ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We are the eleventh largest radio broadcaster in the United States based on total revenues. The thirteen FM radio stations and two AM radio stations we own in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as St. Louis, Indianapolis and Terre Haute, Indiana. Our seven television stations are located in Orlando, Florida, New Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and Terre Haute, Indiana.
Our strategy is to selectively acquire underdeveloped media properties in desirable markets and then to create value by developing those properties to increase their cash flow. We find such underdeveloped properties attractive because they offer greater potential for revenue and cash flow growth than mature properties. We have been successful in acquiring these types of radio stations and improving their ratings, revenues and cash flow with our marketing focus and innovative programming expertise. We have created top-performing radio stations which rank, in terms of primary demographic target audience share, among the top ten stations in the New York City, Los Angeles and Chicago radio markets according to the Winter 1999 Arbitron Survey. We believe that our strong large-market radio presence and diversity of station formats makes us attractive to a diverse base of radio advertisers and reduces our dependence on any one economic sector or specific advertiser.
More recently, we began applying our advertising sales and programming expertise to our television stations. We view our entry into television as a logical outgrowth of our radio business and as a platform for diversification. Like the radio stations we previously acquired, our television stations are underdeveloped properties located in desirable markets, which can benefit from innovative, research-based programming and our experienced management team. We believe we can further improve the ratings, revenues and broadcast cash flow of our television stations with a more market-focused, research-based programming approach and other related strategies, which have proven successful with our radio properties.
In addition to our domestic broadcasting properties, we operate news and agriculture information radio networks in Indiana, publish Indianapolis Monthly, Atlanta, Cincinnati, Texas Monthly, L.A. Magazine, Country Sampler, Country Marketplace and related magazines, have a 54% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos Aires, Argentina. We also engage in various businesses ancillary to our broadcasting business, such as consulting and broadcast tower leasing.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting, enhancing the performance of our broadcast and publishing properties, and distinguishing ourselves through the quality of our operations. Our strategy has the following principal components:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets and innovative programming developed to target specific demographic groups are the most important determinants of individual radio and television station success. We conduct extensive market research to identify underserved segments of the markets we serve or to assure that we are meeting the needs of our target audience. Utilizing the research results, we concentrate on providing a focused programming format carefully tailored to the demographics of our markets and our audiences' preferences.
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and national sales efforts based on advertiser demand and our programming compared to the competitive formats within each market. We provide our sales force with extensive training and the technology for sophisticated inventory management techniques which provide frequent price adjustments based on regional and market conditions. We seek to maximize sources of non-traditional, non-spot revenue and have led the industry in developing "vendor co-op" advertising revenue. Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize and take advantage of the potential of vendor co-op advertising.
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 in those of our current markets where we believe we can increase broadcast cash flow. We will also consider acquisitions of individual radio stations or groups of radio stations in new markets where we expect we can achieve a leadership position. We believe that continued consolidation in the radio broadcasting industry will create attractive acquisition opportunities as the number of potential buyers for radio assets declines due to government regulations on the number of stations a company can own in one market. We believe that attractive acquisition opportunities are also increasingly available in the television broadcasting industry. We intend to evaluate acquisitions of international broadcasting stations (typically in conjunction with strong local minority-interest partners) and magazine publishing properties that present opportunities to capitalize on our management expertise to enhance cash flow at attractive purchase price multiples with minimal capital requirements.
ENCOURAGE AN ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business and that much of its success is the result of the efforts of regional and local management and staff. We have attracted and retained an experienced team of broadcast professionals who understand the viewing and listening preferences, demographics and competitive opportunities of their particular market. Our decentralized approach to station management gives local management oversight of station spending, long-range planning and resource allocation at their individual stations, and rewards all employees based on those stations' performance. In addition, we encourage our managers and employees to own a stake in the company, and over 95% of all full-time employees have an equity ownership position in Emmis. We believe that our entrepreneurial management approach has created a distinctive corporate culture, making Emmis a highly desirable employer in the broadcasting industry and significantly enhancing our ability to attract and retain experienced and highly motivated employees and management.
RADIO AND TELEVISION STATIONS
The following tables set forth certain information regarding our radio and television stations and their broadcast markets.
RADIO STATIONS
In the following table, "Market Rank by Revenue" is the ranking of the market revenue size of the principal radio market served by the station among all radio markets in the United States. Market revenue and ranking figures are from Duncan's Radio Market Guide (1999 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 1999 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.
*On March 28, 2000, Emmis changed the call letters of WNAP-FM to WNOU-FM and changed the format to Top 40.
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 2000. 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, 6:00 a.m. to 2:00 a.m. time period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by Nielsen from 6:00 a.m. to 2:00 a.m., Sunday through Saturday during November 1999. "Station Audience Share" reflects an estimate of the share of DMA households viewing television received by a local commercial station in comparison to other local commercial stations in the market as measured from 6:00 a.m. to 2:00 a.m., Sunday through Saturday.
Emmis also owns KAII-TV and KHAW-TV, which operate as satellite stations of KHON-TV and primarily re-broadcast the signal of KHON-TV. The stations are considered one station for FCC multiple ownership purposes. Low power television translators W40AN and K55D2 retransmit stations WLUK-TV and KHON-TV, respectively.
RADIO NETWORKS
In addition to our other radio broadcasting operations, we own and operate two radio networks. Network Indiana provides news and other programming to nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides farm news, weather information and market analysis to radio stations across Indiana.
PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Indianapolis Monthly. We have published Indianapolis Monthly magazine since September 1988. Indianapolis Monthly covers local personalities, homes and lifestyles and currently has a paid monthly circulation of approximately 45,000. With a large advertising base and a popular editorial focus, Indianapolis Monthly is the market's leading general interest magazine focusing on the Indianapolis area.
Atlanta. We acquired and began publishing Atlanta magazine in August 1993. Atlanta covers area personalities, issues and style and currently has a paid monthly circulation of approximately 65,000. The magazine was unprofitable for several years before we acquired it for a nominal investment. Certain initiatives, including downsizing staff, increasing sales efforts and repositioning the editorial focus, have contributed to improving profitability.
Cincinnati. We acquired Cincinnati magazine in October 1997. Cincinnati magazine was founded by the Greater Cincinnati Chamber of Commerce in 1967 and, under its prior owners, the magazine grew to a paid monthly circulation of approximately 22,000. We repositioned the editorial product to an up-to-date city/regional magazine covering people and entertainment in Cincinnati, doubled the existing sales staff and marketed the newly designed magazine to the Cincinnati area. The magazine currently has a paid monthly circulation of approximately 28,000.
Texas Monthly. We acquired Texas Monthly magazine in February 1998. The critically acclaimed magazine, which has received eight National Magazine Awards, has a paid monthly circulation of approximately 300,000, and we believe it is read by more than 2,436,000 people. Since acquiring the magazine, we have worked to increase Texas Monthly's operating efficiencies while leaving the highly regarded editorial product intact.
Country Sampler. We acquired Country Sampler magazine in April 1999. Country Sampler focuses on country craft and home decorating ideas and products, and we believe it is read by more than two million people. In connection with the acquisition of Country Sampler, we also acquired other related magazines focusing on particular segments of the country craft and home decorating market. To complement Country Sampler, we acquired Country Marketplace in December 1999. Country Marketplace serves the general craft market, providing projects to crafters of all skill levels. Like Country Sampler magazine, Country Marketplace carries a substantial amount of crafter advertising, allowing for great efficiencies in the sales arena.
L.A. Magazine. We acquired L.A. Magazine in March 2000. This high-profile city magazine in the nation's second-largest metropolis maintains a circulation base of approximately 180,000. With the acquisition of L.A. Magazine, Emmis secured a franchise, brand-name product in the country's trend-setting capital. We intend to enhance and upgrade the editorial product, currently a mix of star-coverage, Hollywood insider information and regional service, by including renown columnists, improving lifestyle and service coverage, and exploring hard-hitting stories that make a difference to Angelenos. In addition, we intend to increase the sales force with a renewed emphasis on local retailers.
INTERNET
We believe that the development and explosive growth of the Internet present not only a challenge, but an opportunity for broadcasters and publishers. The challenge is, primarily, increased competition for the time and attention of our listeners, viewers and readers. The opportunity is to further enhance the relationships we already have with our listeners, viewers and readers by expanding products and services offered by our stations and magazines. For that reason, we have been working with other broadcasters and publishers to put together a local media internet venture (LMIV). The LMIV is premised on the idea that each station's or magazine's website would be the entry way into a backbone of internet content provided by a national, or even international, aggregation of broadcasters and publishers. The LMIV would capitalize on the individual relationships between each station or magazine and its listeners, viewers or readers by allowing each station's or magazine's website to reflect the character of the station or magazine. The LMIV would also capitalize on the potentially tremendous economies of scale provided by the stations' and magazines' aggregated websites. Bringing a group of broadcasters and publishers together is almost always a difficult proposition. However, we remain optimistic that the LMIV will be formalized.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the communities we serve. To that end, each of our stations participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable organizations that have been the beneficiaries of our marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, The March of Dimes, American Cancer Society, Riley Children's Hospital and research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In addition to our planned activities, our stations and magazines take leadership roles in community responses to natural disasters.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry organizations. Our senior managers have served in various capacities with industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding members of the Radio Operators Caucus. In addition, our managers have been voted Radio President of the Year and General Manager of the Year, and at various times we have been voted Most Respected Broadcaster in polls of radio industry chief executive officers and managers.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission (the "FCC") under the Communications Act of 1934, as amended (and, as amended by the Telecommunications Act of 1996 (the "1996 Act"), the "Communications Act"). Television or radio broadcasting is prohibited except in accordance with a license issued by the FCC upon a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate television and radio licenses in such manner as will provide a fair, efficient and equitable distribution of service throughout the United States. The FCC determines the location of stations, regulates the apparatus used by stations, and regulates numerous other areas of television and radio broadcasting pursuant to rules, regulations and policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment of a broadcast license or the transfer of control of a corporation holding a license without the prior approval of the FCC. Under the Communications Act, the FCC also regulates certain aspects of the operation of cable television systems and other electronic media that compete with broadcast stations.
The 1996 Act represented the most comprehensive overhaul of the country's telecommunications laws in more than 60 years. The 1996 Act significantly changed both the process for renewal of broadcast station licenses and the broadcast ownership rules. The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Reference should be made to the Communications Act, FCC rules and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of radio and television stations.
The 1996 Act established a "two-step" renewal process that limits the FCC's discretion to consider applications filed in competition with an incumbent's renewal application. The 1996 Act also substantially liberalized the national broadcast ownership rules, eliminating the national radio limits and easing the national restrictions on TV ownership; it also relaxed local radio ownership restrictions.
