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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Fiscal Year Ended February 28, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from _____ to _____.
Commission file number 0-23264
EMMIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1542018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Monument Circle, Suite 700
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
317/266-0100
Registrant's Telephone Number
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 30, 1999, was approximately $566,224,920.
The number of shares outstanding of each of the registrant's classes
of common stock, as of April 30, 1999, was:
13,240,619 Class A Common Shares, $.01 par value
2,582,265 Class B Common Shares, $.01 par value
Documents Incorporated by Reference: See Page 2
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DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Proxy Statement Dated May 26, 1999 Part III
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EMMIS COMMUNICATIONS CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I ......................................................................................................4
Item 1. Business....................................................................................4
Item 2. Properties.................................................................................21
Item 3. Legal Proceedings..........................................................................23
Item 4. Submission of Matters to a Vote of Security Holders........................................23
PART II .....................................................................................................23
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................23
Item 6. Selected Financial Data....................................................................24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.......25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................30
Item 8. Financial Statements and Supplementary Data................................................32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......68
PART III .....................................................................................................69
Item 10. Directors and Executive Officers of the Registrant........................................69
Item 11. Executive Compensation....................................................................70
Item 12. Security Ownership of Certain Beneficial Owners and Management............................70
Item 13. Certain Relationships and Related Transactions............................................70
PART IV .....................................................................................................70
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................70
Signatures....................................................................................................73
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PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television
broadcasting and magazine publishing operations. We are the eighth largest radio
broadcaster in the United States based on total revenues. The thirteen FM radio
stations and three AM radio stations we own in the United States serve the
nation's three largest radio markets of New York City, Los Angeles and Chicago,
as well as St. Louis, Indianapolis and Terre Haute, Indiana. Our six television
stations, which we acquired in 1998, are located in New Orleans, Louisiana,
Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and
Terre Haute, Indiana.
Our strategy is to selectively acquire underdeveloped media properties in
desirable markets and then to create value by developing those properties to
increase their cash flow. We find such underdeveloped properties attractive
because they offer greater potential for revenue and cash flow growth than
mature properties. We have been successful in acquiring these types of radio
stations and improving their ratings, revenues and cash flow with our marketing
focus and innovative programming expertise. We have created top-performing radio
stations which rank, in terms of primary demographic target audience share,
among the top ten stations in the New York City, Los Angeles and Chicago radio
markets according to the Winter 1998 Arbitron Survey. We believe that our strong
large-market radio presence and diversity of station formats makes us attractive
to a diverse base of radio advertisers and reduces our dependence on any one
economic sector or specific advertiser.
More recently, we have begun to apply our advertising sales and programming
expertise to our television stations. We view our entry into television as a
logical outgrowth of our radio business and as a platform for diversification.
Like the radio stations we previously acquired, our television stations are
underdeveloped properties located in desirable markets, which can benefit from
innovative, research-based programming and our experienced management team. We
believe we can improve the ratings, revenues and broadcast cash flow of our
television stations with a more market-focused, research-based programming
approach and other related strategies, which have proven successful with our
radio properties.
In addition to our domestic broadcasting properties, we operate news and
agriculture information networks in Indiana, publish Indianapolis Monthly,
Atlanta, Cincinnati, Texas Monthly and Country Sampler and related magazines,
and have a 54% interest in a national radio station in Hungary. We also engage
in various businesses ancillary to our broadcasting business, such as consulting
and broadcast tower leasing.
BUSINESS STRATEGY
We are committed to maintaining our leadership positions in broadcasting,
enhancing the performance of our broadcast properties, and distinguishing
ourselves through the quality of our operations. Our strategy has the following
principal components:
CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. Our strategy is
to selectively acquire underdeveloped media properties in desirable markets
and then to create value by developing those properties to increase their
cash flow. We believe that our station portfolio provides significant
potential for revenue and cash flow growth through enhanced operating
performance. We believe that our growth is less dependent on overall
advertising market growth than it would be if we owned only mature
properties. We expect to continue to create value, particularly in our
recently-acquired television stations, through maximizing operating
efficiencies, development of innovative programming and focused sales and
marketing efforts.
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DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets
and innovative programming developed to target specific demographic groups
are the most important determinants of individual radio and television
station success. We conduct extensive market research to identify
underserved segments of our markets or to insure that we are meeting the
needs and tastes of our target audiences. Utilizing the research results,
we concentrate on providing focused programming formats carefully tailored
to the demographics of our markets and our advertisers' preferences. Such
programming strategies might include, for example, the development or
acquisition of on-air talent or development of a sports coverage or news
franchise. Local market knowledge is particularly important in developing
programming for our Fox television stations, as the higher degree of
programming flexibility afforded by our Fox affiliation provides us greater
opportunity to tailor our programming to meet the specific demands of our
local markets. Greg Nathanson, who heads our television division and
directs programming, 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.
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. Emmis designs its local and
national sales efforts based on advertiser demand and the competition
within each market. We provide our sales force with extensive training and
technology for sophisticated inventory management techniques, which allows
us to make frequent price adjustments based on regional and local market
conditions. We seek to maximize sources of non-traditional, non-spot
revenue and have led the industry in developing "vendor co-op" (as
explained under Advertising Sales) advertising revenue. Although this
source of advertising revenue is common in the newspaper and magazine
industry, we were among the first broadcasters to recognize and take
advantage of the potential of vendor co-op advertising.
ENCOURAGE ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting
is primarily a local business and that much of our success is the result of
the efforts of regional and local management and staff. We have attracted
and retained an experienced team of broadcast professionals who understand
the musical tastes, demographics and competitive opportunities of their
particular market. Our decentralized approach to station management gives
local management oversight of station spending, long-range planning,
company policies and resource allocation at their individual stations and
rewards local management based on those stations' performance. In addition,
we encourage our managers and employees to own a stake in Emmis, and over
90% of all full-time employees have an equity ownership position in the
company. We believe that this entrepreneurial management approach has given
us a distinctive corporate culture, making Emmis a highly desirable
employer in the broadcasting industry and significantly enhancing our
ability to attract and retain experienced and highly motivated employees
and management.
SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. Our acquisition strategy is to
selectively acquire underdeveloped media properties at reasonable purchase
prices where our experienced management team can enhance value. We believe
that continued consolidation in the radio broadcasting industry will result
in attractive acquisition opportunities as the number of potential buyers
for radio assets declines as a result of in-market ownership limitations,
and we will continue to evaluate acquisitions of individual radio stations
or groups of radio stations in both our current and new markets. We believe
that attractive acquisition opportunities are becoming increasingly
available in the television broadcasting industry. In many cases,
television stations have suffered ratings and revenue declines due to
management inattention, improper programming strategies or inadequate sales
and marketing efforts. We also expect to evaluate acquisitions of
international broadcasting stations and magazine publishing properties
which present attractive purchase prices and significant opportunities to
capitalize on our management expertise to enhance cash flow. We intend to
seek strong local minority-interest partners in evaluating and completing
international broadcasting acquisition opportunities.
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RADIO AND TELEVISION STATIONS
The following tables set forth certain information regarding our radio and
television stations and their broadcast markets.
RADIO STATIONS
In the following table, "Market Rank by Revenue" is the ranking of the
market revenue size of the principal radio market served by the station among
all radio markets in the United States. Market revenue and ranking figures are
from Duncan's Radio Market Guide (1998 ed.). We own a 40% equity interest in the
publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic
Target" is the ranking of the station among all radio stations in its market
based on the Winter 1998 Arbitron Survey, except that rankings for the Terre
Haute stations are based on the Fall 1998 Arbitron Survey because Arbitron
compiles surveys only in the Fall and Spring in that market. A "t" indicates the
station tied with another station for the stated ranking. "Station Audience
Share" represents a percentage generally computed by dividing the average number
of persons over age 12 listening to a particular station during specified time
periods by the average number of such persons for all stations in the market
area as determined by Arbitron.
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RANKING IN
STATION MARKET PRIMARY PRIMARY STATION
AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
------ ------- ------ ----------- ----------- --------
LOS ANGELES 1
KPWR-FM Dance/Contemporary Hit 12-24 1 4.3
NEW YORK 2
WQHT-FM Dance/Contemporary Hit 12-24 1 5.7
WRKS-FM Classic Soul/Smooth R&B 25-54 5 3.6
WQCD-FM Contemporary Jazz 25-54 8 2.7
Chicago 3
WKQX-FM New Rock 18-34 3 3.4
St. Louis 18
KSHE-FM Album Oriented Rock 18-34 11 3.2
WKKX-FM Country 18-34 5 4.1
WXTM-FM Extreme Rock 18-34 10 2.1
Indianapolis 30
WENS-FM Adult Contemporary 25-54 4 5.8
WIBC-AM News/Talk 35-64 3 9.3
WNAP-FM Classic Rock 18-34 8 3.7
WTLC-FM Urban Contemporary 25-54 9 4.6
WTLC-AM Solid Gold Soul, Gospel 25-54 24 0.8
and Talk
Terre Haute 172
WTHI-FM Country 25-54 1t 19.2
WTHI-AM News/Talk 35-54 9t 1.7
WWVR-FM Classic Rock 25-49 1 12.1
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TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company
("Nielsen") as of January 1997. Rankings are based on the relative size of a
station's market among the 210 generally recognized Designated Market Areas
("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the
number of television stations ("Reportable Stations") designated by Nielsen as
"local" to the DMA, excluding public television stations and stations which do
not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience
of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to
midnight time period. "Station Rank" reflects the station's rank relative to
other Reportable Stations based upon the DMA rating as reported by Nielsen from
9:00 a.m. to midnight, Sunday through Saturday during February 1999. "Station
Audience Share" reflects an estimate of the share of DMA households viewing
television received by a local commercial station in comparison to other local
commercial stations in the market as measured from 9:00 a.m. to midnight, Sunday
through Saturday.
NUMBER OF STATION
TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE
----------- --------------- ----- ----------- --------- ----- -----
WVUE-TV New Orleans, LA 41 Fox/8 7 3t 8
WALA-TV Mobile, AL-Pensacola, FL 62 Fox/10 6 3 10
WLUK-TV Green Bay, WI 70 Fox/11 6 4 10
KHON-TV Honolulu, HI 71 Fox/2 6 1 16
WFTX-TV Fort Myers, FL 83 Fox/36 5 4 7
WTHI-TV Terre Haute, IN 139 CBS/10 3 1 24
Emmis also owns 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.
RADIO NETWORKS
In addition to our other radio broadcasting operations, we own and operate
two radio networks. Network Indiana provides news and other programming to
nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides
farm news, weather information and market analysis to radio stations across
Indiana.
PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Indianapolis Monthly. We have 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.
With a large advertising base and a popular editorial focus, Indianapolis
Monthly is the market's leading general interest magazine focusing on the
Indianapolis area.
Atlanta. We acquired and began publishing Atlanta magazine in August 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 we acquired it for a nominal investment. Certain
initiatives, including downsizing staff, increasing sales efforts and
repositioning the editorial focus, have contributed to improving profitability.
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Cincinnati. We acquired Cincinnati magazine in October 1997. Cincinnati
magazine was founded by the Greater Cincinnati Chamber of Commerce in 1967 and,
under its prior owners, the magazine grew to a paid monthly circulation of
approximately 22,000. We repositioned the editorial product to an up-to-date
city/regional magazine covering people and entertainment in Cincinnati, doubled
the existing sales staff and marketed the newly designed magazine to the
Cincinnati area. The magazine currently has a paid monthly circulation of
approximately 31,000.
Texas Monthly. We 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 we believe
it is 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. Since acquiring the magazine, we have worked to increase Texas Monthly's
operating efficiencies while leaving the highly regarded editorial product
intact.
During the year ended February 28, 1999 we also entered into an agreement
to acquire Country Sampler magazine. This acquisition closed in April 1999.
Country Sampler focuses on country craft and home decorating ideas and products,
and we believe it is read by more than two million people. In connection with
the acquisition of Country Sampler, we also acquired other related magazines
focusing on particular segments of the country craft and home decorating market.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the
communities we serve. To that end, each of our stations participates in many
community programs, fundraisers and activities that benefit a wide variety of
organizations. Charitable organizations that have been the beneficiaries of our
marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, The March of Dimes, American Cancer Society, Riley Children's
Hospital and research foundations seeking cures for cystic fibrosis, leukemia
and AIDS and helping to fight drug abuse. In addition to our planned activities,
our stations take leadership roles in community responses to natural disasters.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry
organizations. Our senior managers have served in various capacities with
industry associations, including as directors of the National Association of
Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee and the
Arbitron Advisory Council and as founding members of the Radio Operators Caucus.
In addition, our managers have been voted Radio President of the Year and
General Manager of the Year, and at various times we have been voted Most
Respected Broadcaster in polls of radio industry chief executive officers and
managers.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (and, as amended by the Telecommunications Act of 1996 (the
"1996 Act"), the "Communications Act"). Television or radio broadcasting is
prohibited except in accordance with a license issued by the FCC upon a finding
that the public interest, convenience and necessity would be served by the grant
of such license. The FCC has the power to revoke licenses for, among other
things, false statements made in applications or willful or repeated violations
of the Communications Act or of FCC rules. In general, the Communications Act
provides that the FCC shall allocate 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
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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 1996 Act represented the most comprehensive overhaul of the country's
telecommunications laws in more than 60 years. The 1996 Act significantly
changed both the process for renewal of broadcast station licenses and the
broadcast ownership rules. 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.
First, 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 also substantially liberalized the
national broadcast ownership rules, eliminating the national radio limits and
easing the national restrictions on TV ownership. The 1996 Act also relaxed
local radio ownership restrictions, but left local TV restrictions in place
pending further FCC review. The FCC has already implemented some of these
changes through Commission Orders.
This new regulatory flexibility has engendered aggressive local, regional,
and/or national acquisition campaigns. Removal of previous station ownership
limitations on leading incumbents (i.e., existing networks and major station
groups) has increased sharply the competition for and the 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. We cannot
predict whether any such legislation will be enacted or new or amended FCC
regulations adopted or what their effect would be on Emmis.
License Renewal. 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. Our
licenses currently have the following expiration dates, until renewed:
WENS-FM (Indianapolis)...............................August 1, 2004
WKQX-FM (Chicago)....................................December 1, 2004
KSHE-FM (St. Louis).................................February 1, 2005
KPWR-FM (Los Angeles)................................December 1, 2005
WQHT-FM (New York)...................................June 1, 2006
WQCD-FM (New York)...................................June 1, 2006
WIBC-AM (Indianapolis)...............................August 1, 2004
WNAP-FM (Indianapolis)...............................August 1, 2004
WRKS-FM (New York)...................................June 1, 2006
WKKX-FM (St. Louis)..................................December 1, 2004
WXTM-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-FM (Terre Haute)................................August 1, 2004
WWVR-FM (Terre Haute)................................August 1, 2004
WTHI-TV (Terre Haute)................................August 1, 2005
WFTX-TV(Fort Myers)..................................February 1, 2005
WALA-TV (Mobile).....................................April 1, 2005
WVUE-TV (New Orleans)................................June 1, 2005
WLUK-TV (Green Bay)..................................December 1, 2005
KHON-TV (Honolulu)...................................February 1, 2007
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KAII-TV (Maui).......................................February 1, 2007
KHAW-TV (Hawaii).....................................February 1, 2007
Under the 1996 Act, at the time an application is filed for renewal for a
station license, parties in interest, as well as members of the public, may
apprise the FCC of the service the station has provided during the preceding
license term and urge the denial of the application. If such a petition to deny
presents information from which the FCC concludes (or if the FCC concludes on
its own) 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. 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:
(1) has served the public interest, convenience and necessity;
(2) has committed no serious violations of the Communications Act or the
FCC's rules; and
(3) 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, and
only then may the FCC accept other applications to operate the station of the
former licensee. In a vast majority of cases, the FCC renews broadcast licenses
even when petitions to deny applications are filed against broadcast license
renewal applications.
