10-K 1 file001.txt FOR THE YEAR ENDED FEBRUARY 28, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended February 28, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from _________ to _________. Commission file number 0-23264 EMMIS COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1542018 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 Monument Circle, Suite 700 Indianapolis, Indiana 46204 (Address of principal executive offices) (Zip Code) (317) 266-0100 Registrant's Telephone Number, Including Area Code SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value; 6.25% Series A Cumulative Convertible Preferred Stock, $.01 par value. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by reference in Part II I of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant, as of April 30, 2001, was approximately $1,054,247,000. The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 2001, was: 42,067,639 Class A Common Shares, $.01 par value 5,230,396 Class B Common Shares, $.01 par value DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference Proxy Statement for 2001 Annual Meeting Part III 1 EMMIS COMMUNICATIONS CORPORATION FORM 10-K TABLE OF CONTENTS Page PART I ........................................................ 3 Item 1. Business...................................... 3 Item 2. Properties.................................... 19 Item 3. Legal Proceedings............................. 21 Item 4. Submission of Matters to a Vote of Security Holders....................................... 22 PART II ........................................................ 23 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................... 23 Item 6. Selected Financial Data....................... 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.. 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 34 Item 8. Financial Statements and Supplementary Data... 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 80 PART III ........................................................ 81 Item 10. Directors and Executive Officers of the Registrant.................................... 81 Item 11. Executive Compensation........................ 82 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 82 Item 13. Certain Relationships and Related Transactions 82 PART IV ........................................................ 82 Item 14. Exhibits and Reports on Form 8-K.............. 82 Signatures ........................................................ 85 2 PART I ITEM 1. BUSINESS. GENERAL We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We operate the sixth largest publicly traded radio portfolio in the United States based on total listeners. The twenty FM radio stations and three AM radio stations we operate in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Denver, Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The fifteen television stations we operate serve geographically diverse mid-sized markets in the U.S. as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including five with CBS, five with FOX, three with NBC, one with ABC and one with WB. Our strategy is to selectively acquire underdeveloped media properties in desirable markets and then to create value by developing those properties to increase their cash flow. We find such underdeveloped properties attractive because they offer greater potential for revenue and cash flow growth than mature properties. We have been successful in acquiring these types of radio stations and improving their ratings, revenues and cash flow with our marketing focus and innovative programming expertise. We have created top-performing radio stations which rank, in terms of primary demographic target audience share, among the top ten stations in the New York City, Los Angeles and Chicago radio markets according to the Fall 2000 Arbitron Survey. We believe that our strong large-market radio presence and diversity of station formats makes us attractive to a diverse base of radio advertisers and reduces our dependence on any one economic sector or specific advertiser. More recently, we began applying our advertising sales and programming expertise to our television stations. We view our entry into television as a logical outgrowth of our radio business and as a platform for diversification. Like the radio stations we previously acquired, our television stations are underdeveloped properties located in desirable markets, which can benefit from innovative, research-based programming and our experienced management team. We believe we can further improve the ratings, revenues and broadcast cash flow of our television stations with a more market-focused, research-based programming approach, a focused sales effort and other related strategies, which have proven successful with our radio properties. In addition to our domestic broadcasting properties, we operate news and agriculture information radio networks in Indiana, publish Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati, Country Sampler, Country Marketplace and related magazines and Wildlife Journal, have a 59.5% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos Aires, Argentina. We also engage in various businesses ancillary to our broadcasting business, such as consulting and broadcast tower leasing. BUSINESS STRATEGY We are committed to maintaining our leadership position in broadcasting, enhancing the performance of our broadcast and publishing properties, and distinguishing ourselves through the quality of our operations. Our strategy has the following principal components: DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets and innovative programming developed to target specific demographic groups are the most important determinants of individual radio and television station success. We conduct extensive market research to identify underserved segments of the markets we serve or to assure that we are meeting the needs of our target audience. Utilizing the research results, we concentrate on providing a focused programming format carefully tailored to the demographics of our markets and our audiences' preferences. 3 EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and national sales efforts based on advertiser demand and our programming compared to the competitive formats within each market. We provide our sales force with extensive training and the technology for sophisticated inventory management techniques, which provide frequent price adjustments based on regional and market conditions. We seek to maximize sources of non-traditional, non-spot revenue and have led the industry in developing "vendor co-op" advertising revenue. Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize and take advantage of the potential of vendor co-op advertising. DEVELOP STRONG LOCAL STATION IDENTITIES FOR OUR TELEVISION STATIONS. We strive to create television stations with a strong local "brand" within the station's market, allowing viewers and advertisers to identify with the station while building the station's franchise value. We believe that aggressive promotion and strong local station management, strategies which we have found successful in our radio operations, are critical to the creation of strong local television stations as well. Additionally, we believe that the production and broadcasting of local news and events programming can be an important link to the community and an aid to the station's efforts to expand its viewership. Local news and events programming can provide access to advertising sources targeted specifically to the local or regional community. We believe that strong local news generates high viewership and results in higher ratings both for programs preceding and following the news. PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. We have built our portfolio by selectively acquiring underdeveloped media properties in desirable markets at reasonable purchase prices where our experienced management team has been able to enhance value. We intend to pursue acquisitions of radio stations, where we believe we can increase broadcast cash flow, in our current markets. We will also consider acquisitions of individual radio stations or groups of radio stations in new markets where we expect we can achieve a leadership position. We believe that continued consolidation in the radio broadcasting industry will create attractive acquisition opportunities as the number of potential buyers for radio assets declines due to government regulations on the number of stations a company can own in one market. We believe that attractive acquisition opportunities are also increasingly available in the television broadcasting industry. We intend to evaluate acquisitions of international broadcasting stations (typically in conjunction with strong local minority-interest partners) and magazine publishing properties that present opportunities to capitalize on our management expertise to enhance cash flow at attractive purchase price multiples with minimal capital requirements. ENCOURAGE AN ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business and that much of its success is the result of the efforts of regional and local management and staff. We have attracted and retained an experienced team of broadcast professionals who understand the viewing and listening preferences, demographics and competitive opportunities of their particular market. Our decentralized approach to station management gives local management oversight of station spending, long-range planning and resource allocation at their individual stations, and rewards all employees based on those stations' performance. In addition, we encourage our managers and employees to own a stake in the company, and over 95% of all full-time employees have an equity ownership position in Emmis. We believe that our entrepreneurial management approach has created a distinctive corporate culture, making Emmis a highly desirable employer in the broadcasting industry and significantly enhancing our ability to attract and retain experienced and highly motivated employees and management. 4 RADIO AND TELEVISION STATIONS The following tables set forth certain information regarding our radio and television stations and their broadcast markets. RADIO STATIONS In the following table, "Market Rank by Revenue" is the ranking of the market revenue size of the principal radio market served by the station among all radio markets in the United States. Market revenue and ranking figures are from Duncan's Radio Market Guide (2000 ed.). We own a 40% equity interest in the publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic Target" is the ranking of the station among all radio stations in its market based on the Fall 2000 Arbitron Survey. A "t" indicates the station tied with another station for the stated ranking. "Station Audience Share" represents a percentage generally computed by dividing the average number of persons over age 12 listening to a particular station during specified time periods by the average number of such persons for all stations in the market area as determined by Arbitron.
RANKING IN STATION MARKET PRIMARY PRIMARY STATION AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE MARKET REVENUE FORMAT TARGET AGES TARGET SHARE LOS ANGELES, CA 1 KPWR-FM Contemporary Hit/Urban 12-24 1 4.3 KZLA-FM Country 25-54 11t 2.6 NEW YORK, NY 2 WQHT-FM Contemporary Hit/Urban 12-24 1 5.5 WRKS-FM Classic Soul/Smooth 25-54 4 3.8 R&B WQCD-FM Contemporary Jazz 25-54 6 3.2 Chicago, IL 3 WKQX-FM Alternative Rock 18-34 3 2.9 Phoenix, AZ 14 KKFR-FM Contemporary Hit/Urban 18-34 2 4.9 KKLT-FM Soft 25-54 8 3.7 Adult/Contemporary KTAR-AM News/Talk/Sports 35-64 5t 5.6 KMVP-AM Sports 25-54 20t 0.9 Denver, CO 15 KXPK-FM 80's Rock 18-34 9 3.3 KALC-FM Modern Rock 25-54 9 3.1 St. Louis, MO 18 KSHE-FM Album Oriented Rock 25-54 3t 4.4 WMLL-FM* 80's Rock 18-34 4 2.6 KPNT-FM Alternative Rock 18-34 3 3.3 KIHT-FM 70's Rock 25-54 6 3.9 KFTK-FM Talk 25-54 21 0.9 Indianapolis, IN 31 WENS-FM Adult Contemporary 25-54 3 5.5 WIBC-AM News/Talk/Sports 35-64 3t 9.1 WNOU-FM Contemporary Hit 18-34 7t 4.7 WYXB-FM** Soft 25-54 - - Adult/Contemporary Terre Haute, IN 172 WTHI-FM Country 25-54 1 22.3 WWVR-FM Classic Rock 25-54 2 12.2
* On September 17, 2000, Emmis changed the call letters of WXTM-FM to WMLL-FM and changed the format to 80's Rock. ** On February 14, 2001, Emmis changed the call letters of WTLC-FM to WYXB-FM and changed the format to Soft Adult/Contemporary. 5 TELEVISION STATIONS In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 2001. Rankings are based on the relative size of a station's market among the 210 generally recognized Designated Market Areas ("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the number of television stations ("Reportable Stations") designated by Nielsen as "local" to the DMA, excluding public television stations and stations which do not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to midnight time period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by Nielsen from 9:00 a.m. to midnight, Sunday through Saturday during November 2000. "Station Audience Share" reflects an estimate of the share of DMA households viewing television received by a local commercial station in comparison to other local commercial stations in the market as measured from 9:00 a.m. to midnight, Sunday through Saturday.
