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,
2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from
_________ to _________.
EMMIS COMMUNICATIONS CORPORATION EMMIS OPERATING COMPANY
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
charter) charter)
INDIANA INDIANA
(State of incorporation or organization) (State of incorporation or organization)
0-23264 333-62172-13
(Commission file number) (Commission file number)
35-1542018 35-2141064
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
ONE EMMIS PLAZA ONE EMMIS PLAZA
40 MONUMENT CIRCLE 40 MONUMENT CIRCLE
SUITE 700 SUITE 700
INDIANAPOLIS, INDIANA 46204 INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices) (Address of principal executive offices)
(317) 266-0100 (317) 266-0100
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value; 6.25% Series A Cumulative
Convertible Preferred Stock, $.01 par value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
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, 2002, was
approximately $1,363,568,000.
1
The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 2002, was:
47,790,845 Class A Common Shares, $.01 par value
5,100,127 Class B Common Shares, $.01 par value
0 Class C Common Shares, $.01 par value
Emmis Operating Company has 1,000 shares of common stock outstanding as of April 30, 2002, and all of these shares are owned
by Emmis Communications Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Proxy Statement for 2002 Annual Meeting Part III
2
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
PART I .................................................................................. 4
Item 1. Business............................................................... 4
Item 2. Properties............................................................. 18
Item 3. Legal Proceedings...................................................... 21
PART II .................................................................................. 22
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.................................................. 22
Item 6. Selected Financial Data................................................ 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 34
Item 8. Financial Statements and Supplementary Data........................... 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................... 85
PART III .................................................................................. 85
Item 10. Directors and Executive Officers of the Registrant..................... 85
Item 11. Executive Compensation................................................. 86
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................................... 86
Item 13. Certain Relationships and Related Transactions......................... 86
PART IV .................................................................................. 86
Item 14. Exhibits and Reports on Form 8-K....................................... 86
Signatures ................................................................................. 89
3
PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We
operate the sixth largest publicly traded radio portfolio in the United States based on total listeners. Giving effect to the
sale of our two stations in Denver, we operate eighteen FM radio stations and three AM radio stations in the United States that
serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Phoenix, St. Louis,
Indianapolis and Terre Haute, Indiana. The fifteen television stations we operate serve geographically diverse mid-sized markets
in the U.S. as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including
five with CBS, five with FOX, three with NBC, one with ABC and one with WB.
Our strategy is to selectively acquire underdeveloped media properties in desirable markets and then to create value by
developing those properties to increase their cash flow. We find such underdeveloped properties attractive because they offer
greater potential for revenue and cash flow growth than mature properties. We have been successful in acquiring these types of
media properties and improving their ratings, revenues and cash flow with our marketing focus and innovative programming
expertise. We have created top-performing radio stations which rank, in terms of primary demographic target audience share, among
the top ten stations in the New York City, Los Angeles and Chicago radio markets according to the Fall 2001 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. Since acquisition, we have
generally improved the margins of our television stations and we believe there is further room for margin improvement.
In addition to our domestic broadcasting properties, we operate news and agriculture information radio networks in Indiana,
publish Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati, and Country Sampler and related magazines, have a
59.5% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos Aires, Argentina.
We also engage in various businesses ancillary to our broadcasting business, such as consulting and broadcast tower leasing.
The following discussion pertains to Emmis Communications Corporation ("ECC") and its subsidiaries (collectively, "Emmis" or
the "Company") and to Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a wholly owned subsidiary of
ECC in connection with the Company's reorganization (see Note 1c. to our consolidated financial statements) on June 22, 2001.
Unless otherwise noted, all disclosures contained in this Form 10-K apply to Emmis and EOC.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting, enhancing the performance of our broadcast and
publishing properties, and distinguishing ourselves through the quality of our operations. Our strategy is to maximize
shareholder value by focusing on the following principles:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets and innovative programming developed to target
specific demographic groups are the most important determinants of individual radio and television station success. We conduct
extensive market research to identify underserved segments of the markets we serve or to assure that we are meeting the needs of
our target audience. Utilizing the research results, we concentrate on providing a focused programming format carefully tailored
to the demographics of our markets and our audiences' preferences.
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and national sales efforts based on advertiser demand and
our programming compared to the competitive formats within each market. We provide our sales force with extensive training and the
technology for sophisticated inventory management techniques, which provide frequent price adjustments based on regional and
market conditions. Furthermore, additional company resources have been allocated to locate, hire, train and retain top sales
people. In fiscal 2002, we implemented the Emmis Sales Assault Plan (ESAP), a company-wide initiative geared toward attracting
and developing sales leaders in the radio, television and magazine industries. Through February 28, 2002, nearly 100 sales people
were added to our workforce under this program, which was incremental to hirings in the normal course of business.
4
DEVELOP STRONG LOCAL STATION IDENTITIES FOR OUR TELEVISION STATIONS. We strive to create television stations with a strong
local "brand" within the station's market, allowing viewers and advertisers to identify with the station while building the
station's franchise value. We believe that aggressive promotion and strong local station management, strategies which we have
found successful in our radio operations, are critical to the creation of strong local television stations as well. Additionally,
we believe that the production and broadcasting of local news and events programming can be an important link to the community and
an aid to the station's efforts to expand its viewership. Local news and events programming can provide access to advertising
sources targeted specifically to the local or regional community. We believe that strong local news generates high viewership and
results in higher ratings both for programs preceding and following the news.
PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. We have built our portfolio by
selectively acquiring underdeveloped media properties in desirable markets at reasonable purchase prices where our experienced
management team has been able to enhance value. We intend to pursue acquisitions of radio stations, where we believe we can
increase broadcast cash flow, in our current markets. We will also consider acquisitions of individual radio stations or groups
of radio stations in new markets where we expect we can achieve a leadership position. We believe that continued consolidation in
the radio broadcasting industry will create attractive acquisition opportunities as the number of potential buyers for radio
assets declines due to government regulations on the number of stations a company can own in one market. We believe that
attractive acquisition opportunities are also increasingly available in the television broadcasting industry. We intend to
evaluate acquisitions of magazine publishing properties that present opportunities to capitalize on our management expertise to
enhance cash flow at attractive purchase price multiples with minimal capital requirements.
ENCOURAGE A PERFORMANCE BASED, ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business
and that much of its success is the result of the efforts of regional and local management and staff. We have attracted and
retained an experienced team of broadcast professionals who understand the viewing and listening preferences, demographics and
competitive opportunities of their particular market. Our decentralized approach to station management gives local management
oversight of station spending, long-range planning and resource allocation at their individual stations, and rewards all employees
based on those stations' performance. In addition, we encourage our managers and employees to own a stake in the company, and
over 95% of all full-time employees have an equity ownership position in Emmis. We believe that our performance based,
entrepreneurial management approach has created a distinctive corporate culture, making Emmis a highly desirable employer in the
broadcasting industry and significantly enhancing our ability to attract and retain experienced and highly motivated employees and
management.
5
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 (2001 ed.). We own a 40% equity interest in the publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic
Target" is the ranking of the station among all radio stations in its market based on the Fall 2001 Arbitron Survey. A "t"
indicates the station tied with another station for the stated ranking. "Station Audience Share" represents a percentage generally
computed by dividing the average number of persons over age 12 listening to a particular station during specified time periods by
the average number of such persons for all stations in the market area as determined by Arbitron.
RANKING IN
STATION MARKET PRIMARY PRIMARY STATION
AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
- ---------------- ----------- ---------------------- ---------------- ---------------- ------------
Los Angeles, CA 1
KPWR-FM Contemporary Hit/Urban 12-24 1 4.0
KZLA-FM Country 25-54 17t 2.2
New York, NY 2
WQHT-FM Contemporary Hit/Urban 12-24 1 5.7
WQCD-FM Contemporary Jazz 25-54 4 3.4
WRKS-FM Classic Soul/Smooth R&B 25-54 12t 2.7
Chicago, IL 3
WKQX-FM Alternative Rock 18-34 4 2.8
Phoenix, AZ 14
KTAR-AM News/Talk/Sports 35-64 1 6.8
KKFR-FM Contemporary Hit/Urban 18-34 2 4.4
KKLT-FM Soft Adult/Contemporary 25-54 7 3.7
KMVP-AM Sports 25-54 24t 0.4
St. Louis, MO 18
KSHE-FM Album Oriented Rock 25-54 3 4.5
KPNT-FM Alternative Rock 18-34 1 4.1
KIHT-FM 70's Rock 25-54 6 3.3
WMLL-FM 80's Rock 18-34 13 1.8
KFTK-FM Talk 25-54 21 0.8
Indianapolis, IN 31
WIBC-AM News/Talk/Sports 35-64 4 8.9
WYXB-FM Soft Adult/Contemporary 25-54 3t 5.6
WNOU-FM Contemporary Hit 18-34 4 5.5
WENS-FM Adult Contemporary 25-54 8 3.8
Terre Haute, IN 171
WTHI-FM Country 25-54 1 20.5
WWVR-FM Classic Rock 25-54 2 12.1
In addition to our other domestic 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.
We also have a 59.5% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos
Aires, Argentina.
6
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 2002. Rankings are based
on the relative size of a station's market among the 210 generally recognized Designated Market Areas ("DMAs"), as defined by
Nielsen. "Number of Stations in Market" represents the number of television stations ("Reportable Stations") designated by Nielsen
as "local" to the DMA, excluding public television stations and stations which do not meet minimum Nielsen reporting standards
(i.e., a weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to midnight time
period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by
Nielsen from 9:00 a.m. to midnight, Sunday through Saturday during November 2001. "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 AFFILIATION
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE EXPIRATION
- -------------- ---------------------- ------- --------------- ------------- ---------- ----------- --------------
WKCF-TV Orlando, FL 20 WB/18 6 4t 7 December 31, 2009
KOIN-TV Portland, OR 23 CBS/6 6 2t 12 September 18, 2002(2)
WVUE-TV New Orleans, LA 43 Fox/8 7 3 8 March 5, 2006
KRQE-TV Albuquerque, NM 48 CBS/13 7 3 10 September 18, 2002(2)
WSAZ-TV Huntington, WV-
Charleston, WV 61 NBC/3 4 1 19 October 1, 2002 (2)
WALA-TV Mobile, AL-
Pensacola, FL 63 Fox/10 5 4 10 September 1, 2005
KSNW-TV Wichita, KS 65 NBC/3 4 2 15 September 1, 2005
WLUK-TV Green Bay, WI 69 Fox/11 6 2t 15 November 1, 2005
KGMB-TV (1) Honolulu, HI 72 CBS/9 5 2 13 September 18, 2002(2)
KHON-TV (1) Honolulu, HI 72 Fox/2 5 1 14 August 2, 2006
KGUN-TV Tucson, AZ 73 ABC/9 7 2t 12 February 6, 2005
KMTV-TV Omaha, NE 75 CBS/3 5 2 15 September 18, 2002(2)
WFTX-TV Fort Myers, FL 76 Fox/36 4 3t 9 N/A
KSNT-TV Topeka, KS 138 NBC/27 4 2 12 September 1, 2005
WTHI-TV Terre Haute, IN 145 CBS/10 3 1 22 December 31, 2005
(1) We are currently operating KGMB-TV under a temporary waiver issued by the FCC. We may be required to sell one of these
stations. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
(2) We are currently in negotiations to extend or renew this affiliation agreement and expect the extension or renewal to be
on terms that are reasonably acceptable to us.
Emmis also owns and operates nine satellite stations that primarily re-broadcast the signal of certain of our local stations.
A local station and its satellite station are considered one station for FCC and multiple ownership purposes, provided that the
stations are in the same market.
Each of our television stations is affiliated with CBS, NBC, ABC, Fox or WB (each a "Network") pursuant to a written network
affiliation agreement, except WFTX in Ft. Myers, FL, which is affiliated with Fox pursuant to an oral affiliation agreement. Each
affiliation agreement provides the affiliated television station with the right to rebroadcast all programs transmitted by the
Network with which the television station is affiliated. In return, the Network has the right to sell a substantial portion of
the advertising time during such broadcasts.
The long established networks (ABC, CBS and NBC) have historically paid the affiliated station to broadcast the network's
programming. This network compensation payment varies depending on the time of day that a station broadcasts the network
programming. Typically, prime-time programming generates the highest hourly network compensation payments. In the recent years,
however, ABC, CBS and NBC have begun to eliminate or sharply reduce compensation payments to stations for clearance of network
programming. In some cases, networks have undertaken to cut compensation when a station is to be sold and the affiliation
agreement is to be assigned or transferred, or when an old affiliation agreement has expired. The more recently established
networks (Fox and WB) generally pay little or no cash compensation for the clearance of network programming. They tend, however,
to offer the affiliated station more advertising availability for local sale within network programming than do the long
established networks.
In the twelve months ended February 2000, 2001 and 2002, we received approximately $1.9 million, $2.5 million and $4.6 million
in network compensation payments, which represented less than 1% of our total net revenues in each year.
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PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Monthly
Paid
Circulation
------------
Regional Magazines:
Texas Monthly 300,000
Los Angeles 174,000
Atlanta 68,000
Indianapolis Monthly 44,000
Cincinnati Magazine 28,000
Specialty Magazines*:
Country Sampler and Country Marketplace 426,000
* Our specialty magazines are circulated bimonthly.
INTERNET AND NEW TECHNOLOGIES
We believe that the development and explosive growth of the Internet present not only a challenge, but an opportunity for
broadcasters and publishers. The primary challenge is increased competition for the time and attention of our listeners, viewers
and readers. The opportunity is to further enhance the relationships we already have with our listeners, viewers and readers by
expanding products and services offered by our stations and magazines. For that reason, we worked with other media companies to
put together a local media internet venture (LMIV), which provides content, website development and hosting services for our radio
stations. In addition, we have individuals at each of our properties dedicated to website maintenance and generating revenues
from the property's website.
We believe that there are opportunities to improve and expand our television operations utilizing new technologies such as
those that capitalize on the digital spectrum and the Internet. Along with several other major television broadcasters and local
stations, we have invested in iBlast Networks, the nation's largest network for over-the-air distribution of digital content,
applications and services.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the communities we serve. To that end, each of our stations
participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable
organizations that have been the beneficiaries of our marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, United Way's September 11th Fund, The March of Dimes, American Cancer Society, Riley Children's Hospital and
research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In addition to our
planned activities, our stations and magazines take leadership roles in community responses to natural disasters, such as
commercial-free news broadcasts covering the events of September 11th.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry organizations. Our senior managers have served in various
capacities with industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising
Bureau, the Radio Futures Committee, the Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding members of
the Radio Operators Caucus. In addition, our managers have been voted Radio President of the Year and General Manager of the Year,
and at various times we have been voted Most Respected Broadcaster in polls of radio industry chief executive officers and
managers.
8
COMPETITION
Radio and television broadcasting stations compete with the other broadcasting stations in their respective market areas, as
well as with other advertising media such as newspapers, magazines, outdoor advertising, transit advertising, the Internet and
direct mail marketing. Cable systems generally do not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that otherwise would have been offered to local television stations.
Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market (e.g.,
New York) does not generally compete with stations in other markets (e.g., Chicago). In each of our markets, our stations face
competition from other stations with substantial financial resources, including stations targeting the same demographic groups.
In addition to management experience, factors which are material to competitive position include the station's rank in its market
in terms of the number of listeners or viewers, authorized power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive
position with programming and promotional campaigns aimed at the demographic groups targeted by our stations, and through sales
efforts designed to attract advertisers that have done little or no broadcast advertising by emphasizing the effectiveness of
radio and television advertising in increasing the advertisers' revenues. Changes in the policies and rules of the FCC permit
increased joint ownership and joint operation of local stations. Those stations taking advantage of these joint arrangements
(including our New York, Los Angeles, Phoenix, St. Louis, Indianapolis and Terre Haute clusters) may in certain circumstances have
lower operating costs and may be able to offer advertisers more attractive rates and services. Although we believe that each of
our stations can compete effectively in its market, there can be no assurance that any of our stations will be able to maintain or
increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, some barriers to entry exist. The operation of a broadcasting
station in the United States requires a license from the FCC, and the number of stations that can operate in a given market is
limited by the availability of the frequencies that the FCC will license in that market, as well as by the FCC's multiple
ownership rules regulating the number of stations that may be owned and controlled by a single entity.
The broadcasting industry historically has grown in terms of total revenues despite the introduction of new technology for the
delivery of entertainment and information, such as cable television, the Internet, satellite television, audio tapes and compact
discs. We believe that radio's portability in particular makes it less vulnerable than other media to competition from new
methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction
in the future of any new media technology will not have an adverse effect on the radio or television broadcasting industry.
ADVERTISING SALES
Our stations and magazines 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 or
magazine'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. During the twelve months ended February 28,
2002, approximately 27% of our total net revenues were derived from national sales and 73% were derived from local and regional
sales. For the year ended February 28, 2002, our radio stations derived a higher percentage of their revenues from local and
regional sales (79%) than our television (63%) and publishing entities (76%).
EMPLOYEES
As of February 28, 2002 Emmis had approximately 2,500 full-time employees and approximately 550 part-time employees. We have
approximately 215 employees at various radio and television stations represented by unions. We consider relations with our
employees to be good.
9
FEDERAL REGULATION OF BROADCASTING
Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission (the "FCC") under
the Communications Act of 1934, as amended (and, as amended by the Telecommunications Act of 1996 (the "1996 Act") (the
"Communications Act"). Television or radio broadcasting is prohibited except in accordance with a license issued by the FCC upon
a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power
to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the
Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate broadcast licenses
for television and radio stations in such manner as will provide a fair, efficient and equitable distribution of service
throughout the United States. The FCC determines the operating frequency, location and power of stations; regulates the equipment
used by stations; and regulates numerous other areas of television and radio broadcasting pursuant to rules, regulations and
policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment
of a broadcast license or the transfer of control of an entity holding such a license without the prior approval of the FCC.
Under the Communications Act, the FCC also regulates certain aspects of the operation of cable television systems and other
electronic media that compete with broadcast stations.
The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies.
Reference should be made to the Communications Act as well as FCC rules, public notices and rulings for further information
concerning the nature and extent of federal regulation of radio and television stations. Other legislation has been introduced
from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new
regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or new or
amended FCC regulations will be adopted or what their effect would be on Emmis.
10
LICENSE RENEWAL. Radio and television stations operate pursuant to broadcast licenses that are ordinarily granted by the FCC for
maximum terms of eight years and are subject to renewal upon application to the FCC. Our licenses currently have the following
expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 2004
WIBC-AM (Indianapolis) August 1, 2004
WNOU-FM (Indianapolis) August 1, 2004
WYXB-FM (Indianapolis) August 1, 2004
WTHI-FM (Terre Haute) August 1, 2004
WWVR-FM (Terre Haute) August 1, 2004
WSAZ-TV (Huntington) October 1, 2004
WKQX-FM (Chicago) December 1, 2004
WMLL-FM (St. Louis) December 1, 2004
KSHE-FM (St. Louis) February 1, 2005
WFTX-TV (Fort Myers) February 1, 2005
WKCF-TV (Orlando) February 1, 2005
KFTK-FM (St. Louis) February 1, 2005
KIHT-FM (St. Louis) February 1, 2005
KPNT-FM (St. Louis) February 1, 2005
WALA-TV (Mobile) April 1, 2005
WVUE-TV (New Orleans) June 1, 2005
WTHI-TV (Terre Haute) August 1, 2005
KKLT-FM (Phoenix) October 1, 2005
KKFR-FM (Phoenix) October 1, 2005
KTAR-AM (Phoenix) October 1, 2005
KMVP-AM (Phoenix) October 1, 2005
KPWR-FM (Los Angeles) December 1, 2005
WLUK-TV (Green Bay) December 1, 2005
KZLA-FM (Los Angeles) December 1, 2005
KREZ-TV (Durango) April 1, 2006
WQHT-FM (New York) June 1, 2006
WQCD-FM (New York) June 1, 2006
WRKS-FM (New York) June 1, 2006
KSNW-TV (Wichita) June 1, 2006
KMTV-TV (Omaha) June 1, 2006
KSNT-TV (Topeka) June 1, 2006
KSNG-TV (Garden City) June 1, 2006
KSNC-TV (Great Bend) June 1, 2006
KSNK-TV (McCook-Oberlin) June 1, 2006
KRQE-TV (Albuquerque) October 1, 2006
KGUN-TV (Tucson) October 1, 2006
KBIM-TV (Roswell) October 1, 2006
KHON-TV (Honolulu) February 1, 2007
KAII-TV (Maui) February 1, 2007
KHAW-TV (Hawaii) February 1, 2007
KOIN-TV (Portland) February 1, 2007
KGMB-TV (Honolulu) February 1, 2007
KGMD-TV (Hawaii) February 1, 2007
KGMV-TV (Maui) February 1, 2007
11
Under the Communications Act, at the time an application is filed for renewal for a station license, parties in interest, as
well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and
urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC
concludes on its own motion) that there is a "substantial and material" question as to whether grant of the renewal application
would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine
whether the renewal application should be granted. The Communications Act provides for the grant of a renewal application upon a
finding by the FCC that the licensee:
o has served the public interest, convenience and necessity;
o has committed no serious violations of the Communications Act or the FCC rules; and
o has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny the renewal application, and only then may the FCC consider competing
applications for the same frequency. In a vast majority of cases, the FCC renews a broadcast license even when petitions to deny
have been filed against the renewal application.
REVIEW OF OWNERSHIP RESTRICTIONS. The 1996 Act requires the FCC 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 first biennial review concluded on
June 20, 2000. In its first biennial review report, the FCC stated its intention to commence several separate proceedings to
examine various ownership rules. The upcoming 2002 biennial review will generate similar proceedings.
RADIO OWNERSHIP. Under FCC rules, with limited exceptions, the number of radio stations that may be owned by one entity in a
given radio market is dependent upon the number of commercial radio stations in that market:
o if the market has 45 or more commercial radio stations, one entity may own up to eight stations, not more than five of
which may be in the same service (AM or FM);
o if the market has between 30 and 44 commercial radio stations, one entity may own up to seven stations, not more than
four of which may be in the same service;
o if the market has between 15 and 29 commercial radio stations, a single entity may own up to six stations, not more than
four of which may be in the same service; and
o if the market has fourteen or fewer commercial radio stations, one entity may own up to five stations, not more than
three of which may be in the same service, except that one entity may not own more than fifty percent of the stations in the
market.
Each of the markets in which our radio stations are located has at least 15 commercial radio stations.
The FCC has been aggressive in examining issues of market concentration when considering radio station acquisitions, even where
the numerical limits described above are not violated. In some instances, the FCC has delayed its approval of proposed radio
station purchases because of market concentration concerns, and in one recent case, the FCC ordered an evidentiary hearing to
determine whether a proposed transaction would result in excessive concentration. Additionally, in its biennial review report,
the FCC stated its intention to launch a proceeding to examine possible revisions to the manner in which the FCC counts stations
and defines a radio "market" for purposes of determining compliance with the local radio multiple ownership restrictions. The FCC
initiated the proceeding in December 2000. In November 2001 the FCC subsumed this proceeding into a more comprehensive proceeding
to review all aspects of the agency's local radio multiple ownership rules, including, among other things, whether it may or
should modify its local radio multiple ownership rules to address concerns of undue market concentration. The FCC has also
requested comment on future regulatory treatment of radio time brokerage agreements (also known as "local marketing agreements" or
"LMA's") and radio joint sales agreements.
12
TELEVISION OWNERSHIP. Pursuant to the 1996 Act, the FCC substantially revised its local television ownership rules (including
its television "duopoly" rule and radio/television cross-ownership rule) in an August 2000 decision, as modified by a January 2002
reconsideration order. The FCC's revised television duopoly rule permits an entity to own two or more television stations in
separate Designated Market Areas ("DMAs"). The rule also permits an entity to own two or more television stations in the same DMA
if:
o the coverage areas of the stations do not overlap, or
o at least eight, independently-owned and -operated full-power non-commercial and commercial operating stations (known as
"voices") will remain in the market post-merger, and one of the two commonly-owned stations is not among the top four
television stations in the market (based on audience share ratings).
The Commission will consider permanent waivers of its television duopoly rule where one of the stations is:
o a "failed station," i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding;
o a "failing station," i.e., having a low audience share and financially struggling; or
o an unbuilt facility, where the permittee has made substantial progress towards constructing the facility.
The television duopoly rule was appealed to the United States Court of Appeals for the District of Columbia Circuit ("D.C.
Circuit"). In April 2002 the D.C. Circuit issued a decision remanding the rule to the FCC for further consideration. The court
found that the FCC had not justified excluding media other than television stations as "voices" to be counted for purposes of
determining compliance with the rule.
Our acquisition of the Lee Enterprises stations required a waiver of the television duopoly rule because the signals of KHON-TV
and KGMB-TV (one of the Lee Enterprises stations) overlap, the stations serve the same market, and both stations are rated among
the top four in that market. In approving the acquisition, the FCC granted a temporary waiver of the rule, ordering that an
application for divestiture of either KHON-TV or KGMB-TV (plus associated "satellite" stations) be filed on or before April 1,
2001; that deadline was subsequently extended at our request to April 1, 2002. We have filed a request for a further extension to
and including April 1, 2003. That request has been opposed by a Honolulu broadcaster, and the FCC has required us to file
additional information concerning our divestiture efforts, which we have done. The FCC has extended our waiver to and including
July 1, 2002, pending its review of the information we have submitted. In addition to responding to the FCC's request for
information, we have filed a request for interim relief, asking that the divestiture requirement be stayed, pending review of the
duopoly rule that will be undertaken pursuant to the court remand described above and the 2002 biennial review. We cannot predict
whether either the extension request or the request for interim relief will be granted.
The FCC's revised radio/television cross-ownership rule generally permits the common ownership of the following combinations in
the same market, to the extent permitted under the FCC's television duopoly rule:
o up to two commercial television stations and six commercial radio stations or one commercial television station and seven
commercial radio stations in a market where at least 20 independent media voices will remain post-merger;
o up to two commercial television stations and four commercial radio stations in a market where at least 10 independent
media voices will remain post-merger; and
o two commercial television stations and one commercial radio station in a market regardless of the number of independent
media voices that will remain post-merger.
The Commission will consider permanent waivers of its revised radio/television cross-ownership rule only if one of the stations is
a "failed station."