In February 1999, pursuant to various third-party proposals, the FCC sought
comment on whether it should establish a "microradio" service. The service, as
proposed, would consist of three classes of low-power stations licensed by the
FCC: a class of 1,000 watt stations; a class of 100 watt stations; and a class
of 1-10 watt stations. The licenses would be available only to entities and
individuals with no interests in any other FCC-regulated license and stations
would be permitted to operate on a for-profit basis. In order to accommodate
these "microradio" stations, the FCC is considering whether to weaken the
interference protection provided to full-power radio stations, including those
owned by Emmis. Emmis cannot predict at this time the outcome of this rulemaking
proceeding or what effect establishing a "microradio" service would have on
Emmis' radio stations
Ownership Matters. The 1996 Act eliminated restrictions on the number of
radio stations that may be owned by one entity nationwide. 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 that market:
- 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 own not
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 six markets in which our radio stations are located has at least 15
commercial radio stations. In determining whether we are in compliance with the
local ownership limits on AM and FM stations, the FCC will
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consider our AM and FM holdings as well as the attributable broadcast interests
of our officers, directors and attributable stockholders. Accordingly, any
attributable broadcast interests of our officers and directors may limit the
number of radio stations we may acquire or own in any market in which such
officers or directors hold or acquire attributable broadcast interests. In
addition, our officers and directors may from time to time hold various
nonattributable interests in media properties. One entity may not own a radio
station together with a television station (the "one-to-a-market" rule) or
together with a daily newspaper in the same market, although common ownership
of a radio station and a television station in the same market is permitted
upon a finding by the FCC that such ownership is in the public interest. The
FCC has established a liberal waiver policy to permit common ownership of a
radio station and a television station in any of the nation's 25 largest
markets; the 1996 Act directed the FCC to extend that policy to the 50 largest
markets. Emmis has been granted a waiver of the one-to-a-market rule to permit
its common ownership of WTHI-AM, WTHI-FM, WWVR-FM and WTHI-TV.
With respect to television, the 1996 Act and the FCC's subsequently issued
orders eliminated the previously existing 12-station limit for station ownership
and increased the national audience reach limitation from 25% to 35%. On a local
basis, however, the 1996 Act did not alter current FCC rules that limit an
individual entity to maintaining an attributable interest in only one television
station in a market. The 1996 Act did require the FCC to conduct a rule making
proceeding, however, to determine whether to narrow the geographic scope of the
local television cross-ownership rule (the so-called "TV duopoly rule") to
permit some two-station combinations in certain (large) markets. At the time of
the passage of the 1996 Act, the FCC had already initiated a rule making
proceeding to consider whether the television duopoly rule should be retained,
modified or eliminated. That proceeding remains pending.
The same prohibition concerning daily newspapers and radio stations also
applies to common ownership of a daily newspaper and a television broadcast
station. 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
previously granted only two permanent waivers of this cross-ownership rule. 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:
- whether waivers should only be available in markets of a particular
size;
- whether any weight should be given to a newspaper's or broadcast
station's economic presence or market penetration; and
- 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.
At present, the FCC's one-to-a-market and cross-ownership rules do not
apply to Local Marketing Agreements ("LMAs") as defined below. As part of its
attribution rule making, however, the FCC has proposed to apply these rules to
LMAs. If such a rule were adopted, Emmis could not provide programming to a
radio or television station pursuant to an LMA if Emmis or an individual or an
entity holding an attributable ownership interest in Emmis already owns a
television station or a daily newspaper in the same market.
The FCC rules generally prohibit the direct or indirect common ownership,
operation, control or interest in a cable television system, on the one hand,
and a local television broadcast station whose television signal (predicted
grade B contour as defined under FCC regulations) reaches any portion of the
community served by the cable television system, on the other hand (the
"cable-television ownership rule"). The 1996 Act eliminates the statutory
prohibition underlying the cable-television ownership rule and directed the FCC
to review the cable-television ownership rule to determine if it is necessary in
the public interest. In March 1998, the FCC initiated a rule making proceeding
to determine whether the cable-television ownership rule is necessary and in the
public interest or should
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be eliminated. Pursuant to the mandate of the 1996 Act, the FCC eliminated its
regulatory restriction on cross-ownership of cable systems and national
broadcasting networks.
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. 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.
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 a "pro forma"
application. 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. The FCC normally has an
additional ten days to set aside such grant on its own motion. (FCC rules for
computation of time may cause some more variation in the actual time for action
and response.)
In the case of all of these ownership rules, the FCC requires the
attribution of broadcast licenses between a broadcasting company and certain of
its stockholders, officers or directors such that there would be a violation of
FCC regulations where such a stockholder, officer or director and the
broadcasting company together held more than the permitted number of stations or
a prohibited combination of media outlets in the same market. Under FCC rules,
with certain exceptions, attribution of broadcast licenses occurs where any five
percent voting stockholder or officer or director of a broadcasting company
directly or indirectly owns, operates, controls or has a five percent voting
interest in or is an officer or director of any other broadcasting company.
Attribution also occurs in the case of general partnership interests and in the
case of limited partnership interests where a limited partner is "materially
involved" in the media-related activities of the partnership. Passive
investments of less than ten percent of the voting interest in a broadcasting
company held by certain categories of financial institutions are generally not
cognizable for purposes of the foregoing rules of 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. In cases
involving competing media in the same market, however, FCC policy in certain
instances prohibits common ownership interests under its "cross-interest" policy
even where they are non-voting interests or fall below the five percent and ten
percent "benchmarks" discussed above, although the FCC has initiated proceedings
to inquire whether this policy should be liberalized or eliminated. Emmis'
Amended and Restated Articles of Incorporation and By-Laws authorize the Board
of Directors to prohibit any ownership, voting or transfer of its capital stock
which would cause Emmis to violate the Communications Act or FCC regulations.
For purposes of the local radio ownership rules described above, a station
is also considered to have an attributable interest in another 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, such
programming arrangements may not be entered into by station combinations that
could not be commonly owned under FCC rules.
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In cases where one person or entity (such as Jeffrey H. Smulyan in the case
of Emmis) 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 be deemed to hold an "attributable" interest in the company. However, any
attributable interest by any such shareholder in another broadcast station or
other media in a market where such company owns, or seeks to acquire, a station
would still be subject to review by the FCC under its "cross-interest" policy,
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. Further, in the event that a
majority shareholder of a company (such as Mr. Smulyan in the case of Emmis)
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 considered nonattributable could become attributable, with the
result that any other media interests held by such shareholders would be
combined with the media interests of such company for purposes of determining
compliance with FCC ownership rules. In the case of Emmis, 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. Further, other media interests of shareholders having or
acquiring an attributable interest in such a company could result in the company
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. Conversely, a company's media interests could operate to restrict
other media investments by shareholders having or acquiring an interest in the
company.
Under the 1996 Act, the FCC is required to review all of its broadcast
ownership rules every two years to determine whether the public interest
dictates that such rules be repealed or modified. 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 aspects of its cable-television ownership rule. We cannot predict
the outcome of these proceedings. The adoption of more restrictive ownership
limits could have a material adverse effect on our business.
Alien Ownership Rules. 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 staff has interpreted this provision to require
an affirmative public interest finding to permit the grant or holding of a
license, and such a finding has been made only in limited circumstances. The
foregoing restrictions on alien ownership apply in modified form to other forms
of business organization, including partnerships. Our 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 Emmis to violate the Communications Act or FCC regulations.
Cross-Interest Policy. Under its "cross-interest" policy, referred to
above, 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 (as
defined below) and JSAs (as defined below) between broadcast stations. In its
ongoing rule making proceeding concerning the attribution rules described below,
the FCC has sought comment on, among other things:
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- whether the cross-interest policy should be applied only in smaller
markets and
- whether non-equity financial relationships such as debt, when combined
with multiple business interrelationships such as LMAs and JSAs and
other programming relationships raise concerns under the cross-interest
policy.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it developed to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. However, licensees continue to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. 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 and considered by the FCC at any time.
Stations also must pay regulatory and application fees and follow various rules
promulgated under the Communications Act that regulate, among other things,
political advertising, sponsorship identifications, the advertisement of
contests and lotteries, and technical operations, including limits on radio
frequency radiation. Until recently, the FCC required licensees to develop and
implement affirmative action programs designed to promote equal employment
opportunities, and to submit reports to the FCC with respect to these matters on
an annual basis and in connection with a renewal application. In 1998, the
United States Court of Appeals for the District of Columbia Circuit held that
the FCC's equal employment opportunity policies violate the Fifth Amendment. As
a result, licensees are no longer required to develop or file materials relating
to equal employment opportunity matters. The FCC has proposed new equal
employment opportunity rules that would impose on licensees many of the same
outreach and recordkeeping obligations as the former rules. During the pendancy
of this rulemaking, Emmis and other major licensees have informally volunteered
to comply with the principles espoused in the FCC's old equal employment
opportunity rules and policies.
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. The FCC has adopted
rules to implement the Children's Television Act of 1990, which, among other
provisions, limits 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 also has adopted renewal
processing guidelines effectively requiring 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 and set percentages of closed captioned programming for the
hearing-impaired.
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.
Local Marketing Agreements. Over the past few years, a number of radio and
television stations, including certain Emmis 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 maintain independent control over
the programming and other operations of its own station.
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
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purposes of the FCC's ownership rules, discussed above. As a result, a
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. FCC rules
also prohibit the 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, where the licensee owns those stations or owns one and programs the other
through an LMA arrangement. The FCC has specifically revised its
"cross-interest" policy to make that policy inapplicable to time brokerage
arrangements. Under its current policies, the FCC does not attribute LMAs
between television stations to the station or entity providing programming. In
connection with its review of its attribution rules, as discussed below, the
FCC has proposed to attribute television LMAs in the same fashion as LMAs
between radio stations. Concurrently, the FCC is considering whether and for
how long to "grandfather" existing television LMAs if the LMA would result in
an attributable interest for the brokering station or entity.
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 issuance of 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, would require Emmis to terminate any JSA it might have with a radio
station with which Emmis could not have an LMA.
Recent Developments and Proposed Changes. The FCC in March 1992 initiated
an inquiry and rule making proceeding in which it solicited comment on whether
it should alter its ownership attribution rules, and initiated a further rule
making proceeding in December 1994 to solicit additional public comment on
amending those rules. Among the issues being explored in the proceeding are:
- 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;
- whether to consider non-voting stock interests to be attributable
under the multiple ownership rules (at present such interests are not
attributable);
- 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; and
- 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 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 rule
making in which, in addition to the attribution proposals outlined above, it
sought comment on whether the FCC should modify its attribution rules by, among
other changes:
- attributing ownership in situations where an entity:
(1) holds a non-attributable equity or debt interest in a broadcast
licensee that exceeds a minimum threshold and
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(2) 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");
- attributing interests in LMAs between television stations in the same
market; and
- attributing 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. We 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 ("SDARS"). At the same time,
the FCC put out for comment 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 and a third company has applied
for a license. 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.
In October 1998, in response to a petition filed by USA Digital Radio, the
FCC sought comment on whether to initiate a proceeding to adopt rules for the
delivery of digital audio broadcasting on a local basis by terrestrial stations
utilizing existing broadcasting frequencies. As proposed, digital audio
broadcasting would permit existing AM and FM stations to operate in either full
analog, hybrid or full digital modes on their current frequencies.
Also in April 1997, the FCC adopted rules that require television
broadcasters to provide digital television ("DTV") to consumers. The FCC also
adopted a table of allotments for DTV, which provides eligible existing
broadcasters with a second channel on which to provide DTV service. The FCC's
DTV allotment plan is based on the use of a "core" DTV spectrum between channels
2-51. The Communications Act mandates that unless certain benchmarks are not
satisfied, by the end of 2006 the FCC must recover the channels currently used
for analog broadcasting. Television broadcasters will be allowed to use their
channels according to their best business judgment. Such uses can 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 imposed a fee of 5% of the annual gross revenues for television
broadcasters' use of the 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
were required to be on the air with a digital signal by May 1, 1999. Affiliates
of those networks in markets 11-30 are required to be on the air with digital
signals by November 1, 1999, and the remaining commercial stations, including
those owned by Emmis, are required to file DTV construction permit applications
by November 1, 1999 and to be on the air with digital signals by May 1, 2002.
The FCC stated that broadcasters will remain public trustees and that it will
issue a notice to determine the extent of broadcasters' future public interest
obligations.
In August 1998, the FCC adopted rules to govern the use of auctions to
resolve competing applications for initial licenses and construction permits and
competing applications for major modifications to existing commercial broadcast
facilities. The rules apply to full power commercial radio and analog television
stations, as well as to all secondary commercial broadcast services (e.g., low
power television, FM translator and television translator services). Currently,
pending applications for major modifications are "frozen" and will not be acted
upon by the FCC. Our pending and future applications for major modifications may
become subject to auction proceedings if
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they are found to be mutually exclusive with major modification applications
filed by other radio licensees or applications for new 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.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). The FCC began
implementing the requirements of the 1992 Cable Act in 1993, and final
implementation proceedings remain pending regarding certain of the rules and
regulations previously adopted. Certain statutory provisions, such as signal
carriage and retransmission consent, have a direct effect on television
broadcasting. Other provisions are focused exclusively on the regulation of
cable television but can still be expected to have an indirect effect on Emmis
because of the competition between over-the-air television stations and cable
systems.
The signal carriage, or "must carry," provisions of the 1992 Cable Act
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
The U.S. Supreme Court upheld the constitutionality of the must-carry provisions
of the 1992 Cable Act in 1997. 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
system 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.
Whether and to what extent such must-carry rights will extend to the new
digital television signals discussed above to be broadcast by licensed
television stations (including those to be owned by Emmis) over the next several
years is still a matter to be determined by a rule making proceeding initiated
by the FCC in July 1998. The rule making proceeding also seeks comment on
related issues, including how to resolve technical compatibility problems,
whether the FCC should modify its signal quality requirement during the
transition, how to regulate channel placement of digital television signals and
whether such signals must be carried on the basic cable tier. We cannot predict
at this time whether the FCC will adopt "must carry" requirements for digital
television signals or the effect of an FCC decision on our television stations.
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 operators hold licenses, but have
not yet commenced service. Generally, the signals of local television broadcast
stations are not carried on DBS systems although Congress is considering
legislation which would permit carriage of local stations. DBS operators may not
import distant network signals into local television markets unless the
individual household that would receive the distant network signal is not
capable of receiving a sufficiently strong signal of the local affiliate of the
given network. In 1998, several federal judges found that certain DBS operators
had unlawfully provided distant network signals to households that were not
eligible to receive them and ordered the
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operators to cease providing the illegal signals. In response to these
decisions, Congress is contemplating whether to enact legislation that would
give DBS operators more flexibility in providing distant network signals to
particular households. We cannot predict whether this legislation will pass,
but if it does it could adversely affect our television stations by reducing
the number of households that receive the television signals of our stations.
As part of the ongoing examination of its broadcast ownership rules, the
FCC is considering whether to permit a single entity to own television stations
covering more than 35% of the national television homes. The FCC is also
considering whether to eliminate the 50% discount credited to UHF television
stations in calculating compliance with the national ownership cap. 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 our broadcast stations, result in the loss of audience share and advertising
revenues for our broadcast stations and affect our ability 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;
- proposals permitting FM stations to accept formerly impermissible
interference;
- 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 digital audio broadcasting and satellite
digital audio radio service;
- proposals to tighten safety guidelines relating to radio frequency
radiation exposure; and
- proposals to limit the tax deductibility of advertising expenses by
advertisers.
We cannot predict whether any proposed changes will be adopted, what other
matters might be considered in the future, or what impact, if any, the
implementation of any of these proposals or changes might have on our business.
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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.
ADVERTISING SALES
Our stations derive their advertising revenue from local and regional
advertising in the marketplaces in which they operate, as well as from the sale
of national advertising. Local and most regional sales are made by a station's
sales staff. National sales are made by firms specializing in such sales which
are compensated on a commission-only basis. We believe that the volume of
national advertising revenue tends to adjust to shifts in a station's audience
share position more rapidly than does the volume of local and regional
advertising revenue.
We have led the industry in developing "vendor co-op" advertising revenue
(i.e., revenue from a manufacturer or distributor which is used to promote its
particular goods together with local retail outlets for those goods). Although
this source of advertising revenue is common in the newspaper and magazine
industry, we were among the first radio broadcasters to recognize, and take
advantage of, the potential of vendor co-op advertising. Our Revenue Development
Systems division has established a network of radio stations which share
information about sources of vendor co-op revenue. In addition, each of our
stations has a salesperson devoted exclusively to the development of cooperative
advertising. We also use this approach at our television stations. At the end of
the last fiscal year we acquired substantially all of the assets of the
Co-Opportunities division of Jefferson-Pilot Communications. We believe that the
business of Co-Opportunities (which focuses more on co-op advertising for
television stations and cable systems) provides an excellent complement to
Revenue Development Systems.
COMPETITION
Radio and television broadcasting stations compete with the other
broadcasting stations in their respective market areas, as well as with other
advertising media such as newspapers, magazines, outdoor advertising, transit
advertising, the Internet and direct mail marketing. 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 our markets, our stations face competition from other stations
with substantial financial resources, including stations targeting the same
demographic groups. In addition to management experience, factors which are
material to competitive position include the station's rank in its market,
authorized power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other stations in the market
area. We attempt to improve our competitive position with programming and
promotional campaigns aimed at the demographic groups targeted by our stations,
and through sales efforts designed to attract advertisers that have done little
or no broadcast advertising by emphasizing the effectiveness of radio and
television advertising in increasing the advertisers' revenues. 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 we
believe that each of our stations can compete effectively in its market, there
can be no assurance that any of our stations will be able to maintain or
increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, some barriers to
entry exist. The operation of a broadcasting station in the United States
requires a license from the FCC, and the number of stations that can operate in
a given market is limited by the availability of the frequencies that the FCC
will license in that market, as well as by the FCC's multiple ownership rules
regulating the number of stations that may be owned and controlled by a single
entity. The FCC's multiple ownership rules have changed significantly as a
result of the Telecommunications Act of 1996.