NUMBER OF STATION TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE ---------- --------------- ------ ---------- ------------------- ------- WKCF-TV Orlando, FL 21 WB/18 6 5 6 KOIN-TV Portland, OR 23 CBS/6 6 3 9 WVUE-TV New Orleans, LA 42 Fox/8 6 3 10 KRQE-TV Albuquerque, NM 50 CBS/13 6 3 11 WSAZ-TV Huntington, WV- Charleston, WV 61 NBC/3 4 1 19 WALA-TV Mobile, AL-Pensacola, FL 62 Fox/10 5 3 10 KSNW-TV Wichita, KS 65 NBC/3 4 2 15 WLUK-TV Green Bay, WI 69 Fox/11 6 3t 9 KGUN-TV Tucson, AZ 71 ABC/9 6 1 15 KGMB-TV (1) Honolulu, HI 72 CBS/9 5 2 13 KHON-TV (1) Honolulu, HI 72 Fox/2 5 1t 14 KMTV-TV Omaha, NE 75 CBS/3 5 2t 14 WFTX-TV Fort Myers, FL 81 Fox/36 4 4 7 KSNT-TV Topeka, KS 138 NBC/27 4 2 12 WTHI-TV Terre Haute, IN 139 CBS/10 3 1 20
(1) We are required by FCC rules to sell one of these stations by October 1, 2001 and we are currently exploring various possibilities. Emmis also owns and operates nine satellite stations that primarily re-broadcast the signal of certain of our local stations. A local station and its satellite station are considered one station for FCC and multiple ownership purposes, provided that the stations are in the same market. RADIO NETWORKS In addition to our other radio broadcasting operations, we own and operate two radio networks. Network Indiana provides news and other programming to nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides farm news, weather information and market analysis to radio stations across Indiana. 6 PUBLISHING OPERATIONS We publish the following magazines through our publishing division: Monthly Paid Year Circulation Acquired Regional Magazines: Texas Monthly 300,000 1998 Los Angeles 180,000 2000 Atlanta 65,000 1993 Indianapolis Monthly 45,000 1988 Cincinnati Magazine 22,000 1997 Specialty Magazines*: Country Sampler 465,000 1999 Country Marketplace N/A 1999 * Our specialty magazines are circulated bimonthly. INTERNET AND NEW TECHNOLOGIES We believe that the development and explosive growth of the Internet present not only a challenge, but an opportunity for broadcasters and publishers. The challenge is, primarily, increased competition for the time and attention of our listeners, viewers and readers. The opportunity is to further enhance the relationships we already have with our listeners, viewers and readers by expanding products and services offered by our stations and magazines. For that reason, we worked with other media companies to put together a local media internet venture (LMIV). The LMIV is premised on the idea that each station's or magazine's website would be the entry way into a backbone of internet content provided by a national, or even international, aggregation of media companies. The goal of LMIV is to capitalize on the individual relationships between each station or magazine and its listeners, viewers or readers by allowing each station's or magazine's website to reflect the character of the station or magazine. When fully implemented, the LMIV will also capitalize on the potentially tremendous economies of scale provided by the stations' and magazines' aggregated websites. We believe that there are opportunities to improve and expand our television operations utilizing new technologies such as those that capitalize on the digital spectrum and the Internet. Along with several other major television broadcasters and local stations, we have invested in iBlast Networks, the nation's largest network for over-the-air distribution of digital content, applications and services. COMMUNITY INVOLVEMENT We believe that to be successful, we must be integrally involved in the communities we serve. To that end, each of our stations participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable organizations that have been the beneficiaries of our marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, The March of Dimes, American Cancer Society, Riley Children's Hospital and research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In addition to our planned activities, our stations and magazines take leadership roles in community responses to natural disasters. 7 INDUSTRY INVOLVEMENT We have an active leadership role in a wide range of industry organizations. Our senior managers have served in various capacities with industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding members of the Radio Operators Caucus. In addition, our managers have been voted Radio President of the Year and General Manager of the Year, and at various times we have been voted Most Respected Broadcaster in polls of radio industry chief executive officers and managers. FEDERAL REGULATION Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission (the "FCC") under the Communications Act of 1934, as amended (and, as amended by the Telecommunications Act of 1996 (the "1996 Act"), the "Communications Act"). Television or radio broadcasting is prohibited except in accordance with a license issued by the FCC upon a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate broadcast licenses for television and radio stations in such manner as will provide a fair, efficient and equitable distribution of service throughout the United States. The FCC determines the operating frequency, location and power of stations; regulates the equipment used by stations; and regulates numerous other areas of television and radio broadcasting pursuant to rules, regulations and policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment of a broadcast license or the transfer of control of an entity holding such a license without the prior approval of the FCC. Under the Communications Act, the FCC also regulates certain aspects of the operation of cable television systems and other electronic media that compete with broadcast stations. The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Reference should be made to the Communications Act as well as FCC rules, public notices and rulings for further information concerning the nature and extent of federal regulation of radio and television stations. Other legislation has been introduced from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or new or amended FCC regulations will be adopted or what their effect would be on Emmis. 8 LICENSE RENEWAL. Radio and television stations operate pursuant to broadcast licenses that are ordinarily granted by the FCC for maximum terms of eight years and are subject to renewal upon application to the FCC. Our licenses currently have the following expiration dates, until renewed: WENS-FM (Indianapolis) August 1, 2004 WKQX-FM (Chicago) December 1, 2004 KSHE-FM (St. Louis) February 1, 2005 KPWR-FM (Los Angeles) December 1, 2005 WQHT-FM (New York) June 1, 2006 WQCD-FM (New York) June 1, 2006 WIBC-AM (Indianapolis) August 1, 2004 WNOU-FM (Indianapolis) August 1, 2004 WRKS-FM (New York) June 1, 2006 WMLL-FM (St. Louis) December 1, 2004 WYXB-FM (Indianapolis) August 1, 2004 WTHI-FM (Terre Haute) August 1, 2004 WWVR-FM (Terre Haute) August 1, 2004 WTHI-TV (Terre Haute) August 1, 2005 WFTX-TV (Fort Myers) February 1, 2005 WALA-TV (Mobile) April 1, 2005 WVUE-TV (New Orleans) June 1, 2005 WLUK-TV (Green Bay) December 1, 2005 KHON-TV (Honolulu) February 1, 2007 KAII-TV (Maui) February 1, 2007 KHAW-TV (Hawaii) February 1, 2007 WKCF-TV (Orlando) February 1, 2005 KXPK-FM (Denver) April 1, 2005 KALC-FM (Denver) April 1, 2005 KZLA-FM (Los Angeles) December 1, 2005 KKLT-FM (Phoenix) October 1, 2005 KKFR-FM (Phoenix) October 1, 2005 KTAR-AM (Phoenix) October 1, 2005 KMVP-AM (Phoenix) October 1, 2005 KFTK-FM (St. Louis) February 1, 2005 KIHT-FM (St. Louis) February 1, 2005 KPNT-FM (St. Louis) February 1, 2005 KOIN-TV (Portland) February 1, 2007 KRQE-TV (Albuquerque) October 1, 2006 WSAZ-TV (Huntington) October 1, 2004 KSNW-TV (Wichita) June 1, 2006 KGMB-TV (Honolulu) February 1, 2007 KMTV-TV (Omaha) June 1, 2006 KGUN-TV (Tucson) October 1, 2006 KSNT-TV (Topeka) June 1, 2006 KREZ-TV (Durango) April 1, 2006 KBIM-TV (Roswell) October 1, 2006 KSNG-TV (Garden City) June 1, 2006 KSNC-TV (Great Bend) June 1, 2006 KSNK-TV (McCook-Oberlin) June 1, 2006 KGMD-TV (Hawaii) February 1, 2007 KGMV-TV (Maui) February 1, 2007 9 Under the Communications Act, at the time an application is filed for renewal for a station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC concludes on its own motion) that there is a "substantial and material" question as to whether grant of the renewal application would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine whether the renewal application should be granted. The Communications Act provides for the grant of a renewal application upon a finding by the FCC that the licensee: o has served the public interest, convenience and necessity; o has committed no serious violations of the Communications Act or the FCC rules; and o has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse. If the FCC cannot make such a finding, it may deny the renewal application, and only then may the FCC consider competing applications for the same frequency. In a vast majority of cases, the FCC renews a broadcast license even when petitions to deny have been filed against the renewal application. OWNERSHIP RESTRICTIONS. Under the FCC rules, with limited exceptions, the number of radio stations that may be owned by one entity in a given radio market is dependent upon the number of commercial radio stations in that market: o if the market has 45 or more commercial radio stations, one entity may own up to eight stations, not more than five of which may be in the same service (AM or FM); o if the market has between 30 and 44 commercial radio stations, one entity may own up to seven stations, not more than four of which may be in the same service; o if the market has between 15 and 29 commercial radio stations, a single entity may own up to six stations, not more than four of which may be in the same service; and o if the market has fourteen or fewer commercial radio stations, one entity may own up to five stations, not more than three of which may be in the same service, except that one entity may not own more than fifty percent of the stations in the market. Each of the markets in which our radio stations are located has at least 15 commercial radio stations. Pursuant to the 1996 Act, the FCC substantially revised its local television ownership rules (including its television "duopoly" rule and radio/television cross-ownership rule) in an August 1999 decision, as modified by a January 2001 reconsideration order. The FCC's revised television duopoly rule permits an entity to own two or more television stations in separate Designated Market Areas ("DMAs"). The rule also permits an entity to own two or more television stations in the same DMA if: o the coverage areas of the stations do not overlap, or o at least eight, independently-owned and -operated full-power non-commercial and commercial operating stations will remain in the marker post-merger, and one of the two commonly-owned stations is not among the top four television stations in the market (based on audience share ratings). 10 The Commission will consider permanent waivers of its revised television duopoly rule where: o one of the stations is a "failed station," i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding; o one of the stations is a "failing station," i.e., having a low audience share and financially struggling; or o one of the stations is an unbuilt facility, where the permittee has made substantial progress towards constructing the facility. Our acquisition of the Lee Enterprises stations required a waiver of the television duopoly rule because the signals of KHON-TV and KGMB-TV (one of the Lee Enterprises stations) overlap, the stations serve the same market, and both stations are rated among the top four in that market. In approving the acquisition, the FCC granted a temporary waiver of the rule, ordering that an application for divestiture of either KHON-TV or KGMB-TV (plus associated "satellite" stations) be filed on or before April 1, 2001; that deadline was subsequently extended at our request to October 1, 2001. The FCC's revised radio/television cross-ownership rule generally permits the common ownership of the following combinations in the same market, to the extent permitted under the FCC's television duopoly rule: o up to two commercial television stations and six commercial radio stations or one commercial television station and seven commercial radio stations in a market where at least 20 independent media voices will remain post-merger; o up to two commercial television stations and four commercial radio stations in a market where at least 10 independent media voices will remain post-merger; and o two commercial television stations and one commercial radio station in a market regardless of the number of independent media voices that will remain post-merger. The Commission will consider permanent waivers of its revised radio/television cross-ownership rule only if one of the stations is a "failed station." Pursuant to the 1996 Act, the FCC also revised its restriction on the national ownership of television stations in an August 1999 decision, as reaffirmed by a January 2001 order. The revised FCC rules restrict the ownership of television stations on a nationwide basis to stations serving, in the aggregate, no more than 35 percent of the total national audience. Certain group owners have filed comments with the FCC and/or appeals in the U.S. Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit") seeking elimination, or at least relaxation, of this limit. In early April 2001, the D.C. Circuit granted Viacom/CBS a stay of the May 2001 deadline that the FCC had set for the network to divest certain of its television stations in order to come into compliance with the 35 percent cap. It is anticipated that the stay will remain in effect until the court rules on the merits of Viacom's challenge to the ownership cap. We cannot predict the ultimate outcome of these proceedings or the impact, if any, that they will have on our business. Moreover, current FCC rules prohibit common ownership of a daily newspaper and a radio or television station in the same market. The FCC is expected to initiate a proceeding in the near future proposing to eliminate, or at least relax, this restriction. FCC rules also currently prohibit common ownership of a television station and a cable television system in the same market. Under the 1996 Act, the FCC is required to review all of its broadcast ownership rules every two years to determine whether the public interest dictates that such rules be repealed or modified. We cannot predict the outcome of any future biennial reviews of the FCC's broadcast ownership rules or the impact they may have on our business. 11 ALIEN OWNERSHIP RESTRICTIONS. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its capital stock is owned or voted by aliens or their representatives, a foreign government or representative thereof, or an entity organized under the laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides that no FCC license may be granted to an entity directly or indirectly controlled by another entity of which more than one-fourth of its capital stock is owned or voted by Non-U.S. Persons if the FCC finds that the public interest will be served by the denial of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on alien ownership apply in modified form to other types of business organizations, including partnerships and limited liability companies. Our Amended and Restated Articles of Incorporation and Code of By-Laws authorize the Board of Directors to prohibit such restricted alien ownership, voting or transfer of capital stock as would cause Emmis to violate the Communications Act or FCC regulations. ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC requires the "attribution" of broadcast licenses held by a broadcasting company to certain of the company's stockholders, officers or directors, such that there would be a violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than the permitted number of stations or a prohibited combination of media outlets in the same market. The FCC's attribution rules generally deem the following relationships and interests to be attributable for purposes of the FCC's ownership restrictions: o all officers and directors of a licensee and its (in)direct parent(s); o voting stock interests of at least five percent; o stock interests of at least 20 percent, if the holder is a passive institutional investor (i.e., investment companies, insurance companies, banks); o any equity interest in a limited partnership or limited liability company where the limited partner or member is "materially involved" in the media-related activities of the LP or LLC; o equity and/or debt interests which, in the aggregate, exceed 33 percent of the total asset value of a station or other media entity (the "equity/debt plus policy"), if the interest holder supplies more than 15 percent of the station's total weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a same-market media entity (i.e., broadcast company, cable operator or newspaper). To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable, the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each non-controlling link in a multi-corporation ownership chain. Emmis' Amended and Restated Articles of Incorporation and By-Laws authorize the Board of Directors to prohibit any ownership, voting or transfer of its capital stock which would cause Emmis to violate the Communications Act or FCC regulations. In the January 2001 attribution reconsideration order, the FCC eliminated its "single majority shareholder exemption" from attribution which theretofore had provided that, in cases where one person or entity (such as Jeffrey H. Smulyan in the case of Emmis) held more than 50 percent of the combined voting power of the common stock of a broadcasting company, a minority shareholder of the company generally would not be deemed to hold an attributable interest in the company. Although the FCC eliminated the single majority shareholder exemption, it grandfathered minority interests in broadcasting companies with single majority shareholders where the interests were acquired prior to December 4, 2000 (the adoption date of the January 2001 reconsideration order). Accordingly, any minority interests in Emmis acquired on or after December 4, 2000 will not be exempt from attribution, despite Mr. Smulyan's majority interest; however, any such interests acquired 12 prior to this date (i.e., grandfathered minority interests) will remain exempt from attribution so long as Mr. Smulyan continues to hold more than 50 percent of the combined voting power of Emmis' common stock. In the event that Mr. Smulyan no longer holds more than 50 percent of the voting power, the interests of grandfathered minority shareholders which had theretofore been considered nonattributable would become attributable, such that any other media interests held by these shareholders would be combined with Emmis' media interests for purposes of determining compliance with FCC ownership rules. Mr. Smulyan's level of voting control could decrease to or below 50 percent as a result of transfers of common stock pursuant to agreement or conversion of the Class B Common Stock into Class A Common Stock. In the event of noncompliance with the FCC's attribution rules, steps required to achieve compliance could include divestitures by either the shareholder or Emmis, as the situation dictates. Further, an attributable interest of any shareholder (including grandfathered minority interests) in another broadcast station or other media entity in a market where Emmis owns or seeks to acquire a station is still subject to review by the FCC under its "equity/debt plus policy," and could result in Emmis being unable to obtain one or more FCC authorizations needed to conduct its broadcast business or FCC consents necessary for future acquisitions. Conversely, Emmis' media interests could operate to restrict other media investments by shareholders having or acquiring an interest in Emmis. ASSIGNMENTS AND TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the "character" of the licensee and those persons holding attributable interests therein, compliance with the Communications Act's limitations on alien ownership as well as other statutory and regulatory requirements. When evaluating an assignment or transfer of control application, the FCC is prohibited from considering whether the public interest might be served by an assignment of the broadcast license or transfer of control of the licensee to a party other than the assignee or transferee specified in the application. PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Federal law prohibits the broadcast of obscene material and regulates the broadcast of indecent material, which is subject to enforcement action by the FCC. Complaints from listeners concerning a station's programming often will be considered by the FCC when it evaluates the licensee's renewal applications, although such complaints may be filed by concerned parties and considered by the FCC at any time. Stations also must pay regulatory and application fees and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identification, contest and lottery advertisements, and technical operations, including limits on radio frequency radiation. In 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). Certain provisions of this law, such as signal carriage and retransmission consent, have a direct effect on television broadcasting. In April 1997, the FCC adopted rules that require television broadcasters to provide digital television ("DTV") to consumers. The FCC also adopted a table of allotments for DTV, which assigns eligible broadcasters a second channel on which to provide DTV service. The FCC's DTV allotment plan is based on the use of a "core" DTV spectrum between channels 2-51. Although the Communications Act mandates that each television station return one of its two channels to the FCC by the end of 2006, the Balanced Budget Act of 1997 may effectively extend the transition deadline in some markets by allowing broadcasters to keep both their analog and digital licenses until at least 85 percent of television households in their respective markets can receive a digital signal. Local zoning laws 13 and the lack of qualified tall-tower builders to construct the facilities necessary for DTV operations, among other factors, including the pace of DTV production and sales, may cause delays in the DTV transition. The FCC has announced that it will review the progress of DTV every two years and make adjustments to the 2006 target date, if necessary. Television broadcasters are allowed to use their DTV channels according to their best business judgment, provided that they continue to offer at least one free programming service that is at least comparable to today's analog service. Digital services and programming can include multiple standard definition program channels, data transfer, subscription video, interactive materials, and audio signals (so-called "ancillary" services). The FCC has imposed a fee of five percent of the annual gross revenues for television broadcasters' use of the DTV spectrum to offer ancillary services (i.e., subscription services). The form and amount of these fees may have a significant effect on the profitability of such services. Broadcasters will not be required to air "high definition" programming or, initially, to simulcast their analog programming on the digital channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets were required to be on the air with a digital signal by May 1, 1999, and affiliates of those networks in markets 11-30, including KOIN-TV, were required to be on the air with a digital signal by November 1, 1999; KOIN-TV complied with this deadline. The remaining commercial stations, including all other television stations owned by Emmis, were required to file DTV construction permit applications by November 1, 1999 and are required to be on the air with a digital signal by May 1, 2002. Emmis timely filed DTV construction permit applications for all of its television stations. In January 2001, the FCC issued a further order on DTV transition issues, setting a number of deadlines for commercial broadcasters. By the end of December 2003, commercial stations with both analog and digital channel assignments within the DTV core spectrum (channels 2-51) must elect the channel they will use for broadcasting after the transition is complete. By the end of December 2004, commercial broadcasters not replicating their existing analog service areas will lose interference protection in those portions of their existing service areas not covered by their digital signals. Also by the end of December 2004, commercial broadcasters must provide a stronger digital signal to their communities of license than was previously required. In December 1999, the FCC initiated a proceeding to determine the extent of television broadcasters' public interest obligations during and after the transition to DTV service. In October 2000, the Commission furthered this proceeding by requesting comment on specific proposals to "standardize and enhance" public interest disclosure requirements for analog and digital broadcast licensees during and after the DTV transition. The FCC sought comment on a proposal which would require broadcasters to use a standardized form to provide information on how their stations serve the public interest and on a proposal which would require broadcasters to make the contents of a station's public inspection file available on a web site. In October 2000, the FCC also solicited comment on the implementation of broadcasters' children's television programming obligations during and after the DTV transition and on whether broadcasters should be required to provide quarterly reports of their children's programming activities on a web site. These proceedings remain pending at the Commission, and we cannot predict the outcomes or what impact, if any, the outcomes will have on our business. The FCC currently is considering cable operators' obligations to carry the digital signals of broadcast television stations, including the obligations that should exist during the DTV transition period, when broadcasters' analog and digital signals will be operating simultaneously. In January 2001, the FCC resolved a number of technical and legal issues concerning cable must carry rights of digital broadcast signals, including a determination that digital-only television stations are entitled to carriage of a single programming stream. The FCC also tentatively concluded, however, that the dual carriage of both a broadcaster's analog and digital signals will not be required during the DTV transition. The Commission currently is seeking further comment on this issue. We cannot predict whether the FCC will adopt "must carry" requirements for both analog and digital 14 Television signals during the DTV transition period or the effect of such an FCC decision on our television stations. Responding to the potential problems that DTV allotments posed to low-power television ("LPTV") broadcasters (which must "yield" to full-power television stations), Congress enacted the Community Broadcasters Protection Act of 1999 ("CBPA") in November 1999. CBPA allows qualifying LPTV stations to receive a new type of television station license called a "Class A" license. An LPTV station holding a Class A license will no longer be required to yield to full-power stations; rather, it will be protected from interference from such stations. However, full-service television stations were permitted to file applications to "maximize" (expand the coverage of) their DTV facilities by filing a notice of intent to maximize with the FCC on or before December 31, 1999, and filing a bona fide application to maximize on or before May 1, 2000. Stations meeting those requirements will have their "maximized" DTV facilities protected from interference by Class A stations. Emmis timely filed a Notice of Intent for each of its television stations and "maximization applications" in those cases where it was deemed appropriate. The FCC has authorized the provision of video programming directly to home subscribers through high-powered direct broadcast satellites ("DBS"). DBS systems currently are capable of broadcasting over 500 channels of digital television service directly to subscribers' equipment with 18-inch receiving dishes and decoders. At this time, several entities provide DBS service to consumers throughout the country. Other entities hold DBS licenses, but have not yet commenced service. DBS operators may not import distant network signals into local television markets unless the individual household that would receive the distant network signal is not capable of receiving a sufficiently strong "over-the-air" signal of the local affiliate of the given network. In November 1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which authorizes DBS companies to provide local television signals to their subscribers. During the first six months following enactment of the law, the local television signal could be provided without the consent of the station. Following the initial six-month period, DBS companies have been permitted to provide the signals of local television stations to their subscribers only pursuant to a retransmission consent agreement with the station. In March 2000, the FCC adopted regulations governing the statutory requirements for "good faith" negotiations and non-exclusive agreements in retransmission consent contracts between broadcasters (and all MVPDs). Broadcasters are required to negotiate non-exclusive retransmission consent agreements in good faith until January 1, 2006; however, the law explicitly provides that broadcasters may enter into agreements with competing DBS carriers on different terms. Moreover, effective January 1, 2002, local television stations will be entitled to "must-carry" rights on a DBS system if the system is providing any local television station(s) to its subscribers. SHVIA also "grandfathered" delivery of the signals of television stations via DBS to certain subscribers who may have been receiving such signals in violation of prior law. In November 2000, the FCC adopted rules to implement SHVIA provisions regarding "local-into-local" satellite service, must-carry election cycle rules and related policies for satellite carriage of broadcast signals. Under the new FCC rules, a broadcast television station must affirmatively elect must-carry status to require a DBS operator to carry its station; the first elections are due July 1, 2001. A case currently is pending in the D.C. Circuit in which DBS operators are challenging SHVIA's must-carry requirements. There are FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as the use of auctions to resolve completing application requests, network-affiliate relations, the ability of stations to obtain exclusive rights to air syndicated programming, cable systems' carriage of syndicated and network programming on distant stations, political advertising practices, application procedures and other areas affecting the business or operations of broadcast stations. Failure to observe FCC rules and policies can result in the imposition of various sanctions, including monetary fines, the grant of "short" (less than the maximum term) license renewal terms or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license. 