This new regulatory flexibility has engendered aggressive local, regional, and/or national acquisition campaigns. Removal of previous station ownership limitations on leading incumbents (i.e., existing networks and major station groups) has sharply increased the competition for and the prices of attractive stations.
Other legislation has been introduced from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or new or amended FCC regulations adopted or what their effect would be on Emmis.
LICENSE RENEWAL. Radio and television stations operate pursuant to broadcasting licenses that are ordinarily granted by the FCC for maximum terms of eight years and are subject to renewal upon application to the FCC. Our licenses currently have the following expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 2004 WKQX-FM (Chicago) December 1, 2004 KSHE-FM (St. Louis) February 1, 2005 KPWR-FM (Los Angeles) December 1, 2005 WQHT-FM (New York) June 1, 2006 WQCD-FM (New York) June 1, 2006 WIBC-AM (Indianapolis) August 1, 2004 WNOU-FM (Indianapolis) August 1, 2004 WRKS-FM (New York) June 1, 2006 WKKX-FM (St. Louis) December 1, 2004 WXTM-FM (St. Louis) December 1, 2004 WTLC-AM (Indianapolis) August 1, 2004 WTLC-FM (Indianapolis) August 1, 2004 WTHI-FM (Terre Haute) August 1, 2004 WWVR-FM (Terre Haute) August 1, 2004 WTHI-TV (Terre Haute) August 1, 2005 WFTX-TV (Fort Myers) February 1, 2005 WALA-TV (Mobile) April 1, 2005 WVUE-TV (New Orleans) June 1, 2005 WLUK-TV (Green Bay) December 1, 2005 KHON-TV (Honolulu) February 1, 2007 KAII-TV (Maui) February 1, 2007 KHAW-TV (Hawaii) February 1, 2007 WKCF-TV (Orlando) February 1, 2005
Under the 1996 Act, at the time an application is filed for renewal for a station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC concludes on its own) that there is a "substantial and material" question whether grant of the renewal application would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine whether renewal should be granted. The 1996 Act modified the license renewal process to provide for the grant of a renewal application upon a finding by the FCC that the licensee:
- has served the public interest, convenience and necessity; - has committed no serious violations of the Communications Act or the FCC's rules; and - has committed no other violations of the Communications Act or the FCC's rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny a renewal application, and only then may the FCC accept other applications to operate the station of the former licensee. In a vast majority of cases, the FCC renews broadcast licenses even when petitions to deny applications are filed against broadcast license renewal applications.
OWNERSHIP RESTRICTIONS. The 1996 Act eliminated restrictions on the number of radio stations that may be owned by one entity nationwide. Under the 1996 Act, with limited exceptions, the number of radio stations that may be owned by one entity in a given radio market is dependent on the number of commercial stations in that market:
- if the market has 45 or more stations, one entity may own not more than eight stations, of which not more than five may be in one service (AM or FM); - if the market has between 30 and 44 stations, one entity may own not more than seven stations, of which not more than four may be in one service; - if the market has between 15 and 29 stations, a single entity may own not more than six stations, of which not more than four may be in one service; and - if the market has fourteen or fewer stations, one entity may own not more than five stations, of which not more than three may be in one service, except that in such a market one entity may not own more than fifty percent of the stations in the market.
Each of the six markets in which our radio stations are located has at least 15 commercial radio stations.
In August 1999, the FCC substantially revised its ownership rules concerning the common ownership of radio and television stations in the same market. Previously, the FCC had generally prohibited common ownership of a television station and one or more radio stations in the same market, though waivers of the rule were granted frequently; one such waiver was granted to permit our common ownership of WTHI-TV, WTHI-FM and WWVR-FM in Terre Haute, Indiana. The FCC also generally prohibited common ownership of two or more television stations in the same market. Under the new rules, the Commission will permit the common ownership of one television station, along with:
- up to six radio stations in any market where at least 20 independent voices remain post-merger; - up to four radio stations in any market where at least 10 independent voices remain post-merger; and - one radio station regardless of the number of independent voices remaining post-merger.
Additionally, the new rules provide that an entity may own two television stations in the same Designated Market Area (DMA) if:
- the coverage areas of the stations do not overlap, or - there will remain eight, independently-owned and-operated full-power noncommercial and commercial operating stations, and one of the two commonly-owned stations is not a top 4-ranked station in the market (based on audience).
Furthermore, the Commission will consider waiving these restrictions, if:
- one of the stations is a "failed station," i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding; - one of the stations is a "failing station," i.e., having a low audience share and financially struggling; or - one of the stations is an unbuilt facility, where the permittee has made substantial progress towards constructing the facility.
The 1996 Act and the FCC's subsequently issued rules restrict the ownership of television stations on a nationwide basis to no more than 35% of the national audience; the FCC is considering raising that limit.
Current FCC rules prohibit common ownership of a daily newspaper and a radio or television station in the same market; the FCC is considering possible liberalization or elimination of that prohibition. There is also a prohibition on common ownership of a television station and a cable television system in the same market; however, the FCC is considering possible elimination of that ban.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC requires the "attribution" of broadcast licenses between a broadcasting company and certain of its stockholders, officers or directors, such that there would be a violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than the permitted number of stations or a prohibited combination of media outlets in the same market. Under FCC rules, with certain exceptions, attribution of broadcast licenses occurs where any five percent voting stockholder or officer or director of a broadcasting company directly or indirectly owns, operates, controls or has a five percent voting interest in or is an officer or director of any other broadcasting company; for passive investments by mutual funds, insurance companies and bank trust departments, voting interests of twenty per cent or more are attributable. Attribution also occurs in the case of all general partnership interests and in the case of limited partnership interests and interests in limited liability companies where a limited partner or member is "materially involved" in the media-related activities of the partnership or LLC. To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable, the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each non-controlling link in a multi-corporation ownership chain. Emmis' Amended and Restated Articles of Incorporation and By-Laws authorize the Board of Directors to prohibit any ownership, voting or transfer of its capital stock which would cause Emmis to violate the Communications Act or FCC regulations.
In cases where one person or entity (such as Jeffrey H. Smulyan in the case of Emmis) holds more than 50% of the combined voting power of the common stock of a broadcasting company, a minority shareholder of the company generally would not be deemed to hold an "attributable" interest in the company. However, any attributable interest by any such shareholder in another broadcast station or other media in a market where such company owns, or seeks to acquire, a station would still be subject to review by the FCC under its "equity/debt plus policy" (described below), and could result in the company's being unable to obtain from the FCC one or more authorizations needed to conduct its broadcast business or being unable to obtain FCC consents for future acquisitions. Further, in the event that a majority shareholder of a company (such as Mr. Smulyan in the case of Emmis) were no longer to hold more than 50% of the combined voting power of the common stock of the company, the interests of minority shareholders which had theretofore been considered nonattributable could become attributable, with the result that any other media interests held by such shareholders would be combined with the media interests of such company for purposes of determining compliance with FCC ownership rules. In the case of Emmis, Mr. Smulyan's level of voting control could decrease to or below 50% as a result of transfers of common stock pursuant to agreement or conversion of the Class B Common Stock into Class A Common Stock. In the event of any noncompliance, steps required to achieve compliance could include divestitures by either the shareholder or the affected company. Further, other media interests of shareholders having or acquiring an attributable interest in such a company could result in the company being unable to obtain from the FCC one or more authorizations needed to conduct its broadcast business or being unable to obtain FCC consents for future acquisitions. Conversely, a company's media interests could operate to restrict other media investments by shareholders having or acquiring an interest in Emmis.
The FCC will also find that a person or entity has an attributable interest in a broadcast (radio or television) station if the person or entity (i) owns a broadcast station, cable television system or newspaper in the same market and (ii) is party to a time brokerage agreement (also known as a local marketing agreement) whereby it programs more than 15% of the programming of another station in the market. In such cases, the brokering person or entity would be considered to "own" such other station for purposes of the FCC's ownership rules.
Under a recent change in the FCC's ownership attribution rules, an investor in a television or radio station will also be considered to have an attributable interest in another station where his or her interest in the other station, including both debt and equity holdings, exceeds 33% or the total asset value of the entity owning the other station, and either:
- - the investor is a "major program supplier," including all programming entities such as networks and time brokers which supply more than 15% of the station's total weekly broadcast time; or - - the investor is a same-market media owner subject to the FCC's ownership rules, i.e., a broadcaster, cable operator or newspaper owner.
TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the "character" of the licensee and those persons holding "attributable" interests therein, and compliance with the Communications Act's limitations on alien ownership as well as compliance with other FCC policies. When passing on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer of the broadcast license to any party other than the assignee or transferee specified in the application.
A transfer of control of a corporation controlling a broadcast license may occur in various ways. For example, a transfer of control occurs if an individual stockholder gains or loses "affirmative" or "negative" control of such corporation through issuance, redemption or conversion of stock. "Affirmative" control would consist of control of more than 50% of such corporation's outstanding voting power and "negative" control would consist of control of exactly 50% of such voting power. To obtain the FCC's prior consent to assign or transfer control of a broadcast license, appropriate applications must be filed with the FCC. If the application involves a "substantial change" in ownership or control, the application must be placed on public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. If the application does not involve a "substantial change" in ownership or control, it is a "pro forma" application. The "pro forma" application is nevertheless subject to having informal objections filed against it. If the FCC grants an assignment or transfer application, interested parties have 30 days from public notice of the grant to seek reconsideration of that grant. Generally, parties that do not file initial petitions to deny or informal objections against the application face a high hurdle in seeking reconsideration of the grant. The FCC normally has an additional ten days to set aside such grant on its own motion. (FCC rules for computation of time may cause more variation in the actual time for action and response.)
Under the 1996 Act, the FCC is required to review all of its broadcast ownership rules every two years to determine whether the public interest dictates that such rules be repealed or modified. We cannot predict the outcome of any such reviews or the impact they may have on our business.
ALIEN OWNERSHIP RESTRICTIONS. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides that no FCC license may be granted to any corporation directly or indirectly controlled by any other corporation of which more than one-fourth of its capital stock is owned of record or voted by Non-U.S. Persons if the FCC finds the public interest will be served by the refusal of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on alien ownership apply in modified form to other forms of business 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 ownership, voting or transfer of its capital stock as would cause Emmis to violate the Communications Act or FCC regulations.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Broadcast of obscene or indecent material is regulated by the FCC as well as by state and federal law. Complaints from listeners concerning a station's programming often will be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed and considered by the FCC at any time. Stations also must pay regulatory and application fees and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identifications, the advertisement of contests and lotteries, and technical operations, including limits on radio frequency radiation.