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
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discs. We believe that radio's portability in particular makes it less
vulnerable than other media to competition from new methods of distribution or
other technological advances. There can be no assurance, however, that the
development or introduction in the future of any new media technology will not
have an adverse effect on the radio or television broadcasting industry.
EMPLOYEES
As of February 28, 1999 Emmis had approximately 1,268 full-time employees
and approximately 283 part-time employees. We have approximately 208 employees
at various radio and television stations represented by unions. We consider
relations with our employees to be excellent.
ITEM 2. PROPERTIES.
The following table sets forth information as of February 28, 1999 with
respect to Emmis' offices and studios and its broadcast tower locations.
Management believes that the properties are in good condition and are suitable
for Emmis' operations.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
- -------- ----------- -------- ----------
Corporate and Publishing Headquarters/ 1998 Owned --
WENS-FM/ WIBC-AM/WNAP-FM/
WTLC-AM & FM/ Indianapolis Monthly
One Emmis Plaza
40 Monument Circle
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNAP-FM Tower 1979 Owned --
WIBC-AM Tower 1966 Owned --
WTLC-AM Tower 1965 Leased May 2021
WTLC-FM Tower 1968 Leased December 2000
KSHE-FM 1986 Leased September 2007
700 St. Louis Union Station
St. Louis, Missouri
KSHE-FM Tower 1986 Leased September 2009
WXTM-FM/WKKX-FM 1988 Leased September 2007
800 St. Louis Union Station
St. Louis, Missouri
WXTM-FM Tower 1984 Owned --
WKKX-FM Tower 1989 Leased September 2009
KPWR-FM 1988 Leased February 2003
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased March 2003(1)
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WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1988 Leased Month-to-Month
WRKS-FM Tower 1992 Leased November 2005
WQCD-FM Tower 1992 Leased March 2007
WKQX-FM 1979 Leased July 1999(2)
Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 1999(2)
Atlanta Magazine Office 1993 Leased February 2003
1360 Peachtree Street
Atlanta, Georgia
Cincinnati Magazine 1996 Leased September 2001
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2008
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1987 Leased September 1999(3)
1170 Auahi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2018
WALA-TV 1996 Leased May 2001
210 government Street
Mobile, AL
WALA-TV Tower 1987 Owned --
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1987 Owned --
WLUK-TV 1966 Owned --
787 Lombardi Avenue
Green Bay, WI
WLUK-TV Tower 1961 Owned --
WTHI-TV/AM/FM/WWVR-FM 1954 Owned --
918 Ohio Street
Terre Haute, IN
WTHI-TV Tower 1965 Owned --
WTHI-AM/FM Tower 1954 Owned --
WWVR-FM Tower 1954 Owned --
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WVUE-TV 1972 Owned --
1025 South Jefferson Davis Highway
New Orleans, LA
WVUE-TV Tower 1963 Owned --
- --------------
(1) The lease provides for one renewal option of ten years following the
expiration date. Emmis also owns a tower site which it placed in service in
1984 and currently uses as a back-up facility and on which it leases space
to other broadcasters.
(2) Emmis is in the process of negotiating a new lease with the lessor.
(3) Emmis expects to move into a new studio facility prior to the expiration
of the lease.
ITEM 3. LEGAL PROCEEDINGS.
Emmis currently and from time to time is involved in litigation incidental
to the conduct of its business, but Emmis is not 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 Emmis' fourth quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Emmis' Class A Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System under the symbol EMMS.
The following table sets forth the high and low sale prices of the Class A
Common Stock for the periods indicated. No dividends were paid during any such
periods.
QUARTER ENDED HIGH LOW
May 1997...............................39.25 33.75
August 1997............................49.75 36.50
November 1997..........................47.88 43.25
February 1998..........................49.50 44.00
May 1998...............................55.06 43.13
August 1998............................48.75 37.50
November 1998..........................38.75 25.25
February 1999..........................51.25 34.69
At April 30, 1999, there were approximately 1,439 record holders of the
Class A Common Stock, and there were two record holders, but only one beneficial
owner, of the Class B Common Stock.
Emmis intends to retain future earnings for use in its business and does
not anticipate paying any dividends on shares of its common stock in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
----------------------------
(in thousands, except per share data)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
OPERATING DATA:
Net revenues $74,604 $109,244 $113,720 $140,583 $232,836
Operating expenses 45,990 62,466 62,433 81,170 143,348
International business development expenses 313 1,264 1,164 999 1,477
Corporate expenses 3,700 4,419 5,929 6,846 10,427
Time brokerage fee - - - 5,667 2,220
Depreciation and amortization 3,827 5,677 5,481 7,536 28,314
Noncash compensation 600 3,667 3,465 1,482 4,269
Operating income 20,174 31,751 35,248 36,883 42,781
Interest expense 7,849 13,540 9,633 13,772 35,650
Loss on donation of radio station - - - 4,833 -
Other income (expense), net (170) (303) 325 6 1,914
Income before income taxes and extraordinary item 12,155 17,908 25,940 18,284 9,045
Income before extraordinary item 7,627 10,308 15,440 11,084 2,845
Net income 7,627 10,308 15,440 11,084 1,248
Basic net income per share $0.72 $0.96 $1.41 $1.02 $0.09
Diluted net income per share $0.70 $0.93 $1.37 $0.98 $0.08
Weighted average common shares outstanding:
Basic 10,557 10,691 10,943 10,903 14,453
Diluted 10,832 11,084 11,291 11,362 14,848
FEBRUARY 28 (29),
-------------------------------------------------------------
(Dollars in thousands)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash $ 3,205 $ 1,218 $ 1,191 $ 5,785 $ 6,117
Working capital 10,088 14,761 15,463 21,635 1,249
Net intangible assets 139,729 135,830 131,743 234,558 802,307
Total assets 183,441 176,566 189,716 333,388 1,014,831
Credit facility and senior subordinated debt 152,000 124,000 115,000 215,000 577,000
Shareholders' equity (deficit) (2,661) 13,884 34,422 43,910 235,549
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YEAR ENDED FEBRUARY 28 (29),
----------------------------
(Dollars in thousands)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
OTHER DATA:
Broadcast/publishing cash flow (1) $ 28,614 $ 46,778 $ 51,287 $ 59,413 $ 89,488
Adjusted EBITDA (1) 24,601 41,095 44,194 51,568 77,584
Cash flows from (used in):
Operating activities 15,480 23,221 21,362 22,487 35,121
Investing activities (102,682) 222 (13,919) (116,693) (541,470)
Financing activities 88,800 (25,430) (7,470) 98,800 506,681
Capital expenditures 1,081 1,396 7,559 16,991 37,383
- ---------------
(1) Broadcast/publishing cash flow and adjusted EBITDA are not measures
of liquidity or of performance in accordance with generally accepted
accounting principles, and should be viewed as a supplement to and
not a substitute for Emmis' results of operations presented on the
basis of generally accepted accounting principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
GENERAL
The company evaluates performance of its operating entities based on
broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes
that BCF and PCF are useful because they provide a meaningful comparison of
operating performance between companies in the industry and serve as an
indicator of the market value of a group of stations or publishing entities. BCF
and PCF are generally recognized by the broadcast and publishing industries as a
measure of performance and are used by analysts who report on the performance of
broadcasting and publishing groups. BCF and PCF do not take into account Emmis'
debt service requirements and other commitments and, accordingly, BCF and PCF
are not necessarily indicative of amounts that may be available for dividends,
reinvestment in Emmis' business or other discretionary uses. BCF and PCF are not
measures of liquidity or of performance in accordance with generally accepted
accounting principles, and should be viewed as a supplement to and not a
substitute for our results of operations presented on the basis of generally
accepted accounting principles. Moreover, BCF and PCF are not standardized
measures and may be calculated in a number of ways. Emmis defines BCF and PCF as
revenues net of agency commissions and operating expenses. The primary source of
broadcast advertising revenues is the sale of advertising time to local and
national advertisers. Publishing entities derive revenue from subscriptions and
sale of print advertising. The most significant broadcast operating expenses are
employee salaries and commissions, costs associated with programming,
advertising and promotion, and station general and administrative costs.
Significant publishing operating expenses are employee salaries and commissions,
costs associated with producing the magazine, and general and administrative
costs.
The Company's revenues are affected primarily by the advertising rates its
entities charge. These rates are in large part based on the entities' ability to
attract audiences/subscribers in demographic groups targeted by their
advertisers. Broadcast entities ratings are measured principally four times a
year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen
Company for television stations. Because audience ratings in a station's local
market are critical to the station's financial success, the Company's strategy
is to use market research and advertising and promotion to attract and retain
audiences in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically
exchange advertising time for goods or services which can be used by the station
in its business operations. The Company generally confines the use of such trade
transactions to promotional items or services for which the Company would
otherwise have paid cash. In
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addition, it is the Company's general policy not to pre-empt advertising spots
paid for in cash with advertising spots paid for in trade.
ACQUISITIONS
On April 1, 1999, Emmis acquired substantially all the assets of Country
Sampler, Inc. for approximately $19.0 million in cash, $2.0 million payable
under contract with the principal shareholder through April 2003, and assumed
liabilities of approximately $3.4 million (the "Country Sampler Acquisition").
The acquisition was accounted for as a purchase and was financed through
additional borrowings under the Company's amended and restated credit facility
(Credit Facility).
Effective October 1, 1998, the Company completed its acquisition of
substantially all of the assets of Wabash Valley Broadcasting Corporation (the
"Wabash Acquisition"), the seller, for a cash purchase price of $88.9 million
(including transaction costs), plus assumed program rights payable and other
liabilities of approximately $12.2 million. The Company financed the acquisition
through borrowings under the Credit Facility. The Wabash Acquisition consists of
WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida,
WTHI-TV a CBS network affiliated television station in Terre Haute, Indiana,
WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana
area.
On July 16, 1998, the Company completed its acquisition of substantially
all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations,
Inc. and Subsidiaries (collectively the "SF Acquisition"), the seller, for a
cash purchase price of $287.3 million (including transaction costs), a $25
million promissory note due to the former owner, plus assumed program rights
payable and other liabilities of approximately $34.7 million. The Company
financed the acquisition through a $25 million promissory note and borrowings
under the Credit Facility. The promissory note was paid in full in February
1999. The SF Acquisition consists of four Fox network affiliated television
stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana,
WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including McHale
Videofilm and satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo,
Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station
WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio,
Inc. for a cash purchase price of $141.6 million (including transaction costs)
less approximately $13.0 million for cash purchase price adjustments relating to
taxes, plus $20.0 million of net current tax liabilities, $52.5 million of
deferred tax liabilities and $0.3 million of liabilities associated with the
acquisition. The acquisition was accounted for as a purchase and was financed
through additional bank borrowings. Effective July 1, 1997 through the date of
closing, the Company operated WQCD-FM under a time brokerage agreement.
On February 1, 1998, the Company acquired all of the outstanding capital
stock of Mediatex Communications Corporation for approximately $37.4 million in
cash plus assumed liabilities of $8.0 million (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 "Indianapolis Acquisition").
Emmis financed the acquisition through additional bank borrowings. The
acquisition was accounted for as a purchase.
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Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.)
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. 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.
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 March 31, 1997, Emmis completed its acquisition of substantially all of
the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-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 to a church. 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. Effective December 1, 1996 through the date of
closing, the Company operated the acquired stations under a time brokerage
agreement.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998. Net
revenues for the year ended February 28, 1999 were $232.8 million compared to
$140.6 million for the same period of the prior year, an increase of $92.2
million or 65.6%. This increase was principally due to the Indianapolis,
Cincinnati and Mediatex Acquisitions that occurred toward the end of fiscal 1998
and the SF and Wabash Acquisitions that occurred in fiscal 1999 (collectively
the "98/99 Acquisitions"). Additionally, Emmis realized higher advertising rates
at its 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 revenues would
have increased $22.2 million or 9.2% for the year. For purposes herein, pro
forma information assumes the 98/99 Acquisitions and the WQCD Acquisition were
effective on the first day of the year ended February 28, 1998.
Operating expenses for the year ended February 28, 1999 were $143.3 million
compared to $81.2 million for the same period of the prior year, an increase of
$62.1 million or 76.6%. This increase was principally attributable to the 98/99
Acquisitions and increased promotional spending at the Company's broadcasting
properties. On a pro forma basis, operating expenses would have increased $7.9
million or 5.0% for the year.
Broadcast/publishing cash flow for the year ended February 28, 1999 was
$89.5 million compared to $59.4 million for the same period of the prior year,
an increase of $30.1 million or 50.6%. This increase was due to increased net
revenues partially offset by increased operating expenses as discussed above. On
a pro forma basis, broadcast/publishing cash flow would have increased $14.3
million or 17.1% for the year.
Corporate expenses for the year ended February 28, 1999 were $10.4 million
compared to $6.8 million for the same period of the prior year, an increase of
$3.6 million or 52.3%. This increase was primarily due to an increase in the
number of corporate employees as a result of the growth of the Company and
increased travel and other expenses related to potential acquisitions that were
not finalized.
Adjusted EBITDA is defined as broadcast/publishing cash flow less corporate
and international development expenses. Adjusted EBITDA for the year ended
February 28, 1999 was $77.6 million compared to $51.6 million for the same
period of the prior year, an increase of $26.0 million or 50.4%. This increase
was principally due to the increase in broadcast/publishing cash flow partially
offset by an increase in corporate expenses. On a pro forma basis, adjusted
EBITDA would have increased $10.9 million or 14.5% for the year.
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Interest expense was $35.7 million for the year ended February 28, 1999
compared to $13.8 million for the same period of the prior year, an increase of
$21.9 million or 158.9%. This increase reflected higher outstanding debt due to
the 98/99 Acquisitions and the WQCD Acquisition. On a pro forma basis, interest
expense would have increased $1.9 million or 3.9% for the year.
Depreciation and amortization expense for the year ended February 28, 1999
was $28.3 million compared to $7.5 million for the same period of the prior
year, an increase of $20.8 million or 275.7%. This increase was primarily due to
the 98/99 Acquisitions and the WQCD Acquisition. On a pro forma basis,
depreciation and amortization expense would have increased $5.0 million or
16.3%.
Non-cash compensation expense for the year ended February 28, 1999 was $4.3
million compared to $1.5 million for the same period of the prior year, an
increase of $2.8 million or 188.1%. Non-cash compensation includes compensation
expense associated with stock options granted, restricted common stock issued
under employment agreements and common stock contributed to the Company's Profit
Sharing Plan. The increase in non-cash compensation relates primarily to options
awarded the CEO in fiscal 1999 under his employment contract which similar
options were not awarded in fiscal 1998.
In April 1999, the Fox Network made a proposal to decrease the number of
commercials available for sale by local TV affiliates. If this proposal is
implemented, the Company expects its broadcast cash flow would decrease by
approximately $1.0 million.
YEAR ENDED FEBRUARY 28, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997. Net
revenues for the year ended February 28, 1998 were $140.6 million compared to
$113.7 million for the same period of the prior year, an increase of $26.9
million or 23.6%. 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 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.
Operating expenses for the year ended February 28, 1998 were $81.2 million
compared to $62.4 million for the same period of the prior year, an increase of
$18.8 million or 30.0%. 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.
Broadcast/publishing cash flow for the year ended February 28, 1998 was
$59.4 million compared to $51.3 million for the same period of the prior year,
an increase of $8.1 million or 15.8%. This increase was due to increased net
revenues partially offset by increased operating expenses as discussed above.
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.
Adjusted EBITDA is defined as broadcast/publishing cash flow less corporate
and international development expenses. Adjusted EBITDA 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/publishing cash flow partially
offset by an increase in corporate expenses.
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
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Company's bank debt, offset by voluntary repayments made thereunder and a rate
decrease associated with the refinancing.
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.
Non-cash compensation expense for year the ended February 28, 1998 was $1.5
million compared to $3.5 million for the same period of the prior year, a
decrease of $2.0 million or 57.2%. Non-cash compensation includes compensation
expense associated with stock options granted, restricted common stock issued
under employment agreements and common stock contributed to the Company's Profit
Sharing Plan. This decrease was due primarily to options under an employment
contract awarded to the CEO in fiscal 1997 which similar options were not
awarded in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998, Emmis completed the sale of 4.6 million shares of its Class A
Common Stock at $42.00 per share resulting in total proceeds of $193.0 million.
Net proceeds from the offering were used to repay outstanding obligations under
the Credit Facility.