15 ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission adopted rules implementing a new low power FM ("LPFM") service. A case is pending in the D.C. Circuit which seeks to prohibit the FCC from going forward with LPFM, citing potential interference to existing broadcasters and the lack of a proper cost/benefit analysis of the new service. We cannot predict whether any LPFM stations will interfere with the coverage of our radio stations. The FCC has also authorized satellite delivery of digital audio radio service ("SDARS") on a nationwide basis. This solicited comment on a proposal to permit SDARS to be supplemented by terrestrial "repeating" transmitters designed to fill "gaps" in satellite coverage. In late 2000 and early 2001, the SDARS licensees submitted to the FCC successful test results for various U.S. cities; nationwide commercial operation is expected to commence in mid-2001. The FCC has not yet adopted rules governing the installation and use of terrestrial "repeating" transmitters. We cannot predict the impact of SDARS on our radio stations' listenership. In November 1999, the Commission released proposed rules for terrestrial digital audio broadcasting ("DAB"). The proposed rules would permit existing AM and FM stations to operate on their current frequencies in either full analog mode, full digital mode, or a combination of both (at reduced power). DAB technology is still evolving, and it is not yet certain whether DAB transmission as proposed will be feasible. Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and/or affect our ability to acquire additional broadcast stations or finance such acquisitions. Such matters include, but are not limited to: o proposals to impose spectrum use or other fees on FCC licensees; o proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies; o proposals to change rules relating to political broadcasting; o technical and frequency allocation matters; o AM stereo broadcasting; o proposals to permit expanded use of FM translator stations; o proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages on to tighten safety guidelines relating to radio frequency radiation exposure; and radio; o proposals permitting FM stations to accept formerly impermissible interference; o proposals to reinstate holding periods for licenses; o changes to broadcast technical requirements, including those relative to the implementation of SDARS and DAB; o proposals to limit the tax deductibility of advertising expenses by advertisers. We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what impact, if any, the implementation of any of these proposals or changes might have on our business. The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations. Reference should be made to the Communications Act as well as FCC regulations, public notices and rulings for further information concerning the nature and extent of federal regulation of broadcast stations. 16 ADVERTISING SALES Our stations derive their advertising revenue from local and regional advertising in the marketplaces in which they operate, as well as from the sale of national advertising. Local and most regional sales are made by a station's sales staff. National sales are made by firms specializing in such sales which are compensated on a commission-only basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station's audience share position more rapidly than does the volume of local and regional advertising revenue. We have led the industry in developing "vendor co-op" advertising revenue (i.e., revenue from a manufacturer or distributor which is used to promote its particular goods together with local retail outlets for those goods). Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize, and take advantage of, the potential of vendor co-op advertising. Our Revenue Development Systems division has established a network of radio stations which share information about sources of vendor co-op revenue. In addition, each of our stations has a salesperson devoted exclusively to the development of cooperative advertising. We also use this approach at our television stations. In March 1999, we acquired substantially all of the assets of the Co-Opportunities division of Jefferson-Pilot Communications. We believe that the business of Co-Opportunities (which focuses more on co-op advertising for television stations and cable systems) provides an excellent complement to Revenue Development Systems. COMPETITION Radio and television broadcasting stations compete with the other broadcasting stations in their respective market areas, as well as with other advertising media such as newspapers, magazines, outdoor advertising, transit advertising, the Internet and direct mail marketing. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that otherwise would have been offered to local television stations. Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market (e.g., New York) does not generally compete with stations in other markets (e.g., Chicago). In each of our markets, our stations face competition from other stations with substantial financial resources, including stations targeting the same demographic groups. In addition to management experience, factors which are material to competitive position include the station's rank in its market in terms of the number of listeners or viewers, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive position with programming and promotional campaigns aimed at the demographic groups targeted by our stations, and through sales efforts designed to attract advertisers that have done little or no broadcast advertising by emphasizing the effectiveness of radio and television advertising in increasing the advertisers' revenues. Changes in the policies and rules of the FCC permit increased joint ownership and joint operation of local stations. Those stations taking advantage of these joint arrangements (including our New York, Los Angeles, Denver, Phoenix, St. Louis, Indianapolis and Terre Haute clusters) may in certain circumstances have lower operating costs and may be able to offer advertisers more attractive rates and services. Although we believe that each of our stations can compete effectively in its market, there can be no assurance that any of our stations will be able to maintain or increase its current audience ratings or advertising revenue market share. Although the broadcasting industry is highly competitive, some barriers to entry exist. The operation of a broadcasting station in the United States requires a license from the FCC, and the number of stations that can operate in a given market is limited by the availability of the frequencies that the FCC will license in that market, as well as by the FCC's multiple ownership rules regulating the number of stations that may be owned and controlled by a single entity. 17 The broadcasting industry historically has grown in terms of total revenues despite the introduction of new technology for the delivery of entertainment and information, such as cable television, The Internet, satellite television, audio tapes and compact discs. We believe that radio's portability in particular makes it less vulnerable than other media to competition from new methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio or television broadcasting industry. EMPLOYEES As of February 28, 2001 Emmis had approximately 2,628 full-time employees and approximately 515 part-time employees. We have approximately 268 employees at various radio and television stations represented by unions. We consider relations with our employees to be good. GEOGRAPHIC FINANCIAL INFORMATION The Company's segments operate primarily in the United States with one national radio station located in Hungary and two radio stations located in Argentina. The following tables summarize relevant financial information by geographic area: For the year ended February 28 (29), 1999 2000 2001 ----------- ---------- ----------- (In Thousands) Net Revenues: Domestic $ 229,582 $ 316,454 $ 456,040 International 3,254 8,811 14,578 ----------- ---------- ----------- Total 232,836 325,265 470,618 =========== ========== =========== As of February 28 (29), 1999 2000 2001 ----------- ---------- ----------- (In Thousands) Noncurrent Assets: Domestic $ 925,161 $1,181,640 $ 2,263,796 International 18,588 32,950 27,970 ----------- ---------- ----------- Total 943,749 1,214,590 2,291,766 =========== ========== =========== 18 ITEM 2. PROPERTIES. The following table sets forth information as of February 28, 2001 with respect to Emmis' offices and studios and its broadcast tower locations. Management believes that the properties are in good condition and are suitable for Emmis' operations.
EXPIRATION YEAR PLACED OWNED OR DATE PROPERTY IN SERVICE LEASED OF LEASE ------------------------- ------------ --------- -------- Corporate and Publishing 1998 Owned -- Headquarters/ WENS-FM/ WIBC-AM/WNOU-FM/ WYXB-FM/ Indianapolis Monthly One Emmis Plaza 40 Monument Circle Indianapolis, Indiana WENS-FM Tower 1985 Owned -- WNOU-FM Tower 1979 Owned -- WIBC-AM Tower 1966 Owned -- WYXB-FM Tower 1965 Leased Month-to-month KSHE-FM 1986 Leased September 2007 700 St. Louis Union Station St. Louis, Missouri KSHE-FM Tower 1985 Leased April 2009 WMLL-FM/KFTK-FM/KIHT-FM/KPNT-FM 1998 Leased December 2007 800 St. Louis Union Station St. Louis, Missouri WMLL-FM Tower 1984 Owned -- KFTX-FM Tower 1987 Leased August 2009 with option to March 2023 KIHT-FM Tower 1995 Leased September 2005 with two 5-year options to September 2015 KPNT-FM Tower 1987 Owned -- KPWR-FM 1988 Leased February 2003(1) 2600 West Olive Burbank, California KPWR-FM Tower 1993 Leased October 2002 WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013 395 Hudson Street, 7th Floor New York, New York WQHT-FM Tower 1988 Leased January 2010 WRKS-FM Tower 1984 Leased November 2005 WQCD-FM Tower 1984 Leased February 2007 WKQX-FM 2000 Leased August 2015 (one 5 year extension option) 230 Merchandise Mart Plaza Chicago, Illinois WKQX-FM Tower 1975 Leased September 2009 Atlanta Magazine Office 1997 Leased July 2003 1360 Peachtree Street Atlanta, Georgia Cincinnati Magazine 1996 Leased November 2006 One Centennial Plaza Cincinnati, OH Texas Monthly 1989 Leased August 2009 701 Brazos, Suite 1600 Austin, TX KHON-TV 1999 Owned -- 88 Piikoi Street Honolulu, HI KHON-TV Tower 1978 Leased December 2008 WALA-TV 1952 Leased May 2002 210 Government Street Mobile, AL WALA-TV Tower 1962 Owned -- 19 WFTX-TV 1987 Owned -- 621 Pine Island Road Cape Coral, FL WFTX-TV Tower 1987 Owned -- WLUK-TV 1966 Owned -- 787 Lombardi Avenue Green Bay, WI WLUK-TV Tower 1961 Owned -- WTHI-TV/FM/WWVR-FM 1954 Owned -- 918 Ohio Street Terre Haute, IN WTHI-TV Tower 1965 Owned -- WTHI-FM Tower 1954 Owned -- WWVR-FM Tower 1954 Owned -- WVUE-TV 1972 Owned -- 1025 South Jefferson Davis Highway New Orleans, LA WVUE-TV Tower 1963 Owned -- WKCF-TV 1998 Owned -- 31 Skyine Drive Lake Mary, FL WKCF-TV Tower 1991 Leased September 2006 Los Angeles Magazine 2000 Leased November 2010 5900 Wilshire Blvd., Suite 1000 Los Angeles, CA 90036 Country Sampler 1988 Owned -- 707 Kautz Road St. Charles, IL 60174 RDS/Co-Opportunities 1989 Leased December 2003 324 Campus Lane, Suite B Suisun, CA 94585 Emmis West (Corporate) 1999 Leased January 2004 15821 Ventura Blvd., #685 Encino, CA 91436 Slager Radio 1998 Leased December 2004 Szabadsag Ut 117 (Atronyx Bldg. B) H-2040 Budaors, Hungary Slager Tower 1998 Leased December 2001(2) KOIN-TV 1984 Leased Expires in June 2083 with 222 S.W. Columbia St. right to renew for an Portland, OR 97221 additional 99 years KOIN-TV Tower 1953 Owned -- KSNT-TV 1967 Owned -- 6835 N.W. U.S. Hwy 24 Topeka, KS 66618 KSNT-TV Tower 1967 Owned -- WSAZ-TV 1971 Owned -- 645 5th Avenue Huntington, WV 25701 WSAZ-TV Tower 1954 Owned -- KZLA-FM 1997 Owned -- 7755 Sunset Blvd. Los Angeles, CA 90045 KZLA-FM Tower 1991 Leased June 30, 2003 KGMB-TV 1952 Owned -- 1534 Kapiolani Blvd. Honolulu, HI 96814 KGMB-TV Tower 1962 Owned -- KMTV-TV 1978 Owned -- 10714 Mockingbird Dr. Omaha, NE 68127 KMTV-TV Tower 1967 Owned -- 20 KGUN-TV 1990 Owned -- 7280 E. Rosewood Tucson, AZ 85710 KGUN-TV Tower 1956 Owns July 2016 Tower, Leases Land KXPK-FM/KALC-FM KXPK - 1999 Leased December 2005 1200 17th St., Suite 2300 KALC - 1985 Denver, CO 80202 KXPK-FM Tower 1994 Leased April 2024 KALC-FM Tower 1982 Leased October 2004 KRQE-TV 1953 Owned -- 13 Broadcast Plaza S.W. Albuquerque, NM 87104 KRQE-TV Tower 1959 Owned -- KKFR-FM 1989 Owned -- 631 N. First Ave. Phoenix, AZ 85012 KKFR-FM Tower 1998 Leased April 2003 KTAR-AM/KMVP-AM/KKLT-FM 1994 Owned -- 5300 N. Central Ave. Phoenix, AZ 85012 KTAR-AM Tower 1958 Owned -- KMVP-AM Tower (tower) 1971 Owned -- KMVP-AM Tower (land only) 1996 Leased December 2008 KKLT-FM Tower 1965 Owned -- KSNW-TV 1955 Owned -- 833 N. Main St. Wichita, KS 67203 KSNW-TV Tower 1955 Owned -- Argentina 1996 Owned -- Uriarte 1899 (1414) Capital Federal Buenos Aires, Argentina Argentina Tower 1996 Owned --
