUENT EVENT -- ACQUISITION
Effective March 20, 1998, the Company entered into an agreement to purchase
the majority of the assets of Wabash Valley Broadcasting Corporation for
approximately $90 million in cash. The acquisition consists of WTHI-TV, a CBS
network affiliated television station, WTHI-FM and AM and WWVR-FM, radio
stations located in the Terre Haute, Indiana area, and WFTX-TV, a Fox network
affiliated television station in Ft. Myers, Florida.
Effective March 30, 1998, the Company entered into an agreement to purchase
substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF
Multistations, Inc. and Subsidiaries (collectively "the SF Acquisition") for
approximately $307 million. The purchase price will be paid a portion in cash
($257 million), either issuance of shares of Emmis' Class A Common Stock or
cash, at Emmis' option ($25 million), and a promissory note ($25 million)
bearing interest at 8%, with principal and interest due on the first anniversary
of the closing date which, at Emmis' option, may be paid with an equivalent
amount of Emmis' Class A Common Stock. In accordance with the asset purchase
agreement, Emmis made a $25 million escrow payment. 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 McHale Videofilm and satellite stations
KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii).
These acquisitions are awaiting approval by the FCC. The Company will
account for these acquisitions under the purchase method of accounting.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-------------------------------------------------- FULL
MAY 31 AUGUST 31 NOVEMBER 30 FEBRUARY 28 YEAR
------ --------- ----------- ----------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended February 28, 1997:
Net broadcasting revenues............... $25,350 $28,071 $27,520 $22,351 $103,292
Operating income........................ 8,286 12,342 10,080 4,540 35,248
Net income.............................. 3,505 6,040 4,655 1,240 15,440
Basic net income per share........... $0.32 $0.55 $0.43 $0.11 $1.41
Diluted net income per share......... $0.31 $0.53 $0.41 $0.11 $1.37
Year ended February 28, 1998:
Net broadcasting revenues............... $28,562 $33,889 $36,245 $27,159 $125,855
Operating income........................ 8,091 12,002 10,160 3,230 33,483
Net income (loss)....................... 3,368 4,672 4,079 (3,135) 8,984
Basic net income per share........... $0.31 $0.43 $0.38 $(0.29) $0.82
Diluted net income per share......... $0.30 $0.41 $0.36 $(0.29) $0.79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
54
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors of the
Company is incorporated by reference from the section entitled "Proposal No. 1:
Election of Directors" on pages 4 and 5 of the Company's 1998 Proxy Statement
and the section entitled "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" on page of the Company's 1998 Proxy Statement.
Listed below is certain information about the executive officers of the
Company or its affiliates and who are not directors.
AGE AT YEAR FIRST
NAME POSITION FEBRUARY 28, 1998 ELECTED OFFICER
---- -------- ----------------- ---------------
Richard F. Cummings.................. Executive Vice President 46 1984
Programming
Howard L. Schrott.................... Executive Vice President, 43 1991
Treasurer and Chief Financial
Officer
Norman H. Gurwitz.................... Executive Vice President, 50 1987
Secretary and Corporate Counsel
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.
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 the
Company. His title was changed to Executive Vice President -- Programming in
1988.
HOWARD L. SCHROTT became Vice President, Chief Financial Officer and
Treasurer of the Company in 1991. He became an Executive Vice President in 1995.
Prior to joining the Company, Mr. Schrott was a Vice President in the
Communications Lending Group at First Union National Bank, Charlotte, North
Carolina. From 1984 to 1989 Mr. Schrott served as Chief Operating and Executive
Officer for a group of radio stations. Mr. Schrott also spent two years
practicing law in Washington, D.C. and Indianapolis, Indiana, where he
concentrated on matters before the FCC and general business matters relating to
broadcasting and media.
NORMAN H. GURWITZ was elected Corporate Counsel for the Company in 1987 and
a Vice President in 1988. He was elected Secretary of the Company 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.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" on pages 5 through 10 of the Company's
1998 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" on pages 2 and 3 of
the Company's 1998 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" on page 5 of the Company's 1998 Proxy
Statement.
55
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Financial Statements
The financial statements filed as a part of this report are set forth under
Item 8.
Financial Statement Schedules
The following financial statement schedule is filed as a part of this
report:
Report of Independent Public Accountants on Financial Statement
Schedule
Schedule II Valuation and Qualifying Accounts and Reserves for the
fiscal years in the three year period ended February 28,
1998.
Reports on Form 8-K
The Company filed a report on Form 8-K on April 15, 1997, which was amended
on June 16, 1997, to report the acquisition of radio stations in St. Louis,
Missouri.
All other Schedules are omitted as the required information is inapplicable
or is presented in the financial statements or related notes.