On July 16, 1998, the Company entered into the Credit Facility for $750.0
million, which may be increased up to $1.0 billion. The Credit Facility matures
on August 31, 2006, except for the Term Note which matures on February 28, 2007,
and is comprised of (1) a $400.0 million revolving credit facility which is
subject to certain adjustments as defined in the Credit Facility, (2) a $250.0
million term note and (3) a $100.0 million revolving acquisition credit
facility/term note. This Credit Facility is available for general corporate
purposes and acquisitions. Amounts borrowed under the Credit Facility bear
interest at a variable rate based on an index chosen by the Company. The
commitments under the 8-year revolving credit facility, 8-year revolving
acquisition Credit Facility/term loan are subject to scheduled annual reductions
beginning in 2001 and to additional reductions from the net proceeds of asset
sales if the Company's ratio of total indebtedness to operating cash flow
exceeds a specified level. As of February 28, 1999, Emmis had $473.0 million
available for borrowing under its Credit Facility.
In February 1999, Emmis completed the sale of $300.0 million of senior
subordinated notes that mature in February 2009 (the "Notes"). The Notes bear
interest at 8 1/8% with interest payments due semi-annually on September and
March 15. Net proceeds of the Notes were used to repay a $25 million promissory
note and the related $1.1 million accrued interest due to SF Broadcasting in
connection with the purchase of four television stations and outstanding
obligations under the Credit Facility. Up to 35% of the Notes can be redeemed
prior to March 15, 2002 with the net proceeds of a public offering and the Notes
can be 100% redeemed on or after March 15, 2004.
In connection with the acquisition of KHON-TV in Honolulu, Hawaii, in July
1998, Emmis acquired a commitment to complete the construction of new operating
facilities, including broadcast equipment, for the station. The project is
expected to be completed in the fall of 1999 for an estimated cost of
approximately $19.0 million of which $2.7 million has been incurred through
February 28, 1999.
In the fiscal years ended February 1997, 1998 and 1999, the Company had
capital expenditures of $7.6 million, $17.0 million, and $37.4 million,
respectively. These capital expenditures primarily consisted of progress
payments in connection with the Indianapolis office facility project, 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.
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On April 1, 1999, the Company acquired substantially all the assets of
Country Sampler, Inc. for approximately $19.0 million in cash, $2.0 million
payable under contract with the principal shareholder through April 2003 and
assumed liabilities of approximately $3.4 million (the "Country Sampler
Acquisition"). The acquisition was accounted for as a purchase and was financed
through additional borrowings under the Credit Facility.
The Company expects 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, 1999, working capital requirements, and
capital expenditure requirements for the next year.
IMPACT OF THE YEAR 2000
Emmis has completed its assessment phase of year 2000 compliance for
information technology for all of its radio broadcasting properties except those
included in the Wabash Valley Acquisition. The Company has also completed its
assessment of other equipment, including broadcast equipment and embedded
technology, at certain radio properties. Assessment of year 2000 compliance at
newly acquired television stations, corporate and publishing entities is
partially complete. Certain information technology and other equipment is
represented by its vendors to be year 2000 compliant. Technology and equipment
that is currently not represented as year 2000 compliant will be upgraded or
replaced, and tested prior to August 31, 1999. In connection with the move of
our corporate and Indianapolis operations to an office building in downtown
Indianapolis, substantially all information technology and other equipment in
the building has been replaced and is believed to be year 2000 compliant. Emmis
estimates that the cost of the remaining year 2000 remediation effort will be
approximately $2.0 million, which will be funded from current operations. Emmis
has not separately tracked costs incurred to date relating to year 2000
compliance; however, management believes that these costs have been
insignificant. Emmis has trained its employees regarding year 2000 issues and
compliance. Certain employees at each entity are responsible for year 2000
compliance. Emmis' information systems department is currently auditing the year
2000 compliance of each entity. This audit includes (1) verifying that critical
applications have been identified, (2) testing of critical applications, (3)
ensuring that year 2000 compliance documentation exists, (4) verifying that
remediation is occurring as planned and (5) developing written contingency
plans. The audit should be complete by August 31, 1999. If certain broadcast
equipment and information technology is not year 2000 compliant prior to January
1, 2000, an entity using that equipment and information technology might not be
able to broadcast and process transactions. If this were to occur, temporary
solutions or processes not involving the malfunctioning equipment could be
implemented. The contingency plans documented during the audit process would be
used to implement such temporary solutions.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of Emmis due to adverse changes in
financial and commodity market prices and rates. Emmis is exposed to market risk
from changes in domestic and international interest rates (i.e. prime and LIBOR)
and foreign currency exchange rates. To manage this exposure Emmis periodically
enters into interest rate derivative agreements. Emmis does not use financial
instruments for trading and is not a party to any leveraged derivatives.
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INTEREST RATES
At February 28 1999, Emmis' entire outstanding balance under the Credit
Facility, or approximately 48% of Emmis' Credit Facility and Senior Subordinated
Debt outstanding bears interest at variable rates. Emmis currently hedges a
portion of its outstanding debt with interest rate caps that effectively cap the
Credit Facility's underlying base rate at a weighted average rate of 7.1% on the
three-month LIBOR for agreements in place as of February 28, 1999. Assuming the
current level of borrowings protected under interest rate cap agreements and
that LIBOR increased from the rates at February 28, 1999 to the cap rates,
interest expense would have increased by $5.7 million and net income would have
decreased by $3.5 million. The Credit Facility requires Emmis to maintain
interest rate protection agreements through July 2001. 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 at February 28,
1999 totaled $274 million and expire at various dates ranging from April 2000 to
February 2001. The fair value of the interest rate cap agreements was $166,000
at February 28, 1999.
FOREIGN CURRENCY
Emmis owns a 54% interest in a Hungarian subsidiary which is consolidated
in the accompanying financial statements. This subsidiary's operations are
measured in their local currency. Emmis has a natural hedge through some of the
subsidiary's long-term obligations being denominated in Hungarian forints. Emmis
maintains no other derivative instruments to mitigate the exposure to
translation and/or transaction risk. However, this does not preclude the
adoption of specific hedging strategies in the future. It is estimated that a
10% change in the value of the U.S. dollar to the Hungarian forint would not be
material.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
--------------------------------------------
1997 1998 1999
-------- ------- -------
GROSS REVENUES $134,102 $165,324 $274,056
LESS AGENCY COMMISSIONS 20,382 24,741 41,220
-------- -------- --------
NET REVENUES 113,720 140,583 232,836
Operating expenses 62,433 81,170 143,348
International business
development expenses 1,164 999 1,477
Corporate expenses 5,929 6,846 10,427
Time brokerage fee - 5,667 2,220
Depreciation and amortization 5,481 7,536 28,314
Non-cash compensation 3,465 1,482 4,269
-------- -------- ---------
OPERATING INCOME 35,248 36,883 42,781
------ -------- --------
OTHER INCOME (EXPENSE):
Interest expense (9,633) (13,772) (35,650)
Loss on donation of radio station - (4,833) -
Other income, net 325 6 1,914
-------- -------- ---------
Total other income (expense) (9,308) (18,599) (33,736)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 25,940 18,284 9,045
PROVISION FOR INCOME TAXES 10,500 7,200 6,200
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 15,440 11,084 2,845
EXTRAORDINARY ITEM, NET OF TAX - - 1,597
--------- --------- --------
NET INCOME $ 15,440 $ 11,084 $ 1,248
========= ========== =========
BASIC EARNINGS PER SHARE:
Income before Extraordinary Item $1.41 $1.02 $ 0.20
Extraordinary Item, Net of Tax - - (0.11)
------ ------ -------
Net Income $1.41 $1.02 $ 0.09
===== ===== ======
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $1.37 $0.98 $0.19
Extraordinary item, net of tax - - (0.11)
------ ------ -------
Net income $1.37 $0.98 $ 0.08
===== ===== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
32
33
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28,
----------------------
1998 1999
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,785 $ 6,117
Accounts receivable, net of allowance for doubtful
accounts of $1,346 and $1,698 at February 28, 1998
and 1999, respectively 32,120 51,479
Current portion of TV program rights - 3,646
Income tax refunds receivable 4,968 -
Prepaid expenses and other 8,279 9,840
--------- ---------
Total current assets 51,152 71,082
-------- --------
PROPERTY AND EQUIPMENT:
Land and buildings 2,192 35,411
Leasehold improvements 8,188 8,351
Broadcasting equipment 18,800 63,943
Office equipment and automobiles 12,144 21,199
Construction in progress 13,091 3,418
-------- ---------
54,415 132,322
Less- Accumulated depreciation
and amortization 20,969 26,262
-------- --------
Total property and equipment, net 33,446 106,060
-------- -------
INTANGIBLE ASSETS:
Broadcast licenses 195,400 711,928
Trademarks 1,022 756
Excess of cost over fair value of net
assets of purchased businesses 53,297 123,614
Other intangibles 5,567 5,632
--------- ---------
255,286 841,930
Less- Accumulated amortization 20,728 39,623
-------- --------
Total intangible assets, net 234,558 802,307
------- -------
OTHER ASSETS:
Deferred debt issuance costs and cost of
interest rate cap agreements, net of
accumulated amortization of $692 and
and $839 at February 28, 1998 and
1999, respectively 3,806 18,907
TV program rights, net of current portion - 7,836
Investments 5,114 5,664
Deposits and other 5,312 2,975
------- ------
Total other assets, net 14,232 35,382
-------- --------
Total assets $333,388 $1,014,831
======== ==========
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
33
34
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
FEBRUARY 28,
--------------------
1998 1999
------ ------
CURRENT LIABILITIES:
Current maturities of other long-term debt $ 1,499 $ 835
Current portion of TV program rights payable - 9,471
Accounts payable 13,140 15,635
Collection of account receivable on behalf of
SF Broadcasting and Wabash Valley Broadcasting - 9,016
Accrued salaries and commission 2,893 4,545
Accrued interest 2,421 6,223
Income tax payable - 12,057
Deferred revenue 7,985 7,238
Other 1,579 4,813
-------- ----------
Total current liabilities 29,517 69,833
CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 215,000 577,000
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION - 25,161
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 14,923 18,805
OTHER NONCURRENT LIABILITIES 604 3,466
MINORITY INTEREST 1,875 -
DEFERRED INCOME TAXES 27,559 85,017
-------- ----------
Total liabilities 289,478 779,282
-------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value; authorized 34,000,000 shares; issued
and outstanding 8,430,660 shares and 13,190,207 shares at February 28,
1998 and 1999, respectively 84 132
Class B common stock, $.01 par value; authorized
6,000,000 shares; issued and outstanding 2,560,894 shares and 2,582,265
shares at February 28, 1998 and 1999, respectively 26 26
Additional paid-in capital 69,353 260,344
Accumulated deficit (25,553) (24,305)
Accumulated other comprehensive income - (648)
-------- -----------
Total shareholders' equity 43,910 235,549
-------- ----------
Total liabilities and shareholders' equity $333,388 $1,014,831
======== ==========
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
34
35
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, 1999
Class A Class B
Common Stock Common Stock
-----------------------------------
Addi-
Shares Shares tional
Out- Out- Paid-in
standing Amount standing Amount Capital
-------- ------ -------- ------ -------
(Dollars in thousands, except share data)
BALANCE, FEBRUARY 29, 1996 8,264,940 $ 83 2,606,332 $26 $ 65,852
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
Compensation related to granting
of stock and stock options - - - - 2,715
Issuance of Class A Common
Stock to profit sharing plan 21,739 - - - 750
Comprehensive Income:
Net income - - - - -
---------- ---- --------- --- --------
BALANCE, FEBRUARY 28, 1997 8,410,956 84 2,574,470 26 70,949
---------- ---- --------- --- --------
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
Compensation related to granting
of stock and stock options - - - - 732
Issuance of Class A Common
Stock to profit sharing plan 15,152 - - - 750
Issuance of Class A Common Stock
to employees and officers and related
income tax benefits 79,115 1 - - 954
Purchase of Class A Common
Stock (194,444) (2) - - (6,998)
Comprehensive Income:
Net income - - - - -
---------- ---- --------- --- --------
BALANCE, FEBRUARY 28, 1998 8,430,660 84 2,560,894 26 69,353
---------- ---- --------- --- --------
Issuance of Class A Common Stock in
exchange for Class B Common Stock 7,629 - (7,629) - -
Exercise of stock options and
related income tax benefits 124,678 2 29,000 - 4,128
Compensation related to granting
of stock and stock options - - - - 3,269
Issuance of Class A Common
Stock to profit sharing plan 21,592 - - - 1,000
Issuance of Class A Common Stock
to employees and officers and related
income tax benefits 5,648 - - - -
Equity offering, net of costs incurred
of $10,606 4,600,000 46 - - 182,594
Comprehensive Income:
Net income - - - - -
Cumulative translation adjustment - - - - -
Total comprehensive income - - - - -
---------- ---- --------- --- --------
BALANCE, FEBRUARY 28, 1999 13,190,207 $132 2,582,265 $26 $260,344
========== ==== ========= === ========
Accumu-
Accum- lated Other Total
ulated Comprehen- Shareholders'
Deficit sive Income Equity
-------- ------------ -------------
(Dollars in thousands, except share data)
BALANCE, FEBRUARY 29, 1996 $(52,077) $ - $ 13,884
Issuance of Class A Common Stock in
exchange for Class B Common Stock - - -
Exercise of stock options and
related income tax benefits - - 1,633
Compensation related to granting
of stock and stock options - - 2,715
Issuance of Class A Common
Stock to profit sharing plan - - 750
Comprehensive Income:
Net income 15,440 - 15,440
-------- ----- --------
BALANCE, FEBRUARY 28, 1997 (36,637) - 34,422
-------- ----- --------
Issuance of Class A Common Stock in
exchange for Class B Common Stock - - -
Exercise of stock options and
related income tax benefits - - 2,967
Compensation related to granting
of stock and stock options - - 732
Issuance of Class A Common
Stock to profit sharing plan - - 750
Issuance of Class A Common Stock
to employees and officers and related
income tax benefits - - 955
Purchase of Class A Common
Stock - - (7,000)
Comprehensive Income:
Net income 11,084 - 11,084
-------- ----- --------
BALANCE, FEBRUARY 28, 1998 (25,553) - 43,910
-------- ----- --------
Issuance of Class A Common Stock in
exchange for Class B Common Stock - - -
Exercise of stock options and
related income tax benefits - - 4,130
Compensation related to granting
of stock and stock options - - 3,269
Issuance of Class A Common
Stock to profit sharing plan - - 1,000
Issuance of Class A Common Stock
to employees and officers and related
income tax benefits - - -
Equity offering, net of costs incurred
of $10,606 - - 182,640
Comprehensive Income:
Net income 1,248 -
Cumulative translation adjustment - (648)
Total comprehensive income - - 600
-------- ----- --------
BALANCE, FEBRUARY 28, 1999 $(24,305) $(648) $235,549
======== ===== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
35
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
---------------------------------------------
1997 1998 1999
----- ------- ------
OPERATING ACTIVITIES:
Net income $ 15,440 $ 11,084 $ 1,248
Adjustments to reconcile net income to
net cash provided by operating activities-
Extraordinary item - - 1,597
Depreciation and amortization of property and equipment 1,639 2,580 9,705
Amortization of debt issuance costs and cost of
interest rate cap agreements 1,071 2,183 839
Amortization of intangible assets 3,842 4,956 18,609
Amortization of TV program rights - - 3,005
Provision for bad debts 726 802 1,745
Provision (benefit) for deferred income taxes 1,590 (524) 4,953
Compensation related to stock and stock options granted 2,715 732 3,269
Contribution to profit sharing plan paid with common stock 750 750 1,000
Loss on donation of radio station - 4,833 -
Cash paid for TV program rights - - (1,469)
Other (195) 357 (1,143)
(Increase) decrease in certain current assets .