In February 2000, the FCC adopted new rules requiring licensees to develop and implement affirmative action programs designed to promote equal employment opportunities. The new rules require all broadcasters to implement broad outreach programs that will lead to the widest possible dissemination of job vacancies. In addition, the rules require additional measures for stations employing five or more full-time employees which extend beyond the recruitment efforts for a particular job vacancy. The new rules also require most broadcasters to file periodic reports with the Commission regarding their recruitment efforts.
The FCC has adopted rules to implement the Children's Television Act of 1990, which, among other provisions, limits the permissible amount of commercial matter in children's programs and requires each television station to present "educational and informational" children's programming. The FCC also has adopted renewal processing guidelines effectively requiring television stations to broadcast an average of at least three hours per week of children's educational programming. In addition, the FCC has adopted rules that require television stations to broadcast, over an 8 to 10 year transition period which commenced on January 1, 1998, increasing and set percentages of closed captioned programming for the hearing-impaired.
Over the past few years, a number of radio and television stations, including certain Emmis stations, have entered into what commonly are referred to as "local marketing agreements" or "time brokerage agreements" (together, "LMAs"). These agreements take various forms. Separately-owned and licensed stations may agree to function cooperatively in terms of programming, advertising sales and other matters, subject to compliance with the antitrust laws and the FCC's rules and policies, including the requirement that the licensee of each station maintain independent control over the programming and other operations of its own station. As already noted, a station that brokers more than 15% of the broadcast time of another station in the same market will be deemed to have an
attributable interest in that station. Further, FCC rules prohibit a radio station from "simulcasting" more than 25% of its programming from another station in the same market in the same broadcast service (i.e., AM-AM or FM-FM) where the two stations serve substantially the same geographic area, and where the stations are commonly owned or the owner of one station programs the other through an LMA.
Another example of a cooperative agreement between differently owned broadcast stations in the same market is a joint sales agreement ("JSA"), whereby one station sells advertising time in combination, both on itself and on a station under separate ownership. The FCC has determined that JSA's should generally be left to antitrust enforcement, though it has reserved the right to examine JSA's on a case-by-case basis. Generally, JSA's are not deemed by the FCC to be attributable for purposes of its ownership rules.
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. The signal carriage, or "must carry," provisions require cable operators to carry the signals of local commercial and non-commercial television stations and certain low power television stations. Systems with 12 or fewer usable activated channels and more than 300 subscribers must carry the signals of at least three local commercial television stations. A cable system with more than 12 usable activated channels, regardless of the number of subscribers, must carry the signals of all local commercial television stations, up to one-third of the aggregate number of usable activated channels of such a system. The 1992 Cable Act also includes a retransmission consent provision that prohibits cable operators and other multi-channel video programming distributors ("MVPDs") from carrying broadcast signals without obtaining the station's consent in certain circumstances. The "must carry" and retransmission consent provisions are related in that a local television broadcaster, on a cable system-by-cable system basis, must make a choice once every three years whether to proceed under the "must carry" rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the cable system to carry the station's signal, in most cases in exchange for some form of consideration from the cable operator. Cable systems and other MVPDs must obtain retransmission consent to carry all distant commercial stations other than "super stations" delivered via satellite.
In April 1997, the FCC adopted rules that require television broadcasters to provide digital television ("DTV") to consumers. The FCC also adopted a table of allotments for DTV, which provides eligible existing broadcasters with a second channel on which to provide DTV service. The FCC's DTV allotment plan is based on the use of a "core" DTV spectrum between channels 2-51. The Communications Act mandates that unless certain benchmarks are not satisfied, by the end of 2006 the FCC must recover one of the two channels from each television station. Television broadcasters will be allowed to use their channels according to their best business judgment. Such uses can include multiple standard definition program channels, data transfer, subscription video, interactive materials, and audio signals (so-called "ancillary" services), although broadcasters will be required to provide a free digital video programming service that is at least comparable to today's analog service. The FCC has imposed a fee of 5% of the annual gross revenues for television broadcasters' use of the DTV spectrum to offer ancillary services (i.e., services other than free, over-the-air, advertiser-supported television). The form and amount of these fees may have a significant effect on the profitability of such services. Broadcasters will not be required to air "high definition" programming or, initially, to simulcast their analog programming on the digital channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets were required to be on the air with a digital signal by May 1, 1999, and affiliates of those networks in markets 11-30 were required to be on the air with digital signals by November 1, 1999. The remaining commercial stations, including those owned by Emmis, were required to file DTV construction permit applications by November 1, 1999 and to be on the air with digital signals by May 1, 2002. Emmis timely filed DTV construction permit applications for all
its television stations. The FCC also has released a Notice of Inquiry to determine the extent of broadcasters' future public interest obligations.
Whether and to what extent the cable "must-carry" rights discussed earlier will extend to the new DTV signals is still a matter to be determined by a rule making proceeding initiated by the FCC in July 1998. The rule making proceeding also seeks comment on related issues, including how to resolve technical compatibility problems, whether the FCC should modify its signal quality requirement during the transition, how to regulate channel placement of digital television signals and whether such signals must be carried on the basic cable tier. We cannot predict at this time whether the FCC will adopt "must carry" requirements for digital television signals or the effect of an FCC decision on our television stations.
The FCC has authorized the provision of video programming directly to home subscribers through high-powered direct broadcast satellites ("DBS"). DBS systems currently are capable of broadcasting as many as 175 channels of digital television service directly to subscribers' equipment with 18-inch receiving dishes and decoders. Currently, several entities provide DBS service to consumers throughout the country. Other DBS operators hold licenses, but have not yet commenced service. DBS operators may not import distant network signals into local television markets unless the individual household that would receive the distant network signal is not capable of receiving a sufficiently strong "over-the-air" signal of the local affiliate of the given network. In November 1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which authorizes DBS companies to provide local television signals to their subscribers. During the first six months following enactment of the law, the signal could be provided without the consent of the station. Upon the expiration of that period, the signal may now be provided only pursuant to a retransmission consent agreement with the station. In addition, effective January 1, 2002, a local television station will be entitled to "must-carry" rights on a DBS system if the system is providing any local television stations to its subscribers. The legislation also requires broadcasters to negotiate nonexclusive 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. 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.
SHVIA also created a new category of television stations, Class A stations, which are afforded a measure of protection from new full-service and low-power television stations. Only certain low-power stations qualify for the new Class A status, i.e., those low power television stations certifying that, from September 1, 1999 to November 29, 1999, they (1) operated a minimum of 18 hours per day; (2) produced an average of at least 3 hours per week of programming within the service market; and (3) complied with all applicable low power television (Part 74) rules. Furthermore, the licensee of a Class A station will be required to comply with all applicable full power television station rules as of the date of application for Class A status, including all political advertising restrictions, local public inspection file rules, and the location of the main studio. Finally, SHVIA permitted full-service stations to file applications to "maximize" (expand the coverage of) their DTV facilities by (i) filing a notice of intent to maximize with the FCC on or before December 31, 1999, and (ii) file a bona fide application to maximize on or before May 1, 2000. Stations meeting those requirements will have their "maximized" DTV facilities protected from interference by Class A stations. Emmis timely filed a Notice of Intent and a "maximization application" for each of its television stations.
There are FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as network-affiliate relations, the ability of stations to obtain exclusive rights to air syndicated programming, cable systems' carriage of syndicated and network programming on distant stations, political advertising practices, application procedures and other areas affecting the business or operations of broadcast stations.
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.
Recent Developments and Proposed Changes. In February 2000, the Commission adopted rules implementing a Low Power ("Microradio") FM service. The new service is comprised of two classes of stations. First, "LP-100" Class stations will be authorized to operate with 50 - 100 watts effective radiated power ("ERP"), at a maximum height above average terrain ("HAAT") of 30 meters. Second, "LP-10" Class stations will be authorized to operate with one to ten watts ERP, at a maximum of 30 meters HAAT. The LP-100 stations are expected to have a service radius of up to 3 1/2 miles, and the LP-10 stations will have a service radius of up to two miles. Both classes of stations will be restricted to non-commercial operation. We cannot predict whether any such stations will interfere with the coverage of any of our radio stations. Currently, Congress is considering legislation with a view to ensuring interference protection for existing radio stations.
In April 1997, the FCC adopted rules authorizing delivery of digital audio radio service on a nationwide basis by satellite ("SDARS"). At the same time, the FCC put out for comment a proposal to permit SDARS to be supplemented by terrestrial transmitters designed to fill "gaps" in satellite coverage. The FCC has awarded two nationwide licenses for SDARS. It is anticipated that SDARS, when implemented, will be capable of delivering multiple channels of compact-disc quality sound which will be receivable through the use of special receiving antennas.
In November 1999, the Commission released proposed rules regarding the adoption of 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 (at reduced power) a combination of both. DAB technology is still evolving, and it is not yet certain whether DAB transmission as proposed will be feasible.
In August 1998, the FCC adopted rules to govern the use of auctions to resolve competing applications for initial licenses and construction permits and competing applications for major modifications to existing commercial broadcast facilities. The rules apply to full power commercial radio and analog television stations, as well as to all secondary commercial broadcast services (e.g., low power television, FM translator and television translator services). In September 1999, the Commission conducted the first of its auctions for long-frozen applications. Any future applications we may file for major modifications to our facilities may become subject to auction proceedings if they are found to be mutually exclusive with major modification applications filed by other radio or television licensees or applications for new stations.
On March 13, 1998, the FCC approved a television programming rating system developed by the television industry which will allow parents to "black-out" programs that contain material they consider inappropriate for children. On March 13, 1998, the FCC also adopted technical requirements for the implementation of so-called "v-chip technology" which will enable parents to program television sets so that certain programming will be inaccessible to children.
The Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and affect our ability to acquire additional broadcast stations or finance such acquisitions. Such matters include:
- - proposals to impose spectrum use or other fees on FCC licensees; - - proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies; - - proposals to change rules relating to political broadcasting, including the reinstatement of the so-called "fairness doctrine"; - - technical and frequency allocation matters; - - AM stereo broadcasting; - - proposals to permit expanded use of FM translator stations; - - proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages on radio; - - proposals permitting FM stations to accept formerly impermissible interference; - - proposals to reimpose holding periods for licenses; - - changes to broadcast technical requirements, including those relative to the implementation of digital audio broadcasting and satellite digital audio radio service; - - proposals to tighten safety guidelines relating to radio frequency radiation exposure; and - - proposals to limit the tax deductibility of advertising expenses by advertisers.