Exhibits
The following exhibits are filed or incorporated by reference as a part of
this report:
Exhibits
The following exhibits are filed or incorporated by reference as a part of
this report:
3.1 Amended and Restated Articles of Incorporation of Emmis
Broadcasting Corporation, incorporated by reference from
Exhibit 3.3 to the Registration Statement, as amended (the
"Registration Statement") of the Company on Form S-1, file
no. 33-73218.*
3.2 Amended and Restated Bylaws of Emmis Broadcasting
Corporation, incorporated by reference from Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1995 (the "1995 10-K").*
3.3 Form of stock certificate for Class A Common Stock,
incorporated by reference from Exhibit 3.5 to the
Registration Statement.*
10.1 Emmis Broadcasting Corporation 1986 Stock Incentive Plan, as
amended, incorporated by reference from Exhibit 10.1 to the
Registration Statement.*
10.2 Emmis Broadcasting Corporation 1992 Stock Option Plan,
incorporated by reference from Exhibit 10.3 to the
Registration Statement.*
10.3 Emmis Broadcasting Corporation Profit Sharing Plan,
incorporated by reference from Exhibit 10.4 to the
Registration Statement.*
10.4 Emmis Broadcasting Corporation 1994 Equity Incentive Plan,
incorporated by reference from Exhibit 10.5 to the
Registration Statement.*
10.5 Emmis Broadcasting Corporation 1997 Equity Incentive Plans.
10.6 Amended and Restated Revolving Credit and Term Loan
Agreement, incorporated by reference from Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1997.*
10.7 First, Second and Third Amendments, and Waiver, to Amended
and Restated Revolving Credit and Term Loan Agreement.
56
57
10.8 Form of Employment Agreement with Jeffrey H. Smulyan,
incorporated by reference from Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1994 (the "1994 10-K").*
10.9 Form of Registration Rights Agreement between Emmis
Broadcasting Corporation and Morgan Stanley Group Inc.,
incorporated by reference from Exhibit 10.17 to the
Registration Statement.*
10.10 The Emmis Broadcasting Corporation 1995 Non-Employee
Director Stock Option Plan incorporated by reference from
Exhibit 10.15 of the 1995 10-K.*
10.11 The Emmis Broadcasting Corporation 1995 Equity Incentive
Plan incorporated by reference from Exhibit 10.16 of the
1995 10-K.*
10.12 Employment Agreement with Howard L. Schrott, incorporated by
reference from Exhibit 10 to the Company's report on Form
10-Q for the quarter ended May 31, 1996.*
10.13 Asset Purchase Agreement dated October 31, 1997 between the
Company and Zimco, Inc. (with exhibits omitted in which the
Company agrees to file supplementally upon request),
incorporated by reference from Exhibit 2 to the Company's
report on Form 8-K filed April 15, 1997.*
10.14 Stock Purchase Agreement Among Emmis Broadcasting
Corporation, and Michael R. Levy, Dow Jones & Company, Inc.,
and Gregory Curtis, dated February 6, 1998.
10.15 Asset Purchase Agreement by and between Emmis Broadcasting
Corporation and Wabash Valley Broadcasting Corporation,
dated March 20, 1998.
10.16 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.
11 Schedules re: Calculation of per share and pro forma per
share net income (loss).
21 Subsidiaries of the Company.
23 Consent of Accountants.
24 Powers of Attorney.
27 Financial Data Schedule (EDGAR-filed version only)
99 Proxy Statement.**
- - -------------------------
* Previously Submitted
** To be filed within 120 days of the end of the Company's fiscal year.
57
58
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 BROADCASTING CORPORATION
Date: May 7, 1998 By: /s/ HOWARD L. SCHROTT
------------------------------------
Howard L. Schrott
Executive Vice President
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 7, 1998 JEFFREY H. SMULYAN* President, Chairman of the
--------------------------------------------- Board and Director (Principal
Jeffrey H. Smulyan Executive Officer)
Date: May 7, 1998 /s/ HOWARD L. SCHROTT Executive Vice President,
--------------------------------------------- Treasurer and Chief Financial
Howard L. Schrott Officer (Principal Financial
Officer)
Date: May 7, 1998 SUSAN B. BAYH* Director
---------------------------------------------
Susan B. Bayh
Date: May 7, 1998 GARY L. KASEFF* Director
---------------------------------------------
Gary L. Kaseff
Date: May 7, 1998 RICHARD A. LEVENTHAL* Director
---------------------------------------------
Richard A. Leventhal
Date: May 7, 1998 DOYLE L. ROSE* Radio Division President and
--------------------------------------------- Director
Doyle L. Rose
Date: May 7, 1998 LAWRENCE B. SORREL* Director
---------------------------------------------
Lawrence B. Sorrel
*By: /s/ HOWARD L. SCHROTT
---------------------------
Howard L. Schrott
Attorney-in-Fact
58
59
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Emmis Broadcasting Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of EMMIS BROADCASTING CORPORATION AND
SUBSIDIARIES included in Item 8, in this Form 10-K, and have issued our report
thereon dated March 31, 1998. Our audit was made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
schedule listed in Item 14 is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 31, 1998.
59
60
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 28, 1998
BALANCE
BALANCE AT AT END
BEGINNING OF
CLASSIFICATION OF YEAR PROVISION WRITE-OFFS OTHER YEAR
-------------- ---------- --------- ---------- ----- -------
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS,
Year ended February 29, 1996.................. $620 $834 $(655) $ 0 $ 799
Year ended February 28, 1997.................. 799 726 (705)(1) 0 820
Year ended February 28, 1998.................. 820 802 (981) 705 1,346
- - -------------------------
(1) Represents additions to the allowance for doubtful accounts associated with
certain acquisitions.
60