13
Pursuant to the 1996 Act, the FCC also revised its restriction on the national ownership of television stations in an August
2000 decision, as reaffirmed by a January 2002 order. The revised FCC rules restrict the ownership of television stations on a
nationwide basis to stations reaching, in the aggregate, no more than 35 percent of the total national audience. In response,
certain TV group owners filed comments with the FCC and/or appeals in the D.C. Circuit seeking elimination, or at least
relaxation, of this limit. In February 2002, the D.C. Circuit issued a decision requiring the FCC to initiate further proceedings
to justify its decision to retain the 35 percent national television reach limitation. In the same decision, the court also
vacated the FCC's rule prohibiting common ownership of a television station and a cable television system in the same market. In
early April 2002, the FCC granted Viacom/CBS a stay of the May 2002 deadline that the FCC had set for the network to divest
certain of its television stations in order to come into compliance with the 35 percent cap; the stay will remain in effect until
one year after the FCC completes review of the "national cap" as required by the court's decision. Fox has obtained a similar
stay. The FCC and certain private parties have asked the court to reconsider its decision, arguing in part that the decision
imposes too stringent a standard on the Commission for retention of existing rules in the context of the agency's biennial
reviews.
Current FCC rules also prohibit common ownership of a daily newspaper and a radio or television station in the same market.
Pursuant to its biennial review report, the FCC has initiated a proceeding requesting comment on whether to eliminate, or at least
relax, this restriction.
We cannot predict the ultimate outcome of the proceedings described above, future biennial reviews or other agency or
legislative initiatives or the impact, if any, that they will have on our business.
=
ALIEN OWNERSHIP. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its
capital stock is owned or voted by aliens or their representatives, a foreign government or representative thereof, or an entity
organized under the laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides
that no FCC license may be granted to an entity directly or indirectly controlled by another entity of which more than one-fourth
of its capital stock is owned or voted by Non-U.S. Persons if the FCC finds that the public interest will be served by the denial
of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the
grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on
alien ownership apply in modified form to other types of business organizations, including partnerships and limited liability
companies. Our Amended and Restated Articles of Incorporation and Code of By-Laws authorize the Board of Directors to prohibit
such restricted alien ownership, voting or transfer of capital stock as would cause Emmis to violate the Communications Act or FCC
regulations.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC requires the "attribution" of broadcast licenses
held by a broadcasting company to certain of the company's stockholders, officers or directors, such that there would be a
violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than
the permitted number of stations or a prohibited combination of media outlets in the same market. The FCC's attribution rules
generally deem the following relationships and interests to be attributable for purposes of the FCC's ownership restrictions:
o all officers and directors of a licensee and its (in)direct parent(s);
o voting stock interests of at least five percent;
o stock interests of at least 20 percent, if the holder is a passive institutional investor (i.e., investment companies,
insurance companies, banks);
o any equity interest in a limited partnership or limited liability company where the limited partner or member is
"materially involved" in the media-related activities of the LP or LLC;
o equity and/or debt interests which, in the aggregate, exceed 33 percent of the total asset value of a station or other
media entity (the "equity/debt plus policy"), if the interest holder supplies more than 15 percent of the station's total
weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a
same-market media entity (i.e., broadcast company or newspaper).
To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable,
the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each
non-controlling link in a multi-corporation ownership chain.
14
In the January 2001 attribution reconsideration order, the FCC eliminated its "single majority shareholder exemption" for
purposes of the broadcast attribution rules. The exemption had provided that, in cases where one person or entity (such as
Jeffrey H. Smulyan in the case of Emmis) held more than 50 percent of the combined voting power of the common stock of a
broadcasting company, a minority shareholder of the company generally would not be deemed to hold an attributable interest in the
company. Although the FCC eliminated the single majority shareholder exemption, it grandfathered minority interests in
broadcasting companies with single majority shareholders where the interests were acquired prior to December 14, 2000 (the
adoption date of the January 2001 reconsideration order). The FCC's decision to eliminate the single majority shareholder
exemption was called into question by a recent federal court decision, which reversed and remanded the FCC's decision to eliminate
the corresponding exemption for purposes of the cable television attribution rules. In light of that decision, the Commission
initiated a proceeding to review the single majority shareholder exemption in both the cable and broadcast contexts. The FCC also
has issued an order suspending enforcement of the elimination of the single majority shareholder exemption for the broadcast and
MDS industries pending resolution of the cable ownership/attribution proceeding. Thus, the single majority shareholder exemption
is still technically in force.
Should the FCC ultimately eliminate the exemption, any minority interests in Emmis acquired on or after December 14, 2000, will
not be exempt from attribution, despite Mr. Smulyan's majority interest. Moreover, in the event that Mr. Smulyan no longer holds
more than 50 percent of the voting power, the interests of grandfathered minority shareholders which had theretofore been
considered nonattributable would become attributable, such that any other media interests held by these shareholders would be
combined with Emmis' media interests for purposes of determining compliance with FCC ownership rules. Mr. Smulyan's level of
voting control could decrease to or below 50 percent as a result of transfers of common stock pursuant to agreement or conversion
of the Class B Common Stock into Class A Common Stock. In the event of noncompliance with the FCC's attribution rules, steps
required to achieve compliance could include divestitures by either the shareholder or Emmis, as the situation dictates. Further,
an attributable interest of any shareholder (including grandfathered minority interests) in another broadcast station or other
media entity in a market where Emmis owns or seeks to acquire a station is still subject to review by the FCC under its
"equity/debt plus policy," and could result in Emmis being unable to obtain one or more FCC authorizations needed to conduct its
broadcast business or FCC consents necessary for future acquisitions. Conversely, Emmis' media interests could operate to
restrict other media investments by shareholders having or acquiring an interest in Emmis.
ASSIGNMENTS AND TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer
of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC
considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the
"character" of the licensee and those persons holding attributable interests therein, compliance with the Communications Act's
limitations on alien ownership as well as other statutory and regulatory requirements. When evaluating an assignment or transfer
of control application, the FCC is prohibited from considering whether the public interest might be served by an assignment of the
broadcast license or transfer of control of the licensee to a party other than the assignee or transferee specified in the
application.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s,
the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of
certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be
required to present programming that is responsive to community problems, needs and interests and to maintain certain records
demonstrating such responsiveness. Federal law prohibits the broadcast of obscene material and regulates the broadcast of
indecent material, which is subject to enforcement action by the FCC. Complaints from listeners concerning a station's
programming often will be considered by the FCC when it evaluates the licensee's renewal applications, although such complaints
may be filed by concerned parties and considered by the FCC at any time. Stations also must pay regulatory and application fees
and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising,
sponsorship identification, contest and lottery advertisements, and technical operations, including limits on radio frequency
radiation.
In 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). Certain
provisions of this law, such as signal carriage and retransmission consent, have a direct effect on television broadcasting.
15
In April 1997, the FCC adopted rules that require television broadcasters to provide digital television ("DTV") to consumers.
The FCC also adopted a table of allotments for DTV, which assigns eligible broadcasters a second channel on which to provide DTV
service. The FCC's DTV allotment plan is based on the use of a "core" DTV spectrum between channels 2-51. Although the
Communications Act mandates that each television station return one of its two channels to the FCC by the end of 2006, the
Balanced Budget Act of 1997 may effectively extend the transition deadline in some markets by allowing broadcasters to keep both
their analog and digital licenses until at least 85 percent of television households in their respective markets can receive a
digital signal. Local zoning laws and the lack of qualified tall-tower builders to construct the facilities necessary for DTV
operations, among other factors, including the pace of DTV production and sales, may cause delays in the DTV transition. The FCC
has announced that it will review the progress of DTV every two years and make adjustments to the 2006 target date, if necessary.
The FCC is also considering cable operators' obligations to carry the digital signals of broadcast television stations, including
the obligations that should exist during the DTV transition period, when broadcasters' analog and digital signals will be
operating simultaneously.
Television broadcasters are allowed to use their DTV channels according to their best business judgment, provided that they
continue to offer at least one free programming service that is at least comparable to today's analog service. Digital services
and programming can include multiple standard definition program channels, data transfer, subscription video, interactive
materials, and audio signals (so-called "ancillary" services). The FCC has imposed a fee of five percent of the annual gross
revenues for television broadcasters' use of the DTV spectrum to offer ancillary services. The form and amount of these fees may
have a significant effect on the profitability of such services. Broadcasters will not be required to air "high definition"
programming or, initially, to simulcast their analog programming on the digital channel. Affiliates of ABC, CBS, NBC and Fox in
the top 10 television markets were required to be on the air with a digital signal by May 1, 1999, and affiliates of those
networks in markets 11-30, including KOIN-TV, were required to be on the air with a digital signal by November 1, 2000; KOIN-TV
complied with this deadline. The remaining commercial stations, including all other television stations owned by Emmis, were
required to file DTV construction permit applications by November 1, 2000, and were required to be on the air with a digital
signal by May 1, 2002, absent an extension on a station-by-station basis. All Emmis' stations met the November 1, 2000,
application deadline. Stations WALA, WKCF, and WFTX met the May 1, 2002 on-air deadline, and the deadline for all other Emmis
stations has been extended by the FCC to and including November 1, 2002. Additionally, all of the Emmis stations filed timely
applications to "maximize" (expand the coverage of) the DTV facilities in those cases where it was deemed appropriate to protect
the stations from interference from low power television broadcasters.
In January 2001, the FCC issued a further order on DTV transition issues, setting a number of deadlines for commercial
broadcasters. By the end of December 2002, commercial stations with both analog and digital channel assignments within the DTV
core spectrum (channels 2-51) must elect the channel they will use for broadcasting after the transition is complete. By the end
of December 2004, commercial broadcasters not replicating their existing analog service areas will lose interference protection in
those portions of their existing service areas not covered by their digital signals. Also by the end of December 2004, commercial
broadcasters must provide a stronger digital signal to their communities of license than was previously required.
In November 2001, the FCC issued a reconsideration order on DTV transition issues, which modified many of the rules established
in January 2001. Specifically, the reconsideration order temporarily defers the FCC's previously established deadlines for
broadcasters to: (1) choose their permanent post-transition DTV channel; (2) provide a DTV signal that replicates their analog
service area; and (3) build maximized DTV facilities. The FCC intends to establish deadlines for these requirements in its next
periodic review of the DTV transition and emphasized that none of the deadlines will be after the later of December 31, 2006 or
the date by which 85 percent of the television households in a licensee's market are capable of receiving the signals of DTV
stations. The order also permits broadcasters to request special temporary authority to construct initial minimal DTV facilities
(i.e., facilities that only cover their cities of license) while retaining interference protection for their allotted and maximized
facilities. The order further allows commercial stations subject to the May 1, 2002 construction deadline (i.e., stations not in
the top 30 markets) to initially broadcast a digital signal during prime time hours only.
The FCC has authorized the provision of video programming directly to home subscribers through high-powered direct broadcast
satellites ("DBS"). DBS systems currently are capable of broadcasting over 500 channels of digital television service directly to
subscribers' equipment with 18-inch receiving dishes and decoders. At this time, several entities provide DBS service to
consumers throughout the country. Other entities hold DBS licenses, but have not yet commenced service. DBS operators may import
distant network signals into local television markets where the individual household that would receive the distant network signal
is not capable of receiving a sufficiently strong "over-the-air" signal of the local network affiliate of the given network. In
November 1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which authorizes DBS companies also to provide
16
local television signals to their subscribers pursuant to a retransmission consent agreement with the station. In March 2000, the
FCC adopted regulations governing the statutory requirements for "good faith" negotiations and non-exclusive agreements in
retransmission consent contracts between broadcasters (and all multichannel video program distributors). Broadcasters are
required to negotiate non-exclusive retransmission consent agreements in good faith until January 1, 2006; however, the law
explicitly provides that broadcasters may enter into agreements with competing DBS carriers on different terms.
Moreover, effective January 1, 2002, local television stations became entitled to "must-carry" rights on a DBS system if the
system is providing any local television station(s) to its subscribers. SHVIA also "grandfathered" delivery of the signals of
television stations via DBS to certain subscribers who may have been receiving such signals in violation of prior law. In
November 2000, the FCC adopted rules to implement SHVIA provisions regarding "local-into-local" satellite service, must-carry
election cycle rules and related policies for satellite carriage of broadcast signals. Under the new FCC rules, a broadcast
television station must affirmatively elect must-carry status to require a DBS operator to carry its station; the first elections
were due by July 1, 2001. In response to a challenge to certain provisions of SHVIA, a panel of the U.S. Court of Appeals for the
Fourth Circuit upheld the requirement that DBS operators carry the signal of all local television stations in markets where they
elect to carry any local signals. The court also upheld an FCC rule that permits DBS operators to offer all local television
stations on a single tier or on an a la carte basis. The rule allows consumers to choose between the two options. In response to
broadcasters' first elections, DBS operators issued a large number of carriage denial letters, prompting the FCC to issue an order
in September 2001 clarifying the DBS mandatory carriage rules. In particular, the FCC emphasized that a satellite carrier must
have a "reasonable basis" for rejecting a broadcast station's carriage request.
There are FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as the use of
auctions to resolve mutually exclusive application requests, network-affiliate relations, the ability of stations to obtain
exclusive rights to air syndicated programming, cable systems' carriage of syndicated and network programming on distant stations,
political advertising practices, application procedures and other areas affecting the business or operations of broadcast stations.
Failure to observe FCC rules and policies can result in the imposition of various sanctions, including monetary fines, the
grant of "short" (less than the maximum term) license renewal terms or, for particularly egregious violations, the denial of a
license renewal application or the revocation of a license.
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission has adopted rules implementing a new low power FM ("LPFM")
service. The FCC has begun accepting applications for LPFM stations and has granted some of those applications. We cannot
predict whether any LPFM stations will interfere with the coverage of our radio stations.
The FCC has also authorized two companies to launch and operate satellite digital audio radio service ("SDARS") systems on a
nationwide basis. One of those companies, Sirius Satellite Radio, Inc. has launched three satellites and began commercial service
in a few cities in February 2002. The other company, XM Radio, has launched two satellites and is now providing nationwide
service. Currently, the FCC is considering a proposal to permit SDARS to be supplemented by terrestrial "repeating" transmitters
designed to fill "gaps" in satellite coverage. Also, the FCC has undertaken an inquiry regarding rules for the terrestrial
broadcast of digital signals. Among other issues, this inquiry addresses the need for spectrum outside the existing FM band and
the role of existing broadcasters. A technical standard for the provision of terrestrial digital radio broadcasting has been
developed and is currently before the FCC. We cannot predict the impact of SDARS on our radio stations' listenership.
In November 1999, the Commission released proposed rules for terrestrial digital audio broadcasting ("DAB"). The proposed
rules would permit existing AM and FM stations to operate on their current frequencies in either full analog mode, full digital
mode, or a combination of both (at reduced power). DAB technology is still evolving, and it is not yet certain whether DAB
transmission as proposed will be feasible.
In January 2001, the D.C. Circuit concluded that the FCC's Equal Employment Opportunity ("EEO") regulations were
unconstitutional. Accordingly, broadcasters are currently not subject to FCC-imposed EEO regulations. In December 2001, the FCC
solicited public comment on proposed new EEO affirmative action rules. This proceeding remains pending,.
Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies
regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our
broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and/or affect our
ability to acquire additional broadcast stations or finance such acquisitions. Such matters include, but are not limited to:
17
o proposals to impose spectrum use or other fees on FCC licensees;
o proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies;
o proposals to change rules relating to political broadcasting;
o technical and frequency allocation matters;
o AM stereo broadcasting;
o proposals to permit expanded use of FM translator stations;
o proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
o proposals to tighten safety guidelines relating to radio frequency radiation exposure;
o proposals permitting FM stations to accept formerly impermissible interference;
o proposals to reinstate holding periods for licenses;
o changes to broadcast technical requirements, including those relative to the implementation of SDARS and DAB;
o proposals to limit the tax deductibility of advertising expenses by advertisers.
We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what
impact, if any, the implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations.
Reference should be made to the Communications Act as well as FCC regulations, public notices and rulings for further information
concerning the nature and extent of federal regulation of broadcast stations.
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one national radio station located in Hungary and two radio
stations located in Argentina. The following tables summarize relevant financial information by geographic area:
For the year ended February 28 (29),
2000 2001 2002
----------------- --------------- ---------------
(In Thousands)
Net Revenues:
Domestic $ 316,454 $ 456,040 $ 517,082
International 8,811 14,578 16,698
----------------- --------------- ---------------
Total 325,265 470,618 533,780
================= =============== ===============
As of February 28 (29),
2000 2001 2002
----------------- --------------- ---------------
(In Thousands)
Noncurrent Assets:
Domestic $ 1,181,640 $ 2,263,796 $ 2,229,680
International 32,950 27,970 16,867
----------------- --------------- ---------------
Total 1,214,590 2,291,766 2,246,547
================= =============== ===============
With respect to EOC, the above information would be identical, except domestic noncurrent assets would be $2,218,750 and total
noncurrent assets would be $2,235,617 as of February 28, 2002.
ITEM 2. PROPERTIES.
The following table sets forth information as of February 28, 2002 with respect to offices, studios and broadcast towers of
stations and magazines currently owned by Emmis. Management believes that the properties are in good condition and are suitable
for Emmis' operations.
18
OWNED EXPIRATION
YEAR PLACED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
- -------------------------------------------- ---------------- ---------- ----------
Corporate and Publishing Headquarters/ 1998 Owned --
WENS-FM/ WIBC-AM/WNOU-FM/
WYXB-FM/ Indianapolis Monthly
One Emmis Plaza
40 Monument Circle
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNOU-FM Tower 1979 Owned --
WIBC-AM Tower 1966 Owned --
WYXB-FM Tower 1965 Leased Month-to-month
WMLL-FM/KFTK-FM/KIHT-FM/KPNT-FM/KSHE-FM 1998 Leased December 2007
800 St. Louis Union Station
St. Louis, Missouri
WMLL-FM Tower 1984 Owned --
KFTX-FM Tower 1987 Leased August 2009 with option to March 2023
KIHT-FM Tower 1995 Leased September 2005 with two 5-year options
KPNT-FM Tower 1987 Owned --
KSHE-FM Tower 1985 Leased April 2009
KPWR-FM 1988 Leased February 2003
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased October 2002 (1)
WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1984 Leased January 2010
WRKS-FM Tower 1984 Leased November 2005
WQCD-FM Tower 1984 Leased February 2007
WKQX-FM 2000 Leased December 2015 with 5 year option
230 Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 2009
Atlanta Magazine Office 1997 Leased July 2003
1330 Peachtree Street, N.E.
Atlanta, Georgia
Cincinnati Magazine 1996 Leased November 2006
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2009
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1999 Owned --
88 Piikoi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2008 with 10 year option
--
WALA-TV 2002 Owned
1501 Satchel Paige Dr.
Mobile, AL
WALA-TV Tower 1962 Owned --
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1985 Owned --
19
WLUK-TV 1966 Owned -- 787 Lombardi Avenue Green Bay, WI WLUK-TV Tower 1961 Owned -- WTHI-TV/FM/WWVR-FM 1954 Owned -- 918 Ohio Street Terre Haute, IN WTHI-TV Tower 1965 Owned -- WTHI-FM Tower 1954 Owned -- WWVR-FM Tower 1966 Owned -- WVUE-TV 1972 Owned -- 1025 South Jefferson Davis Highway New Orleans, LA WVUE-TV Tower 1963 Owned -- WKCF-TV 1998 Owned -- 31 Skyine Drive Lake Mary, FL WKCF-TV Tower 2001 Leased September 2006 Los Angeles Magazine 2000 Leased November 2010 5900 Wilshire Blvd., Suite 1000 Los Angeles, CA 90036 Country Sampler 1988 Owned -- 707 Kautz Road St. Charles, IL 60174 RDS/Co-Opportunities 1989 Leased December 2003 324 Campus Lane, Suite B Suisun, CA 94585 Emmis West (Corporate) 1999 Leased January 2004 15821 Ventura Blvd., #685 Encino, CA 91436 Slager Radio 1998 Leased December 2004 Szabadsag Ut 117 (Atronyx Bldg. B) H-2040 Budaors, Hungary Slager Tower 1998 Leased November 2004 KOIN-TV 1984 Leased June 2083 with 99 year option 222 S.W. Columbia St. Portland, OR 97221 KOIN-TV Tower 1953 Owned -- KSNT-TV 1967 Owned -- 6835 N.W. U.S. Hwy 24 Topeka, KS 66618 KSNT-TV Tower 1967 Owned -- WSAZ-TV 1971 Owned -- 645 5th Avenue Huntington, WV 25701 WSAZ-TV Tower 1954 Owned -- KZLA-FM 1997 Owned -- 7755 Sunset Blvd. Los Angeles, CA 90045 KZLA-FM Tower 1991 Leased June 30, 2003 KGMB-TV 1952 Owned -- 1534 Kapiolani Blvd. Honolulu, HI 96814 KGMB-TV Tower 1962 Owned --
20
KMTV-TV 1978 Owned --
10714 Mockingbird Dr.
Omaha, NE 68127
KMTV-TV Tower 1967 Owned --
KGUN-TV 1990 Owned --
7280 E. Rosewood
Tucson, AZ 85710
KGUN-TV Tower 1956 Leased July 2016
KRQE-TV 1953 Owned --
13 Broadcast Plaza S.W.
Albuquerque, NM 87104
KRQE-TV Tower 1959 Owned --
KTAR-AM/KMVP-AM/KKLT-FM/KKFR-FM 1994 Owned --
5300 N. Central Ave.
Phoenix, AZ 85012
KTAR-AM Tower 1958 Owned --
KMVP-AM Tower 1996 Leased December 2008
KKLT-FM Tower 1990 Owned --
KKFR-FM Tower 1998 Leased April 2003
KSNW-TV 1955 Owned --
833 N. Main St.
Wichita, KS 67203
KSNW-TV Tower 1955 Owned --
Argentina 1996 Owned --
Uriarte 1899 (1414) Capital Federal
Buenos Aires, Argentina
Argentina Tower 1996 Owned --
- --------------
(1) In April 2002, Emmis exercised its option to extend the lease until October 2012. The lease contains one additional
ten-year renewal option. 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.
ITEM 3. LEGAL PROCEEDINGS.
Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not
currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on
the financial position or results of operations of Emmis. However, instead of making a required license payment to the Hungarian
government in November 2001, our 59.5% owned national radio station in Hungary requested a modification of the broadcast contract
and ultimately filed suit in arbitration court seeking reformation of the contract and requesting that the payments be reduced.
The Hungarian government then issued an order revoking our station's broadcast license for non-payment of the license fee, and we
appealed the order in the Hungarian ordinary court. The Hungarian government has also filed an action seeking to liquidate our
Hungarian broadcast company. We are vigorously prosecuting the actions in the arbitration court and ordinary court and are
vigorously opposing the action seeking liquidation. However, we cannot predict the outcome of these actions. We do not plan to
continue to operate the station under the present fee arrangement. We do not expect an adverse material financial impact to Emmis
or EOC if the station does not continue to operate.
21
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 2000 47.38 27.00
August 2000 49.13 31.38
November 2000 34.25 17.38
February 2001 37.88 22.13
May 2001 33.95 20.06
August 2001 33.65 23.32
November 2001 24.95 12.27
February 2002 27.37 15.85
At April 30, 2002, there were 3,932 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.
22
ITEM 6. SELECTED FINANCIAL DATA
Emmis Communications Corporation
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Net revenues $ 140,583 $ 232,836 $ 325,265 $ 470,618 $ 533,780
Operating expenses 81,170 143,348 199,818 296,405 348,115
Corporate expenses 7,845 11,904 15,430 17,601 20,283
Time brokerage fees 5,667 2,220 - 7,344 479
Depreciation and amortization 7,536 28,314 44,161 74,018 100,258
Non-cash compensation 1,482 4,269 7,357 5,400 9,095
Restructuring fees - - - 2,057 768
Impairment loss and other (1) - - 896 2,000 10,672
Operating income 36,883 42,781 57,603 65,793 44,110
Interest expense 13,772 35,650 51,986 72,444 129,100
Loss on donation of radio station 4,833 - 956 - -
Other income (loss), net (2) 6 1,914 4,203 38,037 (3,657)
Income (loss) before income taxes
and extraordinary item 18,284 9,045 8,864 31,386 (88,647)
Income (loss) before extraordinary item 11,084 2,845 1,989 13,736 (63,024)
Net income (loss) 11,084 1,248 (33) 13,736 (64,108)
Net income (loss) available to
common shareholders 11,084 1,248 (3,177) 4,752 (73,092)
Net income (loss) per share
available to common shareholders:
Basic $ 0.51 $ 0.04 $ (0.09) $ $0.10 $ (1.54)
Diluted $ 0.49 $ 0.04 $ (0.09) $ $0.10 $ (1.54)
Weight average common shares
Outstanding (3):
Basic 21,806 28,906 36,156 46,869 47,334
Diluted 22,724 29,696 36,156 47,940 47,334
FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash $ 5,785 $ 6,117 $ 17,370 $ 59,899 $ 6,362
Working capital (4) 21,635 1,249 28,274 97,885 19,828
Net intangible assets 234,558 802,307 1,033,970 1,852,259 1,953,331
Total assets 333,388 1,014,831 1,327,306 2,506,872 2,510,069
Long-term credit facility, senior subordinated
debt and senior discount notes (5) 215,000 577,000 300,000 1,380,000 1,343,507
Shareholders' equity 43,910 235,549 776,367 807,471 735,557
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OTHER DATA:
Broadcast/publishing cash flow (6) $ 59,413 $ 89,488 $ 125,447 $ 174,213 $ 185,665
EBITDA before certain charges (6) 51,568 77,584 110,017 156,612 165,382
Cash flows from (used in):
Operating activities 22,487 35,121 26,360 97,730 69,377
Investing activities (116,693) (541,470) (271,946) (1,110,755) (175,105)
Financing activities 98,800 506,681 256,839 1,055,554 52,191
Capital expenditures 16,991 37,383 29,316 26,225 28,416
(1) Year ended February 28, 2002 includes a $9.1 million asset impairment charge and a $1.6 million charge related to the
early termination of certain TV contracts.
(2) See Management's Discussion and Analysis of Financial Condition and Results of operations for a description of the
components of other income in the year ended February 28, 2001.
(3) In February 2000, Emmis effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data
shown has been retroactively adjusted to reflect the stock split.
(4) Excludes assets held for sale and credit facility debt to be repaid with proceeds of assets held for sale.
(5) February 28, 2002 balance excludes $135.0 million of credit facility debt to be repaid with proceeds of assets held for
sale.
(6) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in
accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and
not a substitute for Emmis' results of operations presented on the basis of accounting principles generally accepted in the
United States. See Management's Discussion and Analysis of Financial Condition and Results of operations for a more
detailed description of broadcast/publishing cash flow and EBITDA before certain charges.