We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what impact, if any, the implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations. Reference is made to the Communications Act, FCC regulations and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of broadcast stations.
ADVERTISING SALES
Our stations derive their advertising revenue from local and regional advertising in the marketplaces in which they operate, as well as from the sale of national advertising. Local and most regional sales are made by a station's sales staff. National sales are made by firms specializing in such sales which are compensated on a commission-only basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station's audience share position more rapidly than does the volume of local and regional advertising revenue.
We have led the industry in developing "vendor co-op" advertising revenue (i.e., revenue from a manufacturer or distributor which is used to promote its particular goods together with local retail outlets for those goods). Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize, and take advantage of, the potential of vendor co-op advertising. Our Revenue Development Systems division has established a network of radio stations which share information about sources of vendor co-op revenue. In addition, each of our stations has a salesperson devoted exclusively to the development of cooperative advertising. We also use this approach at our television stations. In March 1999, we acquired substantially all of the assets of the Co-Opportunities division of Jefferson-Pilot Communications. We believe that the business of Co-Opportunities (which focuses more on co-op advertising for television stations and cable systems) provides an excellent complement to Revenue Development Systems.
COMPETITION
Radio and television broadcasting stations compete with the other broadcasting stations in their respective market areas, as well as with other advertising media such as newspapers, magazines, outdoor advertising, transit advertising, the Internet and direct mail marketing. Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market does not generally compete with stations in other market areas. In each of our markets, our stations face competition from other stations with substantial financial resources, including stations targeting the same demographic groups. In addition to management experience, factors which are material to competitive position include the station's rank in its market, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive position with programming and promotional campaigns aimed at the demographic groups targeted by our stations, and through sales efforts designed to attract advertisers that have done little or no broadcast advertising by emphasizing the effectiveness of radio and television advertising in increasing the advertisers' revenues. 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, 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 FCC's multiple ownership rules have changed significantly as a result of the Telecommunications Act of 1996.
The broadcasting industry historically has grown in terms of total revenues despite the introduction of new technology for the delivery of entertainment and information, such as cable television, The Internet, satellite television, audio tapes and compact discs. We believe that radio's portability in particular makes it less vulnerable than other media to competition from new methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio or television broadcasting industry.
EMPLOYEES
As of February 29, 2000 Emmis had approximately 1,440 full-time employees and approximately 270 part-time employees. We have approximately 214 employees at various radio and television stations represented by unions. We consider relations with our employees to be good.
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. The following tables summarize relevant financial information by geographic area:
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth information as of February 29, 2000 with respect to Emmis' offices and studios and its broadcast tower locations. Management believes that the properties are in good condition and are suitable for Emmis' operations.
- -------------- (1) The lease provides for one renewal option of ten years following the expiration date. Emmis also owns a tower site which it placed in service in 1984 and currently uses as a back-up facility and on which it leases space to other broadcasters.
(2) The Company is in the process of building out a studio and office space in the Merchandise Mart. The lease is for this new space, but gives the Company the right to stay in its current space during construction.
(3) The lease provides for annual renewal options.
ITEM 3.
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. See Note 7 in Item 8, "Financial Statements and Supplementary Data" for discussion of litigation with Sinclair Broadcast Group, Inc.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of shareholders of the Company held on February 21, 2000, the following matters received the following votes:
PART II
ITEM 5.
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.
*All prices adjusted for the two-for-one stock split on February 24,2000.
At April 30, 2000, there were approximately 2,122 record holders of the Class A common stock, and there were two record holders, but only one beneficial owner, of the Class B common stock.
Emmis intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its common stock in the foreseeable future.
On October 25, 1999 Emmis sold 2,700,000 shares of its Class A Common Stock (5,400,000 shares after the subsequent stock split) to Liberty EMMS, Inc., a wholly owned subsidiary of Liberty Media Corporation, in a transaction not registered under the Securities Act of 1933. The cash purchase price of the stock was $148,500,000.
The sale was exempt from registration under Section 4(2) of the Securities Act. Liberty Media Group holds interests in a broad range of video programming, communications, technology and internet businesses in the United States, Europe, South America and Asia. Its common stock is traded on the New York Stock Exchange.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(1) 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.
(2) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for Emmis' results of operations presented on the basis of generally accepted accounting principles.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Emmis ("the Company") evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of generally accepted accounting principles. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing the magazine, and general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its entities charge. These rates are in large part based on the entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. Broadcast entities' ratings are measured principally four times a year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen Company for television stations. Because audience ratings in a station's local market are critical to the station's financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain audiences in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services which can be used by the station in its business operations. The Company generally confines the use of such trade transactions to promotional items or services for which the Company would otherwise have paid cash. In 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, DONATIONS AND INVESTMENTS
On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The Lee Acquisition consists 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 acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate the Company's television and radio businesses. Management is evaluating structural and financing alternatives to effect this separation of businesses.
On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. Los Angeles Magazine Holding Company, Inc. owns and operates Los Angeles Magazine, a city magazine. The acquisition will be accounted for as a purchase and was financed through borrowings under the Company's credit facility (the "Credit Facility").
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 one million shares of BuyItNow.com L.L.C. for $5 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. This investment is accounted for using the cost method of accounting and is reflected in other assets in the accompanying consolidated balance sheets. In a separate transaction, BuyItNow.com L.L.C. agreed to a cash purchase of $2.5 million of advertisements from Emmis through February 2001.
On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis consists of one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the Credit Facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheet 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.
In June 1999, the Company entered into an agreement with a former executive of Sinclair Broadcast Group, Inc. ("Sinclair") to purchase the executive's right to acquire the assets of certain broadcast properties in St. Louis, Missouri under an option agreement (the "St. Louis Acquisition"). The right was exercised and allows the Company to purchase, at fair market value, six radio stations (five FM and one AM) and one ABC-affiliated television station from Sinclair.
In November 1999, through completion of an appraisal process, the purchase price of the St. Louis Acquisition was determined to be $366.5 million. Sinclair has since filed a lawsuit in which it alleges, among other things, that the option agreement is not enforceable and that Emmis is not a proper designee of the executive's rights. The Company has denied the allegations made by Sinclair and believes that it has meritorious defenses to Sinclair's allegations. In addition, the Company has filed counterclaims against Sinclair, seeking, among other things, that the court order Sinclair to complete the sale of its St. Louis broadcast properties to the Company.
The St. Louis Acquisition will be subject to approval by both the Federal Communications Commission and the Department of Justice; it will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors.
Under FCC regulations, Emmis can own no more than five FM and three AM stations in the St. Louis market. Since Emmis already owns three FM stations in the St. Louis market, concurrently with the consummation of the St. Louis Acquisition, Emmis must divest three FM stations. Management intends to divest the stations in the St. Louis market with the three weakest transmitting signals.
On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the Credit Facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the Credit Facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station.
On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25 million promissory note and borrowings under the Credit Facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. Effective July 1, 1997 through the
date of closing, the Company operated WQCD-FM under a time brokerage agreement.
On February 1, 1998, the Company acquired all of the outstanding capital stock of Mediatex Communications Corporation for approximately $37.4 million in cash plus liabilities recorded of $8.0 million (the "Mediatex Acquisition"). Mediatex Communications Corporation owns and operates Texas Monthly, a regional magazine. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility.
On November 1, 1997, the Company acquired substantially all of the net assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
On November 1, 1997, the Company completed its acquisition of substantially all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting, L.P. for approximately $15.3 million in cash (the "Indianapolis Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.) which was formed in August 1997. In November 1997, Slager Radio acquired a radio broadcasting license from the Hungarian government at a cost of approximately $19.2 million. The broadcast license has an initial term of seven years and may be renewed, subject to governmental approval, for an additional five years. Slager Radio began broadcasting on February 16, 1998.
On October 1, 1997, the Company acquired the assets of Network Indiana and AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash (the "Network Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM (formerly WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to broadcast approximately $1 million in trade spots, for Zimco, Inc., over a period of years. The purchase price was financed through borrowings under the Credit Facility and the acquisition was accounted for as a purchase. In February 1998, the Company donated radio station WALC-AM to a church. The $4.8 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. Effective December 1, 1996 through the date of closing, the Company operated the acquired stations under a time brokerage agreement.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999. Net revenues for the year ended February 29, 2000 were $325.3 million compared to $232.8 million for the same period of the prior year, an increase of $92.5 million or 39.7%. The increase in net revenues for the year ended February 29, 2000 is primarily the result of the SF, Wabash and WKCF Acquisitions (the "TV Acquisitions")($36.5 million) and Country Sampler Acquisition ($13.4 million). Excluding these transactions, net revenues for the year ended February 29, 2000 would have increased $42.6 million or 21.8%. Included in this increase is a decrease in political advertising revenue at our television stations as our fiscal year ended February 29, 2000 was not a significant year for political campaigns. The remaining increase in net revenues is due to the ability to realize higher advertising rates resulting from higher ratings at certain broadcasting properties, increases in general radio spending in the markets in which the Company operates, the ability to sell more advertising in our publications and an increase in single copy newsstand sales.
Operating expenses for the year ended February 29, 2000 were $199.8 million compared to $143.3 million for the same period of the prior year, an increase of $56.5 million or 39.4%. The increase in operating expenses for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($25.0 million) and Country Sampler Acquisition ($11.2 million). Excluding these transactions, operating expenses for the year ended February 29, 2000 would have increased $20.3 million or 17.0%. This increase is principally due to higher advertising and promotional spending at certain of the Company's properties as well as an increase in sales related costs.
Broadcast/publishing cash flow for the year ended February 29, 2000 was $125.4 million compared to $89.5 million for the same period of the prior year, an increase of $35.9 million or 40.2%. The increase in broadcast/publishing cash flow for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($11.5 million) and Country Sampler Acquisition ($2.2 million). Excluding these transactions, broadcast/publishing cash flow for the year ended February 29, 2000 would have increased $22.2 million or 29.3%. This increase is principally due to increased net revenues partially offset by increased operating expenses as discussed above.
International business development expenses for the year ended February 29, 2000 were $1.6 million compared to $1.5 million for the same period of the prior year. These expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs.
Corporate expenses for the year ended February 29, 2000 were $13.9 million compared to $10.4 million for the same period of the prior year, an increase of $3.5 million or 33.0%. These increases are due to costs associated with year 2000 compliance, analysis of potential acquisitions and an increase in the number of corporate employees in all departments as a result of the growth of the Company.
EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development expenses. EBITDA before certain charges for the year ended February 29, 2000 was $110.0 million compared to $77.6 million for the same period of the prior year, an increase of $32.4 million or 41.8%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses.