(net of dispositions and acquisitions)-
Accounts receivable (2,385) (8,389) (21,104)
Prepaid expenses and other current assets (3,041) (4,760) (727)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions)-
Accounts payable 2,757 5,560 1,868
Accrued salaries and commissions (1,999) 1,332 1,337
Accrued interest (146) 2,247 3,802
Deferred revenue 395 292 (747)
Other current liabilities 26 116 4,486
(Increase) decrease in deposits and other assets (898) (1,832) 3,435
Increase (decrease) in other noncurrent liabilities (925) 168 (587)
-------- --------- ---------
Net cash provided by operating activities 21,362 22,487 35,121
-------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of WXTM-FM, WALC-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) -
Acquisition of WQCD-FM - - (128,550)
Acquisition of SF Broadcasting - - (287,293)
Acquisition of Wabash Valley Broadcasting - - (88,905)
Purchases of property and equipment (7,559) (16,991) (37,383)
Initial payment for purchase of Hungarian broadcast license - (7,325) -
Other 240 - 661
-------- --------- ---------
Net cash used by investing activities (13,919) (116,693) (541,470)
-------- --------- ---------
36
37
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
--------------------------------------------
(DOLLARS IN THOUSANDS)
1997 1998 1999
-------- --------- ----------
FINANCING ACTIVITIES:
Proceeds of credit facility and senior subordinated notes 19,000 288,378 1,063,000
Payments on credit facility (28,102) (183,928) (723,500)
Purchases of interest rate cap agreements and payment
of loan fees - (4,291) (19,589)
Proceeds (purchase) of the Company's Class A Common
Stock, net of transaction costs - (7,000) 182,640
Proceeds from exercise of stock options and income tax
benefits of certain equity transactions 1,632 3,922 4,130
Other - 1,719 -
-------- --------- ----------
Net cash provided (used) by financing activities (7,470) 98,800 506,681
-------- --------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (27) 4,594 332
CASH AND CASH EQUIVALENTS:
Beginning of year 1,218 1,191 5,785
-------- --------- ----------
End of year $ 1,191 $ 5,785 $ 6,117
======== ========= ==========
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38
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 8,708 $ 9,655 $ 33,439
Income taxes 9,180 8,419 1,580
Non-cash investing and financing transactions-
Fair value of assets acquired by incurring debt 17 32 -
ACQUISITION OF WXTM-FM, WALC-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 -
ACQUISITION OF WQCD-FM:
Fair value of assets acquired - - $201,347
Cash paid - - 128,550
-------
Liabilities assumed - - $ 72,797
ACQUISITION OF SF BROADCASTING:
Fair value of assets acquired - - $346,952
Cash paid - - 287,293
-------
Liabilities assumed - - $ 59,659
ACQUISITION OF WABASH VALLEY BROADCASTING:
Fair value of assets acquired - - $101,055
Cash paid - - 88,905
--------
Liabilities assumed - - $ 12,150
The accompanying notes to consolidated financial statements are an integral
part of these statements.
38
39
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Emmis Communications Corporation is a diversified media company
with radio broadcasting, television broadcasting and magazine publishing
operations. The thirteen FM radio stations and three AM radio stations Emmis
Communications Corporation owns in the United States serve the nation's three
largest radio markets of New York City, Los Angeles and Chicago, as well as St.
Louis, Indianapolis and Terre Haute, Indiana. The six television stations,
which Emmis Communications Corporation acquired in 1998, are located in New
Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii,
Fort Myers, Florida and Terre Haute, Indiana. Emmis Communications Corporation
also publishes Indianapolis Monthly, Texas Monthly, Cincinnati and Atlanta
magazines, has a 54% interest in a national radio station in Hungary (Slager
Radio) and engages in certain businesses ancillary to its business, such as
broadcast tower leasing and advertising and program consulting.
b. Principles of Consolidation
In fiscal 1999, Emmis Broadcasting Corporation changed its name
to Emmis Communications Corporation. The consolidated financial statements
include the accounts of Emmis Communications Corporation and its majority owned
Subsidiaries. Unless the content otherwise requires, references to Emmis or the
Company in these financial statements mean Emmis Communications Corporation and
its Subsidiaries. All significant intercompany balances and transactions have
been eliminated. Effective in the fourth quarter of fiscal 1999, Emmis began
recording 100% of Slager Radio's losses as the minority shareholders'
investment had been reduced to zero. When Slager Radio generates net income,
Emmis will recognize 100% of their net income to the extent that losses greater
than Emmis' 54% interest have been previously recorded.
c. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired.
Publication revenue is recognized in the month of delivery.
d. Television Programming
Emmis has agreements with distributors for the rights to
television programming over contract periods which generally run from one to
five years. Each contract is recorded as an asset and a liability at an amount
equal to its gross contractual commitment when the license period begins and
the program is available for its first showing. The portion of program
contracts which become payable within one year is reflected as a current
liability in the accompanying consolidated balance sheet.
The rights to program materials are reflected in the accompanying
consolidated balance sheet at the lower of unamortized cost or estimated net
realizable value. Estimated net realizable values are based upon management's
expectation of future advertising revenues, net of sales commissions, to be
generated by the program material. Amortization of program contract costs is
computed under either the straight-line method over the contract period or
based on usage, whichever yields the greater amortization for each program on a
monthly basis. Program contract costs, estimated by management to be amortized
in the succeeding year, are classified as current assets. Program contract
liabilities are typically paid on a scheduled basis and are not affected by
adjustments for amortization or estimated net realizable value. Certain program
contracts provide for the exchange of advertising air time in lieu of cash
payments for the rights to such programming. These
39
40
contracts are recorded as the programs are aired at the estimated fair value of
the advertising air time given in exchange for the program rights.
e. International Business Development Expenses
International business development expenses include the cost of
the Company's efforts to identify, investigate and develop international
broadcast investments or other international business opportunities.
f. Non-cash Compensation
Non-cash compensation includes compensation expense associated
with stock options granted, restricted common stock issued under employment
agreements and common stock contributed to the Company's Profit Sharing Plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Pro forma disclosure of net income and earnings per share under
SFAS No. 123 is presented in Note 9.
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, office equipment and automobiles. Maintenance, repairs
and minor renewals are expensed; improvements are capitalized. Interest was
capitalized in connection with the construction of the Indianapolis office
facility. The capitalized interest was recorded as part of the building cost.
In fiscal 1999 and 1998 approximately $1,591,000 and $312,000 of interest was
capitalized, respectively. No interest was capitalized in fiscal 1997. 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 excess of cost over fair value of net assets resulting
from the purchase of Texas Monthly (approximately $32.4 million) is being
amortized over 15 years. Other intangibles are amortized using the
straight-line method over varying periods, not in excess of 10 years.
Subsequent to the acquisition of an intangible asset, Emmis
evaluates whether later events and circumstances indicate the remaining
estimated useful life of that asset may warrant revision or that the remaining
carrying value of such an asset may not be recoverable. When factors indicate
that an intangible asset should be evaluated for possible impairment, Emmis
uses an estimate of the related asset's undiscounted future cash flows over the
remaining life of that asset in measuring recoverability. If separately
identifiable cash flows are not available for an intangible asset (as would
generally be the case for the excess of cost over fair value of purchased
businesses), Emmis evaluates recoverability based on the expected undiscounted
cash flows of the specific business to which the asset relates. If such an
analysis indicates that impairment has in fact occurred, Emmis writes down the
remaining net book value of the intangible asset to its fair value. For
40
41
this purpose, fair value is determined using quoted market prices (if
available), appraisals or appropriate valuation techniques.
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 of $5,114,000 is
accounted for on the equity method of accounting.
k. Deposits and Other Assets
Deposits and other assets include amounts due from officers,
including accrued interest, of $1,654,000 and $1,741,000 at February 28, 1998
and 1999, respectively. Officer loans bear interest at the Company's average
borrowing rate of approximately 6.60% and 7.09% for the years ended February
28, 1998 and 1999, 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.
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 and was $648,000 for the year ended February
28,1999. This adjustment is reflected in shareholders' equity in the
accompanying balance sheet.
o. Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", requires dual presentation of basic and diluted earnings
per share ("EPS") on the face of the income statement for all entities with
complex capital structures 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, 10,903,333 and 14,452,820 shares for the years ended February 28,
1997, 1998 and 1999, 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, 11,361,881 and 14,848,171 for the years
ended February 28, 1997, 1998 and 1999, respectively. For the years ended
February 28, 1997, 1998 and 1999, the difference between the weighted-average
shares outstanding used to compute basic and diluted EPS is attributable to
dilution caused by stock options.
41
42
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
As of March 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement establishes new rules for the reporting
and display of comprehensive income and its components. The Company has
reported, in addition to net income, the components of other comprehensive
income including foreign currency translation adjustments, in its consolidated
statements of shareholders' equity. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. The adoption of
this disclosure standard had no impact on the Company's net income or financial
position.
Effective February 28, 1999, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (See Note
12). This pronouncement superseded SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", and establishes new standards for reporting
information about operating segments and related disclosures about products,
geographic areas, and major customers in annual and interim financial
statements. The adoption of SFAS No. 131 does not affect results of operations
or financial operation.
In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued, which establishes accounting
and reporting standards for derivative financial instruments and hedging
activities. This pronouncement, which is required to be adopted in fiscal years
beginning after June 15, 1999, will require, among other things, the Company to
recognize all derivatives as either assets or liabilities on the balance sheet
at fair value. Derivatives not qualifying as hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in its fair value will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments through
income or recognized in other comprehensive income. Hedge ineffectiveness, the
amount by which the change in the value of a hedge does not exactly offset the
change in the value of the hedged item, will be immediately recognized in
earnings. Management has not yet determined what the effect of SFAS No. 133
will be on the Company.
r. Reclassifications
Certain reclassifications have been made to the February 28, 1997
and 1998 financial statements to be consistent with the February 28, 1999
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
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43
paid in capital in the accompanying financial statements and was financed
through additional borrowings under the Company's Credit Facility.
In June 1998, Emmis completed the sale of 4.6 million shares of its
Class A Common Stock at $42.00 per share resulting in total proceeds of $193.0
million. Net proceeds from the offering were used to repay outstanding
obligations under the Credit Facility.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock which may be
issued with such designations, preferences, limitations and relative rights as
Emmis' Board of Directors may authorize. As of February 28, 1998 and 1999, no
shares of preferred stock are issued and outstanding.
4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT
The Credit Facility and Senior Subordinated Debt was comprised of the
following at February 28, 1998 and 1999:
1998 1999
-------- ---------
(dollars in thousands)
Credit Facility:
Revolving Credit Facility $ 115,000 $ 27,000
Term Note 100,000 250,000
8 1/8% Senior Subordinated Notes Due 2009 - 300,000
--------- ---------
Total debt $ 215,000 $ 577,000
========= =========
Credit Facility
On July 16, 1998 the Company entered into an amended and restated Credit
Facility for $750 million, which may be increased up to $1.0 billion. As a
result of the early payoff of the refinanced debt, the Company recorded an
extraordinary loss of approximately $1.6 million, net of taxes, related to
unamortized deferred debt issuance costs. The amended and restated Credit
Facility expires on August 31, 2006, except for the Term Note which matures on
February 28, 2007, and is comprised of (1) a $400 million revolving credit
facility which is subject to certain adjustments as defined in the Credit
Facility, (2) a $250 million term note and (3) a $100 million revolving
acquisition 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. No letters of credit were outstanding at February 28, 1999.
All outstanding amounts under the Credit Facility bear interest, at the
option of Emmis, at a rate equal to the Eurodollar Rate or an alternative base
rate (as defined in the Credit Facility) plus a margin. The margin over the
Eurodollar Rate or the alternative base rate varies, depending on Emmis' ratio
of debt to earnings before interest, taxes, depreciation and amortization
(EBITDA), as defined in the agreement. The weighted-average interest rate on
borrowings outstanding under the Credit Facility at February 28, 1998 and 1999
was approximately 6.72% and 7.69%, 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 2001. 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 at February 28,
1999 totaled $274 million. The agreements, which expire at various dates
ranging from April 2000 to February 2001, establish various ceilings on the
Credit Facility's underlying base rate approximating a weighted average rate of
7.1% on the three-month LIBOR interest rate. The cost of these
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agreements is 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 August 31, 2001. Amortization of the outstanding principal amount
under the term note and revolving acquisition Credit Facility/term note is
payable in quarterly installments beginning August 31, 2001. The annual
amortization and reduction schedules as of February 28, 1999, assuming the
entire $750 million Credit Facility was outstanding prior to the scheduled
amortization payments are as follows:
SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY AVAILABILITY
(In thousands)
Revolving
Acquisition
Revolving Credit Facility/
Year Ended Credit Facility Term Note Term Note
February (29) 28 Amortization Amortization Amortization Total
---------------- ------------- ------------ ------------ -----
2002 $ 40,000 $ 1,875 $ 10,000 $ 51,875
2003 60,000 2,500 15,000 77,500
2004 80,000 2,500 20,000 102,500
2005 90,000 2,500 22,500 115,000
2006 70,000 2,500 17,500 90,000
2007 60,000 238,125 15,000 313,125
-------- -------- -------- --------
Total $400,000 $250,000 $100,000 $750,000
======== ======== ======== ========
Commencing with the fiscal year ending February 28, 2002, 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 4.5 to 1. Excess cash flow is
generally defined as EBITDA reduced by cash taxes, capital expenditures,
required debt service, increases in working capital (net of cash or cash
equivalents), and $5,000,000. 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, 1999. 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.
SENIOR SUBORDINATED NOTES
On February 12, 1999, the Company issued $300 million of 8 1/8% Senior
Subordinated Notes. The Senior Subordinated Notes were sold at 100% of the face
amount. The proceeds were used to retire a $25 million promissory note and the
related $1.1 million accrued interest due to SF Broadcasting in connection with
the purchase of four television stations. The remainder of the proceeds was
used to reduce outstanding borrowings under the Credit Facility. In March 1999,
the Company filed an Exchange Offer Registration Statement with the SEC to
exchange the Senior Subordinated Notes for new Series B Notes ("the Notes")
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registered under the Securities Act. The terms of the new Series B Notes are
identical to the terms of the Senior Subordinated Notes.
Prior to March 15, 2002, the Company may, at its option, use the net
cash proceeds of one or more Public Equity Offerings (as defined), to redeem up
to 35% of the aggregate principal amount at a redemption price equal to
108.125% plus accrued and unpaid interest, provided that at least $195.0
million of the aggregate principal amount of the Notes originally issued
remains outstanding after such redemption. On or after March 15, 2004 and until
March 14, 2007, the Notes will be redeemable at the option of the Company in
whole or in part at prices ranging from 104.063% to 101.354% plus accrued and
unpaid interest. On or after March 15, 2007, the Notes may be redeemable at
100% plus accrued and unpaid interest. Upon a Change of Control (as defined),
the Company is required to make an offer to purchase the Notes then outstanding
at a purchase price equal to 101% plus accrued and unpaid interest. Interest on
the Notes is payable semi-annually. The Notes have no sinking fund requirements
and are due in full on March 15, 2009.
The Notes are general unsecured obligations of the Company and expressly
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. The Notes will rank pari passu with any future
Senior Subordinated Indebtedness (as defined) and senior to all Subordinated
Indebtedness (as defined) of the Company.
The indenture relating to the Notes contains covenants with respect to
the Company which include limitations of indebtedness, restricted payments,
transactions with affiliates, issuance and sale of capital stock of restricted
subsidiaries, sale/leaseback transactions and mergers, consolidations or sales
of substantially all of the Company's assets. The Company was in compliance
with these covenants at February 28, 1999.
5. OTHER LONG-TERM DEBT.
Other long term debt was comprised of the following at February 28, 1998
and 1999:
1998 1999
--------- ---------
(dollars in thousands)
Hungary:
License Obligation $ 11,800 $ 13,428
Bonds Payable 2,996 2,877
Notes Payable 1,448 784
Other 178 2,551
--------- ---------
Total Other Long-Term Debt 16,422 19,640
Less: Current Maturities 1,499 835
--------- ---------
Other Long Term Debt, Net of Current Maturities $14,923 $ 18,805
========= =========
The License Obligation is payable to the Hungarian government in
Hungarian forints, by Emmis' Hungarian subsidiary in four equal annual
installments commencing November 2000. the License Obligation of $13.4 million
as of February 28, 1999, is reflected net of an unamortized discount of $1.3
million. The obligation is non-interest bearing, however, in accordance with
the license purchase agreement, a Hungarian cost of living adjustment is
calculated annually and is payable, concurrent with the principal payments, on
the outstanding obligation. the cost of living adjustment is estimated each
reporting period and is included in interest expense. Prevailing market
interest rates in Hungary exceed inflation by approximately 3%. Accordingly,
the License Obligation has been discounted at an imputed interest rate of
approximately 3% to reflect the obligation at its fair value.
The Bonds and Notes Payable are payable by Emmis' Hungarian subsidiary
to the minority shareholders of the subsidiary. The Bonds, payable in Hungarian
forints, are due on maturity at November 2004 and bear interest at the
Hungarian State Bill rate plus 3% (approximately 23.0% and 20.2% at February
28, 1998 and 1999, respectively). Interest is payable semi-annually. The Notes
Payable and accrued interest,
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payable in U.S. dollars, are due on demand and bear interest at prime plus 2%
(approximately 10.5% and 9.75% at February 28, 1998 and 1999, respectively).
6. TV PROGRAM RIGHTS PAYABLE.
Future payments required under TV program rights payable as of February
28, 1999, are as follows (in thousands):
2000 $ 9,471
2001 7,260
2002 4,944
2003 3,450
2004 2,719
2005 and thereafter 6,788
--------
34,632
Less: Current Portion of TV Program Rights Payable 9,471
--------
TV Program Rights Payable, Net of Current Portion $25,161
========
7. ACQUISITIONS
On March 31, 1997, Emmis completed its acquisition of substantially all
of the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM
(formerly 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. 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 WALC-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 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 (Slager Radio Rt.)
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. 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.