23
Emmis Operating Company
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Net revenues $ 140,583 $ 232,836 $ 325,265 $ 470,618 $ 533,780
Operating expenses 81,170 143,348 199,818 296,405 348,115
Corporate expenses 7,845 11,904 15,430 17,601 20,283
Time brokerage fees 5,667 2,220 - 7,344 479
Depreciation and amortization 7,536 28,314 44,161 74,018 100,258
Non-cash compensation 1,482 4,269 7,357 5,400 9,095
Restructuring fees - - - 2,057 768
Impairment loss and other (1) - - 896 2,000 10,672
Operating income 36,883 42,781 57,603 65,793 44,110
Interest expense 13,772 35,650 51,986 72,444 (104,102)
Loss on donation of radio station 4,833 - 956 - -
Other income (loss), net (2) 6 1,914 4,203 38,037 (4,643)
Income (loss) before income taxes
and extraordinary item 18,284 9,045 8,864 31,386 (64,635)
Income (loss) before extraordinary item 11,084 2,845 1,989 13,736 (46,802)
Net income (loss) 11,084 1,248 (33) 13,736 (47,886)
FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash $ 5,785 $ 6,117 $ 17,370 $ 59,899 $ 6,362
Working capital (3) 21,635 1,249 28,274 97,885 20,951
Net intangible assets 234,558 802,307 1,033,970 1,852,259 1,953,331
Total assets 333,388 1,014,831 1,327,306 2,506,872 2,499,139
Long-term credit facility and senior
subordinated debt (4) 215,000 577,000 300,000 1,380,000 1,117,000
Shareholders' equity 43,910 235,549 776,367 807,471 944,467
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OTHER DATA:
Broadcast/publishing cash flow (5) $ 59,413 $ 89,488 $ 125,447 $ 174,213 $ 185,665
EBITDA before certain charges (5) 51,568 77,584 110,017 156,612 165,382
Cash flows from (used in):
Operating activities 22,487 35,121 23,471 86,871 67,393
Investing activities (116,693) (541,470) (271,946) (1,110,755) (175,105)
Financing activities 98,800 506,681 259,728 1,066,413 54,175
Capital expenditures 16,991 37,383 29,316 26,225 28,416
(1) Year ended February 28, 2002 includes a $9.1 million asset impairment charge and a $1.6 million charge related to the
early termination of certain TV contracts.
(2) See Management's Discussion and Analysis of Financial Condition and Results of operations for a description of the
components of other income in the year ended February 28, 2001.
(3) Excludes assets held for sale and credit facility debt to be repaid with proceeds of assets held for sale.
(4) February 28, 2002 balance excludes $135.0 million of credit facility debt to be repaid with proceeds of assets held for
sale.
(5) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in
accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and
not a substitute for Emmis' results of operations presented on the basis of accounting principles generally accepted in the
United States. See Management's Discussion and Analysis of Financial Condition and Results of operations for a more
detailed description of broadcast/publishing cash flow and EBITDA before certain charges.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion pertains to Emmis Communications Corporation ("ECC") and its subsidiaries (collectively, "Emmis" or
the "Company") and to Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a wholly owned subsidiary of
ECC in connection with the Company's reorganization (see Note 1c. to our consolidated financial statements) on June 22, 2001.
Unless otherwise noted, all disclosures contained in the Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Form 10-K apply to Emmis and EOC.
Emmis generally evaluates the performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow
(PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance
between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities.
BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by
analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt
service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be
available for dividends, reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally accepted in the
United States, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis
of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures and may be
calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The
primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing
entities derive revenue from subscriptions and sale of print advertising. Broadcasting revenue is recognized as advertisements
are aired. Publication revenue is recognized in the month of delivery of the publication. The most significant broadcast
operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and
station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs
associated with producing the magazine, and general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its entities charge. These rates are in large part
based on the entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. Broadcast
entities' ratings are measured principally four times a year by Arbitron Radio Market Reports for radio stations and by A.C.
Nielsen Company for television stations. Because audience ratings in a station's local market are critical to the station's
financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain audiences
in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services which
can be used by the station in its business operations. The Company generally confines the use of such trade transactions to
promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general
policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
During the three year period ended February 28, 2002, we acquired and retained ten radio stations, nine television stations and
three magazine publications for an aggregate cash purchase price of $1.4 billion. A recap of the transactions completed is
summarized hereafter. These transactions impact the comparability of operating results year over year.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KALC-FM in Denver, Colorado to Entercom
Communications Corporation for $88.0 million. Emmis had purchased KALC-FM on January 17, 2001, from Salem Communications
Corporation for $98.8 million in cash plus a commitment fee of $1.2 million and transaction related costs of $0.9 million. On
February 12, 2002, Emmis entered into a definitive agreement to sell KALC-FM to Entercom and Entercom began operating KALC-FM
under a time brokerage agreement on March 16, 2002. Proceeds were used to repay amounts outstanding under our credit facility.
The assets of KALC-FM are reflected as held for sale in the accompanying consolidated balance sheets. Since the agreed-upon sales
25
price for this station was less than its carrying amount as of February 28, 2002, we recognized an impairment loss of $9.1 million
in fiscal 2002, which is reflected in the accompanying consolidated statements of operations. The $87.7 million of credit
facility debt repaid with the net proceeds of the sale is reflected as a current liability in the accompanying consolidated
balance sheets.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KXPK-FM in Denver, Colorado to Entravision
Communications Corporation for $47.5 million. Emmis had purchased KXPK-FM on August 24, 2000, from AMFM, Inc. for an allocated
purchase price of $35.0 million in cash plus liabilities recorded of $1.2 million and transaction related costs of $0.4 million.
Emmis entered into a definitive agreement to sell KXPK-FM to Entravision on February 12, 2002. Proceeds were used to repay
amounts outstanding under our credit facility. We expect to record a gain on sale of approximately $12 million in our first
quarter of fiscal 2003. The assets of KXPK-FM are reflected as held for sale in the accompanying consolidated balance sheets.
The $47.3 million of credit facility debt repaid with the net proceeds of the sale is reflected as a current liability in the
accompanying consolidated balance sheets.
On March 28, 2001, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and
KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus transaction related costs of $0.7
million. The Company financed the acquisition through a $20.0 million advance payment borrowed under the credit facility in June
2000 and the remainder with borrowings under the credit facility and proceeds from ECC's March 2001 senior discount notes
offering. The acquisition was accounted for as a purchase. Emmis began programming and selling advertising on the radio stations
on August 1, 2000 under a time brokerage agreement. The total purchase price was allocated to property and equipment and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the intellectual property of WTLC-FM (both located in
Indianapolis, Indiana) to Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and the AM sale occurred
on April 25, 2001. Emmis retained the FCC license at 105.7 and reformatted the station as WYXB-FM.
On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as
KFTK-FM) and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. for $220.0 million in cash, plus transaction
related costs of $10.9 million (the "Sinclair Acquisition"). The agreement also included the settlement of outstanding lawsuits
by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquisition was financed
through borrowings under Emmis' credit facility and was accounted for as a purchase. The total purchase price was allocated to
property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets and are being amortized over 40 years.
On October 6, 2000, Emmis acquired certain assets of KZLA-FM (the "KZLA Acquisition") in Los Angeles, California from
Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from
Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). Since the fair
value of WKKX exceeded the book value of the station at the date of the exchange, Emmis recorded a gain on exchange of assets of
$22.0 million. This gain is included in other income, net in the accompanying consolidated statements of operations. From August
1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The exchange was accounted for
as a purchase. The total purchase price of $185.0 million was allocated to property and equipment and broadcast licenses based on
an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being
amortized over 40 years.
Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight network-affiliated and seven satellite television
stations from Lee Enterprises, Inc. for $559.5 million in cash, the payment of $21.3 million for working capital and transaction
related costs of $2.2 million (the "Lee Acquisition"). In connection with the acquisition, Emmis recorded $31.3 million of
deferred tax liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a severance related liability of $1.8
million, of which $1.5 million remains outstanding as of February 28, 2002. This transaction was financed through borrowings
under Emmis' credit facility and was accounted for as a purchase. The Lee Acquisition consisted of the following stations:
26
- - KOIN-TV (CBS) in Portland, Oregon
- - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango,
Colorado-Farmington, New Mexico)
- - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia
- - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas
and KSNK-TV, Oberlin, Kansas-McCook, Nebraska)
- - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii)
- - KGUN-TV (ABC) in Tucson, Arizona
- - KMTV-TV (CBS) in Omaha, Nebraska and
- - KSNT-TV (NBC) in Topeka, Kansas.
The total purchase price was allocated to property and equipment, television program rights, working capital related items and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
Because we already own KHON-TV in Honolulu, and both KHON and KGMB were rated among the top four television stations in the
Honolulu market, FCC regulations prohibited us from owning both stations. However, we received a temporary waiver from the FCC
that has allowed us to operate both stations (and their related "satellite" stations). As a result of recent regulatory
developments, we have requested a stay of divestiture until the FCC completes its biennial review. We are currently awaiting the
FCC's decision. No assurances can be given that the FCC will grant us the stay of divestiture and we may need to sell one of the
two stations in Hawaii.
On August 24, 2000, Emmis acquired the assets of radio station KKFR-FM in Phoenix, Arizona from AMFM, Inc. for an allocated
$72.0 million in cash, plus transaction related costs of $0.5 million (the "AMFM Acquisition"). Emmis financed the acquisition
through borrowings under its credit facility. The acquisition was accounted for as a purchase. The total purchase price was
allocated to property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible
assets in the accompanying consolidated balance sheets and are being amortized over 40 years.
In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia.
Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition
that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000,
the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the
station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the
right of first refusal on August 31, 2000, which is included in other income in the accompanying consolidated statements of
operations.
On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for
approximately $36.8 million in cash plus liabilities recorded of $2.7 million (the "Los Angeles Magazine Acquisition"). Los
Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The
acquisition was accounted for as a purchase and was financed through additional borrowings under its credit facility. The excess
of the purchase price over the estimated fair value of identifiable assets was $36.0 million, which is included in intangible
assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and
related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6
million. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. The
excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in
intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On November 16, 1999, Emmis purchased an interest in BuyItNow.com L.L.C. for $5.0 million in cash, which represented an
original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the carrying
value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be
other than temporary.
27
On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A.
("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of $1.6 million was
paid subsequent to closing and up to an additional $0.6 million will be paid by November 2003 if certain conditions are met.
Votionis owns one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition
was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity
Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast
license is being amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in
Orlando, Florida (the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The
purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a
$12.5 million advance payment borrowed under the credit facility and proceeds from the Company's October 1999 Common and Preferred
Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program
rights and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets and are being amortized
over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an
agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through
December 2009.
On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the
"Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The
purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the
credit facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in
October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and
is being amortized over 15 years.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 2002 COMPARED TO YEAR ENDED FEBRUARY 28, 2001. Net revenues for the year ended February 28, 2002 were
$533.8 million compared to $470.6 million for the same period of the prior year, an increase of $63.2 million or 13.4%. On a pro
forma basis (after giving effect to all acquisitions consummated since March 1, 2000), net revenues for the year ended February
28, 2002 would have decreased $38.2 million or 6.7%. This pro forma decrease in net revenues is generally due to a softening U.S.
economy resulting in an overall decrease in advertisement sales, coupled with the absence of political television advertisements
in the twelve months ended February 28, 2002. The decrease was partially offset by a $3.7 million increase in net revenues
primarily attributable to our television division earning a performance guaranty when our national sales rep agency did not
achieve certain performance targets in the second quarter.
Operating expenses for the year ended February 28, 2002 were $348.1 million compared to $296.4 million for the same period of
the prior year, an increase of $51.7 million or, 17.4%. On a pro forma basis, operating expenses decreased $12.3 million or
3.4%. This pro forma decrease is due to the elimination of certain operational positions in the television division and a
decrease in promotional spending, offset by sales personnel increases in all of our divisions. Also, in the quarter ended
February 28, 2002, we implemented a 10% wage cut which was supplemented with a corresponding 10% Emmis stock award. This
initiative reduced cash operating expenses by approximately $3.1 million for the year ended February 28, 2002.
Broadcast/publishing cash flow for the year ended February 28, 2002 was $185.7 million compared to $174.2 million for the same
period of the prior year, an increase of $11.5 million or 6.6%. On a pro forma basis, broadcast/publishing cash flow for the year
ended February 28, 2002 decreased $25.9 million or 12.2%. This pro forma decrease is due to decreased net revenues partially
offset by decreased operating expenses as discussed above.
Corporate expenses for the year ended February 28, 2002 were $20.3 million compared to $17.6 million for the same period of the
prior year, an increase of $2.7 million or 15.2%. This increase is due to an increase in the number of corporate employees in all
departments as a result of our recent growth and training investments we have made in our personnel.
28
EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate expenses. EBITDA before certain
charges for the year ended February 28, 2002 was $165.4 million compared to $156.6 million for the same period of the prior year,
an increase of $8.8 million or 5.6%. On a pro forma basis, EBITDA before certain charges for the year ended February 28, 2002
decreased $28.6 million or 14.7%. This pro forma decrease reflects the pro forma decrease in broadcast/publishing cash flow
coupled with the increase in corporate expenses.
Depreciation and amortization expense for the year ended February 28, 2002 was $100.3 million compared to $74.0 million for the
same period of the prior year, an increase of $26.3 million or 35.5%. Substantially all of the increase in depreciation and
amortization expense for the year ended February 28, 2002 is due to acquisitions consummated since March 1, 2000.
Non-cash compensation expense for the year ended February 28, 2002 was $9.1 million compared to $5.4 million for the same
period of the prior year, an increase of $3.7 million or 68.4%. Non-cash compensation includes compensation expense associated
with stock options granted, restricted common stock issued under employment agreements, common stock contributed to the Company's
Profit Sharing Plan and common stock issued to employees at our discretion. This increase was due to the payment of certain
employee incentives with our common stock and stock issued to supplement the 10% wage reduction discussed above.
In the twelve months ended February 28, 2002, the Company recorded an impairment loss of $9.1 million related to the sale of
KALC-FM to Entercom Communications Corporation, effective May 1, 2002, and a $1.6 million charge related to the early termination
of certain television contracts. In the twelve months ended February 28, 2001, the Company recorded an impairment loss of $2.0
million related to the sale of WTLC-AM to Radio One, Inc.
With respect to Emmis, interest expense was $129.1 million for the year ended February 28, 2002 compared to $72.4 million for
the same period of the prior year, an increase of $56.7 million or 78.2%. This increase reflects higher outstanding debt due to
acquisitions consummated since March 1, 2000, all of which were financed with debt (including our 12.5% senior discount notes
issued March 2001), partially offset by lower interest rates on our floating rate senior bank debt.
With respect to EOC, interest expense was $104.1 million for the year ended February 28, 2002 compared to $72.4 million for the
same period of the prior year, an increase of $31.7 million or 43.8%. This increase reflects higher outstanding debt due to
acquisitions consummated since March 1, 2000, partially offset by lower interest rates on our floating rate senior debt. The
difference between interest expense for Emmis and EOC is due to interest expense associated with the senior discount notes, for
which ECC is the obligor, and thus it is excluded from the operations of EOC.
Other income for the twelve months ended February 28, 2002 was $1.3 million compared to other income of $39.4 million for the
same period of the prior year. Other income for the twelve months ended February 28, 2001 includes a $22.0 million gain on
exchange of assets, offset by valuation adjustments on certain investments and a $17.0 million break-up fee received in connection
with the sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net of related expenses. The difference between other income for
Emmis ($1.3 million) and EOC ($0.4 million) for the year ended February 28, 2002 relates to interest income on $93.0 million of
cash held in escrow, pending the implementation of the restructuring in connection with the senior discount notes issuance (see
Note 4 to our consolidated financial statements, Senior Discount Notes).
With respect to Emmis, our effective tax rate for the year ended February 28, 2002 was a benefit of 28.9%, compared to a
provision of 56.2% for the same period of the prior year. With respect to EOC, our effective tax rate for the year ended February
28, 2002 was a benefit of 27.6%, compared to a provision of 56.2% for the same period of the prior year. Both Emmis and EOC had
pre-tax income in fiscal 2001 versus pre-tax losses in fiscal 2002 due to the factors discussed above. The variance in our
effective tax rate from the statutory tax rate is due to non-deductible expenses, primarily consisting of certain goodwill
amortization that is not deductible for tax purposes.
During the twelve months ended February 28, 2002, EOC repaid $128.0 million of indebtedness under its credit facility, which
permanently reduced amounts available thereunder. As a result of the early payoff of the indebtedness, the Company recorded an
extraordinary loss of approximately $1.1 million, net of taxes, related to unamortized deferred debt costs.
29
YEAR ENDED FEBRUARY 28, 2001 COMPARED TO YEAR ENDED FEBRUARY 29, 2000. Net revenues for the year ended February 28, 2001 were
$470.6 million compared to $325.3 million for the same period of the prior year, an increase of $145.3 million or 44.7%. The
increase in net revenues for the year ended February 28, 2001 is primarily the result of the Country Sampler Acquisition, WKCF
Acquisition, Argentina Acquisition, Los Angeles Magazine Acquisition, AMFM Acquisition, Lee Acquisition, KZLA Acquisition,
Sinclair Acquisition, Salem Acquisition and our operation of radio stations KKLT-FM, KTAR-AM and KMVP-AM under time brokerage
agreements which we collectively refer to as our "Fiscal 2000-2001 Transactions." Excluding these transactions, net revenues for
the year ended February 28, 2001 would have increased $14.7 million or 4.8%. The remaining increase in net revenues is due to our
ability to realize higher advertising rates resulting from higher ratings at certain broadcasting properties, increases in general
radio spending in the markets in which we operate and our ability to sell more advertising in our publications.
Operating expenses for the year ended February 28, 2001 were $296.4 million compared to $199.8 million for the same period of
the prior year, an increase of $96.6 million or 48.3%. The increase in operating expenses for the year ended February 28, 2001 is
primarily the result of our Fiscal 2000-2001 Transactions. Excluding these transactions, operating expenses for the year ended
February 28, 2001 would have increased $3.6 million or 1.9%. This increase is principally due to higher advertising and
promotional spending at certain of our properties as well as an increase in sales related costs.
Broadcast/publishing cash flow for the year ended February 28, 2001 was $174.2 million compared to $125.4 million for the same
period of the prior year, an increase of $48.8 million or 38.9%. The increase in broadcast/publishing cash flow for the year
ended February 28, 2001 is primarily the result of our Fiscal 2000-2001 Transactions. Excluding these transactions,
broadcast/publishing cash flow for the year ended February 28, 2001 would have increased $11.1 million or 9.4%. This increase is
due to increased net revenues partially offset by increased operating expenses as discussed above.
Corporate expenses for the year ended February 28, 2001 were $17.6 million compared to $15.4 million for the same period of the
prior year, an increase of $2.2 million or 14.1%. These increases are due to an increase in the number of corporate employees in
all departments as a result of the growth of the Company.
EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development
expenses. EBITDA before certain charges for the year ended February 28, 2001 was $156.6 million compared to $110.0 million for
the same period of the prior year, an increase of $46.6 million or 42.4%. This increase was principally due to the increase in
broadcast/publishing cash flow partially offset by an increase in corporate expenses.
Interest expense was $72.4 million for the year ended February 28, 2001 compared to $52.0 million for the same period of the
prior year, an increase of $20.4 million or 39.4%. Included in interest expense for the twelve months ended February 28, 2001 is
$3.4 million for the amortization of debt fees related to our Bridge Loan. The remaining increase reflects higher outstanding
debt due to the Fiscal 2000-2001 Transactions.
Depreciation and amortization expense for the year ended February 28, 2001 was $74.0 million compared to $44.2 million for the
same period of the prior year, an increase of $29.8 million or 67.6%. Substantially all of the increase in depreciation and
amortization expense for the year ended February 28, 2001 relates to our Fiscal 2000-2001 Transactions.
Non-cash compensation expense for the year ended February 28, 2001 was $5.4 million compared to $7.4 million for the same
period of the prior year, a decrease of $2.0 million or 26.6%. Non-cash compensation includes compensation expense associated
with stock options granted, grants of restricted stock and common stock contributed to the Company's Profit Sharing Plan. The
decrease was principally due to a decline in the Company's stock price as compared to the prior year.
Other income for the twelve months ended February 28, 2001 was $39.3 million compared to other income of $4.2 million for the
same period of the prior year. Other income for the twelve months ended February 28, 2001 includes a $22.0 million gain on
exchange of assets, offset by valuation adjustments on certain investments and a $17.0 million break-up fee received in connection
with the sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net of related expenses.
Our effective tax rate for the year ended February 28, 2001 was 56.2%, compared to 77.5% for the same period of the prior
year. The decrease in our effective tax rate in the year ended February 28, 2001 primarily resulted from the relative impact of
the non-deductible tax items in relation to the change in pre-tax income.
30
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL REQUIREMENTS AND CAPITAL EXPENDITURES
Our primary uses of capital have historically been, and are expected to continue to be, funding acquisitions, capital
expenditures, working capital and debt service and, in the case of ECC, preferred stock dividend requirements.
In the fiscal years ended February 2000, 2001 and 2002, we had capital expenditures of $29.3 million, $26.2 million and $28.4
million, respectively. These capital expenditures primarily related to the KHON and WALA operating facilities projects, leasehold
improvements to various office and studio facilities, broadcast equipment purchases, tower upgrades and costs associated with our
conversion to digital television. We anticipate that future requirements for capital expenditures will include capital
expenditures incurred during the ordinary course of business, including approximately $11 million in fiscal 2003 for the
conversion to digital television. Although we expect all of our stations will broadcast a digital signal by the end of fiscal
2003, we will incur additional costs, after fiscal 2003, to upgrade the digital signals of four of our local stations and our nine
satellite stations. We expect to fund such capital expenditures with cash generated from operating activities and borrowings
under our credit facility.
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
Other than lease commitments, legal contingencies incurred in the normal course of business, agreements for future barter and
program rights not yet available for broadcast at February 28, 2002, and employment contracts for key employees, all of which are
disclosed in Note 9 to the consolidated financial statements, the Company does not have any off-balance sheet financings or
liabilities. The Company does not have any majority-owned subsidiaries that are not included in the consolidated financial
statements, nor does the Company have any interests in or relationships with any "special-purpose entities" that are not reflected
in the consolidated financial statements.
SUMMARY DISCLOSURES ABOUT CONTRACTUAL CASH OBLIGATIONS
The following table reflects a summary of our contractual cash obligations as of February 28, 2002:
PAYMENTS DUE BY PERIOD
(AMOUNTS IN THOUSANDS)
Less Than 1 to 3 4 to 5 After 5
Contractual Cash Obligations: Total 1 Year Years Years Years
- ----------------------------- -------------- ------------- ------------- ------------- -------------
Long-term debt (1) $ 1,622,000 $ - $ 93,583 $ 160,491 $ 1,367,926
Operating leases 50,037 7,959 12,148 9,641 20,289
TV program rights payable (2) 68,058 27,507 23,310 11,055 6,186
Future TV program rights payable (2) 31,999 5,240 19,831 5,290 1,638
Radio broadcast agreements 5,098 2,281 2,017 480 320
Employment agreements 45,554 23,829 17,628 1,581 2,516
-------------- ------------- ------------- ------------- -------------
Total Contractual Cash Obligations $ 1,822,746 $ 66,816 $ 168,517 $ 188,538 $ 1,398,875
============== ============= ============= ============= =============
(1) ECC's senior discount notes accrete to a face value of $370.0 million in March 2006 and become due in March 2011. As of
February 28, 2002, the face value of the senior discount notes was $226.5 million. With respect to EOC, the above table would
be the same except ECC's senior discount notes would be excluded. These contractual cash obligations are not adjusted to
reflect credit facility debt repaid after February 28, 2002 (See Note 4 to our consolidated financial statements, Credit
Facility).
(2) TV program rights payable represents payments to be made to various program syndicators and distributors in accordance with
current contracts for the rights to broadcast programs. Future TV program rights payable represents commitments for program
rights not available for broadcast as of February 28, 2002.
31
DEBT SERVICE AND PREFERRED STOCK DIVIDEND REQUIREMENTS
As of February 28, 2002, EOC had $1.252 billion of corporate indebtedness outstanding under its credit facility ($.952 billion,
of which $0.135 billion is classified as current)and senior subordinated notes ($0.3 billion), and an additional $14.9 million
of other indebtedness. As of February 28, 2002, total indebtedness outstanding for Emmis included all of EOC's indebtedness as
well as $226.5 million of senior discount notes. Emmis also had $143.8 million of convertible preferred stock outstanding. All
outstanding amounts under the credit facility bear interest, at our option, at a rate equal to the Eurodollar rate or an alternative
Base Rate plus a margin. As of February 28, 2002, EOC's weighted average borrowing rate under its credit facility, including
the effects of interest rate swaps (see discussion in Item 7a. below), was approximately 6.3% and the weighted average borrowing
rate, after taking into account amounts outstanding under the senior subordinated notes, was approximately 6.8%. Emmis' weighted
average borrowing rate, which includes the senior discount notes, was approximately 7.6%.
Based on amounts currently outstanding under our senior subordinated notes, the debt service requirements of EOC for these notes
over the next twelve-month period are $24.4 million. ECC has no additional debt service requirements in the next twelve-month
period since interest on its senior discount notes accretes into the principal balance of the notes until March 2006. However,
ECC has preferred stock dividend requirements of $9.0 million for the next twelve-month period. The terms of ECC's preferred stock
provide for a quarterly dividend payment of $.78125 per share on each January 15, April 15, July 15 and October 15. While Emmis
has sufficient liquidity to declare and pay the dividends as they become due, it was not permitted to do so for the October 15,
2001, January 15, 2002 and April 15, 2002 payments. Emmis' leverage ratio under the senior discount notes indenture exceeded 8:1
for the October, January and April payments. Its leverage ratio under the senior subordinated notes indenture exceeded 7:1 for
the January and April payments. For each of these dividend dates, ECC's board of directors set the record date, but did not
declare the dividend. Instead, on each payment date a wholly-owned, unrestricted subsidiary of EOC made a payment of $.78125 per
share to each preferred shareholder of record. This subsidiary was permitted to make the payment to the preferred shareholders
under the senior discount notes and senior subordinated notes indentures. Currently, Emmis meets its leverage ratio requirements
under the senior subordinated notes and expects to meet its leverage ratio requirements under the senior discount notes upon
application of its April 2002 equity proceeds (see Sources of Liquidity). We expect ECC's board of directors to declare each
dividend and deem the obligation to pay each dividend to have been discharged by the subsidiary's prior payment. We also expect
our board of directors to declare, and for Emmis to pay, the July 15, 2002 dividend in the ordinary course of business.
SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash provided by operations and funds available under our credit facility. At February
28, 2002, we had cash and cash equivalents of $6.4 million and net working capital of $19.8 million, excluding assets held for
sale. At February 28, 2001, we had cash and cash equivalents of $59.9 million and net working capital of $97.9 million, excluding
assets held for sale. With respect to EOC, net working capital, excluding assets held for sale, was $21.0 million at February 28,
2002 and $97.9 million at February 28, 2001. We typically use our excess cash to repay amounts outstanding under our credit
facility. We had a large cash balance as of February 28, 2001 due to borrowings under term loans when we refinanced our credit
facility in December 2000, which was used to close our acquisition of three radio stations in March 2001. The decrease in net
working capital from February 28, 2001 to February 28, 2002 was due to the decrease in cash described above and the collection of
tax refunds receivable (related cash collected was used to repay outstanding debt). In December 2001, Emmis instituted a 10% pay
cut for substantially all of its non-contract employees and also began a stock compensation program under its 2001 Equity
Incentive Plan. We expect the stock compensation program, which currently extends through December 2002, to result in reductions
of approximately $14 million in Emmis' cash compensation expense, $11 million of which will be reflected in fiscal 2003. We
expect to issue approximately 0.8 million shares during the first year of the plan. While no formal decisions have been made, it
is likely that the program will continue in some form during the next fiscal year. On April 30, 2002, we had $220.0 million
available under our credit facility, less $6.6 million in outstanding letters of credit.
In April 2002, ECC completed the sale of 4.6 million shares of its Class A common stock at $26.80 per share resulting in total
proceeds of $123.3 million. The net proceeds of $120.2 were contributed to EOC, of which 50% were used to repay outstanding
obligations under the credit facility. The remaining net proceeds were invested and will either repay outstanding obligations
under the credit facility or redeem or repurchase some of Emmis' outstanding 121/2% senior discount notes.
32
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KALC-FM in Denver, Colorado to Entercom
Communications Corporation for $88.0 million. Also effective May 1, 2002 Emmis completed the sale of substantially all of the
assets of KXPK-FM in Denver, Colorado to Entravision Communications Corporation for $47.5 million. The proceeds from the sale of
these stations were used to repay outstanding obligations under the credit facility.
In connection with the $255.7 million of completed or planned debt repayments described above, Emmis expects to write-off
approximately $4 million of deferred debt costs in the first quarter of our fiscal 2003.
As part of our business strategy, we continually evaluate potential acquisitions of radio and television stations, as well as
publishing properties. If we elect to take advantage of future acquisition opportunities, we may incur additional debt or issue
additional equity or debt securities, depending on market conditions and other factors.
INTANGIBLES
At February 28, 2002, approximately 78% of our total assets consisted of intangible assets, such as FCC broadcast licenses,
goodwill, subscription lists and similar assets, the value of which depends significantly upon the operational results of our
businesses. In the case of our radio and television stations, we would not be able to operate the properties without the related
FCC license for each property. FCC licenses are renewed every eight years; consequently, we continually monitor the activities of
our stations for compliance with all regulatory requirements. Historically, all of our licenses have been renewed at the end of
their respective eight-year periods, and we expect that all FCC licenses will continue to be renewed in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" that requires companies to cease amortizing
goodwill and certain other indefinite-lived intangible assets, including broadcast licenses. Under SFAS 142, goodwill and certain
indefinite-lived intangibles will not be amortized into results of operations, but instead the recorded value of certain
indefinite-lived intangibles including broadcast licenses will be tested for impairment at least annually with impairment being
measured as the excess of the asset's carrying amount over its fair value. Goodwill will also be tested for impairment at least
annually. Intangible assets that have finite useful lives will continue to be amortized over their useful lives and measured for
impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We adopted SFAS 142 and
began our impairment review on March 1, 2002. We have engaged an independent appraiser to conduct valuations of our
indefinite-lived intangible assets and expect to complete our review after the valuations are completed at the end of May 2002.
As of February 28, 2002, we had net unamortized goodwill and broadcast licenses in the amount of $175.2 million and $1,878.3
million, respectively. The adoption of SFAS 142 will eliminate our amortization of goodwill and indefinite-lived intangibles,
which was approximately $41.8 million and $61.2 million in the years ended February 28, 2001 and 2002, respectively. While this
expense will no longer be reflected on future financial statements, it remains deductible for federal income tax purposes. We
expect that our impairment review, once it is completed, will result in write-downs of some of our goodwill and indefinite-lived
intangibles, but we cannot currently determine the amount of the write-downs. However, we believe the write-down may be
material. Upon adoption, any transitional impairment loss recognized under SFAS 142 will be reported as the cumulative effect of
a change of accounting principle in our consolidated statements of operations. After initial adoption, any impairment losses
under SFAS 142 or 144 will be recorded as operating expenses.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which
establishes a single model to account for impairment of assets to be held or disposed, incorporating guidelines for accounting and
disclosure of discontinued operations . This statement supercedes SFAS 121 and was adopted by the Company on March 1, 2002. The
adoption of SFAS 144 did not have a material impact on our results of operations or financial position.
SEASONALITY
Our results of operations are usually subject to seasonal fluctuations, which result in higher second and third quarter
revenues and broadcast cash flow. For our radio operations, this seasonality is due to the younger demographic composition of
many of our stations. Advertisers increase spending during the summer months to target these listeners. In addition, advertisers
generally increase spending across all of our segments during the months of October and November, which are part of our third
quarter, in anticipation of the holiday season. Finally, particularly in our television operations, revenues from political
advertising tend to be higher in even numbered calendar years.
33
INFLATION
The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate
of inflation in the future would not have an adverse effect on our operating results, particularly since our senior bank debt is
largely floating rate debt.
FORWARD-LOOKING STATEMENTS
This report includes or incorporates forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. You can identify these forward-looking statements by our use of words such as "intend," "plan," "may,"
"will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," and similar expressions,
whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or
expectations. All statements regarding our expected financial position, business and financing plans are forward-looking
statements.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important facts in various cautionary statements in this report that we believe could cause
our actual results to differ materially from forward-looking statements that we make. These include, but are not limited to, the
following:
o material adverse changes in economic conditions in the markets of our company;
o the ability of our stations and magazines to attract and retain advertisers;
o the ability of our stations to attract programming and our magazines to attract writers and photographers;
o uncertainty as to the ability of our stations to increase or sustain audience share for their programs and our magazines
to increase or sustain subscriber demand;
o competition from other media and the impact of significant competition for advertising revenues from other media;
o future regulatory actions and conditions in the operating areas of our company;
o the level of our capital expenditures and whether our programming and other expenses increase at a rate faster than
expected;
o financial community and rating agency perceptions of our business, operations and financial condition and the industry in
which we operate;
o the effects of terrorist attacks, political instability, war and other significant events;
o whether pending transactions, if any, are completed on the terms and at the times set forth, if at all;
o other risks and uncertainties inherent in the radio and television broadcasting and magazine publishing businesses.
The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We
undertake no obligation to update or revise any forward-looking statements because of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
GENERAL
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of Emmis
due to adverse changes in financial and commodity market prices and rates. Emmis is exposed to market risk from changes in
domestic and international interest rates (i.e. prime and LIBOR) and foreign currency exchange rates. To manage interest rate
exposure Emmis periodically enters into interest rate derivative agreements. Emmis does not use financial instruments for trading
and is not a party to any leveraged derivatives.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended
in June of 2000 by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." These statements, which were
effective for Emmis on March 1, 2001, establish accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. These statements require that every derivative instrument be recorded in the
balance sheet as either an asset or a liability measured at its fair value. Changes in the fair value of derivatives are to be
34
recorded each period in earnings or comprehensive income, depending on whether the derivative is designated and effective as part
of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in the other
comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item,
and the ineffective portion of all hedges must be recognized in earnings in the current period. These standards result in
additional volatility in reported assets, liabilities, earnings and other comprehensive income.
SFAS No. 133 requires that as of the date of initial adoption the difference between the fair value of the derivative
instruments to be recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20
"Accounting Changes."
On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No. 133 which resulted in an immaterial impact to the
results of operations and the financial position of Emmis.
SFAS No. 133 further requires that the fair value and effectiveness of each hedging instrument must be measured quarterly.
The result of each measurement could result in fluctuations in reported assets, liabilities, other comprehensive income and
earnings as these changes in fair value and effectiveness are recorded to the financial statements. For the year ended February
28, 2002, the fluctuations to the aforementioned areas were immaterial to the financial statements taken as a whole and we
anticipate an immaterial effect on an ongoing basis.
INTEREST RATES
At February 28, 2002, the entire outstanding balance under our credit facility, or approximately 76% of EOC's total
outstanding debt (credit facility and senior subordinated debt) and 64% of Emmis' total outstanding debt (EOC's debt plus our
senior discount notes) bears interest at variable rates. Emmis currently hedges a portion of its outstanding debt with interest
rate swap arrangements that effectively set the credit facility's underlying base rate at a weighted average rate of 4.94% on the
three-month LIBOR for agreements in place as of February 28, 2002. The credit facility requires EOC to have fixed interest rates
for a two year period on at least 50% of its total outstanding debt, as defined (including the senior subordinated debt). After
the first two years, this ratio of fixed to floating rate debt must be maintained if EOC's total leverage ratio, as defined, is
greater than 6:1 at any quarter end. The notional amount of the interest rate swap agreements at February 28, 2002 totaled $350.0
million, and the agreements expire at various dates beginning February 3, 2003 to February 8, 2004.
Based on amounts outstanding at February 28, 2002, if the interest rate on our variable debt, including the effect of interest
rate swaps, were to increase by 1.0%, our annual interest expense would be higher by approximately $6.0 million.
FOREIGN CURRENCY
Emmis owns a 59.5% interest in a Hungarian subsidiary which is consolidated in the accompanying financial statements. This
subsidiary's operations are measured in its local currency (forint). Emmis has a natural hedge since some of the subsidiary's
long-term obligations are denominated in Hungarian forints. Emmis owns a 75% interest in an Argentinean subsidiary which is
consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency (peso),
which until January 2002, was tied to the U.S. dollar through the Argentine government's convertibility plan. In January 2002,
the Argentine government allowed the peso to devalue and trade against the U.S. dollar independently. While Emmis management
cannot predict the most likely average or end-of-period peso to dollar, or forint to dollar, exchange rates for calendar 2002, we
believe any further devaluation of the forint or peso would have an immaterial effect on our financial statements taken as a
whole, as the Hungarian and Argentine stations accounted for approximately 1% of Emmis' broadcast cash flow, approximately 3% of
Emmis' total revenues and less than 1% of Emmis' total assets as of, and for the year ended, February 28, 2002.
Both subsidiaries have or have had outstanding loans denominated in U.S. dollars. In fiscal 2002, the Hungarian subsidiary
repaid $1.2 million in dollar denominated loans and at February 28, 2002 has $0.7 million outstanding. Also in fiscal 2002 and
subsequent to the devaluation of the peso, the Argentinean subsidiary repaid $2.5 million in dollar denominated loans and as of
February 28, 2002 has no dollar denominated loans outstanding. No gain or loss resulted from these transactions on a consolidated
basis.
Emmis maintains no derivative instruments to mitigate the exposure to foreign currency translation and/or transaction risk.
However, this does not preclude the adoption of specific hedging strategies in the future.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 28 (29),
------------------------------------------------------------------
2000 2001 2002
------------------ ------------------ ------------------
GROSS REVENUES $ 380,995 $ 550,073 $ 614,414
LESS AGENCY COMMISSIONS 55,730 79,455 80,634
------------------ ------------------ ------------------
NET REVENUES 325,265 470,618 533,780
Operating expenses 199,818 296,405 348,115
Corporate expenses 15,430 17,601 20,283
Time brokerage fees - 7,344 479
Depreciation and amortization 44,161 74,018 100,258
Non-cash compensation 7,357 5,400 9,095
Restructuring fees 896 2,057 768
Impairment loss and other - 2,000 10,672
------------------ ------------------ ------------------
OPERATING INCOME 57,603 65,793 44,110
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (51,986) (72,444) (129,100)
Loss on donation of radio station (956) - -
Gain (loss) in unconsolidated affiliates - (1,360) (5,003)
Other income, net 4,203 39,397 1,346
------------------ ------------------ ------------------
Total other income (expense) (48,739) (34,407) (132,757)
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 8,864 31,386 (88,647)
PROVISION (BENEFIT) FOR INCOME TAXES 6,875 17,650 (25,623)
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 1,989 13,736 (63,024)
EXTRAORDINARY LOSS, NET OF TAX 2,022 - 1,084
------------------ ------------------ ------------------
NET INCOME (LOSS) (33) 13,736 (64,108)
PREFERRED STOCK DIVIDENDS 3,144 8,984 8,984
------------------ ------------------ ------------------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (3,177) $ 4,752 $ (73,092)
================== ================== =================
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE:
Before extraordinary item $ (0.03) $ 0.10 $ (1.52)
Extraordinary item, net of tax (0.06) - (0.02)
------------------ ------------------ -----------------
Net income (loss) available to common
shareholders $ (0.09) $ 0.10 $ (1.54)
================= =================== =================
The accompanying notes to consolidated financial statements are an integral part of these statements.
36
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28,
--------------------------------------
2001 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 6,362
Accounts receivable, net of allowance for
doubtful accounts of $2,202 and $2,800, respectively 97,281 95,240
Current portion of TV program rights 12,028 9,837
Income tax refunds receivable 13,970 -
Prepaid expenses 17,005 14,847
Other 14,832 13,820
Assets held for sale 134,983 123,416
---------------- ----------------
Total current assets 349,998 263,522
---------------- ----------------
PROPERTY AND EQUIPMENT:
Land and buildings 84,983 88,209
Leasehold improvements 12,299 12,341
Broadcasting equipment 136,312 151,496
Office equipment and automobiles 44,553 49,160
Construction in progress 10,560 16,735
---------------- ----------------
288,707 317,941
Less- Accumulated depreciation and amortization 56,874 86,802
---------------- ----------------
Total property and equipment, net 231,833 231,139
---------------- ----------------
INTANGIBLE ASSETS:
Broadcast licenses 1,736,398 1,891,741
Excess of cost over fair value of net
assets of purchased businesses 204,462 204,429
Other intangibles 33,591 41,135
---------------- ----------------
1,974,451 2,137,305
Less- Accumulated amortization 122,192 183,974
---------------- ----------------
Total intangible assets, net 1,852,259 1,953,331
---------------- ----------------
OTHER ASSETS:
Deferred debt issuance costs, net of accumulated
amortization of $5,729 and $12,227, respectively 29,448 37,745
TV program rights, net of current portion 6,509 8,818
Investments 11,287 12,315
Deposits and other 25,538 3,199
---------------- ----------------
Total other assets, net 72,782 62,077
---------------- ----------------
Total assets $ 2,506,872 $ 2,510,069
================ ================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
37
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28,
--------------------------------------
2001 2002
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 38,995
Current maturities of other long-term debt 4,187 7,933
Current portion of TV program rights payable 28,192 27,507
Accrued salaries and commissions 10,342 7,852
Accrued interest 17,038 14,068
Deferred revenue 17,397 16,392
Other 5,768 7,531
Credit facility debt to be repaid with proceeds
of assets held for sale - 135,000
Liabilities associated with assets held for sale 21 63
---------------- ----------------
Total current liabilities 117,151 255,341
CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 1,380,000 1,117,000
SENIOR DISCOUNT NOTES - 226,507
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 13,684 6,949
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 47,567 40,551
OTHER NONCURRENT LIABILITIES 5,531 26,966
DEFERRED INCOME TAXES 135,468 101,198
---------------- ----------------
Total liabilities 1,699,401 1,774,512
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY:
Series A cumulative convertible preferred stock, $0.01
par value; $50.00 liquidation value; authorized 10,000,000
shares; issued and outstanding 2,875,000 shares in 2001
and 2002 29 29
Class A common stock, $.01 par value; authorized 170,000,000
shares; issued and outstanding 41,900,315 shares and
42,761,299 shares in 2001 and 2002, respectively 419 428
Class B common stock, $.01 par value; authorized 30,000,000
shares; issued and outstanding 5,230,396 shares and
5,250,127 shares in 2001 and 2002, respectively 52 53
Additional paid-in capital 830,299 843,254
Accumulated deficit (22,730) (95,822)
Accumulated other comprehensive income (598) (12,385)
---------------- ----------------
Total shareholders' equity 807,471 735,557
---------------- ----------------
Total liabilities and shareholders' equity $ 2,506,872 $ 2,510,069
================ ================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
38
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 28, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Class A Class B Series A
Common Stock Common Stock Preferred Stock
-------------------------- -------------------------- ---------------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
--------------- ------ ----------- --------- ----------- -------
BALANCE, FEBRUARY 28, 1999 26,380,414 $ 264 5,164,530 $ 52 - $ -
Issuance of Class A Common stock in
exchange for Class B common stock 505,668 5 (505,668) (5) - -
Exercise of stock options and
related income tax benefits 886,496 9 79,720 - - -
Issuance of Class A common
stock to profit sharing plan 34,246 - - - - -
Issuance of Class A common stock to
employees and officers and related
income tax benefits 41,987 - - - - -
Sale of Class A common stock, net
of costs incurred of $14,430 13,384,000 134 - - - -
Sale of Series A cumulative
convertible preferred stock, net
of costs incurred of $5,341 - - - - 2,875,000 29
Preferred stock dividends paid - - - - - -
Comprehensive Income:
Net income (loss) - - - - - -
Cumulative translation adjustment - - - - - -
Total comprehensive income - - - - - -
--------------- ------ --------------- ------- ---------------- -------
BALANCE, FEBRUARY 29, 2000 41,232,811 412 4,738,582 47 2,875,000 29
--------------- ------ --------------- ------- ---------------- -------
Issuance of Class A Common stock in
exchange for Class B common stock 17,875 - (17,875) - - -
Exercise of stock options and
related income tax benefits 482,991 5 509,689 5 - -
Issuance of Class A common
stock to profit sharing plan 47,281 1 - - - -
Issuance of Class A common stock to
employees and officers and related
income tax benefits 82,688 1 - - - -
Sale of Class A common stock
to employees through ESPP 36,669 - - - - -
Preferred stock dividends paid - - - - - -
Comprehensive Income:
Net income (loss) - - - - - -
Cumulative translation adjustment - - - - - -
Total comprehensive income - - - - - -
--------------- ------ --------------- ------- ---------------- -------
BALANCE, FEBRUARY 28, 2001 41,900,315 419 5,230,396 52 2,875,000 29
--------------- ------ --------------- ------- ---------------- -------
Issuance of Class A Common stock in
exchange for Class B common stock - - - - - -
Exercise of stock options and
related income tax benefits 314,258 3 - - - -
Issuance of Class A common
stock to profit sharing plan - - - - - -
Issuance of Class A common stock to
employees and officers and related
income tax benefits 520,579 6 19,731 1 - -
Sale of Class A common stock
to employees through ESPP 26,147 - - - - -
Preferred stock dividends paid - - - - - -
Comprehensive Income:
Net income (loss) - - - - - -
Cumulative translation adjustment - - - - - -
Net unrealized loss on hedged
derivatives - - - - - -
Total comprehensive income - - - - - -
--------------- ------ --------------- ------- ---------------- -------
BALANCE, FEBRUARY 28, 2002 42,761,299 $ 428 5,250,127 $ 53 2,875,000 $ 29
=============== ====== =============== ======= ================ =======
The accompanying notes to consolidated financial statements are an integral part of these statements.
39
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (CONTINUED)
FOR THE THREE YEARS ENDED FEBRUARY 28, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Shareholders'
Capital Deficit Income Equity
---------------- --------------- --------------- ----------------
BALANCE, FEBRUARY 28, 1999 $ 260,186 $ (24,305) $ (648) $ 235,549
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 16,761 - - 16,770
Issuance of Class A common
stock to profit sharing plan 1,250 - - 1,250
Issuance of Class A common stock
to employees and officers and related
income tax benefits 4,807 - - 4,807
Sale of Class A common stock, net
of costs incurred of $14,430 383,436 - - 383,570
Sale of Series A cumulative
convertible preferred stock, net
of costs incurred of $5,341 138,380 - - 138,409
Preferred stock dividends paid - (3,144) - (3,144)
Comprehensive Income:
Net income (loss) - (33) - -
Cumulative translation adjustment - - (811) -
Total comprehensive income - - - (844)
---------------- --------------- --------------- ----------------
BALANCE, FEBRUARY 29, 2000 804,820 (27,482) (1,459) 776,367
---------------- --------------- --------------- ----------------
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 18,707 - - 18,717
Issuance of Class A common
stock to profit sharing plan 1,250 - - 1,251
Issuance of Class A common stock
to employees and officers and related
income tax benefits 4,586 - - 4,587
Sale of Class A common stock
to employees through ESPP 936 - - 936
Preferred stock dividends paid - (8,984) - (8,984)
Comprehensive Income:
Net income (loss) - 13,736 -
Cumulative translation adjustment - - 861
Total comprehensive income - - - 14,597
---------------- --------------- --------------- ----------------
BALANCE, FEBRUARY 28, 2001 $ 830,299 $ (22,730) $ (598) $ 807,471
================ =============== =============== ================
Issuance of Class A Common stock in
exchange for Class B common stock - - - -
Exercise of stock options and
related income tax benefits 3,610 - - 3,613
Issuance of Class A common
stock to profit sharing plan - - - -
Issuance of Class A common stock
to employees and officers and related
income tax benefits 8,770 - - 8,777
Sale of Class A common stock
to employees through ESPP 575 - - 575
Preferred stock dividends paid - (8,984) - (8,984)
Comprehensive Income:
Net income (loss) - (64,108) -
Cumulative translation adjustment - - (6,303)
Net unrealized loss on hedged derivatives - - (5,484)
Total comprehensive income - - - (75,895)
---------------- --------------- --------------- ----------------
BALANCE, FEBRUARY 28, 2002 $ 843,254 $ (95,822) $ (12,385) $ 735,557
================ =============== ================ ================
The accompanying notes to consolidated financial statements are an integral part of these statements.
40
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
--------------- --------------- ---------------
OPERATING ACTIVITIES:
Net income (loss) $ (33) $ 13,736 $ (64,108)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item 2,022 - 1,084
Depreciation and amortization 53,818 94,454 124,335
Accretion of interest on senior discount notes,
including amortization of related debt costs - - 24,998
Provision for bad debts 2,550 3,713 4,005
Provision (benefit) for deferred income taxes 6,670 15,810 (25,623)
Non-cash compensation 7,357 5,400 9,095
Loss on donation of radio station 956 - -
Gain on exchange of assets - (22,000) -
Impairment of asset - - 9,063
Tax benefits of exercise of stock options 2,889 10,859 999
Other (783) 1,464 (5,928)
Changes in assets and liabilities -
Accounts receivable (13,319) (9,316) (2,118)
Prepaid expenses and other current assets (14,546) (24,627) 5,127
Other assets (2,507) 12,099 (5,953)
Accounts payable and accrued liabilities 10,165 15,341 (2,709)
Deferred revenue 4,332 569 (963)
Other liabilities (33,211) (19,772) (1,927)
-------------- --------------- ---------------
Net cash provided by operating activities 26,360 97,730 69,377
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Purchases of property and equipment (29,316) (26,225) (28,416)
Cash paid for acquisitions (231,130) (1,060,681) (140,746)
Deposits on acquisitions and other (11,500) (23,849) (5,943)
--------------- --------------- ---------------
Net cash used in investing activities (271,946) (1,110,755) (175,105)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Payments on long-term debt (426,668) (1,051,549) (133,000)
Proceeds from long-term debt 149,668 2,128,388 5,000
Proceeds from the issuance of the Company's Class A
common stock, net of transaction costs 383,570 - -
Proceeds from the issuance the Company's Series A
cumulative convertible preferred stock, net of
transaction costs 138,409 - -
Proceeds from senior discount notes offering - - 202,612
Proceeds from exercise of stock options
and employee stock purchases 13,881 8,794 3,189
Payments for debt related costs - (21,095) (16,626)
Preferred stock dividends (2,021) (8,984) (8,984)
-------------- --------------- ---------------
Net cash provided by financing activities 256,839 1,055,554 52,191
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,253 42,529 (53,537)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,117 17,370 59,899
--------------- --------------- ---------------
End of period $ 17,370 $ 59,899 $ 6,362
=============== =============== ===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
41
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
---------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 41,735 $ 58,362 $ 99,824
Income taxes 9,589 550 1,281
Non- cash investing and financing transactions-
Preferred stock dividends accrued 1,123 - -
ACQUISITION OF COUNTRY SAMPLER:
Fair value of assets acquired $ 25,608
Cash paid 18,954
---------------
Liabilities recorded $ 6,654
===============
ACQUISITION OF WKCF-TV:
Fair value of assets acquired $ 246,445
Cash paid 197,105
---------------
Liabilities recorded $ 49,340
===============
ACQUISITION OF VOTIONIS, S.A:
Fair value of assets acquired $ 18,936
Cash paid 13,302
---------------
Liabilities recorded $ 5,634
===============
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,520
Cash paid 36,827
---------------
Liabilities recorded $ 2,693
===============
ACQUISITION OF KKFR-FM AND KXPK-FM:
Fair value of assets acquired $ 110,210
Cash paid 109,052
---------------
Liabilities recorded $ 1,158
===============
ACQUISITION OF TELEVISION PROPERTIES
FROM LEE ENTERPRISES, INC:
Fair value of assets acquired $ 633,639
Cash paid 582,994
---------------
Liabilities recorded $ 50,645
===============
ACQUISITION OF KIHT-FM, KFTK-FM, KPNT-FM,
WVRV-FM, WIL-FM AND WRTH-AM:
Fair value of assets acquired $ 230,891
Cash paid 230,891
---------------
Liabilities recorded $ -
===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
42
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
---------------- --------------- ---------------
EXCHANGE OF ASSETS FOR KZLA-FM:
Fair value of assets acquired $ 185,000
Basis in assets exchanged 163,000
Gain on exchange of assets 22,000
Cash paid -
---------------
Liabilities recorded $ -
===============
ACQUISITION OF KALC-FM:
Fair value of assets acquired $ 100,917
Cash paid 100,917
---------------
Liabilities recorded $ -
===============
ACQUISITION OF KKLT-FM, KTAR-AM and KMVP-AM:
Fair value of assets acquired $ 160,746
Cash paid, net of deposit 140,746
Deposit paid in June 2000 20,000
---------------
Liabilities recorded $ -
===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
43
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
------------------------------------------------------------------
2000 2001 2002
------------------ ------------------ ------------------
GROSS REVENUES $ 380,995 $ 550,073 $ 614,414
LESS AGENCY COMMISSIONS 55,730 79,455 80,634
------------------ ------------------ ------------------
NET REVENUES 325,265 470,618 533,780
Operating expenses 199,818 296,405 348,115
Corporate expenses 15,430 17,601 20,283
Time brokerage fees - 7,344 479
Depreciation and amortization 44,161 74,018 100,258
Non-cash compensation 7,357 5,400 9,095
Restructuring fees 896 2,057 768
Impairment loss and other - 2,000 10,672
------------------ ------------------ ------------------
OPERATING INCOME 57,603 65,793 44,110
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest expense (51,986) (72,444) (104,102)
Loss on donation of radio station (956) - -
Gain (loss) in unconsolidated affiliates - (1,360) (5,003)
Other income, net 4,203 39,397 360
------------------ ------------------ ------------------
Total other income (expense) (48,739) (34,407) (108,745)
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 8,864 31,386 (64,635)
PROVISION (BENEFIT) FOR INCOME TAXES 6,875 17,650 (17,833)
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 1,989 13,736 (46,802)
EXTRAORDINARY LOSS, NET OF TAX 2,022 - 1,084
------------------ ------------------ ------------------
NET INCOME (LOSS) $ (33) $ 13,736 $ (47,886)
================= ================= =================
The accompanying notes to consolidated financial statements are an integral part of these statements.