Interest expense was $52.0 million for the year ended February 29, 2000 compared to $35.7 million for the same period of the prior year, an increase of $16.3 million or 45.8%. This increase reflected higher outstanding debt due to the TV Acquisitions, WQCD Acquisition, which was previously operated under a time brokerage agreement, and Country Sampler Acquisition and a higher rate of interest paid by the Company on outstanding debt.
Depreciation and amortization expense for the year ended February 29, 2000 was $44.2 million compared to $28.3 million for the same period of the prior year, an increase of $15.9 million or 56.0%. The increase in depreciation and amortization expense for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($8.0 million), WQCD Acquisition ($2.2 million) and Country Sampler Acquisition ($2.3 million). The remaining increase relates to depreciation of capital additions in recent years.
Non-cash compensation expense for the year ended February 29, 2000 was $7.4 million compared to $4.3 million for the same period of the prior year, an increase of $3.1 million or 72.3%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. This increase was due to shares granted to certain executives under employment agreements for which the fair market value of the shares at the date of grant was higher than the fair market value of shares granted under previous employment agreements due to the appreciation in the Company's stock price.
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998. Net revenues for the year ended February 28, 1999 were $232.8 million compared to $140.6 million for the same period of the prior year, an increase of $92.2 million or 65.6%. This increase was principally due to the Indianapolis, Cincinnati and Mediatex Acquisitions that occurred toward the end of fiscal 1998 and the SF and Wabash Acquisitions that occurred in fiscal 1999 (collectively the "98/99 Acquisitions"). Additionally, Emmis realized higher advertising rates at its broadcasting properties, resulting from higher ratings at certain broadcasting properties, as well as increases in general radio spending in the markets in which the Company operates.
Operating expenses for the year ended February 28, 1999 were $143.3 million compared to $81.2 million for the same period of the prior year, an increase of $62.1 million or 76.6%. This increase was principally attributable to the 98/99 Acquisitions and increased promotional spending at the Company's broadcasting properties.
Broadcast/publishing cash flow for the year ended February 28, 1999 was $89.5 million compared to $59.4 million for the same period of the prior year, an increase of $30.1 million or 50.6%. This increase was due to increased net revenues partially offset by increased operating expenses as discussed above.
International business development expenses for the year ended February 28, 1999 were $1.5 million compared to $1.0 million for the same period of the prior year. These expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs.
Corporate expenses for the year ended February 28, 1999 were $10.4 million compared to $6.8 million for the same period of the prior year, an increase of $3.6 million or 52.3%. This increase was primarily due to an increase in the number of corporate employees as a result of the growth of the Company and increased travel and other expenses related to potential acquisitions that were not finalized.
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, 1999 was $77.6 million compared to $51.6 million for the same period of the prior year, an increase of $26.0 million or 50.4%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses.
Interest expense was $35.7 million for the year ended February 28, 1999 compared to $13.8 million for the same period of the prior year, an increase of $21.9 million or 158.9%. This increase reflected higher outstanding debt due to the 98/99 Acquisitions and the WQCD Acquisition.
Depreciation and amortization expense for the year ended February 28, 1999 was $28.3 million compared to $7.5 million for the same period of the prior year, an increase of $20.8 million or 275.7%. This increase was primarily due to the 98/99 Acquisitions and the WQCD Acquisition.
Non-cash compensation expense for the year ended February 28, 1999 was $4.3 million compared to $1.5 million for the same period of the prior year, an increase of $2.8 million or 188.1%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. The increase in non-cash compensation relates primarily to options awarded the CEO in fiscal 1999 under his employment contract while similar options were not awarded in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided by operations and availability under its Credit Facility. At February 29, 2000, the Company had cash and cash equivalents of $17.4 million, net working capital of $28.3 million and $398.9 million available under the Credit Facility, after considering an outstanding letter of credit of $1.1 million. The Company expects that cash flow from operating activities will be sufficient to fund all debt service requirements for debt existing at February 29, 2000, and working capital and capital expenditure requirements for the next year. In addition, the Company also has access to public equity and debt markets.
On January 14, 2000, Emmis repaid the $250 million term note outstanding under its Credit Facility. The repayment resulted in cancellation of the term note portion of the Credit Facility.
On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
Also on October 29, 1999, the Company completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
Emmis has exercised its right, acquired in June 1999 from a former executive of Sinclair, to purchase certain broadcast properties in St. Louis, Missouri under an option agreement. The purchase price has been determined to be $366.5 million. The St. Louis Acquisition will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors. For further discussion of this item, see Acquisitions, Donations and Investments.
The Company has signed an agreement to purchase the outstanding common stock of one FM radio station and one AM radio station in Buenos Aires, Argentina. This will bring the Company's total radio holdings in Buenos Aires to four radio stations (two FM stations and two AM stations). Emmis expects that this acquisition will have an aggregate purchase price of approximately $10 million and will be financed through borrowings under the Credit Facility.
On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. The acquisition was financed through borrowings under the Credit Facility.
On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate the Company's television and radio businesses. Management is evaluating structural and financing
alternatives to effect this separation of businesses.
In the fiscal years ended February 1998, 1999 and 2000, the Company had capital expenditures of $17.0 million, $37.4 million and $29.3 million, respectively. These capital expenditures primarily related to the Indianapolis office facility project, the KHON operating facilities project, leasehold improvements to office and studio facilities in connection with the consolidation of the New York broadcast properties to a single location, and broadcast equipment purchases and tower upgrades.
As part of its business strategy, the Company continually evaluates potential acquisitions of radio and television stations as well as publishing properties. In connection with future acquisition opportunities, the Company may incur additional debt or issue additional equity or debt securities depending on market conditions and other factors.
SEASONALITY
The Company's results of operations are usually subject to seasonal fluctuations, which result in higher second and third quarter revenues and broadcast cash flow. This seasonality is due to the younger demographic composition of many of the Company's stations. Advertisers increase spending during the summer months to target these listeners. In addition, advertisers generally increase spending during the months of October and November, which are part of the Company's third quarter, in anticipation of the holiday season. Finally, revenues from political advertising tend to be higher in even numbered calendar years.
YEAR 2000
Emmis has not experienced significant problems related to systems properly recognizing date sensitive information as a result of the year 2000. However, if Emmis were to experience such problems in the future, Emmis could implement temporary solutions or processes not involving the malfunctioning equipment. Contingency plans have been documented in the event Emmis must implement such temporary solutions. Emmis completed its assessment of year 2000 compliance for information technology, other equipment, including broadcast equipment, and embedded technology in October 1999. Emmis began tracking costs relating to year 2000 compliance in May 1999. Emmis estimates that the total cost of year 2000 remediation efforts were less than $1.0 million, which was funded from operations.
INFLATION
The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of Emmis due to adverse changes in financial and commodity market prices and rates. Emmis is exposed to market risk from changes in domestic and international interest rates (i.e. prime and LIBOR) and foreign currency exchange rates. To manage this exposure Emmis periodically enters into interest rate derivative agreements. Emmis does not use financial instruments for trading and is not a party to any leveraged derivatives.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative financial instruments and hedging activities. SFAS No. 133 is amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and is effective for years beginning after June 15, 2000. This pronouncement, which Emmis plans to adopt in its fiscal year ending February 28, 2002, will require, among other things, the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. Management believes adoption of this statement will not materially impact the Company's financial position or results of operations.
INTEREST RATES
Although no balance existed as of February 29, 2000, future outstanding balances under the Company's Credit Facility will bear interest at variable rates. The Credit Facility requires Emmis to maintain interest rate protection agreements through July 2001. The notional amount required varies based upon Emmis' ratio of adjusted debt to EBITDA, as defined in the Credit Facility.
FOREIGN CURRENCY
Emmis owns a 54% interest in a Hungarian subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency. Emmis has a natural hedge since some of the subsidiary's long-term obligations are denominated in Hungarian forints. Emmis maintains no other derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. It is estimated that a 10% change in the value of the U.S. dollar to the Hungarian forint would not be material.
Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency (peso), which is tied to the U.S. dollar through the Argentine government's Convertibility Plan. Emmis maintains no derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 29, 2000
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (CONTINUED) FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 29, 2000
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (DOLLARS IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
Emmis Communications Corporation is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The thirteen FM radio stations and two AM radio stations Emmis Communications Corporation owns in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as St. Louis, Indianapolis and Terre Haute, Indiana. The seven television stations are located in Orlando, Florida, New Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and Terre Haute, Indiana. Emmis Communications Corporation also publishes Indianapolis Monthly, Texas Monthly, Country Sampler, Cincinnati and Atlanta magazines, has a 54% 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, and engages in certain businesses ancillary to its business, such as broadcast tower leasing and advertising and program consulting.
b. Principles of Consolidation
The consolidated financial statements include the accounts of Emmis Communications Corporation and its majority owned Subsidiaries. Unless the content otherwise requires, references to Emmis or the Company in these financial statements mean Emmis Communications Corporation and its Subsidiaries. Emmis' foreign subsidiaries report on a fiscal year ending December 31, which Emmis consolidates into its fiscal year ending February 28 (29). All significant intercompany balances and transactions have been eliminated.
c. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery.
d. Television Programming
Emmis has agreements with distributors for the rights to television programming over contract periods which generally run from one to five years. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first showing. The portion of program contracts which become payable within one year is reflected as a current liability in the accompanying consolidated balance sheet.