On February 1, 1998, the Company acquired all of the outstanding capital
stock of Mediatex Communications Corporation for approximately $37.4 million in
cash plus assumed liabilities of $8.0 million. 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.
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On June 5, 1998, the Company completed its acquisition of radio station
WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio,
Inc. for a cash purchase price of $141.6 million (including transaction costs)
less approximately $13.0 million for cash purchase price adjustments relating
to taxes plus $20.0 million of net current tax liabilities, $52.5 million of
deferred tax liabilities and $0.3 million of assumed liabilities associated
with the acquisition. The acquisition was accounted for as a purchase and was
financed through additional bank borrowings under its Credit Facility.
Effective July 1, 1997 through the date of closing, the Company operated
WQCD-FM under a time brokerage agreement.
On July 16, 1998, the Company completed its acquisition of substantially
all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations,
Inc. and Subsidiaries (collectively the "SF Acquisition), the seller, for a
cash purchase price of $287.3 million (including transaction costs), a $25
million promissory note due to the former owner, plus assumed program rights
payable and other liabilities of approximately $34.7 million. The Company
financed the acquisition through a $25 million promissory note (due July15,
1999, bearing interest at 8%) and borrowings under the Credit Facility. The
promissory note was paid in full in February 1999. The SF Acquisition consists
of four Fox network affiliated television stations: WLUK-TV in Green Bay,
Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and
KHON-TV in Honolulu, Hawaii (including McHale Videofilm and satellite stations
KAII-TV, Wailuka, Hawaii, and KHAW-TV, Hilo, Hawaii).
Effective October 1, 1998, the Company completed its acquisition of
substantially all of the assets of Wabash Valley Broadcasting Corporation ("the
Wabash Acquisition"), the seller, for a cash purchase price of $88.9 million
(including transaction costs), plus assumed program rights payable and other
liabilities of approximately $12.2 million. The Company financed the
acquisition through borrowings under the Credit Facility. The Wabash
Acquisition consists of WFTX-TV, a Fox network affiliated television station in
Ft. Myers, Florida, WTHI-TV a CBS network affiliated television station in
Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the
Terre Haute, Indiana area.
The appraisals used to allocate costs for the WQCD-FM Acquisition, the
SF Acquisition and the Wabash Acquisition have not been finalized.
8. 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, 1998 and 1999, assuming the acquisitions
of WXTM-FM, WKKX-FM, WTLC-FM and AM, Texas Monthly, and the WQCD Acquisition,
SF Acquisition and Wabash Acquisition all had occurred on the first day of the
year ended February 28, 1998. 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 WXTM-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, pro forma results for March through January and
actual results for February for the acquisition of Texas Monthly, pro forma
results for March through February for the SF Acquisition and Wabash
Acquisition. 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 results for the year ended February
28, 1999, include actual results for March through June 4, 1998 for the
operation of WQCD-FM under the time brokerage agreement and actual results from
June 5, 1998 through February 28, 1999 for the acquisition of WQCD-FM, pro
forma results from March through July 15, 1998 and actual results from July 16,
1998 through February 28, 1999 for the SF Acquisition, and pro forma results
from March through September and actual results from October through February
for the Wabash Acquisition. 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 amortization of television broadcast rights have been included in
the pro forma statements presented below (in thousands, except per
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share data). The appraisals used to allocate costs for the WQCD-FM Acquisition,
the SF Acquisition and the Wabash Acquisition have not been finalized.
Pro Forma
-------------------------
1998 1999
-------- --------
NET REVENUES $241,472 $263,696
Operating expenses 157,952 165,862
International business
development expenses 999 1,477
Corporate expenses 7,846 10,828
Depreciation and amortization 30,699 35,695
Non-cash compensation 1,482 4,269
Time brokerage agreement fees - -
-------- --------
OPERATING INCOME 42,494 45,565
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (48,147) (50,015)
Other income (expense), net (173) 1,680
-------- --------
Total other income (expense) (48,320) (48,335)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (5,826) (2,770)
PROVISION (BENEFIT) FOR INCOME TAXES (1,200) 2,100
-------- --------
NET INCOME (LOSS) $ (4,626) $ (4,870)
======== ========
Basic net income per share $ (0.30) $ (0.31)
======== ========
Diluted net income per share $ (0.30) $ (0.31)
======== ========
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.
9. 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, 1998 and 1999, 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, 1998 and 1999.
b. 1994 Equity Incentive Plan
Effective March 1, 1994, the shareholders of Emmis approved the 1994
Equity Incentive Plan. Under this Plan, awards equivalent to 1,000,000 shares
of common stock may be granted. The awards, which have
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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 this Plan. As of February 28, 1998 and 1999, 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,
1998 and 1999. 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. Under this Plan, awards equivalent to 650,000 shares of
common stock may be granted pursuant to employment agreements discussed in Note
10.
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 75,000 shares of Class A Common Stock are available
for grant at February 28, 1999.
e. 1997 Equity Incentive Plan
Effective March 1, 1997, the shareholders of Emmis approved the 1997
Equity Incentive Plan. Under this 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 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 this Plan. As of February 28, 1998,
there were no awards granted under this Plan. During fiscal 1999, Emmis granted
incentive and nonqualified stock options and restricted stock 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 Company,
based on their fair value at the date of grant. Under this standard, the
Company has the option of accounting for employee stock option plans as it
currently does or under the new method. The Company has elected to continue to
use the APB 25 method for accounting, but has adopted the disclosure
requirements of SFAS 123. Accordingly, compensation expense reflected in
non-cash compensation in the consolidated statements of operations related to
the plans summarized above was $2,715,000, $732,000 and $3,269,000 for the
years ended February 1997, 1998 and 1999, respectively. Had compensation
expense
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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 28,
------------------------------------------------
1997 1998 1999
------------- --------------- ------------
Net Income:
As Reported $15,440,000 $11,084,000 $1,248,000
Pro Forma $11,545,000 $8,588,000 ($2,056,000)
Basic EPS:
As Reported $1.41 $ 1.02 $.09
Pro Forma $1.06 $ .79 ($.14)
Diluted EPS:
As Reported $1.37 $ .98 $.08
Pro Forma $1.02 $ .76 ($.14)
Because the fair value method of accounting has not been applied to
options granted prior to March 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model utilizing the following weighted average
assumptions:
Year Ended February 28,
------------------------------------------------
1997 1998 1999
------------- --------------- ------------
Risk-Free Interest Rate: 6.39% 5.78% 5.21%
Expected Life (Years): 7.1 7.5 8.0
Expected Volatility: 41.56% 38.65% 42.12%
Expected dividend yields were zero for fiscal 1997, 1998 and 1999.
A summary of the status of options at February 1997, 1998 and 1999 and
the related activity for the year is as follows:
1997 1998 1999
---------------------- ---------------------- ----------------------------
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 893,888 15.88 1,232,335 23.42 1,340,630 26.95
Granted 439,862 35.54 225,200 44.06 586,500 33.14
Exercised (92,415) 10.01 (106,305) 21.09 (145,362) 21.90
Expired and other (9,000) 33.96 (10,600) 42.47 (10,000) 16.00
Outstanding at
End of Year 1,232,335 23.42 1,340,630 26.95 1,771,768 29.25
Exercisable at
End of Year 737,223 16.71 1,055,430 22.76 1,285,268 26.63
Available for Grant 1,385,150 2,671,350 2,074,850
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During the years ended February 1997, 1998 and 1999 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 1997, 1998 and 1999 is as follows:
1997 1998 1999
---------------------- ---------------------- -------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Fair Exercise Fair Exercise Fair Exercise
Value Price Value Price Value Price
----- ----- ----- ----- ----- -----
OPTIONS GRANTED WITH
AN EXERCISE PRICE:
Equal to Fair Market Value of the
Stock on the Date of Grant $ 24.46 $ 42.66 $ 22.85 $ 41.20 $ 20.74 $ 36.77
Less Than Fair Market Value of the
Stock on the Date of Grant $ 24.30 $ 15.50 $ - $ - $ 37.23 $ 15.50
During fiscal 1997 and 1999, 14,800 and 5,000 shares of nonvested stock
were granted at a weighted average grant date fair value of $37.20 and $44.75,
respectively, under employment agreements. No nonvested stock was granted
during fiscal 1998.
The following information relates to options outstanding and exercisable
at February 28, 1999:
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 31,250 3.75 3.2 years 31,250 3.75
9.90-14.85 52,900 12.30 4.6 years 52,900 12.30
14.85-19.80 602,915 15.55 7.4 years 602,915 15.55
24.75-29.70 88,925 28.88 6.6 years 88,925 28.88
29.70-34.65 442,500 33.24 9.4 years 71,000 34.50
34.65-39.60 87,678 38.50 7.0 years 87,678 38.50
39.60-44.55 148,800 44.00 7.3 years 148,800 44.00
44.55-49.50 316,800 46.64 8.4 years 201,800 45.30
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 non-cash compensation in the
consolidated statements of operations were $750,000 for the years ended
February 1997 and 1998, and $1,000,000 for the year ended February 1999.
h. 401(k) Retirement Savings Plan
Emmis sponsors two Section 401(k) retirement savings plans. One
covers substantially all nonunion employees age 18 years and older who have at
least one year of service and the other covers substantially all
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union employees that meet the same qualifications. The union plan became
effective August 1, 1998. Employees may make pretax contributions to the plans
up to 15% of their compensation, not to exceed the annual limit prescribed by
the Internal Revenue Service. Emmis may make discretionary matching
contributions to the plans in the form of shares of the Company's Class A
Common Stock. Effective March 1, 1996, Emmis began to match 50% of employee
contributions up to $2,000. Emmis' contributions to the plans totaled $273,000,
$315,000 and $599,000 for the years ended February 1997, 1998 and 1999,
respectively.
i. Defined Contribution Health and Retirement Plan
Emmis contributes to a multi-employer defined contribution health
and retirement plan for employees who are members of a certain labor union.
Amounts charged to expense related to the multi-employer plan were
approximately $297,000, $342,000 and $344,000 for the years ended February
1997, 1998 and 1999, 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.
10. COMMITMENTS AND CONTINGENCIES
a. Operating Leases
Emmis leases certain office space, tower space, equipment and
automobiles under operating leases expiring at various dates through August
2009. 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, 1999, are as follows:
Payable in Year
Ending February Payments
---------------- --------------
(In Thousands)
2000 $ 4,939
2001 4,324
2002 4,090
2003 3,826
2004 3,080
Thereafter 13,852
-------
$34,111
=======
Minimum payments have not been reduced by minimum sublease
rentals of approximately $592,000 due in the future under noncancelable
subleases.
Rent expense totaled $3,025,000, $4,512,000 and $5,945,000 for
the years ended February 1997, 1998 and 1999, respectively. Rent expense for
the year ended February 1998 and 1999 is net of sublease income of
approximately $86,000 and $148,000, respectively.
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b. Radio Broadcast Agreements
Emmis has entered into agreements to broadcast certain syndicated
programs and sporting events. Future payments related to these radio broadcast
rights are summarized as follows: Year ended February 2000 - $1,564,000, 2001 -
$1,345,000, 2002 - $1,276,000, 2003 - $761,000, 2004 - $142,000, and thereafter
- - $48,000. Expense related to these broadcast rights totaled $1,383,000,
$1,400,000 and $1,492,000 for the years ended February 1997, 1998 and 1999,
respectively.
c. Litigation
Emmis currently and from time to time is involved in litigation
incidental to the conduct of its business, but Emmis is not currently a party
to any lawsuit or proceeding which, in the opinion of management, is likely to
have a material adverse effect on the financial position or results of
operations of Emmis.
d. Employment Agreements
The Company enters into employment agreements with certain
officers and employees. These agreements generally specify base salary, along
with bonuses and grants of stock and/or stock options based on certain
criteria. Options to purchase up to approximately 100,000 shares of the
Company's Class A Common Stock may be granted over the next three years under
agreements in place as of February 28, 1999. Additionally, the Company was
negotiating several new employment contracts at February 28, 1999 which were
expected to be finalized during fiscal 2000.
e. Construction of Office Building
In connection with the acquisition of KHON-TV in Honolulu,
Hawaii, in July 1998, Emmis acquired a commitment to complete the construction
of new operating facilities, including broadcast equipment, for the station.
The project is expected to be completed in the fall of 1999 for an estimated
cost of approximately $19.0 million of which $2.7 million has been incurred
through February 28, 1999.
11. INCOME TAXES
The provision for income taxes for the years ended February 1997, 1998
and 1999, consisted of the following:
1997 1998 1999
------- ------ -----
(In Thousands)
Current:
Federal $ 7,535 $6,474 $1,247
State 1,375 1,250 -
------- ------ ------
8,910 7,724 1,247
------- ------ ------
Deferred:
Federal 1,328 (759) 3,953
State 262 235 1,000
------- ------ ------
1,590 (524) 4,953
------- ------ ------
Provision for income taxes $10,500 $7,200 $6,200
======= ====== ======
The provision for income taxes for the years ended February 1997,
1998 and 1999, differs from that computed at the Federal statutory corporate
tax rate as follows:
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1997 1998 1999
-------- ------ ------
(In Thousands)
Computed income taxes at 35% $ 9,079 $6,399 $3,166
State income tax 1,064 965 650
Foreign losses - - 1,334
Nondeductible goodwill - - 1,324
Other 357 (164) (274)
------- ------ ------
Net provision for income taxes $10,500 $7,200 $6,200
======= ====== ======
The components of deferred tax assets and deferred tax liabilities
at February 28, 1998 and 1999, are as follows:
1998 1999
-------- --------
(In Thousands)
Deferred tax assets:
Capital loss carryforwards $ 2,914 $ 439
Net operating loss carryforwards 2,587 2,142
Compensation relating to stock options 2,243 3,336
Other 2,739 2,219
Valuation allowance (2,914) (1,056)
-------- --------
Total deferred tax assets 7,569 7,080
-------- --------
Deferred tax liabilities:
Intangible assets (33,166) (88,071)
Other (1,962) (4,026)
-------- --------
Total deferred tax liabilities (35,128) (92,097)
-------- --------
Net deferred tax liability $(27,559) $(85,017)
======== ========
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, 1998 and 1999, since these loss carryforwards can
only be utilized to offset future capital gains with expiration of
approximately $730,000 in 2000, and $368,000 in 2002. The expiration of net
operating loss carryforwards approximate $692,000 in 2000, $1,486,000 in 2003,
$2,623,000 in 2004, and $2,133,000 thereafter.
12. SEGMENT INFORMATION
The Company's operations are aligned into three business segments:
Radio, Television and Publishing. These business segments are consistent with
the Company's management of these businesses and its financial reporting
structure.
The Radio segment includes all 17 of the company's radio stations. The
Radio segment derives its revenue from the sale of commercial broadcast
inventory. The Television segment consists of six television stations that
derive revenue from the sale of commercial broadcast inventory. The Company's
Publishing segment consists of four publishing entities which derive revenue
from subscriptions and the sale of print advertising inventory.
The category "Corporate and Other" represents the results of
insignificant operations and income and expense not allocated to reportable
segments.
The Company's segments operate primarily in the United States with one
radio station located in Hungary. Total revenues for the year-ended February
28, 1999 were $3.3 million and total assets as of february 28, 1998 and 1999
were $27.2 million and $20.4 million, respectively, related to the Hungarian
radio station. Total revenues for this station were not material for the year
ended February 28, 1998. The
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55
accounting policies as described in the summary of significant accounting
policies are applied consistently across segments.
The Company evaluates performance of its operating entities based on
broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes
that BCF and PCF are useful because they provide a meaningful comparison of
operating performance between companies in the industry and serve as an
indicator of the market value of a group of stations or publishing entities.
BCF and PCF are generally recognized by the broadcast and publishing industries
as a measure of performance and are used by analysts who report on the
performance of broadcasting and publishing groups. BCF and PCF do not take into
account Emmis' debt service requirements and other commitments and,
accordingly, BCF and PCF are not necessarily indicative of amounts that may be
available for dividends, reinvestment in Emmis' business or other discretionary
uses. BCF and PCF are not a measure of liquidity or of performance in
accordance with generally accepted accounting principles, and should be viewed
as a supplement to and not a substitute for our results of operations presented
on the basis of generally accepted accounting principles.