44
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
FEBRUARY 28,
--------------------------------------
2001 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,899 $ 6,362
Accounts receivable, net of allowance for
doubtful accounts of $2,202 and $2,800, respectively 97,281 95,240
Current portion of TV program rights 12,028 9,837
Income tax refunds receivable 13,970 -
Prepaid expenses 17,005 14,847
Other 14,832 13,820
Current assets held for sale 134,983 123,416
---------------- ----------------
Total current assets 349,998 263,522
---------------- ----------------
PROPERTY AND EQUIPMENT:
Land and buildings 84,983 88,209
Leasehold improvements 12,299 12,341
Broadcasting equipment 136,312 151,496
Office equipment and automobiles 44,553 49,160
Construction in progress 10,560 16,735
---------------- ----------------
288,707 317,941
Less- Accumulated depreciation and amortization 56,874 86,802
---------------- ----------------
Total property and equipment, net 231,833 231,139
---------------- ----------------
INTANGIBLE ASSETS:
Broadcast licenses 1,736,398 1,891,741
Excess of cost over fair value of net
assets of purchased businesses 204,462 204,429
Other intangibles 33,591 41,135
---------------- ----------------
1,974,451 2,137,305
Less- Accumulated amortization 122,192 183,974
---------------- ----------------
Total intangible assets, net 1,852,259 1,953,331
---------------- ----------------
OTHER ASSETS:
Deferred debt issuance costs, net of accumulated
amortization of $5,729 and $11,122, respectively 29,448 26,815
TV program rights, net of current portion 6,509 8,818
Investments 11,287 12,315
Deposits and other 25,538 3,199
---------------- ----------------
Total other assets, net 72,782 51,147
---------------- ----------------
Total assets $ 2,506,872 $ 2,499,139
================ ================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
45
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28,
--------------------------------------
2001 2002
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,206 $ 38,995
Current maturities of other long-term debt 4,187 7,933
Current portion of TV program rights payable 28,192 27,507
Accrued salaries and commissions 10,342 7,852
Accrued interest 17,038 14,068
Deferred revenue 17,397 16,392
Other 5,768 6,408
Credit facility debt to be repaid with proceeds
of assets held for sale - 135,000
Current liabilities held for sale 21 63
---------------- ----------------
Total current liabilities 117,151 254,218
CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 1,380,000 1,117,000
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 13,684 6,949
TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 47,567 40,551
OTHER NONCURRENT LIABILITIES 5,531 26,966
DEFERRED INCOME TAXES 135,468 108,988
---------------- ----------------
Total liabilities 1,699,401 1,554,672
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY:
Common stock, no par value; authorized, issued
and outstanding 1,000 shares at February 28,
2001 and 2002 830,799 1,027,221
Additional paid-in capital - 8,108
Accumulated deficit (22,730) (78,477)
Accumulated other comprehensive income (598) (12,385)
---------------- ----------------
Total shareholders' equity 807,471 944,467
---------------- ----------------
Total liabilities and shareholders' equity $ 2,506,872 $ 2,499,139
================ ================
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
46
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-YEARS ENDED FEBRUARY 28, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
------------------------- Accumulated
Additional Other Total
Shares Paid-in Accumulated Comprehensive Shareholders'
Outstanding Amount Capital Deficit Income Equity
-------------- ---------- -------- ------------ -------------- -------------
BALANCE, FEBRUARY 28, 1999 1,000 $ 260,502 $ - $ (24,305) $ (648) $ 235,549
Distributions to parent - - - (3,144) - (3,144)
Contributions from parent - 544,806 - - - 544,806
Comprehensive Income:
Net income (loss) - - - (33) -
Cumulative translation adjustment - - - - (811)
Total comprehensive income - - - - - (844)
------------- ---------- -------- ------------ --------------- -------------
BALANCE, FEBRUARY 29, 2000 1,000 805,308 - (27,482) (1,459) 776,367
------------- ---------- -------- ------------ --------------- -------------
Distributions to parent - - - (8,984) - (8,984)
Contributions from parent - 25,491 - - - 25,491
Comprehensive Income:
Net income (loss) - - - 13,736 -
Cumulative translation adjustment - - - - 861
Total comprehensive income - - - - - 14,597
------------- ---------- -------- ------------ --------------- -------------
BALANCE, FEBRUARY 28, 2001 1,000 830,799 - (22,730) (598) $ 807,471
============= ========== ======== ============ =============== =============
Accrued dividend at reorganization - - - 1,123 - 1,123
Distributions to parent - - (8,984) - (8,984)
Contributions from parent - 196,422 8,108 - - 204,530
Comprehensive Income:
Net income (loss) - - - (47,886) -
Cumulative translation adjustment - - - - (6,303)
Net unrealized loss on hedged derivatives - - - - (5,484)
Total comprehensive income - - - - - (59,673)
------------- ---------- -------- ------------ --------------- --------------
BALANCE, FEBRUARY 28, 2002 1,000 $1,027,221 $ 8,108 $ (78,477) $ (12,385) $ 944,467
============= ========== ======== ============ =============== =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
47
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
--------------- --------------- ---------------
OPERATING ACTIVITIES:
Net income (loss) $ (33) $ 13,736 $ (47,886)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities -
Extraordinary item 2,022 - 1,084
Depreciation and amortization 53,818 94,454 124,335
Provision for bad debts 2,550 3,713 4,005
Provision (benefit) for deferred income taxes 6,670 15,810 (17,833)
Non-cash compensation 7,357 5,400 9,095
Loss on donation of radio station 956 - -
Gain on exchange of assets - (22,000) -
Impairment of asset - - 9,063
Other (783) 1,464 (5,928)
Changes in assets and liabilities -
Accounts receivable (13,319) (9,316) (2,118)
Prepaid expenses and other current assets (14,546) (24,627) 5,127
Other assets (2,507) 12,099 (5,952)
Accounts payable and accrued liabilities 10,165 15,341 (2,709)
Deferred revenue 4,332 569 (963)
Other liabilities (33,211) (19,772) (1,927)
-------------- --------------- ---------------
Net cash provided by operating activities 23,471 86,871 67,393
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Purchases of property and equipment (29,316) (26,225) (28,416)
Cash paid for acquisitions (231,130) (1,060,681) (140,746)
Deposits on acquisitions and other (11,500) (23,849) (5,943)
--------------- --------------- ---------------
Net cash used in investing activities (271,946) (1,110,755) (175,105)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Payments on long-term debt (426,668) (1,051,549) (133,000)
Proceeds from long-term debt 149,668 2,128,388 5,000
Distributions to parent (2,021) (8,984) (8,984)
Contributions from parent 538,749 19,653 195,753
Payments for debt related costs - (21,095) (4,594)
--------------- --------------- ---------------
Net cash provided by financing activities 259,728 1,066,413 54,175
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,253 42,529 (53,537)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,117 17,370 59,899
--------------- --------------- ---------------
End of period $ 17,370 $ 59,899 $ 6,362
=============== =============== ===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
48
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
---------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 41,735 $ 58,362 $ 99,824
Income taxes 9,589 550 1,281
Non- cash investing and financing transactions-
Preferred stock dividends accrued 1,123 - -
ACQUISITION OF COUNTRY SAMPLER:
Fair value of assets acquired $ 25,608
Cash paid 18,954
---------------
Liabilities recorded $ 6,654
===============
ACQUISITION OF WKCF-TV:
Fair value of assets acquired $ 246,445
Cash paid 197,105
---------------
Liabilities recorded $ 49,340
===============
ACQUISITION OF VOTIONIS, S.A:
Fair value of assets acquired $ 18,936
Cash paid 13,302
---------------
Liabilities recorded $ 5,634
===============
ACQUISITION OF LOS ANGELES MAGAZINE:
Fair value of assets acquired $ 39,520
Cash paid 36,827
---------------
Liabilities recorded $ 2,693
===============
ACQUISITION OF KKFR-FM AND KXPK-FM:
Fair value of assets acquired $ 110,210
Cash paid 109,052
---------------
Liabilities recorded $ 1,158
===============
ACQUISITION OF TELEVISION PROPERTIES
FROM LEE ENTERPRISES, INC:
Fair value of assets acquired $ 633,639
Cash paid 582,994
---------------
Liabilities recorded $ 50,645
===============
ACQUISITION OF KIHT-FM, KFTK-FM, KPNT-FM,
WVRV-FM, WIL-FM AND WRTH-AM:
Fair value of assets acquired $ 230,891
Cash paid 230,891
---------------
Liabilities recorded $ -
===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
49
EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29),
-------------------------------------
2000 2001 2002
---------------- --------------- ---------------
EXCHANGE OF ASSETS FOR KZLA-FM:
Fair value of assets acquired $ 185,000
Basis in assets exchanged 163,000
Gain on exchange of assets 22,000
Cash paid -
---------------
Liabilities recorded $ -
===============
ACQUISITION OF KALC-FM:
Fair value of assets acquired $ 100,917
Cash paid 100,917
---------------
Liabilities recorded $ -
===============
ACQUISITION OF KKLT-FM, KTAR-AM and KMVP-AM:
Fair value of assets acquired $ 160,746
Cash paid, net of deposit 140,746
Deposit paid in June 2000 20,000
---------------
Liabilities recorded $ -
===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
50
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The following discussion pertains to Emmis Communications Corporation ("ECC") and its subsidiaries (collectively, "Emmis" or
the "Company") and to Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a wholly owned subsidiary of
ECC in connection with the Company's reorganization (see Note 1c. below) on June 22, 2001. Unless otherwise noted, all
disclosures contained in these Notes to Consolidated Financial Statements apply to Emmis and EOC. Emmis' foreign subsidiaries
report on a fiscal year ending December 31, which Emmis consolidates into its fiscal year ending February 28 (29). All
significant intercompany balances and transactions have been eliminated.
b. Organization
Emmis Communications Corporation is a diversified media company with radio broadcasting, television broadcasting and magazine
publishing operations. After giving effect to the Company's sale of two stations in Denver, Emmis operates eighteen FM radio
stations and three AM radio stations in the United States that serve the nation's three largest radio markets of New York City,
Los Angeles and Chicago, as well as Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The fifteen television stations
Emmis operates serve geographically diverse, mid-sized markets in the U.S., as well as the large markets of Portland and Orlando,
and have a variety of television network affiliations, including five with CBS, five with Fox, three with NBC, one with ABC and
one with WB. Emmis Communications Corporation also publishes Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly,
Cincinnati, Country Sampler, and Country Marketplace magazines, and has a 59.5% interest in a national radio station in Hungary
(Slager Radio), a 75% interest in one FM and one AM radio station in Buenos Aires, Argentina (Votionis), and engages in certain
businesses ancillary to broadcasting, such as broadcast tower leasing.
c. Reorganization
On June 22, 2001, ECC transferred all of its assets and substantially all of its liabilities, including its credit facility and
its outstanding senior subordinated notes, to EOC, a newly formed, wholly-owned subsidiary in exchange for 1,000 shares of no par
value common stock. As a result, effective June 22, 2001, EOC became the only direct subsidiary of ECC and ECC became a holding
company that conducts its business operations through EOC and its subsidiaries. ECC remains the issuer of the Class A, Class B
and Class C common stock and the convertible preferred stock, and is the obligor of the senior discount notes. However, EOC is
the obligor of the senior subordinated notes and the borrower under the credit facility. Pursuant to the terms of the senior
subordinated notes, EOC is required to file with the SEC periodic reports on Forms 10-Q, 10-K and 8-K as if EOC were required to
do so pursuant to SEC rules and regulations. EOC's financial statements are presented herein for all periods required as if EOC
had existed at the beginning of the earliest period presented because the corporate reorganization was accounted for as a
reorganization of entities under common control.
Substantially all of ECC's business is conducted through its subsidiaries. The credit facility and senior subordinated notes
indenture contain certain provisions that may restrict the ability of ECC's subsidiaries to transfer funds to ECC in the form of
cash dividends, loans or advances. See the accompanying financial statements of EOC and its subsidiaries for the net assets of
the restricted subsidiaries.
d. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of
the publication.
51
e. Allowance for Doubtful Accounts
A provision for doubtful accounts is recorded based on management's judgement of the collectibility of receivables. The
activity in the allowance for doubtful accounts during the years ended February 2000, 2001 and 2002 was as follows:
Balance at Balance
Beginning At End
Of Year Provision Write-Offs Of Year
------------- ------------ ----------- -------------
Year ended February 29, 2000 $ 1,698 $ 2,550 $ (2,324) $ 1,924
Year ended February 28, 2001 1,924 3,713 (3,435) 2,202
Year ended February 28, 2002 2,202 4,005 (3,407) 2,800
f. 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 sheets.
The rights to program materials are reflected in the accompanying consolidated balance sheets at the lower of unamortized cost
or estimated net realizable value. Estimated net realizable values are based upon management's expectation of future advertising
revenues, net of sales commissions, to be generated by the program material. Amortization of program contract costs is computed
under either the straight-line method over the contract period or based on usage, whichever yields the greater amortization for
each program on a monthly basis. Program contract costs that management expects to be amortized in the succeeding year are
classified as current assets. Program contract liabilities are typically paid on a scheduled basis and are not affected by
adjustments for amortization or estimated net realizable value. Certain program contracts provide for the exchange of advertising
air time in lieu of cash payments for the rights to such programming. These contracts are recorded as the programs are aired at
the estimated fair value of the advertising air time given in exchange for the program rights.
g. Time Brokerage Fees
The Company generally enters into time brokerage agreements in connection with acquisitions, pending regulatory approval of
transfer of license assets. Under the terms of these agreements, the Company makes specified periodic payments to the
owner-operator in exchange for the grant to the Company of the right to program and sell advertising of a specified portion of the
station's inventory of broadcast time. The Company records revenues and expenses associated with the portion of the station's
inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and
responsibility for the operation of the station, including responsibility over all programming broadcast on the station.
Included in the accompanying consolidated statements of operations for the years ended February 2001 and 2002 are time
brokerage fees of $7.3 million and $0.5 million, respectively.
h. Non-cash Compensation
Non-cash compensation includes compensation expense associated with stock options granted, the issuance of restricted common
stock, common stock contributed to the Company's Profit Sharing Plan, and common stock issued to employees at our discretion. 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 8.
In December 2001, Emmis instituted a 10% pay cut for substantially all of its non-contract employees and also began a stock
compensation program under its 2001 Equity Incentive Plan. All Emmis employees who were affected by the pay cut are automatically
eligible to participate in the stock compensation program and all other employees are eligible to participate in the program by
taking a voluntary pay cut. Each participant in the program may elect to receive the portion of their compensation that was cut
in the form of payroll stock that is issued every two weeks or in the form of restricted stock that is issued after the end of the
award year in January 2003. The payroll stock is awarded based on the fair market value of Emmis' Class A Common Stock on the
date it is issued. The restricted stock is awarded based on a discount off the initial value of Emmis' Class A Common Stock.
52
During the first award year (which extends through December 2002), we expect the stock compensation program to reduce cash
compensation expense by approximately $14 million, but non-cash compensation will increase by the same amount. We expect to issue
approximately 0.8 million shares during the first award year. While no formal decisions have been made, it is likely that the
program will continue in some form during the next fiscal year.
i. Restructuring Fees
In fiscal 2000, 2001 and 2002, Emmis incurred restructuring fees of $896, $2,057 and $768, respectively. The $896 in fiscal
2000 reflects the present value of future payments under a syndicated program agreement that was terminated in connection with
reformatting one of our radio stations. The $2,057 in fiscal 2001 reflects professional fees associated with the evaluation of
structural alternatives. The $768 in fiscal 2002 principally consists of severance and related costs associated with centralizing
certain technical functions of the television division.
j. 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.
k. Property and Equipment
Property and equipment are recorded at cost. Depreciation is generally computed by the straight-line method over the estimated
useful lives of the related assets which are 31.5 years for buildings, not more than 32 years or the life of the lease, whichever
is lower for leasehold improvements, and 5 to 7 years for broadcasting equipment, office equipment and automobiles. Maintenance,
repairs and minor renewals are expensed; improvements are capitalized. Interest was capitalized in connection with the
construction of the KHON operating facility. The capitalized interest was recorded as part of the building. In fiscal 2000
approximately $420 of interest was capitalized. No interest was capitalized in fiscal 2001 or 2002. 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.
l. Intangible Assets
Intangible assets are recorded at cost. Generally, broadcast licenses, trademarks and the excess of cost over fair value of net
assets of purchased businesses are being amortized using the straight-line method over 40 years. The cost of the broadcast
license for Slager Radio is being amortized over the seven year initial term of the license. The cost of the broadcast license
for the two stations in Buenos Aires, Argentina is being amortized over the twenty-three year term of the license. The excess of
cost over fair value of net assets resulting from the purchase of publications is being amortized over 15 years. Other
intangibles are amortized using the straight-line method over varying periods, not in excess of 10 years.
Subsequent to the acquisition of an intangible asset, Emmis evaluates whether later events and circumstances indicate the
remaining estimated useful life of that asset may warrant revision or that the remaining carrying value of such an asset may not
be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, Emmis uses an estimate
of the related asset's undiscounted future cash flows over the remaining life of that asset in measuring recoverability. If
separately identifiable cash flows are not available for an intangible asset (as would generally be the case for the excess of
cost over fair value of purchased businesses), Emmis evaluates recoverability based on the expected undiscounted cash flows of the
specific business to which the asset relates. If such an analysis indicates that impairment has in fact occurred, Emmis writes
down the remaining net book value of the intangible asset to its fair value. For this purpose, fair value is determined using
quoted market prices (if available), appraisals or appropriate valuation techniques.
In fiscal 2001, the Company determined an intangible balance related to WTLC-AM was impaired and as a result incurred a $2.0
million impairment charge to record the intangible asset at its fair value. This impairment charge is reflected in impairment
loss and other in the accompanying consolidated statements of operations. This station was sold in April 2001.
53
In fiscal 2002, the Company determined an intangible balance related to KALC-FM was impaired and as a result incurred a $9.1
million impairment charge to record the intangible asset at its fair value. This impairment charge is reflected in impairment
loss and other in the accompanying consolidated statements of operations. This station was sold in May 2002.
m. Assets held for sale
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of radio station KALC-FM in Denver, Colorado
to Entercom Communications Corporation for $88.0 million. Also effective May 1, 2002, Emmis completed the sale of substantially
all of the assets of radio station KXPK-FM in Denver, Colorado to Entravision Communications Corporation for $47.5 million. The
proceeds from the sale of these stations were used to repay outstanding obligations under the credit facility. As of February 28,
2002, the net carrying amount of the assets held for sale was $123.4 million.
Combined revenues of the assets held for sale were approximately $4.1 million and $11.9 million for the years ended February
2001 and 2002, respectively. Combined operating expenses of the assets held for sale were approximately $4.7 million and $8.6
million for the years ended February 2001 and 2002, respectively. Combined depreciation and amortization of the assets held for
sale were approximately $1.4 million and $3.6 million for the years ended February 2001 and 2002, respectively. In connection
with the sale of KALC-FM, the Company recognized an impairment loss of $9.1 million in fiscal 2002, which is reflected in
impairment loss and other in the accompanying consolidated statements of operations.
n. Advertising and Subscription Acquisition Costs
Advertising and subscription acquisition costs are expensed the first time the advertising takes place, except for certain
direct-response advertising related to the identification of new magazine subscribers, the primary purpose of which is to elicit
sales from customers who can be shown to have responded specifically to the advertising and that results in probable future
economic benefits. These direct-response advertising costs are capitalized as assets and amortized over the estimated period of
future benefit, ranging from six months to two years subsequent to the promotional event. As of February 28, 2001 and 2002, we
had approximately $1.4 million and $1.2 million, respectively, in direct-response advertising costs capitalized as assets. On an
interim basis, the Company defers major advertising campaigns for which future benefits can be demonstrated. These costs are
amortized over the shorter of the period benefited or the remainder of the fiscal year. Advertising expense for the years ended
February 2000, 2001 and 2002 was $15.8 million, $23.9 million and $15.0 million, respectively.
o. Investments
Emmis has a 50% ownership interest (approximately $5,114 as of February 28, 2002) in a partnership in which the sole asset is
land on which a transmission tower is located. The other owner has voting control of the partnership. Emmis has a 29% ownership
interest (approximately $2,627 as of February 28, 2002) in a local media internet venture. Emmis has a 25% ownership interest
(approximately $2,165 as of February 28, 2002) in a company that operates a tower site in Portland, Oregon. Emmis has a 51%
ownership interest (approximately $740 as of February 28, 2002) in a company that operates crafting stores, but Emmis does not
control the operations of the entity. These investments are accounted for using the equity method of accounting. Emmis owns less
than 2% (approximately $970 as of February 28, 2002) of an over-the-air digital content distributor. This investment is accounted
for using the cost method of accounting. During fiscal 2001, Emmis reduced the carrying value of its investment in BuyItNow.com
from $5.0 million to zero as the decline in the value of the investment was deemed to be other than temporary. This expense is
reflected in other income in the accompanying consolidated statements of operations.
p. Deferred Revenue and Barter Transactions
Deferred revenue includes deferred magazine subscription revenue and deferred barter revenue. Deferred magazine subscription
revenue is recognized when the publication is shipped. Barter transactions are recorded at the estimated fair value of the
product or service received. Broadcast revenue from barter transactions is recognized when commercials are broadcast or
publication is delivered. The appropriate expense or asset is recognized when merchandise or services are used or received.
Barter revenues for the years ended February 2000, 2001 and 2002 were $10.2 million, $12.0 million and $15.8 million,
respectively, and barter expenses were $9.8 million, $12.0 million and $15.2 million, respectively.
54
q. Foreign Currency Translation
The functional currency of Slager Radio is the Hungarian forint. Slager Radio's balance sheet has been translated from forints
to the U.S. dollar using the current exchange rate in effect at the subsidiary's balance sheet date. Slager Radio's results of
operations have been translated using an average exchange rate for the period. The translation adjustment resulting from the
conversion of Slager Radio's financial statements was $811, ($861) and ($754) for the years ended February 2000, 2001 and 2002,
respectively. This adjustment is reflected in shareholders' equity in the accompanying consolidated balance sheets.
The functional currency of the two stations in Argentina is the Argentinean peso, which until January 2002 was tied to the U.S.
dollar through the Argentine government's convertibility plan. In January 2002, the Argentine government allowed the peso to
devalue and trade against the U.S. dollar independently. These two stations' balance sheets have been translated from pesos to
U.S. dollars using the exchange rate in effect at the subsidiary's balance sheet date. The results of operations have been
translated using an average exchange rate for the period. The translation adjustment resulting from the conversion of their
financial statements was $7,057 for the year ended February 2002. This adjustment is reflected in shareholders' equity in the
accompanying consolidated balance sheets.
r. Earnings Per Share
Emmis
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", requires dual presentation of basic and
diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. Basic
EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares
outstanding for the period (36,155,982, 46,869,050 and 47,334,038 shares for the years ended February 2000, 2001 and 2002,
respectively). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted. Potentially dilutive securities at February 2000, 2001 and 2002 consisted of stock options and
the 6.25% Series A cumulative convertible preferred stock. The conversion of the preferred stock is not included in the
calculation of diluted net income per common share for the three years ended February 28, 2002 as the effect of these conversions
would be antidilutive. Additionally, the conversion of stock options is not included in the calculation of diluted net income per
common share for the year ended February 29, 2000 or February 28, 2002 as the effect of their conversion would be antidilutive.
Weighted average common equivalent shares outstanding for the period for purposes of computing diluted EPS are 36,155,982,
47,940,265 and 47,334,038 for the years ended February 2000, 2001 and 2002, respectively. Excluded from the calculation of
diluted net income per share are 2.7 million, 3.7 million and 3.7 million weighted average shares that would result from the
conversion of preferred shares for the years ended February 2000, 2001 and 2002, respectively. In the year ended February 28,
2001, approximately 0.7 million options were excluded from the calculation of diluted net income per share as the effect of their
conversion would be antidilutive.
EOC
Because EOC is a wholly-owned subsidiary of Emmis, disclosure of earnings per share for EOC is not required.
s. Stock Splits
In February 2000, the Company effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data
shown in the accompanying consolidated financial statements and notes has been retroactively adjusted to reflect the stock split.
t. Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
55
u. Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the short maturity of
these financial instruments. The carrying amounts of interest rate swaps are recorded at their fair value of $8,437, as of
February 28, 2002 and are included in other noncurrent liabilities in the accompanying consolidated balance sheets. The change in
fair value of interest rate swaps during the year of $5,484, net of tax, are recorded in accumulated other comprehensive income in
the accompanying consolidated balance sheets. Except for the senior subordinated notes and senior discount notes, the carrying
amounts of long-term debt approximate fair value due to the variable interest rate on such debt. On February 28, 2002, the fair
value of the senior subordinated notes was approximately $308.3 million and the fair value of the senior discount notes was
approximately $268.3 million. Fair value estimates are made at a specific point in time, based on relevant market information
about the financial instrument.
v. Derivative Financial Instruments
On March 1, 2001, Emmis adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." These statements establish accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other contracts. These statements
require that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair
value. Changes in the fair value of derivatives are to be recorded each period in earnings or comprehensive income, depending on
whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains
or losses on derivative instruments reported in the other comprehensive income must be reclassified as earnings in the period in
which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges must be recognized in
earnings in the current period. These standards result in additional volatility in reported assets, liabilities, earnings and
other comprehensive income. SFAS No. 133 further requires that the fair value and effectiveness of each hedging instrument must
be measured quarterly. The result of each measurement could result in fluctuations in reported assets, liabilities, other
comprehensive income and earnings as these changes in fair value and effectiveness are recorded to the financial statements.