The rights to program materials are reflected in the accompanying consolidated balance sheet at the lower of unamortized cost or estimated net realizable value. Estimated net realizable values are based upon management's expectation of future advertising revenues, net of sales commissions, to be generated by the program material. Amortization of program contract costs is computed under either the straight-line method over the contract period or based on usage, whichever yields the greater amortization for each program on a monthly basis. Program contract costs 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.
e. International Business Development Expenses
International business development expenses include the cost of the Company's efforts to identify, investigate and develop international broadcast investments or other international business opportunities.
f. Non-cash Compensation
Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Pro forma disclosure of net income and earnings per share under SFAS No. 123 is presented in Note 9.
g. Cash and Cash Equivalents
Emmis considers time deposits, money market fund shares, and all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
h. Property and Equipment
Property and equipment are recorded at cost. Depreciation 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 for leasehold improvements, and 5 to 7 years for broadcasting equipment, office equipment and automobiles. Maintenance, repairs and minor renewals are expensed; improvements are capitalized. Interest was capitalized in connection with the construction of the Indianapolis office facility and the KHON operating facility. The capitalized interest was recorded as part of the buildings. In fiscal 1998, 1999 and 2000 approximately $312,000, $1,591,000 and $420,000 of interest was capitalized, respectively. On a continuing basis, the Company reviews the financial statement carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations.
i. Intangible Assets
Intangible assets are recorded at cost. Generally, broadcast licenses, trademarks and the excess of cost over fair value of net assets of purchased businesses are being amortized using the straight-line method over 40 years. The cost of the broadcast license for Slager Radio 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 remaining 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.
j. Investments
Emmis has a 50% ownership interest in a partnership in which the sole asset is land on which a transmission tower is located. The other owner has voting control of the partnership. This investment of $5,114,000 is accounted for on the equity method of accounting. Emmis has a $5,000,000 investment, which represents an original 2.49% ownership interest, in BuyItNow.com L.L.C., which is being accounted for on the cost method of accounting.
k. Deferred Revenue and Barter Transactions
Deferred revenue includes deferred magazine subscription revenue and deferred barter revenue. Barter transactions are recorded at the estimated fair value of the product or service received. Broadcast revenue from barter transactions is recognized when commercials are broadcast. The appropriate expense or asset is recognized when merchandise or services are used or received.
l. Foreign Currency Translation
The functional currency of Slager Radio is the Hungarian forint. Slager Radio's balance sheet has been translated from forints to the U.S. dollar using the current exchange rate in effect at the balance sheet date. Slager Radio's results of operations have been translated using an average exchange rate for the period. The translation adjustment resulting from the conversion of Slager Radio's financial statements was $648,000 and $811,000 for the years ended February 28 (29), 1999 and 2000, respectively. This adjustment is reflected in shareholders' equity in the accompanying consolidated balance sheet.
The functional currency of the two stations in Argentina is the Argentinean peso. The peso is tied to the U.S. dollar through the Argentine government's Convertibility Plan. Thus, translation adjustments resulting from the conversion of these stations' financial statements were immaterial for the year ended February 29, 2000.
m. Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period (21,806,666, 28,905,640 and 36,155,982 shares for the years ended February 28 (29), 1998, 1999 and 2000, respectively). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at February 28, 1998 and 1999 consisted solely of stock options. Potentially dilutive securities at February 29, 2000 consisted of stock options and the 6.25% Series A cumulative convertible preferred stock. Neither the conversion of the stock options nor the conversion of the preferred stock is included in the calculation of diluted net income per common share for the year ended February 29, 2000 as the effect of these conversions would be antidilutive. Weighted average common equivalent shares outstanding for the period for purposes of computing diluted EPS are 22,723,762, 29,696,342 and 36,155,982 for the years ended February 28 (29), 1998, 1999 and 2000, respectively. Excluded from the calculation of diluted net income per share are 2.7 million weighted average shares that would result from the conversion of the stock options and preferred shares for the year ended February 29, 2000.
n. 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.
o. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
p. Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the short maturity of these financial instruments. Except for the Senior Subordinated Notes, the carrying amounts of long-term debt approximate fair value due to the variable interest rate on such debt. The fair value of the Senior Subordinated Notes on February 29, 2000 was approximately $281.3 million, based on current market information. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.
q. Accounting Pronouncement
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative financial instruments and hedging activities. SFAS No. 133 is amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and is effective for years beginning after June 15, 2000. This pronouncement, which Emmis plans to adopt in its fiscal year ending February 28, 2002, will require, among other things, the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. Management believes adoption of this statement will not materially impact the Company's financial position or results of operations.
r. Reclassifications
Certain reclassifications have been made to the February 28, 1998 and 1999 financial statements to be consistent with the February 29, 2000 presentation.
2. COMMON STOCK
Emmis has authorized 170,000,000 shares of Class A common stock, par value $.01 per share, 30,000,000 shares of Class B common stock, par value $.01 per share, and 30,000,000 shares of Class C common stock, par value $.01 per share. The rights of these three classes are essentially identical except that each share of Class A common stock has one vote with respect to substantially all matters, each share of Class B common stock has 10 votes with respect to substantially all matters, and each share of Class C common stock has no voting rights with respect to substantially all matters. Class B common stock is owned by the principal shareholder (Jeffrey H. Smulyan). All shares of Class B common stock convert to Class A common stock upon sale or other transfer to a party unaffiliated with the principal shareholder. At February 28 (29), 1999 and 2000, no shares of Class C common stock were issued or outstanding. The financial statements presented reflect the issuance of Class A and Class B common stock.
In June 1997, Emmis acquired 388,888 shares of its Class A common stock from Morgan Stanley, Dean Witter, Discover and Co. at $18.00 per share. The aggregate purchase price of $7.0 million is reflected as a decrease to paid in capital in the accompanying financial statements and was financed through additional borrowings under the Company's Credit Facility.
In June 1998, Emmis completed the sale of 9.2 million shares of its Class A common stock at $21.00 per share resulting in total proceeds of $193.2 million. Net proceeds from the offering were used to repay outstanding obligations under the Credit Facility.
On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock which may be issued with such designations, preferences, limitations and relative rights as Emmis' Board of Directors may authorize.
On October 29, 1999, the Company completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility.
The 6.25% Series A cumulative convertible preferred stock has a liquidation preference of $50 per share and a par value of $.01 per share. Each preferred share is convertible at the option of the holder into 1.28 shares of Class A common stock, subject to certain events. Dividends are cumulative and payable quarterly in arrears on January 15, April 15, July 15, and October 15 of each year at an annual rate of $3.125 per preferred share.
The Company may not redeem the preferred stock prior to April 15, 2001. From April 15, 2001 to October 15, 2002, the Company may redeem the preferred stock at a redemption premium equal to 104.911% of the stated liquidation preference (plus accumulated and unpaid dividends, if any) if certain conditions are met. Beginning on October 15, 2002,
and each October 15 thereafter, the Company may redeem the preferred stock for cash at the following redemption premiums (which are expressed as a percentage of the liquidation preference per share), plus in each case accumulated and unpaid dividends, if any, whether or not declared to the redemption date:
4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT
The Credit Facility and Senior Subordinated Debt was comprised of the following at February 28 (29), 1999 and 2000:
Credit Facility
On July 16, 1998 the Company entered into an amended and restated Credit Facility for $750 million, which could have originally been increased up to $1.0 billion. As a result of the early payoff of the refinanced debt, the Company recorded an extraordinary loss of approximately $1.6 million, net of taxes, related to unamortized deferred debt issuance costs in the year ended February 28, 1999. On July 17, 1999, in accordance with a provision in the Credit Facility, total borrowing capacity under the Credit Facility decreased by $100.0 million. On January 14, 2000, Emmis repaid its $250 million term note outstanding under its Credit Facility. As provided in the Credit Facility, the repayment resulted in the cancellation of the term note and the Company recorded an extraordinary loss of approximately $2.0 million, net of taxes, related to unamortized deferred debt issuance costs, in the year ended February 29, 2000. The amended and restated Credit Facility expires on August 31, 2006 and is now comprised of a $400 million revolving credit facility, which may be increased up to $650 million.
The amended and restated Credit Facility provides for letters of credit to be made available to the Company not to exceed $50 million. The aggregate amount of outstanding letters of credit and amounts borrowed under the revolving credit facility cannot exceed the revolving credit facility commitment. At February 29, 2000, a $1.1 million letter of credit was outstanding.
All outstanding amounts under the Credit Facility bear interest, at the option of Emmis, at a rate equal to the Eurodollar Rate or an alternative base rate (as defined in the Credit Facility) plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies, depending on Emmis' ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the agreement. The weighted-average interest rate on borrowings outstanding under the Credit Facility at February 28, 1999 was approximately 7.69% and there were no borrowings outstanding as of February 29, 2000. Interest is due on a calendar quarter basis under the alternative base rate and at least every three months under the Eurodollar Rate. The Credit Facility requires the Company to maintain interest rate protection agreements through July 2001. The notional amount required varies based upon Emmis' ratio of adjusted debt to EBITDA, as defined in the Credit Facility. The notional amount of the agreements at February 29, 2000 totaled $274 million. The agreements, which expire at various dates ranging from April 2000 to February
2001, establish various ceilings on the Credit Facility's underlying base rate approximating a weighted average rate of 7.1% on the three-month LIBOR interest rate. The cost of these agreements is being amortized over the lives of the agreements and the amortization is included as a component of interest expense.
The aggregate amount of the revolving credit facility reduces quarterly beginning August 31, 2001. The annual amortization and reduction schedules as of February 29, 2000, assuming the entire $400 million Credit Facility was outstanding prior to the scheduled amortization payments are as follows:
SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY AVAILABILITY (In thousands)
Commencing with the fiscal year ending February 28, 2002, in addition to the scheduled amortization/reduction of the Credit Facility, within 60 days after the end of each fiscal year, the Credit Facility is permanently reduced by 50% of the Company's excess cash flow if the ratio of adjusted debt (as defined in the Credit Facility) to EBITDA exceeds 4.5 to 1. Excess cash flow is generally defined as EBITDA reduced by cash taxes, capital expenditures, required debt service, increases in working capital (net of cash or cash equivalents), and $5,000,000. The net proceeds from any sale of certain assets must also be used to permanently reduce borrowings under the Credit Facility. If the ratio of adjusted debt to EBITDA is less than 5.5 to 1 and certain other conditions are met, the Company will be permitted in certain circumstances to reborrow the amount of the net proceeds within nine months solely for the purpose of funding an acquisition.
The Credit Facility contains various financial and operating covenants and other restrictions with which Emmis must comply, including, among others, restrictions on additional indebtedness, engaging in businesses other than broadcasting and publishing, paying cash dividends, redeeming or repurchasing capital stock of Emmis and use of borrowings, as well as requirements to maintain certain financial ratios. The Company was in compliance with these covenants at February 29, 2000. The Credit Facility also prohibits Emmis, under certain circumstances, from making acquisitions and disposing of certain assets without the prior consent of the lenders, and provides that an event of default will occur if Jeffrey H. Smulyan ceases to maintain (i) a significant equity investment in Emmis (as specified in the Credit Facility), (ii) the ability to elect a majority of Emmis' directors or (iii) control of a majority of shareholder voting power. Substantially all of Emmis' assets, including the stock of Emmis' wholly-owned subsidiaries, are pledged to secure the Credit Facility.
SENIOR SUBORDINATED NOTES
On February 12, 1999, the Company issued $300 million of 8 1/8% Senior Subordinated Notes. The Senior Subordinated Notes were sold at 100% of the face amount. The proceeds were used to retire a $25 million promissory note and the related $1.1 million accrued interest due to SF Broadcasting in connection with the purchase of four television stations. The remainder of the proceeds was used to reduce outstanding borrowings under the Credit Facility. In March 1999, the Company filed an Exchange Offer Registration Statement with the SEC to exchange the Senior Subordinated Notes for new Series B Notes ("the Notes") registered under the Securities Act. The terms of the new Series B Notes are identical to the terms of the Senior Subordinated Notes.
Prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined), to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 108.125% plus accrued and unpaid interest, provided that at least $195.0 million of the aggregate principal amount of the Notes originally issued remains outstanding after such redemption. On or after March 15, 2004 and until March 14, 2007, the Notes will be redeemable at the option of the Company in whole or in part at prices ranging from 104.063% to 101.354% plus accrued and unpaid interest. On or after March 15, 2007, the Notes may be redeemable at 100% plus accrued and unpaid interest. Upon a Change of Control (as defined), the Company is required to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. Interest on the Notes is payable semi-annually. The Notes have no sinking fund requirements and are due in full on March 15, 2009.
The Notes are guaranteed by certain subsidiaries of the Company and expressly subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. The Notes will rank pari passu with any future Senior Subordinated Indebtedness (as defined) and senior to all Subordinated Indebtedness (as defined) of the Company.
The indenture relating to the Notes contains covenants with respect to the Company which include limitations of indebtedness, restricted payments, transactions with affiliates, issuance and sale of capital stock of restricted subsidiaries, sale/leaseback transactions and mergers, consolidations or sales of substantially all of the Company's assets. The Company was in compliance with these covenants at February 29, 2000.
5. OTHER LONG-TERM DEBT.
Other long-term debt was comprised of the following at February 28 (29), 1999 and 2000:
The License Obligation is payable to the Hungarian government in Hungarian forints, by Emmis' Hungarian subsidiary in four equal annual installments commencing November 2000. The License Obligation of $14.1 million as of February 29, 2000, is reflected net of an unamortized discount of $0.9 million. The obligation is non-interest bearing, however, in accordance with the license purchase agreement, a Hungarian cost of living adjustment is calculated annually and is payable, concurrent with the principal payments, on the outstanding obligation. The cost of living adjustment is estimated each reporting period and is included in interest expense. Prevailing market interest rates in Hungary exceed inflation by approximately 3%. Accordingly, the License Obligation has been discounted at an imputed interest rate of approximately 3% to reflect the obligation at its fair value.
The 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 20.2% and 17.5% at February 28 (29), 1999 and 2000, 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 10.25%.
6. TV PROGRAM RIGHTS PAYABLE.
Future payments required under TV program rights payable as of February 29, 2000, are as follows (in thousands):
7. ACQUISITIONS, DONATIONS AND INVESTMENTS
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 one million shares of BuyItNow.com L.L.C. for $5 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. This investment is accounted for using the cost method of accounting and is reflected in other assets in the accompanying consolidated balance sheets. In a separate transaction, BuyItNow.com L.L.C. agreed to a cash purchase of $2.5 million of advertisements from Emmis through February 2001.
On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis consists of one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the Credit Facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheet 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.
In June 1999, the Company entered into an agreement with a former executive of Sinclair Broadcasting Group, Inc. ("Sinclair") to purchase the executive's right to acquire the assets of certain broadcast properties in St. Louis, Missouri under an option agreement (the "St. Louis Acquisition"). The right was exercised and allows the Company to purchase, at fair market value, six radio stations (five FM and one AM) and one ABC-affiliated television station from Sinclair.
In November 1999, through completion of an appraisal process, the purchase price of the St. Louis Acquisition was determined to be $366.5 million. Sinclair has since filed a lawsuit in which it alleges, among other things, that the option agreement is not enforceable and that Emmis is not a proper designee of the executive's rights. The Company has denied the allegations made by Sinclair and believes that it has meritorious defenses to Sinclair's allegations. In addition, the Company has filed counterclaims against Sinclair, seeking, among other things, that the court order Sinclair to complete the sale of its St. Louis broadcast properties to the Company.
The St. Louis Acquisition will be subject to approval by both the Federal Communications Commission and the Department of Justice; it will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors.
Under FCC regulations, Emmis can own no more than five FM and three AM stations in the St. Louis market. Since Emmis already owns three FM stations in the St. Louis market, concurrently with the consummation of the St. Louis Acquisition, Emmis must divest three FM stations. Management intends to divest the stations in the St. Louis market with the three weakest transmitting signals.
On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the Credit Facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the Credit Facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station.
On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25 million promissory note and borrowings under the Credit Facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. Effective July 1, 1997 through the date of closing, the Company operated WQCD-FM under a time brokerage agreement.
On February 1, 1998, the Company acquired all of the outstanding capital stock of Mediatex Communications Corporation for approximately $37.4 million in cash plus liabilities recorded of $8.0 million (the "Mediatex Acquisition"). Mediatex Communications Corporation owns and operates Texas Monthly, a regional magazine. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility.
On November 1, 1997, the Company acquired substantially all of the net assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
On November 1, 1997, the Company completed its acquisition of substantially all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting, L.P. for approximately $15.3 million in cash (the "Indianapolis Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.) which was formed in August 1997. In November 1997, Slager Radio acquired a radio broadcasting license from the Hungarian government at a cost of approximately $19.2 million. The broadcast license has an initial term of seven years and may be renewed, subject to governmental approval, for an additional five years. Slager Radio began broadcasting on February 16, 1998.
On October 1, 1997, the Company acquired the assets of Network Indiana and AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash (the "Network Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase.
On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM (formerly WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to broadcast approximately $1 million in trade spots, for Zimco, Inc., over a period of years. The purchase price was financed through borrowings under the Credit Facility and the acquisition was accounted for as a purchase. In February 1998, the Company donated radio station WALC-AM to a church. The $4.8 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. Effective December 1, 1996 through the date of closing, the Company operated the acquired stations under a time brokerage agreement.
8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Unaudited pro forma summary information is presented below for the years ended February 28 (29), 1999 and 2000, assuming the June 1998 WQCD Acquisition, the July 1998 SF Acquisition, the October 1998 Wabash Acquisition, the April 1999 Country Sampler Acquisition, the October 1999 WKCF-TV Acquisition, the November 1999 Votionis Acquisition, the December 1999 Country Marketplace Acquisition and the use of proceeds from the June 1998 Equity Offering, the July 1998 Credit Facility, the February 1999 Senior Subordinated Notes Offering, the October 1999 Common and Preferred Equity Offerings and the November 1999 Liberty Investment all had occurred on the first day of the pro forma periods presented below.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company. 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.
9. EMPLOYEE BENEFIT PLANS
a. 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 100,000 shares of Class A common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 1999 and 2000.
b. 1997 Equity Incentive Plan
At the 1997 annual meeting, the shareholders of Emmis approved the 1997 Equity Incentive Plan. Under this plan, awards equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 75,000 shares of common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 1999 and 2000.
c. 1999 Equity Incentive Plan
At the 1999 annual meeting, the shareholders of Emmis approved the 1999 Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 2,000,000 shares of common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 29, 2000.
d. Other Disclosures Related to Stock Option and Equity Incentive Plans
The Company has historically accounted for its Stock Option Plans in accordance with APB Opinion No. 25 ("APB 25"), under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of the share of stock at the date of grant. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123), which considers the stock options as compensation expense to the Company, based on their fair value at the date of grant. Under this standard, the Company has the option of accounting for employee stock option plans as it currently does or under the new method. The Company has elected to continue to use the APB 25 method for accounting, but has adopted the disclosure requirements of SFAS 123. Accordingly, compensation expense reflected in non-cash compensation in the consolidated statements of operations related to the plans summarized above was $732,000, $3,269,000 and $6,107,000 for the years ended February 1998, 1999 and 2000, 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:
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:
Expected dividend yields were zero for fiscal 1998, 1999 and 2000.
A summary of the status of options and restricted stock at February 1998, 1999 and 2000 and the related activity for the year, including the adoption of the 1999 Equity Incentive Plan, is as follows:
During the years ended February 1998, 1999 and 2000 options were granted with an exercise price equal to or less than fair market value of the stock on the date of grant. A summary of the weighted average fair value and exercise price of options granted during 1998, 1999 and 2000 is as follows:
During fiscal 1999 and 2000, 10,000 and 135,600 shares of nonvested stock were granted at a weighted average grant date fair value of $22.38 and $22.70, respectively, under employment agreements. No nonvested stock was granted during fiscal 1998.
The following information relates to options outstanding and exercisable at February 29, 2000:
In addition to the benefit plans noted above, Emmis has the following employee benefit plans:
e. Profit Sharing Plan
In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with one year of service. Contributions to the plan are at the discretion of the Emmis Board of Directors and can be made in the form of newly issued Emmis common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions reflected in non-cash compensation in the consolidated statements of operations for the years ended February 1998, 1999 and 2000 were $750,000, $1,000,000 and $1,250,000, respectively.
f. 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. The union plan became effective August 1, 1998. Employees may make pretax contributions to the plans up to 15% of their compensation, not to exceed the annual limit prescribed by the Internal Revenue Service. Emmis may make discretionary matching contributions to the plans in the form of shares of the Company's Class A common stock. Effective March 1, 1996, Emmis began to match 50% of employee contributions up to $2,000. Emmis' contributions to the plans totaled $315,000, $599,000 and $807,000 for the years ended February 1998, 1999 and 2000, respectively.
g. 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 $342,000, $344,000 and $345,000 for the years ended February 1998, 1999 and 2000, respectively.
h. 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 $22,500 annually per employee. The Company will not record compensation expense pursuant to this plan as management expects it to meet the requirements of Section 423(b) of the Internal Revenue Code. This plan will be submitted for approval at the annual shareholders' meeting.
10. COMMITMENTS AND CONTINGENCIES
a. Operating Leases
Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through December 2021. Some of the lease agreements contain renewal options and annual rental escalation clauses (generally tied to the Consumer Price Index or increases in the lessor's operating costs), as well as provisions for payment of utilities and maintenance costs.
The future minimum rental payments (exclusive of future escalation costs) required by noncancelable operating leases which have remaining terms in excess of one year as of February 29, 2000, are as follows:
Minimum payments have not been reduced by minimum sublease rentals of approximately $444,000 due in the future under noncancelable subleases.
Rent expense totaled $4,512,000, $5,945,000 and $4,404,000 for the years ended February 1998, 1999 and 2000, respectively. Rent expense for the year ended February 1998, 1999 and 2000 is net of sublease income of approximately $86,000, $148,000 and $148,000, respectively.
b. Radio Broadcast Agreements
Emmis has entered into agreements to broadcast certain syndicated programs and sporting events. Future payments related to these radio broadcast rights are summarized as follows: Year ended February 2001 - $1,899,000, 2002 - $1,650,000, 2003 - $781,000, 2004 - $196,000, 2005 - $48,000 and thereafter - $0. Expense related to these broadcast rights totaled $1,400,000, $1,492,000 and $1,780,000 for the years ended February 1998, 1999 and 2000, respectively.