-------------- (1) The lease provides for one renewal option of ten years following the expiration date. Emmis also owns a tower site which it placed in service in 1984 and currently uses as a back-up facility and on which it leases space to other broadcasters. (2) The lease provides for annual renewal options. ITEM 3. LEGAL PROCEEDINGS. Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the annual meeting of shareholders of the Company held on January 10, 2001, the following matters received the following votes: MATTER DESCRIPTION VOTES FOR VOTES AGAINST ABSTAINING ------------------ --------- ------------- ---------- Election of Directors: Jeffrey H. Smulyan 85,262,658 - 2,548,432 Doyle L. Rose 85,207,458 - 2,603,632 Greg Nathanson 85,261,521 - 2,549,569 Gary L. Kaseff 85,263,281 - 2,547,809 Lawrence B. Sorrel 80,842,898 - 6,968,192 Richard A. Leventhal 85,262,349 - 2,548,741 Frank V. Sica* 28,486,308 - 7,020,822 Susan B. Bayh* 32,962,259 - 2,544,871 * Class A Director Approval of Employee Stock Purchase Plan 80,990,916 2,988,451 13,053 Approval of Appointment of Auditors 87,747,615 12,644 50,831 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Emmis' Class A common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol EMMS. The following table sets forth the high and low sale prices of the Class A common stock for the periods indicated. No dividends were paid during any such periods. QUARTER ENDED HIGH* LOW* May 1999 25.13 19.50 August 1999 29.56 22.00 November 1999 42.38 27.25 February 2000 62.34 35.63 May 2000 47.38 27.00 August 2000 49.13 31.38 November 2000 34.25 17.38 February 2001 37.88 22.13 *All prices adjusted for the two-for-one stock split on February 24, 2000. At April 30, 2001, there were 3,571 record holders of the Class A common stock, and there were two record holders, but only one beneficial owner, of the Class B common stock. Emmis intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its common stock in the foreseeable future. On October 25, 1999 Emmis sold 2,700,000 shares of its Class A Common Stock (5,400,000 shares after the subsequent stock split) to Liberty EMMS, Inc., a wholly owned subsidiary of Liberty Media Corporation, in a transaction not registered under the Securities Act of 1933. The cash purchase price of the stock was $148,500,000. The sale was exempt from registration under Section 4(2) of the Securities Act. Liberty Media Group holds interests in a broad range of video programming, communications, technology and internet businesses in the United States, Europe, South America and Asia. Its common stock is traded on the New York Stock Exchange. 23 ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29), ---------------------------------------------------------- (Dollars in thousands, except share data) 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- OPERATING DATA: Net revenues $ 113,720 $ 140,583 $ 232,836 $ 325,265 $ 470,618 Operating expenses 62,433 81,170 143,348 199,818 296,405 International business development expenses 1,164 999 1,477 1,558 1,553 Corporate expenses 5,929 6,846 10,427 13,872 16,048 Time brokerage fees - 5,667 2,220 - 7,344 Depreciation and amortization 5,481 7,536 28,314 44,161 74,018 Non-cash compensation 3,465 1,482 4,269 7,357 5,400 Corporate restructuring fees and other (1) - - - 896 4,057 Operating income 35,248 36,883 42,781 57,603 65,793 Interest expense 9,633 13,772 35,650 51,986 72,444 Loss on donation of radio station - 4,833 - 956 - Other income, net (2) 325 6 1,914 4,203 38,037 Income before income taxes and extraordinary item 25,940 18,284 9,045 8,864 31,386 Income before extraordinary item 15,440 11,084 2,845 1,989 13,736 Net income (loss) 15,440 11,084 1,248 (33) 13,736 Net income (loss) available to common shareholders 15,440 11,084 1,248 (3,177) 4,752 Net income (loss) per share available to common shareholders: Basic $ 0.71 $ 0.51 $ 0.04 $ (0.09) $ $0.10 Diluted $ 0.68 $ 0.49 $ 0.04 $ (0.09) $ $0.10 Weight average common shares Outstanding (3): Basic 21,886 21,806 28,906 36,156 46,869 Diluted 22,582 22,724 29,696 36,156 47,940
FEBRUARY 28 (29), (Dollars in thousands) 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- BALANCE SHEET DATA: Cash $ 1,191 $ 5,785 $ 6,117 $ 17,370 $ 59,899 Working capital 15,463 21,635 1,249 28,274 97,955 Net intangible assets 131,743 234,558 802,307 1,033,970 1,981,097 Total assets 189,716 333,388 1,014,831 1,327,306 2,506,872 Credit facility and senior subordinated debt 115,000 215,000 577,000 300,000 1,380,000 Shareholders' equity 34,422 43,910 235,549 776,367 807,471
YEAR ENDED FEBRUARY 28 (29), (Dollars in thousands) 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- OTHER DATA: Broadcast/publishing cash flow (4) $ 51,287 $ 59,413 $ 89,488 $ 125,447 $ 174,213 EBITDA before certain charges (4) 44,194 51,568 77,584 110,017 156,612 Cash flows from (used in): Operating activities 21,362 22,487 35,121 26,360 97,730 Investing activities (13,919) (116,693) (541,470) (271,946) (1,110,755) Financing activities (7,470) 98,800 506,681 256,839 1,055,554 Capital expenditures 7,559 16,991 37,383 29,316 26,225
(1) Year ended February 28, 2001 includes a $2.0 million asset impairment charge and $2.1 million of professional fees associated with the evaluation of structural alternatives. (2) See Management's Discussion and Analysis of Financial Condition and Results of operations for a description of the components of other income in the year ended February 28, 2001. (3) In February 2000, Emmis effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data shown has been retroactively adjusted to reflect the stock split. (4) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and not a substitute for Emmis' results of operations presented on the basis of accounting principles generally accepted in the United States. See Management's Discussion and Analysis of Financial Condition and Results of operations for a more detailed description of broadcast/publishing cash flow and EBITDA before certain charges. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Emmis ("the Company") generally evaluates the performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses. BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing the magazine, and general and administrative costs. The Company's revenues are affected primarily by the advertising rates its entities charge. These rates are in large part based on the entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. Broadcast entities' ratings are measured principally four times a year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen Company for television stations. Because audience ratings in a station's local market are critical to the station's financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain audiences in each station's chosen demographic target group. In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services which can be used by the station in its business operations. The Company generally confines the use of such trade transactions to promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade. ACQUISITIONS, DISPOSITIONS, DONATIONS AND INVESTMENTS During the three year period ended February 28, 2001, we acquired and retained thirteen radio stations, fifteen television stations and three magazine publications for an aggregate cash purchase price of $1.8 billion. A recap of the transactions completed is summarized hereafter. These transactions impact the comparability of operating results year over year. 25 Subsequent to year-end, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash. The Company financed the acquisition through a $20.0 million advance payment borrowed under the credit facility in June 2000 and the remainder with borrowings under the credit facility and proceeds from the Company's March 2001 Senior Discount Notes Offering. The acquisition was accounted for as a purchase. Emmis began programming and selling advertising on the radio stations on August 1, 2000 under a time brokerage agreement. On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the intellectual property of WTLC-FM (both located in Indianapolis, Indiana) to Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and the AM sale occurred on April 25, 2001. Emmis retained the FCC license at 105.7 and reformatted the station as WYXB-FM. On January 17, 2001, Emmis completed its acquisition of substantially all of the assets of radio station KALC-FM in Denver, Colorado from Salem Communications Corporation for $98.8 million in cash plus a commitment fee of $1.2 million and transaction related costs of $0.9 million (the "Salem Acquisition"). The acquisition, which was accounted for as a purchase, was financed through borrowings under the credit facility. Emmis began operating the station under a time brokerage agreement in October 2000. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as KFTK-FM) and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. for $220.0 million in cash, plus transaction related costs of $10.9 million (the "Sinclair Acquisition"). The agreement also included the settlement of outstanding lawsuits by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquisition was financed through borrowings under Emmis' credit facility and was accounted for as a purchase. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. On October 6, 2000, Emmis acquired certain assets of KZLA-FM (the "KZLA Acquisition") in Los Angeles, California from Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). Since the fair value of WKKX exceeded the book value of the station at the date of the exchange, Emmis recorded a gain on exchange of assets of $22.0 million. This gain is included in other income, net in the accompanying consolidated statements of operations. From August 1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The exchange was accounted for as a purchase. The total purchase price of $185.0 million was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $559.5 million in cash, the payment of $21.3 million for working capital and transaction related costs of $2.2 million (the "Lee Acquisition"). In connection with the acquisition, Emmis recorded $31.3 million of deferred tax liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a severance related liability of $1.8 million and the entire amount remained outstanding as of February 28, 2001. Emmis expects the remaining amount to be fully utilized during the year ended February 28, 2002. This transaction was financed through borrowings under Emmis' credit facility and was accounted for as a purchase. The Lee Acquisition consisted of the following stations: 26 - KOIN-TV (CBS) in Portland, Oregon - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango, Colorado-Farmington, New Mexico) - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas and KSNK-TV, Oberlin, Kansas-McCook, Nebraska) - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii) - KGUN-TV (ABC) in Tucson, Arizona - KMTV-TV (CBS) in Omaha, Nebraska and - KSNT-TV (NBC) in Topeka, Kansas. The total purchase price was allocated to property and equipment, television program rights, working capital related items and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. As a result of the Lee Acquisition, Emmis owns more television stations in the Hawaiian market than is currently permitted by FCC regulations. Emmis is currently operating the stations under an FCC waiver that requires Emmis to file an application to sell one of its Hawaiian television stations by October 1, 2001. Emmis is currently exploring various possibilities. On August 24, 2000, Emmis acquired the assets of radio stations KKFR-FM in Phoenix, Arizona and KXPK-FM in Denver, Colorado from AMFM, Inc. for $108.0 million in cash, less purchase price adjustments of $1.0 million, plus liabilities recorded of $1.2 and transaction related costs of $0.9 million (the "AMFM Acquisition"). Emmis financed the acquisition through borrowings under its credit facility. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia. Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000, the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the right of first refusal on August 31, 2000, which is included in other income in the accompanying consolidated statements of operations. On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.8 million in cash plus liabilities recorded of $2.7 million (the "Los Angeles Magazine Acquisition"). Los Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The acquisition was accounted for as a purchase and was financed through additional borrowings under its credit facility. The excess of the purchase price over the estimated fair value of identifiable assets was $36.0 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. 27 On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6 million. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. The excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. On November 16, 1999, Emmis purchased an interest in BuyItNow.com L.L.C. for $5.0 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the carrying value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be other than temporary. On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis owns one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years. On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the credit facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets and are being amortized over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through December 2009. On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the credit facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the credit facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV, a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. 