SFAS No. 133 requires that as of the date of initial adoption the difference between the fair value of the derivative
instruments to be recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20
"Accounting Changes." On March 1, 2002, Emmis recorded the effect of the adoption of SFAS No. 133 which resulted in an immaterial
impact to the results of operations and the financial position of Emmis. See footnote 4 for discussion of the interest rate swap
agreements in effect during fiscal 2002 and at February 28, 2002.
w. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" that requires companies to cease amortizing
goodwill and certain other indefinite-lived intangible assets, including broadcast licenses. Under SFAS 142, goodwill and certain
indefinite-lived intangibles will not be amortized into results of operations, but instead the recorded value of certain
indefinite-lived intangibles including broadcast licenses will be tested for impairment at least annually with impairment being
measured as the excess of the asset's carrying amount over its fair value. Goodwill will also be tested for impairment at least
annually. Intangible assets that have finite useful lives will continue to be amortized over their useful lives and measured for
impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We adopted SFAS 142 and
began our impairment review on March 1, 2002. We have engaged an independent appraiser to conduct valuations of our
indefinite-lived intangible assets and expect to complete our review after the valuations are completed at the end of May 2002.
As of February 28, 2002, we had net unamortized goodwill and broadcast licenses in the amount of $175.2 million and $1,878.3
million, respectively. The adoption of SFAS 142 will eliminate our amortization of goodwill and indefinite-lived intangibles,
which was approximately $41.8 million and $61.2 million in the years ended February 28, 2001 and 2002, respectively. While this
expense will no longer be reflected on future financial statements, it remains deductible for federal income tax purposes. We
expect that our impairment review, once it is completed, will result in write-downs of some of our goodwill and indefinite-lived
intangibles, but we cannot currently determine the amount of the write-downs. However, we believe the write-down may be
material. Upon adoption, any transitional impairment loss recognized under SFAS 142 will be reported as the cumulative effect of
a change of accounting principle in our consolidated statements of operations. After initial adoption, any impairment losses
under SFAS 142 or 144 will be recorded as operating expenses.
56
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which
establishes a single model to account for impairment of assets to be held or disposed, incorporating guidelines for accounting and
disclosure of discontinued operations . This statement supercedes SFAS 121 and was adopted by the Company on March 1, 2002. The
adoption of SFAS 144 did not have a material impact on our results of operations or financial position.
x. Reclassifications
Certain reclassifications have been made to the prior years financial statements to be consistent with the February 28, 2002
presentation.
2. COMMON STOCK
Emmis has authorized 170,000,000 shares of Class A common stock, par value $.01 per share, 30,000,000 shares of Class B common
stock, par value $.01 per share, and 30,000,000 shares of Class C common stock, par value $.01 per share. The rights of these
three classes are essentially identical except that each share of Class A common stock has one vote with respect to substantially
all matters, each share of Class B common stock has 10 votes with respect to substantially all matters, and each share of Class C
common stock has no voting rights with respect to substantially all matters. Class B common stock is owned by the principal
shareholder (Jeffrey H. Smulyan). All shares of Class B common stock convert to Class A common stock upon sale or other transfer
to a party unaffiliated with the principal shareholder. At February 28, 2001 and 2002, no shares of Class C common stock were
issued or outstanding. The financial statements presented reflect the issuance of Class A and Class B common stock.
On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share
resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in
Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the credit
facility.
At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase
agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty
for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando,
Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the credit facility.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock, which may be issued with such designations, preferences,
limitations and relative rights as Emmis' Board of Directors may authorize.
On October 29, 1999, ECC completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock
at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition
of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under
the credit facility.
The 6.25% Series A cumulative convertible preferred stock has a liquidation preference of $50 per share and a par value of
$.01 per share. Each preferred share is convertible at the option of the holder into 1.28 shares of Class A common stock, subject
to certain events. Dividends are cumulative and payable quarterly in arrears on January 15, April 15, July 15, and October 15 of
each year at an annual rate of $3.125 per preferred share.
From April 15, 2001 to October 15, 2002, Emmis may redeem the preferred stock at a redemption premium equal to 104.911% of the
stated liquidation preference (plus accumulated and unpaid dividends, if any) if certain conditions are met. Beginning on October
15, 2002, and each October 15 thereafter, Emmis may redeem the preferred stock for cash at the following redemption premiums
(which are expressed as a percentage of the liquidation preference per share), plus in each case accumulated and unpaid dividends,
if any, whether or not declared to the redemption date:
57
Year Amount
---- --------
2002 103.571%
2003 102.679%
2004 101.786%
2005 100.893%
2006 and thereafter 100.000%
The terms of ECC's preferred stock provide for a quarterly dividend payment of $.78125 per share on each January 15, April 15,
July 15 and October 15. While Emmis has sufficient liquidity to declare and pay the dividends as they become due, it was not
permitted to do so for the October 15, 2001, January 15, 2002 and April 15, 2002 payments. Emmis' leverage ratio under the senior
discount notes indenture exceeded 8:1 for the October, January and April payments. Its leverage ratio under the senior
subordinated notes indenture exceeded 7:1 for the January and April payments. For each of these dividend dates, ECC's board of
directors set the record date, but did not declare the dividend. Instead, on each payment date a wholly-owned, unrestricted
subsidiary of EOC made a payment of $.78125 per share to each preferred shareholder of record. This subsidiary was permitted to
make the payment to the preferred shareholders under the senior discount notes and senior subordinated notes indentures.
Currently, Emmis meets its leverage ratio requirements under the senior subordinated notes and expects to meet its leverage ratio
requirements under the senior discount notes upon application of its April 2002 equity proceeds (discussed above). When permitted
to do so under the indentures, management expects ECC's board of directors to declare each dividend and deem the obligation to pay
each dividend to have been discharged by the subsidiary's prior payment.
4. CREDIT FACILITY, SENIOR SUBORDINATED NOTES AND SENIOR DISCOUNT NOTES
The credit facility, senior subordinated notes and senior discount notes were comprised of the following at February 28, 2001
and 2002:
2001 2002
--------------- ---------------
Credit Facility
Revolver $ - $ -
Term Note A 480,000 398,453
Term Note B 600,000 553,547
8 1/8% Senior Subordinated Notes Due 2009 300,000 300,000
--------------- ---------------
1,380,000 1,252,000
Less: Credit facility debt to be repaid with proceeds
of assets held for sale - 135,000
--------------- ---------------
EOC 1,380,000 1,117,000
12 1/2% Senior Discount Notes Due 2011 - 226,507
--------------- ---------------
Emmis $ 1,380,000 $ 1,343,507
=============== ===============
CREDIT FACILITY
On December 29, 2000 ECC entered into an amended and restated credit facility for $1.4 billion (consisting of a $320.0 million
revolver, a $480.0 million term note A and a $600.0 million term note B), which included a provision allowing ECC to increase the
commitment by $500.0 million under circumstances described in the credit facility. In June 2001, upon completion of the Company's
reorganization (see Note 1c), the Company repaid $93.0 million of term notes and transferred the credit facility to EOC. The
repayment resulted in the cancellation of a portion of the term notes and the Company recorded an extraordinary loss of
approximately $1.1 million, net of taxes, related to unamortized deferred debt issuance costs for the year ended February 28,
2002. During the year, EOC repaid and cancelled an additional $35.0 million in term notes. On November 30, 2001, EOC amended the
financial covenants of its credit facility through November 30, 2002 (the "Amendment Period"), which, among other things, reduced
total availability under the revolver to $220.0 million and resulted in the amortization of $1.4 million of deferred debt issuance
costs into interest expense during the year ended February 28, 2002
58
The revolver and term note A mature February 28, 2009 and the term note B matures August 31, 2009. Net deferred debt costs of
approximately $20.0 million relating to the credit facility are reflected in the accompanying consolidated balance sheets as of
February 28, 2002, and are amortized over the life of the credit facility as a component of interest expense.
Prior to the existing credit facility, EOC entered into a bridge financing arrangement in October 2000 that provided up to $1.0
billion in capacity. The bridge financing was replaced by the existing credit facility and accordingly $3.4 million of fees
associated with the bridge financing were amortized into interest expense during the year ended February 28, 2001.
The amended and restated credit facility provides for letters of credit to be made available to EOC not to exceed $100.0
million. The aggregate amount of outstanding letters of credit and amounts borrowed under the revolver cannot exceed the revolver
commitment. At February 28, 2002, $6.6 million in letters of credit were outstanding.
All outstanding amounts under the credit facility bear interest, at the option of EOC, at a rate equal to the Eurodollar Rate
or an alternative base rate (as defined in the credit facility) plus a margin. The margin over the Eurodollar Rate or the
alternative base rate varies (ranging from 0% to 2.9% and 0.5% to 3.5% during the Amendment Period), depending on Emmis' ratio of
debt to operating cash flow, as defined in the agreement. The weighted-average interest rate on borrowings outstanding under the
credit facility, including the effects of interest rate swaps (discussed below) was approximately 6.3% and 7.4% at February 28,
2002 and February 28, 2001, 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 EOC to have fixed interest rates for a two year
period on at least 50% of its total outstanding debt, as defined (including the senior subordinated debt). After the first two
years, this ratio of fixed to floating rate debt must be maintained if EOC's total leverage ratio, as defined, is greater than 6:1
at any quarter end. The notional amount of interest rate protection agreements at February 28, 2002 totaled $350.0 million. The
interest rate swap agreements, which expire at various dates beginning February 3, 2003 to February 8, 2004, effectively establish
interest rates on the credit facility's underlying base rate approximating a weighted average rate of 4.94% on the three-month
LIBOR interest rate.
As indicated in footnote 1u., Emmis accounts for interest rate swap arrangements under SFAS No. 133 as amended by SFAS No.
138. The fair market value of these swaps at February 28, 2002, was a liability of $8,437 which is reflected in the accompanying
consolidated balance sheets, with an associated income tax asset of $2,953. As Emmis has designated these interest rate swap
agreements as cash flow hedges and the swaps were highly effective during the year ended February 28, 2002, the net liability was
recorded as a component of comprehensive income and the ineffectiveness was not material. Interest paid under these swap
arrangements was $0 and $3,648 for the years ended February 28, 2001 and 2002, respectively.
The aggregate amount of term notes A and B begin amortizing in December 2003. The annual amortization and reduction schedules
for debt outstanding as of February 28, 2002, are as follows:
SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY
Year Ended Term Loan A Term Loan B Total Adjusted Total
February 28 (29), Amortization Amortization Amortization Amortization (1)
- -------------------- ---------------- ---------------- ---------------- -----------------
2003 $ - $ - $ - $ -
2004 16,934 1,384 18,318 10,084
2005 69,729 5,535 75,265 41,359
2006 73,714 5,535 79,249 43,406
2007 75,706 5,535 81,242 44,430
2008 79,691 5,535 85,226 46,478
2009 82,679 5,535 88,214 48,014
2010 - 524,486 524,486 523,129
----------- ----------- ----------- ---------------
Total $ 398,453 $ 553,547 $ 952,000 $ 756,900
=========== =========== =========== ===============
(1) Adjusted to give effect to the repayment of $60.1 million of credit facility debt in April
2002 with 50% of net equity offering proceeds and the repayment of $135.0 million of credit
facility debt in May 2002 with net proceeds from asset sales.
Proceeds from raising additional equity, issuing additional subordinated debt, or from asset sales, as well as excess cash flow
beginning in February 29, 2004, may be required to repay amounts outstanding under the credit facility. These mandatory repayment
provisions may apply depending on EOC's total leverage ratio, as defined under the credit facility. Additionally, EOC may
reborrow amounts paid in accordance with these provisions under certain circumstances.
59
The credit facility contains various financial and operating covenants and other restrictions with which EOC must comply,
including, among others, restrictions on additional indebtedness, incurrence of liens, engaging in businesses other than its
primary business, paying cash dividends on common stock, redeeming or repurchasing capital stock of ECC, acquisitions and asset
sales, as well as requirements to maintain certain financial ratios. After giving effect to the November 2001 amendment, EOC was
in compliance with these covenants at February 28, 2002. The credit facility provides that an event of default will occur if
there is a change of control of ECC, as defined. A change of control includes, but is not limited to, Jeffrey H. Smulyan or any
beneficial holder ceasing to own at least 35% of the general voting rights of the capital stock of ECC. Substantially all of
Emmis' assets, including the stock of Emmis' wholly-owned subsidiaries, are pledged to secure the credit facility.
SENIOR SUBORDINATED NOTES
On February 12, 1999, ECC issued $300 million of 8 1/8% senior subordinated notes. The senior subordinated notes were sold at
100% of the face amount. In March 1999, EOC filed an Exchange Offer Registration Statement with the SEC to exchange the senior
subordinated notes for new series B notes registered under the Securities Act. The terms of the series B notes are identical to
the terms of the senior subordinated notes. In June 2001, ECC transferred the senior discount notes to EOC as part of the
company's reorganization (see Note 1c).
On or after March 15, 2004 and until March 14, 2007, the notes may be redeemed at the option of EOC in whole or in part at
prices ranging from 104.063% to 101.354% plus accrued and unpaid interest. On or after March 15, 2007, the notes may be redeemed
at 100% plus accrued and unpaid interest. Upon a change of control (as defined), EOC is required to make an offer to purchase the
notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. Interest on the notes is payable
semi-annually. The notes have no sinking fund requirements and are due in full on March 15, 2009.
The notes are guaranteed by certain subsidiaries of EOC and expressly subordinated in right of payment to all existing and
future senior indebtedness (as defined) of EOC. The notes will rank pari passu with any future senior subordinated indebtedness
(as defined) and senior to all subordinated indebtedness (as defined) of EOC.
The indenture relating to the notes contains covenants with respect to EOC which include limitations of indebtedness,
restricted payments (including preferred stock dividend payments, see Note 3), transactions with affiliates, issuance and sale of
capital stock of restricted subsidiaries, sale/leaseback transactions and mergers, consolidations or sales of substantially all of
EOC's assets. EOC was in compliance with these covenants at February 28, 2002.
SENIOR DISCOUNT NOTES
On March 27, 2001, Emmis received $202.6 million of proceeds from the issuance of senior discount notes due 2011, less
approximately $12.0 million of debt issuance costs. The notes, for which ECC is the obligor, accrete interest at a rate of 12.5%
per year, compounded semi-annually to an aggregate principal amount of $370.0 million on March 15, 2006. Commencing on September
15, 2006, interest is payable in cash on each March 15 and September 15, with the aggregate principal amount of $370.0 million due
on March 15, 2011. The notes have no sinking fund requirement. A portion of the net proceeds was used to fund the acquisition of
three radio stations in Phoenix, Arizona and the remaining net proceeds ($93.0 million) were placed in escrow. In June 2001, upon
completion of the Company's reorganization (see Note 1c), the proceeds held in escrow were released and used to reduce outstanding
borrowings under the credit facility.
In June 2001, ECC filed an Exchange Offer Registration Statement with the SEC to exchange the senior discount notes for new
senior discount notes registered under the Securities Act. The terms of the new senior discount notes are identical to the terms
of the senior discount notes they replaced.
Prior to March 15, 2004, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as
defined), to redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 112.5% plus accrued
and unpaid interest, provided that at least $240.5 million of the aggregate principal amount at maturity of the notes originally
issued remains outstanding after such redemption. Additionally, any time prior to March 15, 2006, the Company may redeem all or
part of the notes at a redemption price equal to 100% of the accreted value (as defined) of the notes plus the applicable premium
(as defined) as of, and liquidating damages (as defined), if any, to the date of redemption. On or after March 15, 2006 and until
March 14, 2009, the notes may be redeemed at the option of the Company in whole or in part at prices ranging from 106.25% to
102.083% plus accrued and unpaid interest. On or after March 15, 2009, the notes may be redeemed at 100% plus accrued and unpaid
interest. Upon a change of control (as defined), the Company is required to make an offer to purchase the notes then
60
outstanding. Prior to March 15, 2006, the purchase price will be 101% of the accreted value of the notes. On or after March 15,
2006, the purchase price will be 101% of the outstanding principal amount of the notes plus accrued and unpaid interest.
The notes are unsecured obligations of ECC and will rank pari passu with all future senior indebtedness (as defined) and senior
in right of payment to future subordinated indebtedness (as defined). The notes are subordinated to all indebtedness and
liabilities (as defined) of ECC's subsidiaries.
The indenture relating to the notes contains covenants with respect to the Company which include limitations of indebtedness,
restricted payments (including preferred stock dividend payments, see Note 3), transactions with affiliates, issuance and sale of
capital stock of restricted subsidiaries, and mergers, consolidations or sales of substantially all of the Company's assets. The
Company was in compliance with these covenants at February 28, 2002.
5. OTHER LONG-TERM DEBT
Other long-term debt was comprised of the following at February 28, 2001 and 2002:
2001 2002
--------------- ---------------
Hungary:
License Obligation $ 10,605 $ 11,285
Bonds Payable 2,207 2,261
Notes Payable 1,872 659
Other 3,187 677
--------------- ---------------
Total Other Long-Term Debt 17,871 14,882
Less: Current Maturities 4,187 7,933
--------------- ---------------
Other Long-Term Debt, Net of
Current Maturities $ 13,684 $ 6,949
=============== ===============
The License Obligation is payable to the Hungarian government in Hungarian forints, by Emmis' Hungarian subsidiary in four
equal annual installments that commenced in November 2000. The License Obligation of $11.3 million as of February 28, 2002, is
reflected net of an unamortized discount of $0.2 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. Slager is currently trying to renegotiate the terms of the license payments. See Note 9d for further discussion.
The Hungarian Bonds and Notes Payable are payable by Emmis' Hungarian subsidiary to the minority shareholders of the
subsidiary. The Bonds, payable in Hungarian forints, are due on maturity at November 2004 and bear interest at the Hungarian
State Bill rate plus 3% (approximately 13.7% and 17.5% at February 28, 2001 and 2002, respectively). Interest is payable
semi-annually. The Notes Payable and accrued interest, payable in U.S. dollars, are due December 31, 2002 and bear interest at the
prime rate plus 2%.
6. ACQUISITIONS, DISPOSITONS AND INVESTMENTS
On March 28, 2001, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and
KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus transaction related costs of $0.7
million. The Company financed the acquisition through a $20.0 million advance payment borrowed under the credit facility in June
2000 and the remainder with borrowings under the credit facility and proceeds from ECC's March 2001 senior discount notes
offering. The acquisition was accounted for as a purchase. Emmis began programming and selling advertising on the radio stations
on August 1, 2000 under a time brokerage agreement. The total purchase price was allocated to property and equipment and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
61
On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the intellectual property of WTLC-FM (both located in
Indianapolis, Indiana) to Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and the AM sale occurred
on April 25, 2001. Emmis retained the FCC license at 105.7 and reformatted the station as WYXB-FM.
On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as
KFTK-FM) and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. for $220.0 million in cash, plus transaction
related costs of $10.9 million (the "Sinclair Acquisition"). The agreement also included the settlement of outstanding lawsuits
by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquisition was financed
through borrowings under Emmis' credit facility and was accounted for as a purchase. The total purchase price was allocated to
property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets and are being amortized over 40 years.
On October 6, 2000, Emmis acquired certain assets of KZLA-FM (the "KZLA Acquisition") in Los Angeles, California from
Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from
Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). Since the fair
value of WKKX exceeded the book value of the station at the date of the exchange, Emmis recorded a gain on exchange of assets of
$22.0 million. This gain is included in other income, net in the accompanying consolidated statements of operations. From August
1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The exchange was accounted for
as a purchase. The total purchase price of $185.0 million was allocated to property and equipment and broadcast licenses based on
an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being
amortized over 40 years.
Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight network-affiliated and seven satellite television
stations from Lee Enterprises, Inc. for $559.5 million in cash, the payment of $21.3 million for working capital and transaction
related costs of $2.2 million (the "Lee Acquisition"). In connection with the acquisition, Emmis recorded $31.3 million of
deferred tax liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a severance related liability of $1.8
million, of which $1.5 million remains outstanding as of February 28, 2002. This transaction was financed through borrowings
under Emmis' credit facility and was accounted for as a purchase. The Lee Acquisition consisted of the following stations:
- - KOIN-TV (CBS) in Portland, Oregon
- - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango,
Colorado-Farmington, New Mexico)
- - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia
- - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas
and KSNK-TV, Oberlin, Kansas-McCook, Nebraska)
- - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii)
- - KGUN-TV (ABC) in Tucson, Arizona
- - KMTV-TV (CBS) in Omaha, Nebraska and
- - KSNT-TV (NBC) in Topeka, Kansas.
The total purchase price was allocated to property and equipment, television program rights, working capital related items and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
Because we already own KHON-TV in Honolulu, and both KHON and KGMB were rated among the top four television stations in the
Honolulu market, FCC regulations prohibited us from owning both stations. However, we received a temporary waiver from the FCC
that has allowed us to operate both stations (and their related "satellite" stations). As a result of recent regulatory
developments, we have requested a stay of divestiture until the FCC completes its biennial review. We are currently awaiting the
FCC's decision. No assurances can be given that the FCC will grant us the stay of divestiture and we may need to sell one of the
two stations in Hawaii.
On August 24, 2000, Emmis acquired the assets of radio station KKFR-FM in Phoenix, Arizona from AMFM, Inc. for an allocated
$72.0 million in cash, plus transaction related costs of $0.5 million (the "AMFM Acquisition"). Emmis financed the acquisition
through borrowings under its credit facility. The acquisition was accounted for as a purchase. The total purchase price was
62
allocated to property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible
assets in the accompanying consolidated balance sheets and are being amortized over 40 years.
In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia.
Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition
that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000,
the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the
station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the
right of first refusal on August 31, 2000, which is included in other income in the accompanying consolidated statements of
operations.
On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for
approximately $36.8 million in cash plus liabilities recorded of $2.7 million (the "Los Angeles Magazine Acquisition"). Los
Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The
acquisition was accounted for as a purchase and was financed through additional borrowings under its credit facility. The excess
of the purchase price over the estimated fair value of identifiable assets was $36.0 million, which is included in intangible
assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and
related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6
million. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. The
excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in
intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On November 16, 1999, Emmis purchased an interest in BuyItNow.com L.L.C. for $5.0 million in cash, which represented an
original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the carrying
value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be
other than temporary.
On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A.
("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of $1.6 million was
paid subsequent to closing and up to an additional $0.6 million will be paid by November 2003 if certain conditions are met.
Votionis owns one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition
was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity
Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast
license is being amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in
Orlando, Florida (the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The
purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a
$12.5 million advance payment borrowed under the credit facility and proceeds from the Company's October 1999 Common and Preferred
Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program
rights and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets and are being amortized
over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an
agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through
December 2009.
On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the
"Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The
purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the
credit facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in
October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and
is being amortized over 15 years.
63
7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Unaudited pro forma summary information is presented below for the years ended February 28, 2001 and 2002, assuming the
following events all had occurred on the first day of the pro forma periods presented below: (a) the acquisition of (i) KKLT-FM,
KTAR-AM and KMVP-AM in March 2001, (ii) KALC-FM in January 2001, (iii) KZLA-FM, eight network-affiliated television stations from
Lee Enterprises, Inc. and KPNT-FM, KXOK-FM AND KIHT-FM in October 2000, (iv) KKFR-FM and KXPK-FM in August 2000, (b) the
disposition of (i) WTLC-AM in April 2001 and (ii) WKKX-FM in October 2000; (c) the issuance of the senior discount notes in March
2001 and subsequent pay-down of senior debt and (d) the refinancing of the credit facility in December 2000.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company's management.
The pro forma summary information presented below is not necessarily indicative of the results that actually would have occurred
if the transactions indicated above had been consummated at the beginning of the periods presented, and is not intended to be a
projection of future results.
EMMIS
Pro Forma
------------------------------------------------------
2001 2002
------------------- -------------------
Net revenues $ 571,956 $ 533,780
=================== ===================
Broadcast/publishing cash flow $ 211,578 $ 185,665
=================== ===================
Net loss before extraordinary item $ (9,896) (A) $ (62,973)
=================== ===================
Net loss available to common
shareholders before extraordinary
loss $ (18,880) (A) $ (71,957)
=================== ===================
Basic and diluted net loss available
to common shareholders before
extraordinary loss $ (0.40) (A) $ (1.52)
=================== ====================
Weighted average shares outstanding:
Basic 46,869 47,334
Diluted 46,869 47,334
(A) Includes approximately $39 million of nonrecurring pre-tax other income.
EOC
Unaudited pro forma summary information is presented below for the twelve months ended February 28, 2001 and 2002, using the
same assumptions as those described in the Emmis pro formas, except that interest expense on ECC's senior discount notes is not
reflected.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company's management.
The pro forma summary information presented below is not necessarily indicative of the results that actually would have occurred
if the transactions indicated above had been consummated at the beginning of the periods presented, and is not intended to be a
projection of future results.
64
Pro Forma
------------------------------------------------------
2001 2002
------------------- -------------------
Net revenues $ 571,956 $ 533,780
=================== ===================
Broadcast/publishing cash flow $ 211,578 $ 185,665
=================== ===================
Net income (loss) before extraordinary item $ 7,305 (A) $ (45,772)
=================== ===================
(A) Includes approximately $39 million of nonrecurring pre-tax other income.