CORPORATE
YEAR ENDED FEBRUARY 28, 1999 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED
Net revenues $155,028 $ 39,623 $36,476 $ 1,709 $ 232,836
Operating expenses 84,907 26,130 31,491 820 143,348
-------- ------- ------- --------- ----------
Broadcast/publishing cash flow 70,121 13,493 4,985 889 89,488
International business
development expenses - - - 1,477 1,477
Corporate expenses - - - 10,427 10,427
Time brokerage fee 2,220 - - - 2,220
Depreciation and amortization 13,990 8,352 4,813 1,159 28,314
Non-cash compensation - - - 4,269 4,269
-------- ------- ------- --------- ----------
Operating income 53,911 5,141 172 (16,443) 42,781
Total assets 460,065 439,279 44,171 71,316 1,014,831
CORPORATE
YEAR ENDED FEBRUARY 28, 1998 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED
Net revenues $125,855 - $13,586 $ 1,142 $140,583
Operating expenses 67,646 - 12,600 924 81,170
--------- -- ------- ------- --------
Broadcast/publishing cash flow 58,209 - 986 218 59,413
International business
development expenses - - - 999 999
Corporate expenses - - - 6,846 6,846
Time brokerage fee 5,667 - - - 5,667
Depreciation and amortization 7,034 - 294 208 7,536
Non-cash compensation - - - 1,482 1,482
--------- -- ------- ------- --------
Operating income 45,508 - 692 (9,317) 36,883
Total assets 255,541 - 50,086 27,761 333,388
55
56
CORPORATE
YEAR ENDED FEBRUARY 28, 1997 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED
Net revenues $103,292 - $9,493 $ 935 $113,720
Operating expenses 52,839 - 8,957 637 62,433
--------- -- ------- ------- --------
Broadcast/publishing cash flow 50,453 - 536 298 51,287
International business
development expenses - - - 1,164 1,164
Corporate expenses - - - 5,929 5,929
Time brokerage fee - - - - -
Depreciation and amortization 5,098 - 158 225 5,481
Non-cash compensation - - - 3,465 3,465
--------- -- ------- ------- --------
Operating income 45,355 - 378 (10,485) 35,248
Total assets 168,730 - 3,652 17,334 189,716
13. 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, 1999.
c. Interest Rate Cap Agreements
The unamortized cost of interest rate cap agreements included in
the February 28, 1999 consolidated balance sheet totals $231,000. The fair
value of interest rate caps is estimated by obtaining quotations from brokers
and approximates $166,000 at February 28, 1999.
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.
14. RELATED PARTY TRANSACTIONS
Two officers of Emmis are partners in a law firm which provides legal
services to Emmis. Legal fees paid to this law firm were approximately
$296,000, $512,000 and $868,000 for the years ended February 1997, 1998 and
1999, respectively.
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15. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY
NON-GUARANTOR
Emmis conducts a significant portion of its business through
subsidiaries. The Senior Subordinated Notes are fully and unconditionally
guaranteed, jointly and severally, by certain direct and indirect subsidiaries
(the "Subsidiary Guarantors"). One of Emmis' subsidiaries does not guarantee
the Senior Subordinated Notes (the "Non-Guarantor Subsidiary"). The claims of
creditors of the Non-Guarantor Subsidiary have priority over the rights of
Emmis to receive dividends or distributions from such subsidiary.
Presented below is condensed consolidating financial information for
Emmis, the Subsidiary Guarantors and the Non-Guarantor Subsidiary as of
February 28, 1999 and 1998 and for each of the three years in the period ended
February 28, 1999.
The equity method has been used by Emmis with respect to investments in
subsidiaries. Separate financial statements for Subsidiary Guarantors are not
presented based on management's determination that they do not provide
additional information that is material to investors.
57
58
Emmis Communications Corporation
Condensed Consolidating Balance Sheet
As of February 28, 1999
(in thousands of dollars)
Eliminations
Parent and
Company Subsidiary Subsidiary Consolidating
Only Guarantors Non-Guarantor Entries Consolidated
-------- -------------- --------------- ------------ --------------
Current Assets
Cash and cash equivalents $ 2,286 $ 3,146 $ 685 $ - $ 6,117
Accounts receivable, net - 50,436 1,043 - 51,479
Current portion of TV program rights - 3,646 - - 3,646
Income tax refunds receivable - - - - -
Prepaid expenses and other 5,720 4,048 72 - 9,840
-------- -------- ------- --------- ----------
Total current assets 8,006 61,276 1,800 - 71,082
Property and equipment, net 33,769 71,342 949 - 106,060
Intangible assets, net 151 785,219 16,937 - 802,307
Investment in affiliates 856,701 - - (856,701) -
Other assets, net 31,866 7,648 702 (4,834) 35,382
-------- -------- ------- --------- ----------
Total assets $930,493 $925,485 $20,388 $(861,535) $1,014,831
======== ======== ======= ========= ==========
Current Liabilities
Current maturities of other long-
term debt $ 34 $ 16 $ 2,239 $ (1,454) $ 835
Current portion of TV program
rights payable - 9,471 - - 9,471
Accounts payable 7,527 7,739 369 - 15,635
Collection of accounts receivable on
behalf of SF Broadcasting and
Wabash Valley Broadcasting - 9,016 - - 9,016
Accrued salaries and commissions 1,262 2,719 564 - 4,545
Accrued interest 6,222 1 - - 6,223
Income taxes payable 11,790 267 - - 12,057
Deferred revenue - 7,238 - - 7,238
Other 146 4,667 - - 4,813
-------- -------- ------- --------- ----------
Total current liabilities 26,981 41,134 3,172 (1,454) 69,833
Credit Facility and Senior
Subordinated Debt 577,000 - - - 577,000
TV program rights payable, net
of current portion - 25,161 - - 25,161
Other long-term debt, net of
current portion 2,543 (45) 19,687 (3,380) 18,805
Other noncurrent liabilities (4) 3,470 - - 3,466
Minority interest - - - - -
Deferred income taxes 87,776 (2,759) - - 85,017
-------- -------- ------- --------- ----------
Total liabilities 694,296 66,961 22,859 (4,834) 779,282
Shareholders' Equity
Class A common stock 132 - - - 132
Class B common stock 26 - - - 26
Additional paid-in capital 260,344 - 4,297 (4,297) 260,344
Subsidiary investment - 637,223 - (637,223) -
Retained earnings (accumulated deficit) (24,305) 221,301 (6,120) (215,181) (24,305)
Accumulated other comprehensive income - - (648) - (648)
-------- -------- ------- --------- ----------
Total shareholders' equity 236,197 858,524 (2,471) (856,701) 235,549
-------- -------- ------- --------- ----------
Total liabilities and
shareholders' equity $930,493 $925,485 $20,388 $(861,535) $1,014,831
======== ======== ======= ========= ==========
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Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 1999
(in thousands of dollars)
Eliminations
Parent and
Company Subsidiary Subsidiary Consolidating
Only Guarantors Non-Guarantor Entries Consolidated
-------- -------------- --------------- ------------ --------------
Net revenues $ 1,709 $227,873 $ 3,254 $ - $232,836
Operating expenses 820 138,581 3,947 - 143,348
International business development expenses - 1,477 - - 1,477
Corporate expenses 10,427 - - - 10,427
Time brokerage agreement fee - 2,220 - - 2,220
Depreciation and amortization 1,159 24,336 2,819 - 28,314
Non-cash compensation 3,600 669 - - 4,269
-------- -------- ------- ------- --------
Operating income (14,297) 60,590 (3,512) - 42,781
-------- -------- ------- ------- --------
Other income (Expense)
Interest expense (33,667) (102) (3,171) 1,290 (35,650)
Other income (expense), net 74,865 (73,957) 421 585 1,914
-------- -------- ------- ------- --------
Total other income (expense) 41,198 (74,059) (2,750) 1,875 (33,736)
-------- -------- ------- ------- --------
Income (loss) before income taxes 26,901 (13,469) (6,262) 1,875 9,045
Provision (benefit) for income taxes 9,719 (3,377) (142) - 6,200
-------- -------- ------- ------- --------
17,182 (10,092) (6,120) 1,875 2,845
Extraordinary item, net of tax (1,597) - - - (1,597)
Equity in earnings (loss) of subsidiaries (14,337) - - 14,337 -
-------- -------- ------- ------- --------
Net income (loss) $ 1,248 $(10,092) $(6,120) $16,212 $ 1,248
======== ======== ======= ======= ========
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Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 28, 1999
(in thousands of dollars)
Parent Company Subsidiary Subsidiary
Only Guarantors Non-Guarantor Eliminations Consolidated
-------------- ---------- ------------- ------------ ------------
Operating Activities:
Net income $ 1,248 $ (10,092) $(6,120) $ 16,212 $ 1,248
Adjustments to reconcile net income to net cash
provided (used) by operating activities -
Extraordinary item 1,597 - - - 1,597
Depreciation and amortization of property
and equipment 779 6,886 2,040 - 9,705
Amortization of debt issuance costs and
cost of interest rate cap agreements 839 - - - 839
Amortization of intangible assets 380 17,450 779 - 18,609
Amortization of TV program rights - 3,005 - - 3,005
Provision for bad debts - 1,745 - - 1,745
Provision (benefit) for deferred income taxes 4,953 - - - 4,953
Noncash compensation 3,600 669 - - 4,269
Cash paid for TV program rights - (1,469) - - (1,469)
Equity in earnings of subsidiaries 14,337 - - (14,337) -
Intercompany (522,788) 521,699 2,543 (1,454) -
Other 103 629 - (1,875) (1,143)
(Increase) decrease in certain assets (net
of dispositions and acquisitions) -
Accounts receivable 345 (21,835) 386 - (21,104)
Prepaid expenses and other current assets (4,725) 4,070 (72) - (727)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions) -
Accounts payable 4,146 (2,057) (1,675) 1,454 1,868
Accrued salaries and commissions 236 537 564 - 1,337
Accrued interest 3,801 1 - - 3,802
Deferred revenue - (747) - - (747)
Other current liabilities (2,625) 6,320 791 - 4,486
(Increase) decrease in deposits and other assets 9,516 (6,408) 327 - 3,435
Increase (decrease) in other noncurrent liabilities 596 248 (1,431) - (587)
---------- --------- ------- -------- ----------
Net cash provided (used) by
operating activities (483,662) 520,651 (1,868) - 35,121
---------- --------- ------- -------- ----------
Investing Activities:
Acquisition of WQCD-FM - (128,550) - - (128,550)
Acquisition of SF Broadcasting - (287,293) - - (287,293)
Acquisition of Wabash Valley Broadcasting - (88,905) - - (88,905)
Purchases of property and equipment (21,363) (13,654) (2,366) - (37,383)
Other 7 654 - - 661
---------- --------- ------- -------- ----------
Net cash used in
investing activities (21,356) (517,748) (2,366) - (541,470)
---------- --------- ------- -------- ----------
Financing Activities:
Proceeds of credit facility and senior
subordinated notes 1,063,000 - - - 1,063,000
Payments on credit facility (723,500) - - - (723,500)
Purchase of interest rate cap agreements
and payment of loan fees (19,589) - - - (19,589)
Proceeds of the Company's Class A
common stock, net of transaction costs 182,640 - - - 182,640
Proceeds from exercise of stock options and
income tax benefits of certain
equity transactions 4,130 - - - 4,130
Other - - - - -
---------- --------- ------- -------- ----------
Net cash provided by
financing activities 506,681 - - - 506,681
---------- --------- ------- -------- ----------
Effect of exchange rates on cash - - - - -
Increase (decrease) in cash and cash equivalents 1,663 2,903 (4,234) - 332
Cash and cash equivalents
Beginning of year 623 243 4,919 - 5,785
---------- --------- ------- -------- ----------
End of year $ 2,286 $ 3,146 $ 685 $ $ 6,117
========== ========= ======= ======== ==========
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Emmis Communications Corporation
Condensed Consolidating Balance Sheet
As of February 28, 1998
(in thousands of dollars)
Eliminations
Parent and
Company Subsidiary Subsidiary Consolidating
Only Guarantors Non-Guarantor Entries Consolidated
--------- ---------- ------------- ------------- ------------
Current Assets
Cash and cash equivalents $ 623 $ 243 $ 4,919 $ - $ 5,785
Accounts receivable, net 345 30,346 1,429 - 32,120
Income tax refunds receivable 4,968 - - - 4,968
Prepaid expenses and other 995 7,284 - - 8,279
-------- -------- ------- --------- --------
Total current assets 6,931 37,873 6,348 - 51,152
Property and equipment, net 13,295 19,528 623 - 33,446
Intangible assets, net 529 214,797 19,232 - 234,558
Investment in affiliates 257,816 - - (257,816) -
Other assets, net 17,892 1,593 1,029 (6,282) 14,232
-------- -------- ------- --------- --------
Total assets $296,463 $273,791 $27,232 $(264,098) $333,388
======== ======== ======= ========= ========
Current Liabilities
Current maturities of other long-
term debt $ 34 $ 17 $ 1,448 $ - $ 1 ,499
Accounts payable 3,381 9,169 590 - 13,140
Accrued salaries and commissions 1,026 1,867 - - 2,893
Accrued interest 2,421 - - - 2,421
Deferred revenue - 7,985 - - 7,985
Other current liabilities 1,189 390 - - 1,579
-------- -------- ------- --------- --------
Total current liabilities 8,051 19,428 2,038 - 29,517
Credit facility and senior
subordinated debt 215,000 - - - 215,000
Other long-term debt, net of
current portion 59 28 21,118 (6,282) 14,923
Other noncurrent liabilities 1,884 595 - (1,875) 604
Minority interest - - - 1,875 1,875
Deferred income taxes 27,559 - - - 27,559
-------- -------- ------- --------- --------
Total liabilities 252,553 20,051 23,156 (6,282) 289,478
Shareholders' Equity
Class A common stock 84 - - - 84
Class B common stock 26 - - - 26
Additional paid-in capital 69,353 - 4,076 (4,076) 69,353
Subsidiary investment - 22,347 - (22,347) -
Retained earnings/accumulated deficit (25,553) 231,393 - (231,393) (25,553)
-------- -------- ------- --------- --------
Total shareholders' equity 43,910 253,740 4,076 (257,816) 43,910
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity $296,463 $273,791 $27,232 $(264,098) $333,388
======== ======== ======= ========= ========
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Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 1998
(in thousands of dollars)
Eliminations
Parent and
Company Subsidiary Consolidating
Only Guarantors Entries Consolidated
-------- ---------- ------------- ------------
Net revenues $ 1,142 $139,441 $ - $140,583
Operating expenses 924 80,246 - 81,170
International business development expenses - 999 - 999
Corporate expenses 6,846 - - 6,846
Time brokerage agreement fee - 5,667 - 5,667
Depreciation and amortization 171 7,365 - 7,536
Noncash compensation 818 664 - 1,482
-------- -------- -------- --------
Operating income (7,617) 44,500 - 36,883
-------- -------- -------- --------
Other income (expense)
Interest expense (13,766) (6) - (13,772)
Loss on donation of radio station (4,833) - - (4,833)
Other income (expense), net 15 (9) - 6
-------- -------- -------- --------
Total other income (expense) (18,584) (15) - (18,599)
-------- -------- -------- --------
Income (loss) before income taxes (26,201) 44,485 - 18,284
Provision for income taxes (10,480) 17,680 - 7,200
-------- -------- -------- --------
(15,721) 26,805 - 11,084
Equity in earnings (loss) of subsidiaries 26,805 - (26,805) -
-------- -------- -------- --------
Net income (loss) $ 11,084 $ 26,805 $(26,805) $ 11,084
======== ======== ======== ========
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Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 28, 1998
(in thousands of dollars)
Parent Company Subsidiary Subsidiary
Only Guarantors Non-Guarantor Eliminations Consolidated
-------------- ---------- ------------- ------------ ------------
Operating Activities:
Net income (loss) $ 11,084 $ 26,805 $ - $(26,805) $ 11,084
Adjustments to reconcile net income
to net cash provided (used) by
operating activities -
Depreciation and amortization of property
and equipment 155 2,425 - - 2,580
Amortization of debt issuance costs and
cost of interest rate cap agreements 2,183 - - - 2,183
Amortization of intangible assets 16 4,940 - - 4,956
Provision for bad debts 20 782 - - 802
Equity in earnings of subsidiaries (26,805) - - 26,805 -
Provision (benefit) for deferred income taxes (121) (403) - - (524)
Noncash compensation 818 664 - - 1,482
Loss on donation of radio station 4,833 - - - 4,833
Other 357 - - - 357
Intercompany (75,327) 68,642 8,560 (1,875) -
(Increase) decrease in certain assets (net
of dispositions and acquisitions) -
Accounts receivable 797 (7,757) (1,429) - (8,389)
Prepaid expenses and other current assets (5,234) 474 - - (4,760)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions) -
Accounts payable 1,021 4,058 481 - 5,560
Accrued salaries and commissions 779 553 - - 1,332
Accrued interest 2,247 - - - 2,247
Deferred revenue - 292 - - 292
Other current liabilities 1,084 (968) - - 116
(Increase) decrease in deposits and other assets (951) (6,136) (1,027) 6,282 (1,832)
Increase (decrease) in other
noncurrent liabilities (28) 196 - - 168
--------- -------- ------- -------- ---------
Net cash provided (used in)
operating activities (83,072) 94,567 6,585 4,407 22,487
--------- -------- ------- -------- ---------
Investing Activities:
Acquisition of WXTM-FM, WALC-AM
and WKKX-FM - (36,964) - - (36,964)
Acquisition of WTLC-FM and WTLC-AM - (15,336) - - (15,336)
Acquisition of Texas Monthly - (37,389) - - (37,389)
Acquisition of Cincinnati Magazine - (1,979) - - (1,979)