28 On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25.0 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25.0 million promissory note and borrowings under the credit facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii and KHAW-TV, Hilo, Hawaii). On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. Effective July 1, 1997 through the date of closing, the Company operated WQCD-FM under a time brokerage agreement. RESULTS OF OPERATIONS YEAR ENDED FEBRUARY 28, 2001 COMPARED TO YEAR ENDED FEBRUARY 29, 2000. Net revenues for the year ended February 28, 2001 were $470.6 million compared to $325.3 million for the same period of the prior year, an increase of $145.3 million or 44.7%. The increase in net revenues for the year ended February 28, 2001 is primarily the result of the Country Sampler Acquisition, WKCF Acquisition, Argentina Acquisition, Los Angeles Magazine Acquisition, AMFM Acquisition, Lee Acquisition, KZLA Acquisition, Sinclair Acquisition, Salem Acquisition and our operation of radio stations KKLT-FM, KTAR-AM and KMVP-AM under time brokerage agreements which we collectively refer to as our "Fiscal 2000-2001 Transactions." Excluding these transactions, net revenues for the year ended February 28, 2001 would have increased $14.7 million or 4.8%. The remaining increase in net revenues is due to our ability to realize higher advertising rates resulting from higher ratings at certain broadcasting properties, increases in general radio spending in the markets in which we operate and our ability to sell more advertising in our publications. Operating expenses for the year ended February 28, 2001 were $296.4 million compared to $199.8 million for the same period of the prior year, an increase of $96.6 million or 48.3%. The increase in operating expenses for the year ended February 28, 2001 is primarily the result of our Fiscal 2000-2001 Transactions. Excluding these transactions, operating expenses for the year ended February 28, 2001 would have increased $3.6 million or 1.9%. This increase is principally due to higher advertising and promotional spending at certain of our properties as well as an increase in sales related costs. Broadcast/publishing cash flow for the year ended February 28, 2001 was $174.2 million compared to $125.4 million for the same period of the prior year, an increase of $48.8 million or 38.9%. The increase in broadcast/publishing cash flow for the year ended February 28, 2001 is primarily the result of our Fiscal 2000-2001 Transactions. Excluding these transactions, broadcast/publishing cash flow for the year ended February 28, 2001 would have increased $11.1 million or 9.4%. This increase is due to increased net revenues partially offset by increased operating expenses as discussed above. Corporate expenses for the year ended February 28, 2001 were $16.0 million compared to $13.9 million for the same period of the prior year, an increase of $2.1 million or 15.7%. These increases are due to an increase in the number of corporate employees in all departments as a result of the growth of the Company. 29 EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development expenses. EBITDA before certain charges for the year ended February 28, 2001 was $156.6 million compared to $110.0 million for the same period of the prior year, an increase of $46.6 million or 42.4%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses. Interest expense was $72.4 million for the year ended February 28, 2001 compared to $52.0 million for the same period of the prior year, an increase of $20.4 million or 39.4%. Included in interest expense for the twelve months ended February 28, 2001 is $3.4 million for the amortization of debt fees related to our Bridge Loan. The remaining increase reflects higher outstanding debt due to the Fiscal 2000-2001 Transactions. Depreciation and amortization expense for the year ended February 28, 2001 was $74.0 million compared to $44.2 million for the same period of the prior year, an increase of $29.8 million or 67.6%. Substantially all of the increase in depreciation and amortization expense for the year ended February 28, 2001 relates to our Fiscal 2000-2001 Transactions. Non-cash compensation expense for the year ended February 28, 2001 was $5.4 million compared to $7.4 million for the same period of the prior year, a decrease of $2.0 million or 26.6%. Non-cash compensation includes compensation expense associated with stock options granted, grants of restricted stock and common stock contributed to the Company's Profit Sharing Plan. The decrease was principally due to a decline in the Company's stock price as compared to the prior year. Other income for the twelve months ended February 28, 2001 was $38.0 million compared to other income of $3.2 million for the same period of the prior year. Other income for the twelve months ended February 28, 2001 includes a $22.0 million gain on exchange of assets, offset by valuation adjustments on certain investments and a $17.0 million break-up fee received in connection with the sale of WALR-FM in Atlanta, Georgia to Cox Radio, Inc., net of related expenses. Our effective tax rate for the year ended February 28, 2001 was 56.2%, compared to 77.5% for the same period of the prior year. The decrease in our effective tax rate in the year ended February 28, 2001 primarily resulted from the relative impact of the non-deductible tax items in relation to the change in pre-tax income. YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999. Net revenues for the year ended February 29, 2000 were $325.3 million compared to $232.8 million for the same period of the prior year, an increase of $92.5 million or 39.7%. The increase in net revenues for the year ended February 29, 2000 is primarily the result of the SF, Wabash and WKCF Acquisitions (the "Fiscal 1999-2000 TV Acquisitions")($44.1 million) and Country Sampler Acquisition ($13.4 million). Excluding these transactions, net revenues for the year ended February 29, 2000 would have increased $35.0 million or 15.0%. Included in this increase is a decrease in political advertising revenue at our television stations as our fiscal year ended February 29, 2000 was not a significant year for political campaigns. The remaining increase in net revenues is due to the ability to realize higher advertising rates resulting from higher ratings at certain broadcasting properties, increases in general radio spending in the markets in which the Company operates, the ability to sell more advertising in our publications and an increase in single copy newsstand sales. Operating expenses for the year ended February 29, 2000 were $199.8 million compared to $143.3 million for the same period of the prior year, an increase of $56.5 million or 39.4%. The increase in operating expenses for the year ended February 29, 2000 is primarily the result of the Fiscal 1999-2000 TV Acquisitions ($30.2 million) and Country Sampler Acquisition ($11.2 million). Excluding these transactions, operating expenses for the year ended February 29, 2000 would have increased $15.1 million or 10.5%. This increase is principally due to higher advertising and promotional spending at certain of the Company's properties as well as an increase in sales related costs. 30 Broadcast/publishing cash flow for the year ended February 29, 2000 was $125.4 million compared to $89.5 million for the same period of the prior year, an increase of $35.9 million or 40.2%. The increase in broadcast/publishing cash flow for the year ended February 29, 2000 is primarily the result of the Fiscal 1999-2000 TV Acquisitions ($13.9 million) and Country Sampler Acquisition ($2.2 million). Excluding these transactions, broadcast/publishing cash flow for the year ended February 29, 2000 would have increased $19.8 million or 22.1%. This increase is principally due to increased net revenues partially offset by increased operating expenses as discussed above. Corporate expenses for the year ended February 29, 2000 were $13.9 million compared to $10.4 million for the same period of the prior year, an increase of $3.5 million or 33.0%. These increases are due to costs associated with year 2000 compliance, analysis of potential acquisitions and an increase in the number of corporate employees in all departments as a result of the growth of the Company. EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development expenses. EBITDA before certain charges for the year ended February 29, 2000 was $110.0 million compared to $77.6 million for the same period of the prior year, an increase of $32.4 million or 41.8%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses. Interest expense was $52.0 million for the year ended February 29, 2000 compared to $35.7 million for the same period of the prior year, an increase of $16.3 million or 45.8%. This increase reflected higher outstanding debt due to the Fiscal 1999-2000 TV Acquisitions, WQCD Acquisition, which was previously operated under a time brokerage agreement, and Country Sampler Acquisition and a higher rate of interest paid by the Company on outstanding debt. Depreciation and amortization expense for the year ended February 29, 2000 was $44.2 million compared to $28.3 million for the same period of the prior year, an increase of $15.9 million or 56.0%. The increase in depreciation and amortization expense for the year ended February 29, 2000 is primarily the result of the Fiscal 1999-2000 TV Acquisitions ($9.1 million), WQCD Acquisition ($2.2 million) and Country Sampler Acquisition ($2.3 million). The remaining increase relates to depreciation of capital additions in recent years. Non-cash compensation expense for the year ended February 29, 2000 was $7.4 million compared to $4.3 million for the same period of the prior year, an increase of $3.1 million or 72.3%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. This increase was due to shares granted to certain executives under employment agreements for which the fair market value of the shares at the date of grant was higher than the fair market value of shares granted under previous employment agreements due to the appreciation in the Company's stock price. Our effective tax rate for the year ended February 29, 2000 was 77.5%, compared to 68.5% for the same period of the prior year. Our effective tax rate was higher in the year ended February 29, 2000 due to a slight decrease in pre-tax income coupled with an increase in nondeductible entertainment related expenses. LIQUIDITY AND CAPITAL RESOURCES CAPITAL REQUIREMENTS Our primary uses of capital have been historically, and are expected to continue to be, funding acquisitions, capital expenditures, working capital and debt and preferred stock service requirements. 31 Emmis is constructing new operating facilities for WALA-TV in Mobile, Alabama. The project is expected to be completed in December of 2001 for an estimated cost of $11.3 million of which $1.9 million has been incurred through February 28, 2001, and this project will be financed through cash flows from operating activities and/or borrowings under the credit facility. CAPITAL EXPENDITURES In the fiscal years ended February 1999, 2000 and 2001, we had capital expenditures of $37.4 million, $29.3 million and $26.2 million, respectively. These capital expenditures primarily related to the Indianapolis office facility project, the KHON operating facilities project, leasehold improvements to various office and studio facilities, broadcast equipment purchases and tower upgrades. We anticipate that future requirements for capital expenditures will include capital expenditures incurred during the ordinary course of business, including costs related to our conversion to digital television. We expect to fund such capital expenditures with cash generated from operating activities and borrowings under our credit facility. DEBT SERVICE AND PREFERRED STOCK DIVIDEND REQUIREMENTS As of February 28, 2001, we had $1.38 billion of corporate indebtedness outstanding under our credit facility ($1.08 billion) and senior subordinated notes ($0.3 billion), and an additional $17.9 million of other indebtedness. We also had $143.8 million of our preferred stock outstanding. See Sources of Liquidity for discussion of our senior discount notes offering in March 2001. All outstanding amounts under our credit facility bear interest, at our option, at a rate equal to the Eurodollar rate or an alternative Base Rate plus a margin (the margin, which ranges from 0% to 2.9%, varies based on our ratio of total debt to operating cash flow). As of February 28, 2001, our weighted average borrowing rate under our credit facility was approximately 8.0%. Based on amounts currently outstanding under our senior subordinated notes and convertible preferred stock, the debt service and preferred stock dividend requirements for the next twelve month period are $24.4 million and $9.0 million, respectively. SOURCES OF LIQUIDITY Our primary sources of liquidity are cash provided by operations and funds available under our credit facility. At February 28, 2001, we had cash and cash equivalents of $59.9 million and net working capital of $98.0 million. At February 29, 2000, we had cash and cash equivalents of $17.4 million and net working capital of $28.3 million. On March 27, 2001, we received $202.6 million of proceeds from the issuance of senior discount notes due 2011, less approximately $10.8 million of debt issuance costs. The notes accrete interest at a rate of 12.5% per year, compounded semi-annually to an aggregate principle amount of $370.0 million on March 15, 2006. Commencing on September 15, 2006, interest is payable in cash on each March 15 and September 15. A portion of the net proceeds were used to fund the acquisition of three radio stations in Phoenix, Arizona and the remaining net proceeds (approximately $93.0 million) were placed in escrow to ultimately reduce outstanding borrowings under the credit facility. The senior discount notes will automatically be exchanged for 13.25% Exchangeable PIK Preferred Stock unless we can effect a corporate reorganization by July 24, 2001. Under this reorganization, we will transfer all of our assets, as well as our obligations under the credit facility and the senior subordinated notes, to a wholly-owned subsidiary, Emmis Operating Company. Emmis Communications Corporation will still be the issuer of our Class A, Class B and Class C common stock, our convertible preferred stock and the senior discount notes, and Emmis Operating Company will be the obligor of the senior subordinated notes. We do not expect the reorganization, which should be completed before the July 24, 2001 deadline, to materially affect our operations because we currently conduct substantially all of our business through subsidiaries. At April 30, 2001, we have $320.0 million available under our credit facility, less $6.6 million in outstanding letters of credit. We expect that cash flow from operating activities will be sufficient to fund all working capital, 32 capital expenditures, debt service, and preferred stock dividend requirements for the forseeable future. As part of our business strategy, we continually evaluate potential acquisitions of radio and television stations as well as publishing properties. If we elect to take advantage of future acquisition opportunities, we may incur additional debt or issue additional equity or debt securities, depending on market conditions and other factors. On March 28, 2001, we completed our acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash. We financed the acquisition through a $20.0 million advance payment borrowed under our credit facility in June 2000 and the remainder with borrowings under the credit facility and proceeds from our March 2001 senior discount notes offering. The acquisition was accounted for as a purchase. INTANGIBLES At February 28, 2001, approximately 79% of our total assets consisted of intangible assets, such as FCC broadcast licenses, goodwill, subscription lists and similar assets, the value of which depends significantly upon the operational results of our businesses. In the case of our radio and television stations, we would not be able to operate the properties without the related FCC license for each property. FCC licenses are renewed every eight years; consequently, we continually monitor the activities of our stations to ensure they comply with all regulatory requirements. Historically, all of our licenses have been renewed at the end of their respective eight-year periods, and we expect that all licenses will continue to be renewed in the future. SEASONALITY Our results of operations are usually subject to seasonal fluctuations, which result in higher second and third quarter revenues and broadcast cash flow. This seasonality is due to the younger demographic composition of many of our stations. Advertisers increase spending during the summer months to target these listeners. In addition, advertisers generally increase spending during the months of October and November, which are part of our third quarter, in anticipation of the holiday season. Finally, revenues from political advertising tend to be higher in even numbered calendar years. INFLATION The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on our operating results. FORWARD-LOOKING STATEMENTS This report includes or incorporates forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by our use of words such as "intend," "plan," "may," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. All statements regarding our expected financial position, business and financing plans are forward-looking statements. 