8. EMPLOYEE BENEFIT PLANS
a. 1994 Equity Incentive Plan
At the 1994 annual meeting, the shareholders of Emmis approved the 1994 Equity Incentive Plan. Under this Plan, awards
equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive
stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights, performance units or limited
stock appreciation rights. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the
stock except for shares of restricted stock which may be granted with a purchase price at amounts greater than or equal to the par
value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under
this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not
more than 10 years from the date of grant. Under this Plan, awards equivalent to 223,000 shares of common stock are available for
grant at February 28, 2002. Certain stock options awarded remain outstanding as of February 28, 2001 and 2002.
b. 1995 Equity Incentive Plan
At the 1995 annual meeting, the shareholders of Emmis approved the 1995 Equity Incentive Plan. Under this Plan, awards
equivalent to 1,300,000 shares of common stock may be granted pursuant to employment agreements. Under the Plan, no further
awards are available for grant at February 28, 2002. Certain stock options awarded remain outstanding as of February 28, 2001 and
2002.
c. Non-Employee Director Stock Option Plan
At the 1995 annual meeting, the shareholders of Emmis approved a Non-Employee Director Stock Option Plan. Under this Plan, each
non-employee director, as of January 24, 1995, was granted an option to acquire 10,000 shares of the Company's Class A common
stock. Thereafter, upon election or appointment of any non-employee director or upon a continuing director becoming a
non-employee director, such individual will also become eligible to receive a comparable option. In addition, an equivalent
option will be automatically granted on an annual basis to each non-employee director. All awards are granted with an exercise
price equal to the fair market value of the stock on the date of grant. Under this Plan, awards equivalent to 20,000 shares of
Class A common stock are available for grant at February 28, 2002. Certain stock options awarded remain outstanding as of
February 28, 2001 and 2002.
d. 1997 Equity Incentive Plan
At the 1997 annual meeting, the shareholders of Emmis approved the 1997 Equity Incentive Plan. Under this plan, awards
equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive
stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market value of the stock except for shares of restricted
stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No
more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under
this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of
grant. Under this Plan, awards equivalent to 81,000 shares of common stock are available for grant at February 28, 2002. Certain
stock options and restricted stock awarded remain outstanding as of February 28, 2001 and 2002.
65
e. 1999 Equity Incentive Plan
At the 1999 annual meeting, the shareholders of Emmis approved the 1999 Equity Incentive Plan. Under this plan, awards
equivalent to 3,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive
stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market value of the stock except for shares of restricted
stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No
more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under
this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of
grant. Under this Plan, awards equivalent to 201,000 shares of common stock are available for grant at February 28, 2002. Certain
stock options and restricted stock awarded remain outstanding as of February 28, 2001 and 2002.
f. 2001 Equity Incentive Plan
At the 2001 annual meeting, the shareholders of Emmis approved the 2001 Equity Incentive Plan. Under this plan, awards
equivalent to 3,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive
stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market value of the stock except for shares of restricted
stock which may be granted with an exercise price, if any, at amounts greater than or equal to the par value of the underlying
stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock
options under this Plan generally expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to
2,733,000 shares of common stock are available for grant at February 28, 2002. Certain stock awards remain outstanding as of
February 28, 2002.
g. Other Disclosures Related to Stock Option and Equity Incentive Plans
The Company accounts 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. An alternative method would be to follow 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. 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 $7,357, $5,400 and $9,095 for the years ended February 2000,
2001 and 2002, respectively. Had compensation expense related to these plans been determined based on fair value at date of
grant, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended February 28 (29),
------------------------------------------------------------------
2000 2001 2002
------------------ ----------------- -----------------
Net Income Available to Common Shareholders:
As Reported $ (3,177) $ 4,752 $ (73,092)
Pro Forma $ (8,741) $ 113 $ (85,760)
Basic EPS:
As Reported $ (.09) $ .10 $ (1.54)
Pro Forma $ (.24) $ .00 $ (1.81)
Diluted
As Reported $ (.09) $ .10 $ (1.54)
Pro Forma $ (.24) $ .00 $ (1.81)
66
Because the fair value method of accounting has not been applied to options granted prior to March 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in future years. The fair value of each option granted
is estimated on the date of grant using the Black-Scholes option pricing model utilizing the following weighted average
assumptions:
Year Ended February 28 (29),
------------------------------------------------------------------
2000 2001 2002
------------------ ----------------- -----------------
Risk-Free Interest Rate: 6.12% 4.54% 5.41%
Expected Life (Years): 5.2 6.4 8.3
Expected Volatility: 44.31% 56.79% 57.67%
Expected dividend yields were zero for fiscal 2000, 2001 and 2002.
A summary of the status of options and restricted stock at February 2000, 2001 and 2002 and the related activity for the year,
including the adoption of the 2001 Equity Incentive Plan, is as follows:
2000 2001 2002
---------------------------- --------------------------- -------------------------
Number of Weighted Number of Weighted Number of Weighted
Options/ Average Options/ Average Options/ Average
Restricted Exercise Restricted Exercise Restricted Exercise
Stock Price Stock Price Stock Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at
Beginning of Year 3,485,386 14.63 4,559,168 18.07 4,144,793 23.14
Granted 2,012,000 23.39 814,629 34.66 1,089,369 29.01
Exercised (922,298) 16.20 (1,092,688) 9.78 (250,420) 17.56
Lapsing of restrictions on stock awards - - (101,805) - (190,162) -
Expired and other (15,920) 18.57 (34,511) 20.32 (40,067) 23.68
Outstanding at
End of Year 4,559,168 18.07 4,144,793 23.14 4,753,513 25.39
Exercisable at
End of Year 2,537,168 13.92 2,008,680 19.26 2,464,827 21.10
Total Available for Grant 2,530,325 1,792,400 3,257,944
During the years ended February 2000, 2001 and 2002, all options were granted with an exercise price equal to fair market value
of the stock on the date of grant. During fiscal 2000, 2001 and 2002, the Company entered into employment agreements providing
for grants of 135,600, 9,200 and 26,190 shares, respectively, at a weighted average fair value of $22.70, $35.51 and $27.57,
respectively.
The following information relates to options outstanding and exercisable at February 28, 2002:
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
---------------- -------------- -------------- -------------- -------------- -----------
$3.80-$7.60 19,600 $ 6.90 1.0 years 19,600 $ 6.90
7.60-11.40 208,760 7.78 1.0 years 208,760 7.78
11.40-15.20 26,564 14.44 1.6 years 26,564 14.44
15.20-19.00 511,930 16.56 1.3 years 511,930 16.56
19.00-22.80 1,055,751 21.35 2.3 years 1,055,084 21.35
22.80-26.60 177,328 24.63 2.9 years 177,328 24.63
26.60-30.40 2,076,722 28.60 8.2 years 240,000 28.02
30.40-34.20 - - - years - -
34.20-38.00 676,858 35.40 8.0 years 255,561 35.38
In addition to the benefit plans noted above, Emmis has the following employee benefit plans:
h. Profit Sharing Plan
In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with six months of service.
Contributions to the plan are at the discretion of the Emmis Board of Directors and can be made in the form of newly issued Emmis
common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions
reflected in non-cash compensation in the consolidated statements of operations for the years ended February 2000, 2001 and 2002
were $1,250, $1,250, and $0 respectively.
67
i. 401(k) Retirement Savings Plan
Emmis sponsors two Section 401(k) retirement savings plans. One covers substantially all nonunion employees age 18 years and
older who have at least six months of service and the other covers substantially all union employees that meet the same
qualifications. Employees may make pretax contributions to the plans up to 15% of their compensation, not to exceed the annual
limit prescribed by the Internal Revenue Service. Emmis may make discretionary matching contributions to the plans in the form of
shares of the Company's Class A common stock. Effective March 1, 1996, Emmis began to match 50% of employee contributions up to $2
thousand. Emmis' contributions to the plans totaled $807, $1,337 and $1,684 for the years ended February 2000, 2001 and 2002,
respectively.
j. 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 $345, $441, and $465 for the
years ended February 2000, 2001 and 2002, respectively.
k. Employee Stock Purchase Plan
Effective March 1, 1995, the Company implemented an employee stock purchase plan which permits employees to purchase, via
payroll deduction, shares of the Company's Class A common stock, at fair market value, up to an amount not to exceed 10% of an
employee's annual gross pay.
Effective March 1, 2000, the Company replaced its previous employee stock purchase plan with a new plan that allows employees
to purchase shares of the Company's Class A common stock at the lesser of 90% of the fair value of such shares at the beginning or
end of each semi-annual offering period. Purchases are subject to a maximum limitation of $22.5 annually per employee. The
Company will not record compensation expense pursuant to this plan as it is designed to meet the requirements of Section 423(b) of
the Internal Revenue Code.
9. OTHER COMMITMENTS AND CONTINGENCIES
a. TV Program Rights Payable
The Company has obligations to various program syndicators and distributors in accordance with current contracts for the rights
to broadcast programs. Future payments scheduled under contracts for programs available as of February 28, 2002, are as follows:
2003 $ 27,507
2004 12,852
2005 10,458
2006 7,964
2007 3,091
Thereafter 6,186
-------------------
68,058
Less: Current Portion 27,507
-------------------
TV Program Rights Payable, Net
of Current Portion $ 40,551
===================
In addition, the Company has entered into commitments for future program rights (programs not available as of February 28,
2002). Future payments scheduled under these commitments are summarized as follows: Year ended February 2003 - $5,240, 2004 -
$11,224, 2005 - $8,607, 2006 - $3,789, 2007 - $1,501 and thereafter - $1,638.
b. Radio Broadcast Agreements
The Company has entered into agreements to broadcast certain syndicated programs and sporting events. Future payments scheduled
under these agreements are summarized as follows: Year ended February 2003 - $2,281, 2004 - $1,036, 2005 - $981, 2006 - $240, 2007
- - $240 and thereafter - $320. Expense related to these broadcast rights totaled $1,780, $2,376, and $2,522 for the years ended
February 2000, 2001 and 2002, respectively.
68
In connection with reformatting one of its radio stations, the Company terminated a syndicated program agreement in fiscal
2000. The contract required continued payments in the event of termination, and these payments are included in the future
payments disclosed above. The discounted present value of these payments of $896 is reflected in the accompanying consolidated
statements of operations as restructuring fees.
c. Operating Leases
The Company leases certain office space, tower space, equipment and automobiles under operating leases expiring at various
dates through August 2019. 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.
Future minimum rental payments (exclusive of future escalation costs) required by non-cancelable operating leases, with an
initial term of one year or more as of February 28, 2002, are as follows:
2003 $ 7,959
2004 6,472
2005 5,676
2006 5,240
2007 4,401
Thereafter 20,289
-----------------
$ 50,037
=================
Minimum payments have not been reduced by minimum sublease rentals of approximately $124 due in the future under non-cancelable
subleases.
Rent expense totaled $4,404, $6,457, and $7,995 for the years ended February 2000, 2001 and 2002, respectively. Rent expense
for the years ended February 2000, 2001 and 2002 is net of sublease income of approximately $148, $86 and $0, respectively.
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. Future minimum cash payments
scheduled under terms of these agreements are summarized as follows: Year ended February 2003 - $23,829, 2004 - $13,800, 2005 -
$3,828, 2006 - $961, 2007 - $620 and thereafter - $2,516.
In addition to future cash payments, at February 28, 2002, 66,800 shares of common stock and options to purchase 1,091,500
shares of common stock have been granted in connection with current employment agreements. Additionally, up to 21,000 shares and
options to purchase up to 148,500 shares of common stock may be granted (or have been granted subject to forfeiture) under the
agreements in the next two years.
e. Litigation
The Company currently, and from time to time, is involved in litigation incidental to the conduct of its business, but the
Company 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 the Company. However, instead of making a required license
payment to the Hungarian government in November 2001, our 59.5% owned national radio station in Hungary requested a modification
of the broadcast contract and ultimately filed suit in arbitration court seeking reformation of the contract and requesting that
the payments be reduced. The Hungarian government then issued an order revoking our station's broadcast license for non-payment
of the license fee, and our station appealed the order in the Hungarian ordinary court. The Hungarian government has also filed
an action seeking to liquidate our Hungarian broadcast company. Our station is vigorously prosecuting the actions in the
arbitration court and ordinary court and is vigorously opposing the action seeking liquidation. However, we cannot predict the
outcome of these actions. We do not plan to continue to operate the station under the present fee arrangement. We do not expect
an adverse material financial impact to Emmis or EOC if the station does not continue to operate.
69
10. INCOME TAXES
The provision (benefit) for income taxes for the years ended February 2000, 2001 and 2002, consisted of the following:
EMMIS:
2000 2001 2002
----------- ----------- -----------
Current:
Federal $ 105 $ 1,540 $ -
State 100 300 -
----------- ----------- -----------
205 1,840 -
----------- ----------- -----------
Deferred:
Federal 6,010 14,360 (25,189)
State 660 1,450 (434)
----------- ----------- -----------
6,670 15,810 (25,623)
----------- ----------- -----------
Provision (benefit) for
income taxes 6,875 17,650 (25,623)
Tax benefit of extraordinary
item 1,250 - 664
----------- ----------- -----------
Net provision (benefit) for income taxes $ 5,625 $ 17,650 $ (26,287)
=========== =========== ===========
EOC:
2000 2001 2002
----------- ----------- -----------
Current:
Federal $ 105 $ 1,540 $ -
State 100 300 -
----------- ----------- -----------
205 1,840 -
----------- ----------- -----------
Deferred:
Federal 6,010 14,360 (17,399)
State 660 1,450 (434)
----------- ----------- -----------
6,670 15,810 (17,833)
----------- ----------- -----------
Provision (benefit) for
income taxes 6,875 17,650 (17,833)
Tax benefit of extraordinary
item 1,250 - 664
----------- ----------- -----------
Net provision (benefit) for income taxes $ 5,625 $ 17,650 $ (18,497)
=========== =========== ===========
The provision (benefit) for income taxes for the years ended February 2000, 2001 and 2002, differs from that computed at the
Federal statutory corporate tax rate as follows:
EMMIS:
2000 2001 2002
----------- ----------- -----------
Computed income taxes at 35% $ 3,102 $ 10,985 $ (31,026)
State income tax 494 1,138 (282)
Nondeductible foreign losses 893 1,778 1,084
Nondeductible goodwill 1,394 1,537 2,637
Nondeductible interest - - 616
Other 992 2,212 1,348
----------- ----------- -----------
Provision (benefit) for income taxes $ 6,875 $ 17,650 $ (25,623)
=========== =========== ===========
70
EOC:
2000 2001 2002
----------- ----------- -----------
Computed income taxes at 35% $ 3,102 $ 10,985 $ (22,620)
State income tax 494 1,138 (282)
Nondeductible foreign losses 893 1,778 1,084
Nondeductible goodwill 1,394 1,537 2,637
Nondeductible interest - - -
Other 992 2,212 1,348
----------- ----------- -----------
Provision (benefit) for income taxes $ 6,875 $ 17,650 $ (17,833)
=========== =========== ===========
The components of deferred tax assets and deferred tax liabilities at February 2001 and 2002 are as follows:
EMMIS:
2001 2002
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 2,183 $ 44,443
Compensation relating to stock options 3,373 5,601
Non-cash interest expense - 8,412
Impairment loss - 3,444
Other 5,257 8,731
Valuation allowance (1,506) (2,017)
------------- --------------
Total deferred tax assets 9,307 $ 68,614
------------- --------------
Deferred tax liabilities
Intangible assets (136,526) (167,130)
Other (8,249) (2,682)
------------- --------------
Total deferred tax liabilities (144,775) (169,812)
------------- --------------
Net deferred tax liability $ (135,468) $ (101,198)
============= ==============
EOC:
2001 2002
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 2,183 $ 45,065
Compensation relating to stock options 3,373 5,601
Non-cash interest expense - -
Impairment loss - 3,444
Other 5,257 8,731
Valuation allowance (1,506) (2,017)
------------- --------------
Total deferred tax assets 9,307 60,824
------------- --------------
Deferred tax liabilities
Intangible assets (136,526) (167,130)
Other (8,249) (2,682)
------------- --------------
Total deferred tax liabilities (144,775) (169,812)
------------- --------------
Net deferred tax liability $ (135,468) $ (108,988)
============= ==============
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 the net operating loss carryforwards related to the Company's foreign
subsidiaries since these subsidiaries have not yet generated taxable income against which the net operating losses could be
utilized. With respect to Emmis, the expiration of net operating loss carryforwards, excluding those at the Company's Hungarian
subsidiary, which do not expire, approximate $1,177 in 2005, $758 in 2006 and $103,686 thereafter. With respect to EOC, the
expiration of net operating loss carryforwards, excluding those at the Company's Hungarian subsidiary, which do not expire,
approximate $1,177 in 2005, $758 in 2006 and $104,672 thereafter.
71
11. SEGMENT INFORMATION
The Company's operations are aligned into four business segments: Radio, Television, Publishing, and Interactive. These
business segments are consistent with the Company's management of these businesses and its financial reporting structure.
Corporate represents expense not allocated to reportable segments.
The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations
located in Argentina. Total revenues of the radio station in Hungary for the years ended February 2000, 2001 and 2002 were $7.4
million, $6.2 million and $7.2 million, respectively. This station's long lived assets as of February 28, 2001 and 2002 were $9.6
million and $6.9 million, respectively. Total revenues of the radio stations in Argentina for the years ended February 28, 2001
and 2002 were $8.4 million and $9.5 million, respectively. Total revenues for these stations were not material for the year ended
February 29, 2000. Long lived assets for these stations as of February 28, 2001 and 2002 were $18.4 million and $10.0 million,
respectively.
The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF).
Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between
companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and
PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who
report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service
requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available
for dividends, reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally accepted
in the United States, and should be viewed as a supplement to, and not a substitute for, our results of operations presented on
the basis of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures
and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating
expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers.
Publishing entities derive revenue from subscriptions and sale of print advertising inventory. Interactive derives revenue from
the sale of advertisements on the websites of the Company's stations. The most significant broadcast operating expenses are
employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and
administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with
producing a magazine, and general and administrative costs. Significant interactive operating expenses are employee salaries and
general and administrative costs.
YEAR ENDED FEBRUARY 28, 2002 Radio Television Publishing Interactive Corporate Consolidated
------------- ------------- ------------- ------------- ------------- -------------
Net revenues $ 256,619 $ 205,460 $ 70,880 $ 821 $ - $ 533,780
Operating expenses 142,872 139,256 64,437 1,550 - 348,115
------------- ------------- ------------- ------------- ------------- -------------
Broadcast/publishing cash flow 113,747 66,204 6,443 (729) - 185,665
Corporate expenses - - - - 20,283 20,283
Depreciation and amortization 33,507 53,513 8,477 9 4,752 100,258
Time brokerage fees 479 - - - - 479
Non-cash compensation - - - - 9,095 9,095
Impairment loss and other 9,063 1,609 - - - 10,672
Restructuring fees - - - - 768 768
------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) $ 70,698 $ 11,082 $ (2,034) $ (738) $ (34,898) $ 44,110
============= ============= ============= ============= ============= =============
Total assets $ 1,037,598 $ 1,288,428 $ 88,913 $ 248 $ 94,882 $ 2,510,069
============= ============= ============= ============= ============= =============
With respect to EOC, the above information would be identical, except corporate total assets would be $83,952 and consolidated
total assets would be $2,499,139.
YEAR ENDED FEBRUARY 28, 2001 Radio Television Publishing Interactive Corporate Consolidated
------------- ------------- ------------- ------------- ------------- -------------
Net revenues $ 239,590 $ 156,835 $ 74,088 $ 105 $ - $ 470,618
Operating expenses 132,918 97,327 65,538 622 - 296,405
------------- ------------- ------------- ------------- ------------- -------------
Broadcast/publishing cash flow 106,672 59,508 8,550 (517) - 174,213
Corporate expenses - - - - 17,601 17,601
Depreciation and amortization 21,470 33,574 14,941 5 4,028 74,018
Time brokerage fees 7,344 - - - - 7,344
Non-cash compensation - - - - 5,400 5,400
Impairment loss and other 2,000 - - - - 2,000
Restructuring fees - - - - 2,057 2,057
------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) $ 75,858 $ 25,934 $ (6,391) $ (522) $ (29,086) $ 65,793
============= ============= ============= ============= ============= =============
Total assets $ 920,002 $ 1,312,270 $ 96,550 $ 26 $ 178,024 $ 2,506,872
============= ============= ============= ============= ============= =============
72
YEAR ENDED FEBRUARY 29, 2000 Radio Television Publishing Interactive Corporate Consolidated
------------- ------------- ------------- ------------- ------------- ------------
Net revenues $ 189,000 $ 82,160 $ 54,105 $ - $ - $ 325,265
Operating expenses 100,184 53,178 46,456 - - 199,818
------------- ------------- ------------- ------------- ------------- -------------
Broadcast/publishing cash flow 88,816 28,982 7,649 - - 125,447
Corporate expenses - - - - 15,430 15,430
Depreciation and amortization 16,694 17,138 6,934 - 3,395 44,161
Time brokerage fees - - - - - -
Non-cash compensation - - - - 7,357 7,357
Impairment loss and other - - - - - -
Restructuring fees 896 - - - - 896
------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) $ 71,226 $ 11,844 $ 715 $ - $ (26,182) $ 57,603
============= ============= ============= ============= ============ =============
Total assets $ 474,403 $ 701,672 $ 68,927 $ - $ 82,304 $ 1,327,306
============= ============= ============= ============= ============= =============
12. 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 $756, $926 and $606 for the years ended February 2000, 2001 and 2002, respectively.
Emmis has made interest-bearing loans to various officers and employees. The approximate amount of such indebtedness
outstanding at February 28, 2001 and 2002, was $1,072 and $1,117, respectively, net of an allowance of $849 and $0, respectively.
These loans bear interest at the Company's average borrowing rate of approximately 8.0% and 7.6% for the years ended February 2001
and 2002.
During the year ended February 28, 2002, the Company purchased approximately $26 in corporate gifts and specialty items from a
company owned by the spouse of Norman H. Gurwitz. Also during the last fiscal year, Emmis made payments of approximately $258 to
a company owned by Mr. Smulyan for use of an airplane to transport employees to various trade shows and meetings. Furthermore,
Emmis made payments of $405 to a management company for direct operating expenses incurred by Emmis' use of the plane and an
allocation of certain maintenance costs of the airplane.
A significant amount of business is conducted between EOC and its parent company, ECC. This activity includes equity financing
and certain debt financing arrangements as well as reimbursement by EOC to ECC for corporate overhead expenses. Corporate
overhead expenses are third party costs incurred in the ordinary course of conducting business as a parent holding company and
include, but are not limited to, SEC filing fees and expenses, and legal, accounting, trustee and outside director fees.
13. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTORS
Emmis conducts a significant portion of its business through subsidiaries. The senior subordinated notes are fully and
unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries (the "Subsidiary Guarantors"). As
of February 28, 2002, subsidiaries holding Emmis' interest in its radio stations in Hungary and Argentina, as well as certain
other subsidiaries conducting joint ventures with third parties, did not guarantee the senior subordinated notes (the "Subsidiary
Non-Guarantors"). The claims of creditors of Emmis subsidiaries have priority over the rights of Emmis to receive dividends or
distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the Parent Company Only, the Subsidiary Guarantors and the
Subsidiary Non-Guarantors as of February 28, 2001 and 2002 and for each of the three years in the period ended February 28, 2002.
Emmis uses the equity method with respect to investments in subsidiaries. Separate financial statements for Subsidiary
Guarantors are not presented based on management's determination that they do not provide additional information that is material
to investors.