Acquisition of Network Indiana and AgriAmerica - (709) - - (709)
Purchases of property and equipment (13,349) (3,019) (623) - (16,991)
Initial payment for purchase of Hungarian
broadcast license - - (7,325) - (7,325)
--------- -------- ------- -------- ---------
Net cash used in investing activities (13,349) (95,396) (7,948) - (116,693)
--------- -------- ------- -------- ---------
Financing Activities:
Proceeds of credit facility 288,378 - 6,282 (6,282) 288,378
Payments on credit facility (183,928) - - - (183,928)
Payment on loan fees (4,291) - - - (4,291)
Purchase of Company's Class A
common stock (7,000) - - - (7,000)
Proceeds from exercise of stock options
and income tax benefits of certain
equity transactions 3,922 - - - 3,922
Other (156) - - 1,875 1,719
--------- -------- ------- -------- ---------
Net cash provided (used) by
financing activities 96,925 - 6,282 (4,407) 98,800
--------- -------- ------- -------- ---------
Increase (decrease) in cash and cash equivalents 504 (829) 4,919 - 4,594
Cash and cash equivalents
Beginning of year 119 1,072 - - 1,191
--------- -------- ------- -------- ---------
End of year $ 623 $ 243 $ 4,919 $ - $ 5,785
========= ======== ======= ======== =========
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Emmis Communications Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 1997
(in thousands of dollars)
Eliminations
Parent and
Company Subsidiary Consolidating
Only Guarantors Entries Consolidated
---------- ---------- ------------- ------------
Net revenues $ 935 $112,785 $ - $113,720
Operating expenses 638 61,795 - 62,433
International business development expenses - 1,164 - 1,164
Corporate expenses 5,929 - - 5,929
Depreciation and amortization 179 5,302 - 5,481
Non-cash compensation 2,702 763 - 3,465
---------- -------- -------- --------
Operating income ( 8,513) 43,761 - 35,248
---------- -------- -------- --------
Other income (expense)
Interest expense (9,573) (60) - (9,633)
Other income (expense), net 351 (26) - 325
---------- -------- -------- --------
Total other income (expense) (9,222) (86) - (9,308)
---------- -------- -------- --------
Income before income taxes (17,735) 43,675 - 25,940
Provision (benefit) for income taxes (7,094) 17,594 - 10,500
---------- -------- -------- --------
(10,641) 26,081 - 15,440
Equity in earnings of subsidiaries 26,081 - (26,081) -
---------- -------- -------- --------
Net income (loss) $ 15,440 $ 26,081 $(26,081) $ 15,440
========== ======== ======== ========
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Emmis Communications Corporation
Consolidating Statement of Cash Flows
For the Year Ended February 28, 1997
(in thousands of dollars)
Parent Company Subsidiary
Only Guarantors Eliminations Consolidated
-------------- ---------- ------------ ------------
Operating Activities:
Net income $ 15,440 $ 26,081 $(26,081) $ 15,440
Adjustments to reconcile net income
to net cash provided by
operating activities -
Depreciation and amortization of
property and equipment 161 1,478 - 1,639
Amortization of debt issuance costs and
cost of interest rate cap agreements 1,071 - - 1,071
Amortization of intangible assets 18 3,824 - 3,842
Provision of bad debts - 726 - 726
Equity in earnings of subsidiaries (26,081) - 26,081 -
Provision (benefit) for deferred income taxes - 1,590 - 1,590
Non cash compensation 2,702 763 - 3,465
Other (195) - - (195)
Intercompany 21,582 (21,582) - -
(Increase) decrease in certain current assets (net
of dispositions and acquisitions) -
Accounts receivable 615 (3,000) - (2,385)
Prepaid expenses and other current assets (517) (2,524) - (3,041)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions) -
Accounts payable 2,020 737 - 2,757
Accrued salaries and commissions (532) (1,467) - (1,999)
Accrued interest (146) - - (146)
Deferred revenue - 395 - 395
Other current liabilities (57) 83 - 26
(Increase) decrease in deposits and other assets (1,353) 455 - (898)
Increase (decrease) in other noncurrent liabilities - (925) - (925)
-------- -------- -------- --------
Net cash provided by operating activities 14,728 6,634 - 21,362
Investing Activities:
Acquisition of WXTM-FM, WALC-AM and WKKX-FM (6,600) - - (6,600)
Purchases of property and equipment (1,102) (6,457) - (7,559)
Other 240 - - 240
-------- -------- -------- --------
Net cash used in investing activities (7,462) (6,457) - (13,919)
-------- -------- -------- --------
Financing Activities:
Proceeds of credit facility 19,000 - - 19,000
Payments on credit facility (28,102) - - (28,102)
Proceeds from exercise of stock options and
income tax benefits of certain
equity transactions 1,632 - - 1,632
-------- -------- -------- --------
Net cash used in financing activities (7,470) - - (7,470)
-------- -------- -------- --------
Increase (Decrease) in cash and cash equivalents (204) 177 - (27)
Cash and cash equivalents
Beginning of year 323 895 - 1,218
-------- -------- -------- --------
End of year $ 119 $ 1,072 $ - $ 1,191
======== ======== ======== ========
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16. SUBSEQUENT EVENT - ACQUISITION
On April 1, 1999, the Company acquired substantially all the assets of
Country Sampler, Inc. for approximately $19.0 million in cash, $2.0 million
payable under contract with the principal shareholder through April 2003 and
assumed liabilities of approximately $3.4 million (the "Country Sampler
Acquisition"). The acquisition was accounted for as a purchase and was financed
through additional bank borrowings.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
-------------------------------------------- Full
May 31 Aug. 31 Nov. 30 Feb. 28 Year
------ ------- ------- ------- --------
(In thousands, except per share data)
Year ended February 28, 1998:
Net revenues $31,330 $37,008 $39,809 $32,436 $140,583
Operating income 8,091 12,002 10,160 6,630 36,883
Net income (loss) 3,368 4,672 4,079 (1,035) 11,084
Basic net income per share $0.31 $0.43 $0.38 $(0.10) $1.02
Diluted net income per share $0.30 $0.41 $0.36 $(0.10) $0.98
Year ended February 28, 1999:
Net revenues $44,619 $57,874 $71,639 $58,704 $232,836
Operating income 8,173 14,807 18,085 1,716 42,781
Income before extraordinary item 1,788 4,161 3,012 (6,116) 2,845
Net income (loss) 1,788 2,564 3,012 (6,116) 1,248
Basic earnings per share:
Income before extraordinary item $0.16 $0.27 $0.19 $(0.39) $0.20
Net Income $0.16 $0.17 $0.19 $(0.39) $0.09
Diluted earnings per share:
Income before extraordinary item $0.16 $0.26 $0.19 $(0.39) $0.19
Net income $0.16 $0.16 $0.19 $(0.39) $0.08
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REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of EMMIS
COMMUNICATIONS CORPORATION (an Indiana corporation) and Subsidiaries as of
February 28, 1999 and 1998, 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, 1999. 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
Communications Corporation and Subsidiaries as of February 28, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended February 28, 1999 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
April 30, 1999.
67
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
68
69
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors of Emmis
is incorporated by reference from the section entitled "Proposal No. 1:
Election of Directors" on pages 4-6 of the Emmis 1999 Proxy Statement and the
section entitled "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" on page 14 of the Emmis 1999 Proxy Statement.
Listed below is certain information about the executive officers of
Emmis or its affiliates who are not directors.
AGE AT YEAR FIRST
FEBRUARY 28, ELECTED
NAME POSITION 1999 OFFICER
---- -------- -------------- ---------
Richard F. Cummings Executive Vice 47 1984
President-Programming
Norman H. Gurwitz Executive Vice President-Human 51 1987
Resources and Secretary
Walter Z. Berger Executive Vice President, Treasurer 43 1999
and Chief Financial Officer (1)
- -------------
(1) Mr. Berger began serving in these positions on March 1, 1999.
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
Emmis. He became Executive Vice President--Programming in 1988.
Norman H. Gurwitz currently serves as Executive Vice President -- Human
Resources, a position he assumed in 1998. Previously he served as Corporate
Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995.
He became Secretary of Emmis in 1989 and became an Executive Vice President in
1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott &
Gurwitz.
Walter Z. Berger became Executive Vice President, Treasurer and Chief
Financial Officer of Emmis on March 1, 1999. Most recently, Mr. Berger served
as Group President of the Energy Marketing Division of LG&E Energy Corporation.
Prior to that appointment, he served as Executive Vice President and Chief
Financial Officer of LG&E Energy Corporation. From 1992 to 1996, he held
several senior financial and operating management positions at Enron
Corporation and its affiliates. Mr. Berger also spent seven years in various
financial management roles at Baker Hughes Incorporated.
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ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference
from the section entitled "Executive Compensation" on pages 6-7 and 9-11 of the
Emmis 1999 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
3-4 of the Emmis 1999 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 6 of the Emmis 1999
Proxy Statement.
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, 1999.
Reports on Form 8-K
During its last fiscal quarter, Emmis filed a report on Form 8-K on
December 2, 1998, to report its acquisition of radio station WQCD-FM in New
York City.
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:
3.1 Amended and Restated Articles of Incorporation of Emmis Communications
Corporation, as amended, incorporated by reference to Exhibit 2.3 to
Emmis' Registration Statement on Form S-1, File No. 33-73218, as amended
(the "1994 Registration Statement"), and to Exhibit 3.1 to Emmis'
Quarterly Report on Form 10-Q for the quarter ended August 31, 1998.
70
71
3.2 Amended and Restated Bylaws of Emmis Communications Corporation, as
amended, incorporated by reference to Exhibit 2.4 to Emmis' Quarterly
Report on Form 10-Q for the quarter ended May 31, 1995, and to Exhibit
3.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August
31, 1998.
3.3 Form of stock certificate for Class A Common Stock, incorporated by
reference from Exhibit 3.5 to the 1994 Registration Statement.
4.1 Indenture dated February 12, 1999 among Emmis Communications
Corporation, certain subsidiary guarantors and IBJ Whitehall Bank and
Trust Company, as trustee, including as an exhibit thereto the form of
note, incorporated by reference to Exhibit 4.1 to Emmis' Registration
Statement on Form S-4, File No. 333-74377, as amended (the "1999
Registration Statement").
4.2 Registration Rights Agreement dated as of February 12, 1999, by and
among Emmis Communications Corporation and its Subsidiary Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston
Robertson Stephens Inc., First Union Capital Markets Corp., Goldman,
Sachs & Co. and TD Securities (USA) Inc., incorporated by reference to
Exhibit 4.2 to the 1999 Registration Statement.
10.1 Emmis Communications Corporation 1986 Stock Incentive Plan, as amended,
incorporated by reference from Exhibit 10.1 to the 1994 Registration
Statement.++
10.2 Emmis Communications Corporation 1992 Stock Option Plan, incorporated by
reference from Exhibit 10.3 to the 1994 Registration Statement.++
10.3 Emmis Communications Corporation Profit Sharing Plan, incorporated by
reference from Exhibit 10.4 to the 1994 Registration Statement.++
10.4 Emmis Communications Corporation 1994 Equity Incentive Plan,
incorporated by reference from Exhibit 10.5 to the 1994 Registration
Statement.++
10.5 The Emmis Communications Corporation 1995 Non-Employee Director Stock
Option Plan, incorporated by reference from Exhibit 10.15 to Emmis'
Annual Report on Form 10-K for the fiscal year ended February 28, 1995
(the "1995 10-K").++
10.6 The Emmis Communications Corporation 1995 Equity Incentive Plan
incorporated by reference from Exhibit 10.16 to the 1995 10-K.++
10.7 Emmis Communications Corporation 1997 Equity Incentive Plan,
incorporated by reference from Exhibit 10.5 to Emmis' Annual Report on
Form 10-K for the fiscal year ended February 28, 1998 (the "1998
10-K").++
10.8 Employment Agreement dated as of March 1, 1994, by and between Emmis
Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by
reference from Exhibit 10.13 to Emmis' Annual Report on Form 10-K for
the fiscal year ended February 28, 1994.++
10.9 Employment Agreement dated as of March 1, 1999, by and between Emmis
Communications Corporation and Walter Z. Berger.* ++
10.10 Second Amended and Restated Revolving Credit and Term Loan Agreement,
and First Amendment to Second Amended and Restated Revolving Credit and
Term Loan Agreement, incorporated by reference to Exhibits 10.1 and
10.2, respectively, to Emmis' Quarterly Report on Form 10-Q for the
quarter ended August 31, 1998.
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72
10.11 Second Amendment to Second Amended and Restated Revolving Credit and
Term Loan Agreement.*
10.12 Asset Purchase Agreement dated October 31, 1997 between Emmis
Broadcasting Corporation and Zimco, Inc. (with exhibits omitted which
Emmis agrees to file supplementally upon request), incorporated by
reference from Exhibit 2 to Emmis' report on Form 8-K filed April 15,
1997.
10.13 Stock Purchase Agreement Among Emmis Broadcasting Corporation, and
Michael R. Levy, Dow Jones & Company, Inc., and Gregory Curtis, dated
February 6, 1998, incorporated by reference from Exhibit 10.14 to the
1998 10-K.
10.14 Asset Purchase Agreement by and between Emmis Broadcasting Corporation
and Wabash Valley Broadcasting Corporation, dated March 20, 1998,
incorporated by reference from Exhibit 10.15 to the 1998 10-K.
10.15 Asset Purchase Agreement by and among SF Broadcasting of Honolulu, Inc.,
SF Honolulu License Subsidiary, Inc., SF Broadcasting of New Orleans,
Inc., SF New Orleans License Subsidiary, Inc., SF Broadcasting of
Mobile, Inc., SF Mobile License Subsidiary, Inc., SF Broadcasting of
Green Bay, Inc., SF Green Bay License Subsidiary, Inc. and Emmis
Broadcasting Corporation, dated March 30, 1998, incorporated by
reference from Exhibit 10.16 to the 1998 10-K.
10.16 Asset Purchase Agreement by and among Emmis Communications Corporation,
Country Sampler, Inc. and Mark A. Nickel, dated as of February 23, 1999,
together with associated Consulting Agreement and Letter Agreement.*
21 Subsidiaries of Emmis.*
23 Consent of Accountants.*
24 Powers of Attorney.*
27 Financial Data Schedule (EDGAR-filed version only)
- --------------------
* Filed with this report.
++ Management contract or compensatory plan or arrangement.
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73
Signatures.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
EMMIS COMMUNICATIONS CORPORATION
Date: May 25, 1999 By: /s/ Jeffrey H. Smulyan
--------------------------
Jeffrey H. Smulyan
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and on the dates indicated.
SIGNATURE TITLE
Date: May 25, 1999 /s/ Jeffrey H. Smulyan President, Chairman of the Board
---------------------- and Director (Principal Executive
Jeffrey H. Smulyan Officer)
Date: May 25, 1999 /s/ Walter Z. Berger Executive Vice President, Treasurer
-------------------- and Chief Financial Officer
Walter Z. Berger (Principal Accounting Officer)
Date: May 25, 1999 Susan B. Bayh* Director
------------------
Susan B. Bayh
Date: May 25, 1999 Gary L. Kaseff* Executive Vice President, General
------------------- Counsel and Director
Gary L. Kaseff
Date: May 25, 1999 Richard A. Leventhal* Director
-------------------------
Richard A. Leventhal
Date: May 25, 1999 Greg A. Nathanson* Television Division President and
------------------- Director
Greg A. Nathanson
Date: May 25, 1999 Doyle L. Rose* Radio Division President and
------------------ Director
Doyle L. Rose
Date: May 25, 1999 Frank V. Sica* Director
------------------
Frank V. Sica
Date: May 25, 1999 Lawrence B. Sorrel* Director
-----------------------
Lawrence B. Sorrel
*By: /s/ J. Scott Enright
---------------------
J. Scott Enright
Attorney-in-Fact
73
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Emmis Communications Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of EMMIS COMMUNICATIONS CORPORATION AND
SUBSIDIARIES included in Item 8, in this Form 10-K, and have issued our report
thereon dated April 30, 1999. 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,
April 30, 1999.
75
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 28, 1999
(DOLLARS IN THOUSANDS)
Balance at Balance
Beginning At End
CLASSIFICATION Of Year Provision Write-Offs Other Of Year
- -------------- ---------- ---------- ---------- ----- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS,
Year ended February 28, 1997 $799 $726 $(705) $ - $820
Year ended February 28, 1998 820 802 (981) 705(1) 1,346
Year ended February 28, 1999 1,346 1,745 (1,393) - 1,698
(1) Represents additions to the allowance for doubtful accounts associated
with certain acquisitions.