33 Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important facts in various cautionary statements in this report that we believe could cause our actual results to differ materially from forward-looking statements that we make. These include, but are not limited to, the following: o the ability of our stations and magazines to attract and retain advertisers; o the level of our capital expenditures and whether our programming and other expenses increase at a rate faster than expected; o whether any pending transactions are completed on the terms and at the times set forth, if at all; o financial community and rating agency perceptions of our business, operations and financial condition and the industry in which we operate; o the ability of our stations to attract programming and our magazines to attract writers and photographers; o uncertainty as to the ability of our stations to increase or sustain audience share for their programs and our magazines to increase or sustain subscriber demand; o risks and uncertainties inherent in the radio and television broadcasting magazine publishing businesses; o material adverse changes in economic conditions in the markets of our company; o future regulatory actions and conditions in the operating areas of our company; and o competition from other media and the impact of significant competition for advertising revenues from other media. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We undertake no obligation to update or revise any forward-looking statements because of new information, future events or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. GENERAL Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of Emmis due to adverse changes in financial and commodity market prices and rates. Emmis is exposed to market risk from changes in domestic and international interest rates (i.e. prime and LIBOR) and foreign currency exchange rates. To manage this exposure Emmis periodically enters into interest rate derivative agreements. Emmis does not use financial instruments for trading and is not a party to any leveraged derivatives. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June of 2000 by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." These statements, which are effective for Emmis on March 1, 2001, establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. These statements require that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in the other comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item, and the 34 ineffective portion of all hedges must be recognized in earnings in the current period. These new standards will result in additional volatility in reported assets, liabilities, earnings and other comprehensive income. SFAS No. 133 requires that as of the date of initial adoption the difference between the fair value of the derivative instruments to be recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20 "Accounting Changes." On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No. 133 which resulted in an immaterial impact to the results of operations and the financial position of Emmis. SFAS No. 133 further requires that the fair value and effectiveness of each hedging instrument must be measured quarterly. The result of each measurement could result in fluctuations in reported assets, liabilities, other comprehensive income and earnings as these changes in fair value and effectiveness are recorded to the financial statements. Emmis anticipates, on an ongoing basis, the fluctuations to the aforementioned areas will be immaterial to the financial statements taken as a whole. INTEREST RATES At February 28, 2001, the entire outstanding balance under our credit facility, or approximately 78% of our total outstanding debt (credit facility and senior subordinated debt) bears interest at variable rates. Emmis currently hedges a portion of its outstanding debt with interest rate swap arrangements that effectively set the credit facility's underlying base rate at a weighted average rate of 5.27% on the three-month LIBOR for agreements in place as of February 28, 2001. The credit facility requires the Company to have fixed interest rates for a two year period on at least 50% of its total outstanding debt, as defined (including the senior subordinated debt), by June 27, 2001. After the first two years, this ratio of fixed to floating rate debt must be maintained if Emmis' total leverage ratio, as defined, is greater than 6:1 at any quarter end. The notional amount of the interest rate swap agreements at February 28, 2001 totaled $120.0 million, and the agreements expire February 2003. Based on amounts outstanding at February 28, 2001, if the interest rate on our variable debt were to increase by 1.0%, our annual interest expense would be higher by $9.6 million. FOREIGN CURRENCY Emmis owns a 59.5% interest in a Hungarian subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency (forint). Emmis has a natural hedge since some of the subsidiary's long-term obligations are denominated in Hungarian forints. Emmis maintains no other derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. It is estimated that a 10% change in the value of the U.S. dollar to the Hungarian forint would not be material. Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency (peso), which is tied to the U.S. dollar through the Argentine government's convertibility plan. Emmis maintains no derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED FEBRUARY 28 (29), --------------------------------------------- 1999 2000 2001 ------------ ------------ ------------ GROSS REVENUES $ 274,056 $ 380,995 $ 550,073 LESS AGENCY COMMISSIONS 41,220 55,730 79,455 ------------ ------------ ------------ NET REVENUES 232,836 325,265 470,618 Operating expenses 143,348 199,818 296,405 International business development expenses 1,477 1,558 1,553 Corporate expenses 10,427 13,872 16,048 Time brokerage fees 2,220 - 7,344 Depreciation and amortization 28,314 44,161 74,018 Non-cash compensation 4,269 7,357 5,400 Corporate restructuring fees and other - 896 4,057 ------------ ------------ ------------ OPERATING INCOME 42,781 57,603 65,793 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (35,650) (51,986) (72,444) Loss on donation of radio station - (956) - Other income, net 1,914 4,203 38,037 ------------ ------------ ------------ Total other income (expense) (33,736) (48,739) (34,407) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 9,045 8,864 31,386 PROVISION FOR INCOME TAXES 6,200 6,875 17,650 ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY LOSS 2,845 1,989 13,736 EXTRAORDINARY LOSS, NET OF TAX 1,597 2,022 - ------------ ------------ ------------ NET INCOME (LOSS) 1,248 (33) 13,736 PREFERRED STOCK DIVIDENDS - 3,144 8,984 ------------ ------------ ------------ NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 1,248 $ (3,177) $ 4,752 ============ ============ ============ BASIC EARNINGS PER COMMON SHARE: Before extraordinary item $ 0.10 $ (0.03) $ 0.10 Extraordinary item, net of tax (0.06) (0.06) - ------------ ------------ ------------ Net income (loss) available to common shareholders $ 0.04 $ (0.09) $ 0.10 ============ ============ ============ DILUTED EARNINGS PER COMMON SHARE: Before extraordinary item $ 0.10 $ (0.03) $ 0.10 Extraordinary item, net of tax (0.06) (0.06) - ------------ ------------ ------------ Net income (loss) available to common shareholders $ 0.04 $ (0.09) $ 0.10 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 36
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) FEBRUARY 28 (29), ------------------------- 2000 2001 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 17,370 $ 59,899 Accounts receivable, net of allowance for doubtful accounts of $1,924 and $2,202, respectively 66,471 97,281 Current portion of TV program rights 5,452 12,028 Income tax refunds receivable 4,685 13,970 Prepaid expenses 10,053 17,096 Other 8,685 14,832 ---------- ---------- Total current assets 112,716 215,106 ---------- ---------- PROPERTY AND EQUIPMENT: Land and buildings 52,789 84,983 Leasehold improvements 9,006 12,584 Broadcasting equipment 74,975 142,185 Office equipment and automobiles 30,270 45,000 Construction in progress 1,210 10,696 ---------- ---------- 168,250 295,448 Less- Accumulated depreciation and amortization 39,346 57,561 ---------- ---------- Total property and equipment, net 128,904 237,887 ---------- ---------- INTANGIBLE ASSETS: Broadcast licenses 959,454 1,880,989 Excess of cost over fair value of net assets of purchased businesses 131,013 189,462 Other intangibles 14,558 33,591 ---------- ---------- 1,105,025 2,104,042 Less- Accumulated amortization 71,055 122,945 ---------- ---------- Total intangible assets, net 1,033,970 1,981,097 ---------- ---------- OTHER ASSETS: Deferred debt issuance costs, net of accumulated amortization of $2,535 and $5,729, respectively 14,082 29,448 TV program rights, net of current portion 15,851 6,509 Investments 10,664 11,287 Deposits and other 11,119 25,538 ---------- ---------- Total other assets, net 51,716 72,782 ---------- ---------- Total assets $1,327,306 $2,506,872 =========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 37
CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) FEBRUARY 28 (29), ------------------------- 2000 2001 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 22,957 $ 34,206 Current maturities of other long-term debt 5,379 4,187 Current portion of TV program rights payable 16,816 28,192 Accrued salaries and commissions 8,162 10,342 Accrued interest 11,077 17,038 Deferred revenue 15,912 17,418 Other 4,139 5,768 ---------- ---------- Total current liabilities 84,442 117,151 CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 300,000 1,380,000 OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 14,607 13,684 TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 58,585 47,567 OTHER NONCURRENT LIABILITIES 6,166 5,531 DEFERRED INCOME TAXES 87,139 135,468 ---------- ---------- Total liabilities 550,939 1,699,401 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' EQUITY: Series A cumulative convertible preferred stock, $0.01 par value; $50.00 liquidation value; authorized 10,000,000 shares; issued and outstanding 2,875,000 shares in 2000 and 2001 29 29 Class A common stock, $.01 par value; authorized 170,000,000 shares; issued and outstanding 41,232,811 shares and 41,900,315 shares in 2000 and 2001, respectively 412 419 Class B common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,738,582 shares and 5,230,396 shares in 2000 and 2001, respectively 47 52 Additional paid-in capital 804,820 830,299 Accumulated deficit (27,482) (22,730) Accumulated other comprehensive income (1,459) (598) ---------- ---------- Total shareholders' equity 776,367 807,471 ---------- ---------- Total liabilities and shareholders' equity $1,327,306 $2,506,872 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 38
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 28, 2001 Class A Class B Series A Common Stock Common Stock Preferred Stock ----------------------- -------------------- ---------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ------------ ------- ----------- ------ ----------- ------ (Dollars in thousands, except share data) BALANCE, FEBRUARY 28, 1998 16,861,320 $ 168 5,121,788 $ 52 - $ - Issuance of Class A Common stock in exchange for Class B common stock 15,258 - (15,258) - - - Exercise of stock options and related income tax benefits 249,356 3 58,000 - - - Issuance of Class A common stock to profit sharing plan 43,184 1 - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 11,296 - - - - - Sale of Class A common stock, net of costs incurred of $10,560 9,200,000 92 - - - - Comprehensive Income: Net income - - - - - - Cumulative translation adjustment - - - - - - Total comprehensive income - - - - - - ----------- ------- ----------- ----- ------------ ------ BALANCE, FEBRUARY 28, 1999 26,380,414 264 5,164,530 52 - - ----------- ------- ----------- ----- ------------ ------ Issuance of Class A Common stock in exchange for Class B common stock 505,668 5 (505,668) (5) - - Exercise of stock options and related income tax benefits 886,496 9 79,720 - - - Issuance of Class A common stock to profit sharing plan 34,246 - - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 41,987 - - - - - Sale of Class A common stock, net of costs incurred of $14,430 13,384,000 134 - - - - Sale of Series A cumulative convertible preferred stock, net of costs incurred of $5,341 - - - - 2,875,000 29 Preferred stock dividends paid - - - - - - Comprehensive Income: Net income - - - - - - Cumulative translation adjustment - - - - - - Total comprehensive income - - - - - - ----------- -------- ------------ ----- ------------ ------- BALANCE, FEBRUARY 29, 2000 41,232,811 412 4,738,582 47 2,875,000 29 ----------- -------- ------------ ----- ------------ ------- Issuance of Class A Common stock in exchange for Class B common stock 17,875 - (17,875) - - - Exercise of stock options and related income tax benefits 482,991 5 509,689 5 - - Issuance of Class A common stock to profit sharing plan 47,281 1 - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 82,688 1 - - - - Sale of Class A common stock to employees 36,669 - - - - - Preferred stock dividends paid - - - - - - Comprehensive Income: Net income - - - - - - Cumulative translation adjustment - - - - - - Total comprehensive income - - - - - - ----------- ------- ------------- ----- ------------- -------- BALANCE, FEBRUARY 28, 2001 41,900,315 $ 419 5,230,396 $ 52 2,875,000 $ 29 =========== ======= ============= ===== ============= ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