73
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 28, 2002
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ - $ 4,970 $ 1,392 $ - $ 6,362
Accounts receivable, net - 91,244 3,996 - 95,240
Current portion of TV
program rights - 9,837 - - 9,837
Income tax refunds receivable - - - - -
Prepaid expenses 612 14,049 186 - 14,847
Other 271 13,475 74 - 13,820
Assets held for sale - 123,416 - - 123,416
------------- ------------ ----------- -------------- -------------
Total current assets 883 256,991 5,648 - 263,522
Property and equipment, net 35,957 192,690 2,492 - 231,139
Intangible assets, net 5,637 1,933,846 13,848 - 1,953,331
Investment in affiliates 2,274,321 - - (2,274,321) -
Other assets, net 43,428 12,655 527 (5,463) 51,147
------------- ------------ ----------- -------------- -------------
Total assets $ 2,360,226 $ 2,396,182 $ 22,515 $ (2,279,784) $ 2,499,139
============= ============ ========== ============= ============
CURRENT LIABILITIES:
Accounts payable $ 15,646 $ 18,373 $ 4,976 $ - $ 38,995
Current maturities of other
long-term debt 34 10 10,722 (2,833) 7,933
Current portion of TV
program rights payable - 27,507 - - 27,507
Accrued salaries and
commissions 214 7,363 275 - 7,852
Accrued interest 14,047 - 21 - 14,068
Deferred revenue - 16,392 - - 16,392
Other 2,813 3,595 - - 6,408
Credit facility debt to be repaid with
proceeds of assets held for sale 135,000 - - - 135,000
Liabilities associated with assets
held for sale - 63 - - 63
------------ ---------- ---------- ------------- -------------
Total current liabilities 167,754 73,303 15,994 (2,833) 254,218
Credit facility and senior
subordinated debt 1,117,000 - - - 1,117,000
TV program rights payable,
net of current portion - 40,551 - - 40,551
Other long-term debt, net of
current portion 41 366 9,172 (2,630) 6,949
Other noncurrent liabilities 21,976 4,403 587 - 26,966
Deferred income taxes 108,988 - - - 108,988
------------- ------------ ----------- -------------- -------------
Total liabilities 1,415,759 118,623 25,753 (5,463) 1,554,672
Shareholders' equity
Common stock 1,027,221 - - - 1,027,221
Additional paid-in capital 8,108 - 4,393 (4,393) 8,108
Subsidiary investment - 1,883,897 20,650 (1,904,547) -
Retained earnings /
(accumulated deficit) (78,477) 393,662 (21,380) (372,282) (78,477)
Accumulated other
comprehensive loss (12,385) - (6,901) 6,901 (12,385)
------------- ------------ ----------- -------------- -------------
Total shareholders' equity 944,467 2,277,559 (3,238) (2,274,321) 944,467
------------- ------------ ----------- -------------- -------------
Total liabilities and
shareholders' equity $ 2,360,226 $ 2,396,182 $ 22,515 $ (2,279,784) $ 2,499,139
============= ============ =========== ============== =============
74
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 2002
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,695 $ 515,387 $ 16,698 $ - $ 533,780
Operating expenses 1,204 332,311 14,600 - 348,115
Corporate expenses 20,283 - - - 20,283
Depreciation and amortization 4,752 91,979 3,527 - 100,258
Non-cash compensation 6,821 2,274 - - 9,095
Time brokerage agreement fees - 479 - - 479
Impairment loss and other - 10,672 - - 10,672
Restructuring fees 768 - - - 768
------------- ----------- ----------- ------------ ------------
Operating income (loss) (32,133) 77,672 (1,429) - 44,110
------------- ----------- ----------- ------------ ------------
Other income (expense)
Interest income (expense) (102,109) (285) (2,324) 616 (104,102)
Income (loss) from unconsolidated
affiliates (4,232) (771) - - (5,003)
Other income (expense), net 1,403 (466) (756) 179 360
------------- ----------- ----------- ------------ ------------
Total other income (expense) (104,938) (1,522) (3,080) 795 (108,745)
------------- ----------- ----------- ------------ ------------
Income (loss) before income taxes (137,071) 76,150 (4,509) 795 (64,635)
Provision (benefit) for income taxes (46,770) 28,937 - - (17,833)
------------- ----------- ----------- ------------ ------------
Income (loss) before extraordinary loss (90,301) 47,213 (4,509) 795 (46,802)
Extraordinary loss, net of tax 1,084 - - - 1,084
Equity in earnings (loss) of subsidiaries 43,499 - - (43,499) -
------------- ----------- ----------- ------------ ------------
Net income (loss) $ (47,886) $ 47,213 $ (4,509) $ (42,704) $ (47,886)
============= =========== =========== =========== ============
75
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 28, 2002
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
----------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (47,886) $ 47,213 $ (4,509) $ (42,704) $ (47,886)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Extraordinary item 1,084 - - - 1,084
Depreciation and amortization 10,226 110,582 3,527 - 124,335
Provision for bad debts - 4,005 - - 4,005
Provision (benefit) for deferred
income taxes (17,833) - - - (17,833)
Non-cash compensation 6,821 2,274 - - 9,095
Equity in earnings of subsidiaries (43,499) - - 43,499 -
Impairment of asset - 9,063 - - 9,063
Other 795 375 (6,303) (795) (5,928)
Changes in assets and
liabilities -
Accounts receivable - (3,649) 1,531 - (2,118)
Prepaid expenses and other
current assets 3,082 1,202 843 - 5,127
Other assets 2,057 (9,364) 1,355 - (5,952)
Accounts payable and accrued
liabilities 5,035 (6,965) (779) - (2,709)
Deferred revenue - (963) - - (963)
Other liabilities 24,482 (15,553) (10,856) - (1,927)
------------- ----------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities (55,636) 138,220 (15,191) - 67,393
------------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (2,252) (27,299) 1,135 - (28,416)
Cash paid for acquisitions - (140,746) - - (140,746)
Deposits on acquisitions and other (5,943) - - - (5,943)
------------- ----------- ----------- ------------ ------------
Net cash provided by (used in)
investing activities (8,195) (168,045) 1,135 - (175,105)
------------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (133,000) - - - (133,000)
Proceeds from long-term debt 5,000 - - - 5,000
Intercompany 141,250 30,777 14,742 - 186,769
Debt related costs (4,594) - - - (4,594)
------------- ----------- ----------- ------------ ------------
Net cash provided by
financing activities 8,656 30,777 14,742 - 54,175
------------- ----------- ----------- ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (55,175) 952 686 - (53,537)
CASH AND CASH EQUIVALENTS:
Beginning of period 55,175 4,018 706 - 59,899
------------- ----------- ----------- ------------ ------------
End of period $ - $ 4,970 $ 1,392 $ - $ 6,362
============= =========== =========== ============ ============
76
Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 55,175 $ 4,018 $ 706 $ - $ 59,899
Accounts receivable, net - 91,754 5,527 - 97,281
Current portion of TV
program rights - 12,028 - - 12,028
Income tax refunds receivable 13,970 - - - 13,970
Prepaid expenses 2,032 14,646 327 - 17,005
Other 1,932 12,124 776 - 14,832
Assets held for sale - 134,983 - - 134,983
------------- ------------ ----------- -------------- -------------
Total current assets 73,109 269,553 7,336 - 349,998
Property and equipment, net 38,151 189,350 4,332 - 231,833
Intangible assets, net - 1,830,503 21,756 - 1,852,259
Investment in affiliates 2,169,004 - - (2,169,004) -
Other assets, net 68,113 9,706 1,882 (6,919) 72,782
------------- ------------ ----------- -------------- -------------
Total assets $ 2,348,377 $ 2,299,112 $ 35,306 $ (2,175,923) $ 2,506,872
============= ============ ========== ============= ============
CURRENT LIABILITIES:
Accounts payable $ 6,908 $ 22,499 $ 4,799 $ - $ 34,206
Current maturities of other
long-term debt 34 18 4,135 - 4,187
Current portion of TV
program rights payable - 28,192 - - 28,192
Accrued salaries and
commissions 1,410 8,482 450 - 10,342
Accrued interest 16,236 - 802 - 17,038
Deferred revenue - 17,397 - - 17,397
Other 813 4,955 - - 5,768
Liabilities associated with
assets held for sale - 21 - - 21
------------ ------------ ---------- -------------- -------------
Total current liabilities 25,401 81,564 10,186 - 117,151
Credit facility and senior
subordinated debt 1,380,000 - - - 1,380,000
TV program rights payable,
net of current portion - 47,567 - - 47,567
Other long-term debt, net of
current portion 37 598 19,968 (6,919) 13,684
Other noncurrent liabilities - 4,884 647 - 5,531
Deferred income taxes 135,468 - - - 135,468
------------- ------------ ----------- -------------- -------------
Total liabilities 1,540,906 134,613 30,801 (6,919) 1,699,401
Shareholders' equity
Common stock 830,799 - - - 830,799
Additional paid-in capital - - 4,393 (4,393) -
Subsidiary investment - 1,818,050 17,581 (1,835,631) -
Retained earnings /
(accumulated deficit) (22,730) 346,449 (16,871) (329,578) (22,730)
Accumulated other
comprehensive loss (598) - (598) 598 (598)
------------- ------------ ----------- -------------- -------------
Total shareholders' equity 807,471 2,164,499 4,505 (2,169,004) 807,471
------------- ------------ ----------- -------------- -------------
Total liabilities and
shareholders' equity $ 2,348,377 $ 2,299,112 $ 35,306 $ (2,175,923) $ 2,506,872
============= ============ =========== ============= =============
77
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,876 $ 454,164 $ 14,578 $ - $ 470,618
Operating expenses 1,692 281,409 13,304 - 296,405
Corporate expenses 17,601 - - - 17,601
Depreciation and amortization 4,028 66,527 3,463 - 74,018
Non-cash compensation 4,050 1,350 - - 5,400
Time brokerage agreement fees - 7,344 - - 7,344
Corporate restructuring fees
and other 2,057 2,000 - - 4,057
------------- ----------- ----------- ------------ ------------
Operating income (loss) (27,552) 95,534 (2,189) - 65,793
------------- ----------- ----------- ------------ ------------
Other income (expense)
Interest income (expense) (69,608) (297) (3,221) 682 (72,444)
Other income (expense), net 11,972 26,977 (354) (558) 38,037
------------- ----------- ----------- ------------ ------------
Total other income (expense) (57,636) 26,680 (3,575) 124 (34,407)
------------- ----------- ----------- ------------ ------------
Income (loss) before income taxes (85,188) 122,214 (5,764) 124 31,386
Provision (benefit) for income
taxes (28,201) 45,851 - - 17,650
------------- ----------- ----------- ------------ ------------
(56,987) 76,363 (5,764) 124 13,736
Equity in earnings (loss) of
subsidiaries 70,723 - - (70,723) -
------------- ----------- ----------- ------------ ------------
Net income (loss) $ 13,736 $ 76,363 $ (5,764) $ (70,599) $ 13,736
============= =========== =========== ============ ============
78
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 28, 2001
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 13,736 $ 76,363 $ (5,764) $ (70,599) $ 13,736
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Depreciation and amortization 9,758 81,233 3,463 - 94,454
Provision for bad debts - 3,713 - - 3,713
Provision for deferred income
taxes 15,810 - - - 15,810
Non-cash compensation 4,050 1,350 - - 5,400
Equity in earnings of
subsidiaries (70,723) - - 70,723 -
Gain on exchange of assets - (22,000) - - (22,000)
Other 379 348 861 (124) 1,464
Changes in assets and
liabilities -
Accounts receivable - (7,114) (2,202) - (9,316)
Prepaid expenses and other
current assets (12,716) (11,527) (384) - (24,627)
Other assets 10,435 1,216 448 - 12,099
Accounts payable and accrued
liabilities 9,070 5,493 778 - 15,341
Deferred revenue - 569 - - 569
Other liabilities (220) (23,096) 3,544 - (19,772)
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities (20,421) 106,548 744 - 86,871
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (3,683) (22,323) (219) - (26,225)
Cash paid for acquisitions - (1,060,681) - - (1,060,681)
Deposits on acquisitions and other (23,849) - - - (23,849)
----------- ----------- ----------- ------------ ------------
Net cash used in investing
activities (27,532) (1,083,004) (219) - (1,110,755)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (1,048,388) - (3,161) - (1,051,549)
Proceeds from long-term debt 2,128,388 - - - 2,128,388
Intercompany (956,225) 977,910 (11,016) - 10,669
Debt related costs (21,095) - - - (21,095)
----------- ----------- ----------- ------------ ------------
Net cash provided by
financing activities 102,680 977,910 (14,177) - 1,066,413
----------- ----------- ----------- ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 54,727 1,454 (13,652) - 42,529
CASH AND CASH EQUIVALENTS:
Beginning of period 448 2,564 14,358 - 17,370
----------- ----------- ----------- ------------ ------------
End of period $ 55,175 $ 4,018 $ 706 $ - $ 59,899
=========== =========== =========== ============ ============
79
Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 29, 2000
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
--------------------------------------------------------------------
Net revenues $ 1,810 $ 314,644 $ 8,811 $ - $ 325,265
Operating expenses 1,252 191,666 6,900 - 199,818
Corporate expenses 15,430 - - - 15,430
Depreciation and amortization 3,395 37,733 3,033 - 44,161
Non-cash compensation 5,518 1,839 - - 7,357
Time brokerage agreement fees - - - - -
Programming restructuring cost - 896 - - 896
Operating income (loss) (23,785) 82,510 (1,122) - 57,603
------------- ----------- ----------- ------------ ------------
Other income (expense)
Interest income (expense) (49,257) (107) (3,363) 741 (51,986)
Loss on donation of station - (956) - - (956)
Other income (expense), net 3,428 13 (502) 1,264 4,203
------------- ----------- ----------- ------------ ------------
Total other income (expense) (45,829) (1,050) (3,865) 2,005 (48,739)
------------- ----------- ----------- ------------ ------------
Income (loss) before income taxes (69,614) 81,460 (4,987) 2,005 8,864
Provision (benefit) for income
taxes (22,689) 29,564 - - 6,875
------------- ----------- ----------- ------------ ------------
(46,925) 51,896 (4,987) 2,005 1,989
Extraordinary item, net of tax (2,022) - - - (2,022)
Equity in earnings (loss) of
subsidiaries 48,914 - - (48,914) -
------------- ----------- ----------- ------------ ------------
Net income (loss) $ (33) $ 51,896 $ (4,987) $ (46,909) $ (33)
============= =========== =========== ============ ============
80
Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 29, 2000
Eliminations
Parent Subsidiary and
Company Subsidiary Non- Consolidating
Only Guarantors Guarantors Entries Consolidated
---------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (33) $ 51,896 $ (4,987) $ (46,909) $ (33)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities -
Extraordinary item 2,022 - - - 2,022
Depreciation and amortization 5,805 44,980 3,033 - 53,818
Provision for bad debts - 2,550 - - 2,550
Provision for deferred income
taxes 6,670 - - - 6,670
Non-cash compensation 5,518 1,839 - - 7,357
Equity in earnings of
subsidiaries (48,914) - - 48,914 -
Gain on exchange of assets - - - - -
Loss on donation of radio station - 956 - - 956
Other 2,033 - (811) (2,005) (783)
Changes in assets and
liabilities -
Accounts receivable - (13,029) (290) - (13,319)
Prepaid expenses and other
current assets (1,258) (13,101) (187) - (14,546)
Other assets (8,393) 7,382 (1,496) - (2,507)
Accounts payable and accrued
liabilities (391) 9,255 1,301 - 10,165
Deferred revenue - 4,332 - - 4,332
Other liabilities (13,278) (19,933) - - (33,211)
----------- ----------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities (50,219) 77,127 (3,437) - 23,471
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (8,124) (21,170) (22) - (29,316)
Cash paid for acquisitions - (217,828) (13,302) - (231,130)
Deposits on acquisitions and other (5,000) (6,500) - - (11,500)
----------- ----------- ----------- ------------ ------------
Net cash used in investing
activities (13,124) (245,498) (13,324) - (271,946)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on long-term debt (426,668) - - - (426,668)
Proceeds from long-term debt 149,668 - - - 149,668
Intercompany 338,505 167,789 30,434 - 536,728
Debt related costs - - - - -
----------- ----------- ----------- ------------ ------------
Net cash provided by
financing activities 61,505 167,789 30,434 - 259,728
----------- ----------- ----------- ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,838) (582) 13,673 - 11,253
CASH AND CASH EQUIVALENTS:
Beginning of period 2,286 3,146 685 - 6,117
----------- ----------- ----------- ------------ ------------
End of period $ 448 $ 2,564 $ 14,358 $ - $ 17,370
=========== =========== =========== ============ ============
81
14. SUBSEQUENT EVENTS
In April 2002, ECC completed the sale of 4.6 million shares of its Class A common stock at $26.80 per share resulting in total
proceeds of $123.3 million. The net proceeds of $120.2 were contributed to EOC, of which 50% were used to repay outstanding
obligations under the credit facility. The remaining net proceeds were invested and will either repay outstanding obligations
under the credit facility or redeem or repurchase some of Emmis' outstanding 121/2% senior discount notes.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KALC-FM in Denver, Colorado to Entercom
Communications Corporation for $88.0 million. Emmis had purchased KALC-FM on January 17, 2001, from Salem Communications
Corporation for $98.8 million in cash plus a commitment fee of $1.2 million and transaction related costs of $0.9 million. On
February 12, 2002, Emmis entered into a definitive agreement to sell KALC-FM to Entercom and Entercom began operating KALC-FM
under a time brokerage agreement on March 16, 2002. Proceeds were used to repay amounts outstanding under the credit facility.
The assets of KALC-FM are reflected as held for sale in the accompanying consolidated balance sheets. The $87.7 million of credit
facility debt repaid with the net proceeds of the sale is reflected as a current liability in the accompanying consolidated
balance sheets.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KXPK-FM in Denver, Colorado to Entravision
Communications Corporation for $47.5 million. Emmis had purchased KXPK-FM on August 24, 2000, from AMFM, Inc. for an allocated
purchase price of $35.0 million in cash plus liabilities recorded of $1.2 million and transaction related costs of $0.4 million.
Emmis entered into a definitive agreement to sell KXPK-FM to Entravision on February 12, 2002. Proceeds were used to repay
amounts outstanding under the credit facility. We expect to record a gain on sale of approximately $12 million in our first
quarter of fiscal 2003. The assets of KXPK-FM are reflected as held for sale in the accompanying consolidated balance sheets.
The $47.3 million of credit facility debt repaid with the net proceeds of the sale is reflected as a current liability in the
accompanying consolidated balance sheets.
In connection with the $255.7 million of completed or planned debt repayments described above, Emmis expects to write-off
approximately $4 million of deferred debt costs in the first quarter of our fiscal 2003.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
EMMIS
Quarter Ended
---------------------------------------------------------
Full
May 31 Aug. 31 Nov. 30 Feb. 28 Year
----------- ----------- ----------- ----------- -----------
Year ended February 28, 2001
Net revenues $ 100,519 $ 109,069 $ 143,606 $ 117,424 $ 470,618
Operating income (loss) 18,603 25,223 26,164 (4,197) 65,793
Net income (loss) before extraordinary item 5,911 16,638 11,566 (20,379) 13,736
Net income (loss) available to common shareholders 3,665 14,392 9,320 (22,625) 4,752
Basic earnings per common share:
Before extraordinary item $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10
Net income (loss) available to common shareholders $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10
Diluted earnings per common share:
Before extraordinary item $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10
Net income (loss) available to common shareholders $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10
Year ended February 28, 2002
Net revenues $ 137,335 $ 142,447 $ 137,119 $ 116,879 $ 533,780
Operating income (loss) 15,399 25,691 16,824 (13,804) 44,110
Net income (loss) before extraordinary item (13,477) (6,070) (11,698) (31,779) (63,024)
Net income (loss) available to common shareholders (15,723) (9,400) (13,944) (34,025) (73,092)
Basic earnings per common share:
Before extraordinary item $ (0.33) $ (0.18) $ (0.29) $ (0.72) $ (1.52)
Net income (loss) available to common shareholders $ (0.33) $ (0.20) $ (0.29) $ (0.72) $ (1.54)
Diluted earnings per common share:
Before extraordinary item $ (0.33) $ (0.18) $ (0.29) $ (0.72) $ (1.52)
Net income (loss) available to common shareholders $ (0.33) $ (0.20) $ (0.29) $ (0.72) $ (1.54)
82
EOC
Quarter Ended
---------------------------------------------------------
Full
May 31 Aug. 31 Nov. 30 Feb. 28 Year
----------- ----------- ----------- ----------- -----------
Year ended February 28, 2001
Net revenues $ 100,519 $ 109,069 $ 143,606 $ 117,424 $ 470,618
Operating income (loss) 18,603 25,223 26,164 (4,197) 65,793
Net income (loss) 5,911 16,638 11,566 (20,379) 13,736
Year ended February 28, 2002
Net revenues $ 137,335 $ 142,447 $ 137,119 $ 116,879 $ 533,780
Operating income (loss) 15,399 25,691 16,824 (13,804) 44,110
Net income (loss) before extraordinary item (10,862) (2,079) (7,268) (26,593) (46,802)
Net income (loss) (10,862) (3,163) (7,268) (26,593) (47,886)
83
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, 2002 and 2001, 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, 2002. We have also audited the accompanying
consolidated balance sheets of EMMIS OPERATING COMPANY (an Indiana corporation and wholly owned subsidiary of Emmis Communications
Corporation) and Subsidiaries as of February 28, 2002 and 2001, 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, 2002. These financial statements
are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require
that we plan and perform the audits 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, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States and the financial position of Emmis Operating Company and Subsidiaries as of February 28, 2002 and
2001, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2002
in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1v. of the notes to consolidated financial statements, effective March 1, 2001, the Company changed its
accounting for derivative instruments and hedging activities pursuant to the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Hedging Activities."
/s/ ARTHUR ANDERSEN LLP
-------------------------
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
May 2, 2002.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors or nominees to be directors of Emmis is incorporated by
reference from the section entitled "Proposal No. 1: Election of Directors" in the Emmis 2002 Proxy Statement and the section
entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Emmis 2002 Proxy Statement.
Listed below is certain information about the executive officers of Emmis or its affiliates who are not directors or nominees
to be directors.
AGE AT YEAR FIRST
FEBRUARY 28, ELECTED
NAME POSITION 2002 OFFICER
---------------------- ------------------------------ ------------- -------------
Randy Bongarten Television Division President 51 2000
Richard F. Cummings Radio Division President 49 1984
Norman H. Gurwitz Executive Vice President- 53 1987
Human
Resources and Secretary
Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates
who is not also a director.
Randy Bongarten is employed as President of Emmis Television since October 2000 and President of Emmis International since June
1998. Prior to June 1998, Mr. Bongarten had served as President of GAF Broadcasting and as Executive Vice President of Operations
for Emmis Radio Division.
Richard F. Cummings was the Program Director of WENS from 1981 to March 1984, when he became the National Program Director and
a Vice President of Emmis. He became Executive Vice President--Programming in 1988 and became Radio Division President in
December 2001.
Norman H. Gurwitz currently serves as Executive Vice President -- Human Resources, a position he assumed in 1998. Previously
he served as Corporate Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995. He became Secretary of
Emmis in 1989 and became an Executive Vice President in 1995. Prior to 1987, he was a partner in the Indianapolis law firm of
Scott & Gurwitz. Mr. Gurwitz is the brother-in-law of Richard A. Leventhal, a director of the Company.
85
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the section entitled "Executive Compensation" in the
Emmis 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the section entitled "Voting Securities and Beneficial
Owners" in the Emmis 2002 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the section entitled "Certain Transactions" in the Emmis
2002 Proxy Statement.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
Financial Statements
The financial statements filed as a part of this report are set forth under Item 8.
Reports on Form 8-K
On December 13, 2001, the Company filed a Form 8-K that contained Exhibit B to the articles of incorporation for Emmis
Communications Corporation.
On February 13, 2002, the Company filed a Form 8-K to disclose quarterly pro forma financial information by business segment
for the seven quarters ended November 30, 2001.
Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
3.1 Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation, incorporated by reference
from Exhibit 3.1 to Emmis' Annual Report on Form 10-K/A for the fiscal year ended February 29, 2000, and Exhibit B to
the Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation, incorporated by
reference from Exhibit 3 to Emmis' Form 8-K filed December 13, 2001.
3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference from Exhibit 3.2 to the
Company's Form 10-K/A for the fiscal year ended February 29, 2000.
3.3 Form of stock certificate for Class A common stock, incorporated by reference from Exhibit 3.5 to the 1994 Emmis
Registration Statement on Form S-1, File No. 33-73218, the "1994 Registration Statement".
4.1 Indenture dated February 12, 1999 among Emmis Communications Corporation, certain subsidiary guarantors and IBJ Whitehall
Bank and Trust Company, as trustee, including as an exhibit thereto the form of note, incorporated by reference to
Exhibit 4.1 to Emmis' Registration Statement on Form S-4, File No. 333-74377, as amended (the "1999 Registration
Statement").
86
4.2 Indenture dated March 27, 2001 among Emmis Communications Corporation and The Bank of Nova Scotia Trust Company of New
York, 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. 333-621604, as amended (the "2001 Registration Statement").
10.1 Emmis Communications Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the 1994
Registration Statement.++
10.2 Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the 1994
Registration Statement.++
10.3 The Emmis Communications Corporation 1995 Non-Employee Director Stock Option Plan, incorporated by reference from
Exhibit 10.15 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (the "1995 10-K").++
10.4 The Emmis Communications Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 to the
1995 10-K.++
10.5 Emmis Communications Corporation 1997 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to Emmis'
Annual Report on Form 10-K for the fiscal year ended February 28, 1998 (the "1998 10-K").++
10.6 Emmis Communications Corporation 1999 Equity Incentive Plan, incorporated by reference from the Company's proxy
statement dated May 26, 1999.++
10.7 Emmis Communications Corporation 2001 Equity Incentive Plan, incorporated by reference from the Company's proxy
statement dated May 25, 2001.++
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 and amendment to Employment Agreement, effective March 1, 1999, between the Company and Jeffrey H. Smulyan,
incorporated by reference from Exhibit 10.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30,
1999.++
10.9 Employment Agreement dated as of March 1, 1999, by and between Emmis Communications Corporation and Walter Z. Berger,
incorporated by reference from Exhibit 10.9 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28,
1999.++
10.10 Fourth Amended and Restated Revolving Credit and Term Loan Agreement, and First Amendment to Fourth Amended and
Restated Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibits 10.1 and 10.2, respectively,
to Emmis' Form 8-K filed on April 12, 2001.
10.11 Second Amendment to Fourth Amended and Restated Revolving Credit and Term Loan Agreement.
10.12 Third Amendment to Fourth Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference from
Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 2001.
10.13 Asset Purchase Agreement, dated as of February 12, 2002, by and among Entercom Communications Corporation and Emmis
Communications Corporation. *
10.14 Asset Purchase Agreement, dated as of February 12, 2002, by and among Entravision Communications Corporation and Emmis
Communications Corporation. *
10.15 Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee Enterprises, Incorporated, New Mexico
Broadcasting Co. and Emmis Communications Corporation, incorporated by reference from Exhibit 2.1 to Emmis' Form 8-K
filed on October 16, 2000.
87
10.16 Option Agreement, dated as of June 5, 2000, by and among Hearst-Argyle Properties, Inc. and Emmis Communications
Corporation. *
10.17 Asset Purchase Agreement, dated as of June 21, 2000, by and among Sinclair Radio of St. Louis, Inc., Sinclair Radio of
St. Louis Licensee, LLC and Emmis Communications Corporation, incorporated by reference from Exhibit 2.2 to Emmis' Form
8-K filed on October 16, 2000.
10.18 Asset Exchange Agreement, dated as of October 6, 2000, between Emmis Communications Corporation, Emmis 106.5 FM
Broadcasting Corporation of St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and Bonneville International
Corporation and Bonneville Holding Company, incorporated by reference from Exhibit 2.3 to Emmis' Form 8-K filed on
October 16, 2000.
10.19 Asset Purchase Agreement, dated as of June 19, 2000, by and among Emmis Communications Corporation, AMFM Houston, Inc.,
AMFM Ohio, Inc. and AMFM Radio Licenses, LLC, incorporated by reference from Exhibit 10.2 to Emmis' Form 8-K filed on
October 16, 2000.
10.20 Asset Purchase Agreement by and among Emmis Communications Corporation, Country Sampler, Inc. and Mark A. Nickel, dated
as of February 23, 1999, together with associated Consulting Agreement and Letter Agreement, incorporated by reference
from Exhibit 10.16 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999.
21 Subsidiaries of Emmis.*
23 Consent of Accountants.*
24 Powers of Attorney.*
99.1 Letter of Acknowledgement with respect to Arthur Andersen's Audit.*
- ------------------------
* Filed with this report.
++ Management contract or compensatory plan or arrangement.
88
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 10, 2002 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 10, 2002 /s/ Jeffrey H. Smulyan President, Chairman of the Board and
----------------------
Jeffrey H. Smulyan Director (Principal Executive Officer)
Date: May 10, 2002 /s/ Walter Z. Berger Executive Vice President, Treasurer,
--------------------
Walter Z. Berger Chief Financial Officer and Director
(Principal Accounting Officer)
Date: May 10, 2002 Susan B. Bayh* Director
-------------
Susan B. Bayh
Date: May 9, 2002 Gary L. Kaseff* Executive Vice President, General
--------------
Gary L. Kaseff Counsel and Director
Date: May 10, 2002 Richard A. Leventhal* Director
--------------------
Richard A. Leventhal
Date: May 8, 2002 Greg A. Nathanson* Director
-----------------
Greg A. Nathanson
Date: May 13, 2002 Frank V. Sica* Director
-------------
Frank V. Sica
Date: May 9, 2002 Lawrence B. Sorrel* Director
------------------
Lawrence B. Sorrel
*By: /s/ J. Scott Enright
---------------------
J. Scott Enright
Attorney-in-Fact