In connection with reformatting one of its radio stations, the Company terminated a syndicated program agreement. 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 $896,000 is reflected in the accompanying consolidated statements of operations as Programming Restructuring Costs.
c. Litigation
Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. See Note 7 for discussion of litigation with Sinclair.
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. The Company finalized negotiations on several new employment contracts with key executives, including the Chief Executive Officer, during the year ended February 29, 2000. At February 29, 2000, 9,383 shares of stock and 1,596,000 options to purchase stock have been granted in connection with current employment agreements. Additionally, up to 168,600 shares and options to purchase up to 272,250 shares of the Company's Class A common stock may be granted (or have been granted subject to forfeiture) under the contracts in the next two years.
11. INCOME TAXES
The provision for income taxes for the years ended February 1998, 1999 and 2000, consisted of the following:
The provision for income taxes for the years ended February 1998, 1999 and 2000, differs from that computed at the Federal statutory corporate tax rate as follows:
The components of deferred tax assets and deferred tax liabilities at February 1999 and 2000 are as follows:
In connection with the acquisition of WQCD-FM, the deferred tax liability was increased (decreased) by $52,505 and ($4,548) in 1999 and 2000, respectively.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. A valuation allowance has been provided for 100% of the capital loss carryforwards available as of February 1999 and 2000 since these loss carryforwards can only be utilized to offset future capital gains. Additionally, a valuation allowance has been provided for the net operating loss carryforwards related to the Company's foreign subsidiaries since these subsidiaries have not yet generated taxable income against which the net operating losses could be utilized. The expiration of net operating loss carryforwards, excluding those at the Company's Hungarian subsidiary, which do not expire, approximate $1,194,000 in 2005, and $758,000 thereafter.
12. SEGMENT INFORMATION
The Company's operations are aligned into three business segments: Radio, Television and Publishing. These business segments are consistent with the Company's management of these businesses and its financial reporting structure.
The Radio and Television segments derive revenue from the sale of commercial broadcast inventory. The Publishing segment derives revenue from subscriptions and the sale of print advertising inventory.
Corporate and Other represents the results of insignificant operations and income and expense not allocated to reportable segments.
The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. Total revenues of the radio station in Hungary for the years ended February 1999 and 2000 were $3.3 million and $7.4 million, respectively. Total revenues for this station were not material for the year ended February 1998. This station's total assets as of February 28 (29), 1999 and 2000 were $20.4 million and $16.2 million, respectively. Total revenues of the radio stations in Argentina acquired on November 1, 1999 were not significant for the year ended February 29, 2000 and total assets as of February 29, 2000 were $35.2 million.
The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of generally accepted accounting principles. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising inventory. 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.
13. RELATED PARTY TRANSACTIONS
Two officers of Emmis are partners in a law firm which provides legal services to Emmis. Legal fees paid to this law firm were approximately $512,000, $868,000 and $756,000 for the years ended February 1998, 1999 and 2000, respectively.
Emmis has periodically made interest-bearing loans to various officers and employees. The approximate amount of such indebtedness outstanding at February 28 (29), 1999 and 2000, was $1,741,000 and $1,834,000, respectively. These loans bear interest at the Company's average borrowing rate of approximately 7.09% and 7.50% for the years ended February 1999 and 2000.
During the year ended February 29, 2000, the Company purchased approximately $157,000 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 $364,000 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 $506,000 to a management company for an allocation of operating and maintenance costs of the airplane.
14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTORS
Emmis conducts a significant portion of its business through subsidiaries. The Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries (the "Subsidiary Guarantors"). As of February 29, 2000, subsidiaries holding Emmis' interest in its radio stations in Hungary and Argentina, as well as certain other subsidiaries conducting joint ventures with third parties, did not guarantee the Senior Subordinated Notes (the "Subsidiary Non-Guarantors"). The claims of creditors of Emmis subsidiaries have priority over the rights of Emmis to receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for the Parent Company Only, the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of February 28 (29), 1999 and 2000 and for each of the three years in the period ended February 29, 2000.
Emmis uses the equity method with respect to investments in subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented based on management's determination that they do not provide additional information that is material to investors.
Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 29, 2000 (in thousands of dollars)
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 29, 2000 (in thousands of dollars)
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 29, 2000 (in thousands of dollars)
Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 28, 1999 (in thousands of dollars)
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1999 (in thousands of dollars)
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1999 (in thousands of dollars)
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1998 (in thousands of dollars)
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1998 (in thousands of dollars)
15. SUBSEQUENT EVENTS - ACQUISITIONS
On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. Los Angeles Magazine Holding Company, Inc. owns and operates Los Angeles Magazine, a city magazine. The acquisition will be accounted for as a purchase and was financed through borrowings under the Credit Facility.
On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The Lee Acquisition consists 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 acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate all or part of the Company's television and radio businesses. Management is evaluating structural and financing alternatives to effect this separation of businesses.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of EMMIS COMMUNICATIONS CORPORATION (an Indiana corporation) and Subsidiaries as of February 28 (29), 2000 and 1999, 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 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Emmis Communications Corporation and Subsidiaries as of February 28 (29), 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 2000 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP ------------------------------------------ ARTHUR ANDERSEN LLP
Indianapolis, Indiana, May 7, 2000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors of Emmis is incorporated by reference from the section entitled "Proposal No. 1: Election of Directors" in the Emmis 2000 Proxy Statement and the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Emmis 2000 Proxy Statement.
Listed below is certain information about the executive officers of Emmis or its affiliates who are not directors.
Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates who is not also a director.
Richard F. Cummings was the Program Director of WENS from 1981 to March 1984, when he became the National Program Director and a Vice President of Emmis. He became Executive Vice President--Programming in 1988.
Norman H. Gurwitz currently serves as Executive Vice President -- Human Resources, a position he assumed in 1998. Previously he served as Corporate Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995. He became Secretary of Emmis in 1989 and became an Executive Vice President in 1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott & Gurwitz. Mr. Gurwitz is the brother-in-law of Richard A. Leventhal, a director of the Company.
Walter Z. Berger became Executive Vice President, Treasurer and Chief Financial Officer of Emmis on March 1, 1999. Most recently, Mr. Berger served as Group President of the Energy Marketing Division of LG&E Energy Corporation. Prior to that appointment, he served as Executive Vice President and Chief Financial Officer of LG&E Energy Corporation. From 1992 to 1996, he held several senior financial and operating management positions at Enron Corporation and its affiliates. Mr. Berger also spent seven years in various financial management roles at Baker Hughes Incorporated after working for eight years at Arthur Andersen & Co.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the section entitled "Executive Compensation" in the Emmis 2000 Proxy Statement.
ITEM 12.
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 2000 Proxy Statement.
ITEM 13.
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 2000 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Financial Statements
The financial statements filed as a part of this report are set forth under Item 8.
Financial Statement Schedules
The following financial statement schedule is filed as a part of this report:
Report of Independent Public Accountants on Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves for the fiscal years in the three year period ended February 29, 2000.
Reports on Form 8-K
The Company filed no reports on Form 8-K during its last fiscal quarter.
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. *
3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference from Exhibit 3.2 to the Company's Form 10-Q for the period ended August 31, 1999.
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").
10.1 Emmis Communications Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the 1994 Registration Statement.++
10.2 Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the 1994 Registration Statement.++
10.3 The Emmis Communications Corporation 1995 Non-Employee Director Stock Option Plan, incorporated by reference from Exhibit 10.15 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (the "1995 10-K").++
10.4 The Emmis Communications Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 to the 1995 10-K.++
10.5 Emmis Communications Corporation 1997 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1998 (the "1998 10-K").++
10.6 Emmis Communications Corporation 1999 Equity Incentive Plan, incorporated by reference from the Company's proxy statement dated May 26, 1999.++
10.7 Employment Agreement dated as of March 1, 1994, by and between Emmis Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.13 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1994 and amendment to Employment Agreement, effective March 1, 1999, between the Company and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.++
10.8 Employment Agreement dated as of March 1, 1999, by and between Emmis Communications Corporation and Walter Z. Berger, incorporated by reference from Exhibit 10.9 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999.++
10.9 Employment Agreement, effective March 1, 1999, between the Company and Doyle L. Rose, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999.++
10.10 Employment Agreement, effective March 1, 1999, between the Company and Richard F. Cummings, incorporated by reference from Exhibit 10.3 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999.++
10.11 Second Amended and Restated Revolving Credit and Term Loan Agreement, and First Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference to Exhibits 10.1 and 10.2, respectively, to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1998.
10.12 Second Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibit 10.11 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999.
10.13 Stock Purchase Agreement dated October 25, 1999 by and between Liberty Media Corporation and Emmis Communications Corporation with Registration Rights Agreement as Exhibit A thereto, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.
10.14 Asset Purchase Agreement dated June 3, 1999 between Emmis Communications Corporation and Press Communications Corporation, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999.
10.15 Asset Purchase Agreement by and between Emmis Broadcasting Corporation and Wabash Valley Broadcasting Corporation, dated March 20, 1998, incorporated by reference from Exhibit 10.15 to the 1998 10-K.
10.16 Asset Purchase Agreement by and among SF Broadcasting of Honolulu, Inc., SF Honolulu License Subsidiary, Inc., SF Broadcasting of New Orleans, Inc., SF New Orleans License Subsidiary, Inc., SF Broadcasting of Mobile, Inc., SF Mobile License Subsidiary, Inc., SF Broadcasting of Green Bay, Inc., SF Green Bay License Subsidiary, Inc. and Emmis Broadcasting Corporation, dated March 30, 1998, incorporated by reference from Exhibit 10.16 to the 1998 10-K.
10.17 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.*
27 Financial Data Schedule (EDGAR-filed version only)
- ------------------------ * Filed with this report. ++ Management contract or compensatory plan or arrangement.
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 30, 2000 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.
*By: /s/ J. Scott Enright ---------------------------- J. Scott Enright Attorney-in-Fact
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Emmis Communications Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES included in Item 8, in this Form 10-K, and have issued our report thereon dated March 29, 2000. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP ----------------------------------- ARTHUR ANDERSEN LLP
Indianapolis, Indiana, May 7, 2000.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 29, 2000
(DOLLARS IN THOUSANDS)
(1) Represents additions to the allowance for doubtful accounts associated with certain acquisitions.