39 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (CONTINUED) FOR THE YEAR ENDED FEBRUARY 28, 2001 Accumulated Additional Other Total Paid-in Accumulated Comprehensive Shareholders' Capital Deficit Income Equity ----------- ---------- ----------- ---------- (Dollars in thousands, except share data) BALANCE, FEBRUARY 28, 1998 $ 69,243 $ (25,553) $ - $ 43,910 Issuance of Class A Common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 4,127 - - 4,130 Issuance of Class A common stock to profit sharing plan 999 - - 1,000 Issuance of Class A common stock to employees and officers and related income tax benefits 3,269 - - 3,269 Sale of Class A common stock, net of costs incurred of $10,560 182,548 - - 182,640 Comprehensive Income: Net income - 1,248 - Cumulative translation adjustment - - (648) Total comprehensive income - - - 600 ----------- ---------- ----------- ---------- BALANCE, FEBRUARY 28, 1999 260,186 (24,305) (648) 235,549 ----------- ---------- ----------- ---------- Issuance of Class A Common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 16,761 - - 16,770 Issuance of Class A common stock to profit sharing plan 1,250 - - 1,250 Issuance of Class A common stock to employees and officers and related income tax benefits 4,807 - - 4,807 Sale of Class A common stock, net of costs incurred of $14,430 383,436 - - 383,570 Sale of Series A cumulative convertible preferred stock, net of costs incurred of $5,341 138,380 - - 138,409 Preferred stock dividends paid - (3,144) - (3,144) Comprehensive Income: Net income - (33) - Cumulative translation adjustment - - (811) Totalcomprehensive income - - - (844) ----------- ---------- ----------- ---------- BALANCE, FEBRUARY 29, 2000 $ 804,820 $ (27,482) $ (1,459) $ 776,367 =========== ========== =========== ========== Issuance of Class A Common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 18,707 - - 18,717 Issuance of Class A common stock to profit sharing plan 1,250 - - 1,251 Issuance of Class A common stock to employees and officers and related income tax benefits 4,586 - - 4,587 Sale of Class A common stock to employees 936 - - 936 Preferred stock dividends paid - (8,984) - (8,984) Comprehensive Income: Net income - 13,736 - Cumulative translation adjustment - - 861 Total comprehensive income - - - 14,597 ----------- ---------- ----------- ---------- BALANCE, FEBRUARY 28, 2001 $ 830,299 $ (22,730) $ (598) $ 807,471 =========== ========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. 40
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED FEBRUARY 28 (29), ------------------------------------ 1999 2000 2001 ----------- ---------- ----------- OPERATING ACTIVITIES: Net income (loss) $ 1,248 $ (33) $ 13,736 Adjustments to reconcile net income (loss) to net cash provided by operating activities - Extraordinary item 1,597 2,022 - Depreciation and amortization 32,158 53,818 94,454 Provision for bad debts 1,745 2,550 3,713 Provision for deferred income taxes 4,953 6,670 15,810 Non-cash compensation 4,269 7,357 5,400 Loss on donation of radio station - 956 - Gain on exchange of assets - - (22,000) Tax benefits of exercise of stock options 486 2,889 10,859 Other (1,143) (783) 1,464 Changes in assets and liabilities - Accounts receivable (21,104) (13,319) (9,316) Prepaid expenses and other current assets (727) (14,546) (24,627) Other assets 3,435 (2,507) 12,099 Accounts payable and accrued liabilities 7,007 10,165 15,341 Deferred revenue (747) 4,332 569 Other liabilities 1,944 (33,211) (19,772) ----------- ---------- ----------- Net cash provided by operating activities 35,121 26,360 97,730 ----------- ---------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment (37,383) (29,316) (26,225) Cash paid for acquisitions (504,748) (231,130) (1,060,681) Deposits on acquisitions and other 661 (11,500) (23,849) ----------- ---------- ----------- Net cash used in investing activities (541,470) (271,946) (1,110,755) ----------- ---------- ----------- FINANCING ACTIVITIES: Payments on long-term debt (723,500) (426,668) (1,051,549) Proceeds from long-term debt 1,063,000 149,668 2,128,388 Proceeds from the issuance of the Company's Class A common stock, net of transaction costs 182,640 383,570 - Proceeds from the issuance the Company's Series A cumulative convertible preferred stock, net of transaction costs - 138,409 - Proceeds from exercise of stock options and employee stock purchases 4,130 13,881 8,794 Payments for debt related costs (19,589) - (21,095) Preferred stock dividends - (2,021) (8,984) ----------- ---------- ----------- Net cash provided by financing activities 506,681 256,839 1,055,554 ----------- ---------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 332 11,253 42,529 CASH AND CASH EQUIVALENTS: Beginning of period 5,785 6,117 17,370 ----------- ---------- ----------- End of period $ 6,117 $ 17,370 $ 59,899 =========== ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. 41
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED FEBRUARY 28 (29), ------------------------------------ 1999 2000 2001 ----------- ---------- ----------- SUPPLEMENTAL DISCLOSURES: Cash paid for- Interest $ 33,439 $ 41,735 $ 58,362 Income taxes 1,580 9,589 550 Non- cash investing and financing transactions- Preferred stock dividends accrued - 1,123 - ACQUISITION OF WQCD-FM: Fair value of assets acquired $ 201,347 Cash paid 128,550 ---------- Liabilities recorded $ 72,797 =========== ACQUISITION OF TELEVISION PROPERTIES FROM SF BROADCASTING: Fair value of assets acquired $ 346,952 Cash paid 287,293 ----------- Liabilities recorded $ 59,659 =========== ACQUISITION OF TELEVISION PROPERTIES FROM WABASH VALLEY BROADCASTING: Fair value of assets acquired $ 101,055 Cash paid 88,905 ----------- Liabilities recorded $ 12,150 =========== ACQUISITION OF COUNTRY SAMPLER: Fair value of assets acquired $ 25,608 Cash paid 18,954 ---------- Liabilities recorded $ 6,654 ========== ACQUISITION OF WKCF-TV: Fair value of assets acquired $ 246,445 Cash paid 197,105 ---------- Liabilities recorded $ 49,340 ========== ACQUISITION OF VOTIONIS, S.A: Fair value of assets acquired $ 18,936 Cash paid 13,302 ---------- Liabilities recorded $ 5,634 ========== ACQUISITION OF LOS ANGELES MAGAZINE: Fair value of assets acquired $ 39,520 Cash paid 36,827 ----------- Liabilities recorded $ 2,693 =========== ACQUISITION OF KKFR-FM AND KXPK-FM: Fair value of assets acquired $ 110,210 Cash paid 109,052 ----------- Liabilities recorded $ 1,158 =========== ACQUISITION OF TELEVISION PROPERTIES FROM LEE ENTERPRISES, INC: Fair value of assets acquired $ 633,639 Cash paid 582,994 ----------- Liabilities recorded $ 50,645 ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. 42
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED FEBRUARY 28 (29), ------------------------------------ 1999 2000 2001 ----------- ---------- ----------- ACQUISITION OF KIHT-FM, KFTK-FM, KPNT-FM, WVRV-FM, WIL-FM AND WRTH-AM: Fair value of assets acquired $ 230,891 Cash paid 230,891 ----------- Liabilities recorded $ - =========== EXCHANGE OF ASSETS FOR KZLA-FM: Fair value of assets acquired $ 185,000 Basis in assets exchanged 163,000 Gain on exchange of assets 22,000 Cash paid - ----------- Liabilities recorded $ - =========== ACQUISITION OF KALC-FM: Fair value of assets acquired $ 100,917 Cash paid 100,917 ----------- Liabilities recorded $ - ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. 43 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization Emmis Communications Corporation is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The twenty FM radio stations and three AM radio stations Emmis Communications Corporation operates in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Denver, Phoenix, St. Louis, Indianapolis and Terre Haute, Indiana. The fifteen television stations Emmis operates serve geographically diverse, mid-sized markets in the U.S. as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including five with CBS, five with Fox, three with NBC, one with ABC and one with WB. Emmis Communications Corporation also publishes Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati, Country Sampler, and Country Marketplace magazines, and has a 59.5% interest in a national radio station in Hungary (Slager Radio), a 75% interest in one FM and one AM radio station in Buenos Aires, Argentina (Votionis), and engages in certain businesses ancillary to broadcasting, such as broadcast tower leasing and advertising and program consulting. b. Principles of Consolidation The consolidated financial statements include the accounts of Emmis Communications Corporation and its majority owned Subsidiaries. Unless otherwise indicated, references to Emmis or the Company in these financial statements mean Emmis Communications Corporation and its Subsidiaries. Emmis' foreign subsidiaries report on a fiscal year ending December 31, which Emmis consolidates into its fiscal year ending February 28 (29). All significant intercompany balances and transactions have been eliminated. c. Revenue Recognition Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. d. Allowance for Doubtful Accounts A provision for doubtful accounts is recorded based on management's judgement of the collectibility of receivables. The activity in the allowance for doubtful accounts during the years ended February 1999, 2000 and 2001 was as follows: Balance at Balance Beginning At End Of Year Provision Write-Offs Of Year Year ended February 28, 1999 $ 1,346 $ 1,745 $(1,393) $ 1,698 Year ended February 29, 2000 1,698 2,550 (2,324) 1,924 Year ended February 28, 2001 1,924 3,713 (3,435) 2,202 44 e. Television Programming Emmis has agreements with distributors for the rights to television programming over contract periods which generally run from one to five years. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first showing. The portion of program contracts which become payable within one year is reflected as a current liability in the accompanying consolidated balance sheet. The rights to program materials are reflected in the accompanying consolidated balance sheet at the lower of unamortized cost or estimated net realizable value. Estimated net realizable values are based upon management's expectation of future advertising revenues, net of sales commissions, to be generated by the program material. Amortization of program contract costs is computed under either the straight-line method over the contract period or based on usage, whichever yields the greater amortization for each program on a monthly basis. Program contract costs that management expects to be amortized in the succeeding year are classified as current assets. Program contract liabilities are typically paid on a scheduled basis and are not affected by adjustments for amortization or estimated net realizable value. Certain program contracts provide for the exchange of advertising air time in lieu of cash payments for the rights to such programming. These contracts are recorded as the programs are aired at the estimated fair value of the advertising air time given in exchange for the program rights. f. Time Brokerage Fees The Company generally enters into time brokerage fees in connection with acquisitions, pending regulatory approval of transfer of license assets. Under the terms of these agreements, the Company makes specified periodic payments to the owner-operator in exchange for the grant to the Company of the right to program and sell advertising on a specified portion of the station's inventory of broadcast time. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station. Included in the accompanying consolidated statements of operations for the years ended February 1999, 2000 and 2001 are time brokerage fees of $2.2 million, $0 and $7.3 million, respectively. g. International Business Development Expenses International business development expenses include the cost of the Company's efforts to identify, investigate, develop and support international broadcast investments or other international business opportunities. h. Non-cash Compensation Non-cash compensation includes compensation expense associated with stock option and restricted common stock grants, and common stock contributed to the Company's Profit Sharing Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Pro forma disclosure of net income and earnings per share under SFAS No. 123 is presented in Note 9. i. Cash and Cash Equivalents Emmis considers time deposits, money market fund shares, and all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. 45 j. Property and Equipment Property and equipment are recorded at cost. Depreciation is generally computed by the straight-line method over the estimated useful lives of the related assets which are 31.5 years for buildings, not more than 32 years or the life of the lease, whichever is lower for leasehold improvements, and 5 to 7 years for broadcasting equipment, office equipment and automobiles. Maintenance, repairs and minor renewals are expensed; improvements are capitalized. Interest was capitalized in connection with the construction of the Indianapolis office facility and the KHON operating facility. The capitalized interest was recorded as part of the buildings. In fiscal 1999 and 2000, approximately $1,591 and $420 of interest was capitalized, respectively. No interest was capitalized in fiscal 2001. On a continuing basis, the Company reviews the financial statement carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations. k. Intangible Assets Intangible assets are recorded at cost. Generally, broadcast licenses, trademarks and the excess of cost over fair value of net assets of purchased businesses are being amortized using the straight-line method over 40 years. The cost of the broadcast license for Slager Radio is being amortized over the seven year initial term of the license. The cost of the broadcast license for the two stations in Buenos Aires, Argentina is being amortized over the twenty-three year term of the license. The excess of cost over fair value of net assets resulting from the purchase of publications is being amortized over 15 years. Other intangibles are amortized using the straight-line method over varying periods, not in excess of 10 years. Subsequent to the acquisition of an intangible asset, Emmis evaluates whether later events and circumstances indicate the remaining estimated useful life of that asset may warrant revision or that the remaining carrying value of such an asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, Emmis uses an estimate of the related asset's undiscounted future cash flows over the remaining life of that asset in measuring recoverability. If separately identifiable cash flows are not available for an intangible asset (as would generally be the case for the excess of cost over fair value of purchased businesses), Emmis evaluates recoverability based on the expected undiscounted cash flows of the specific business to which the asset relates. If such an analysis indicates that impairment has in fact occurred, Emmis writes down the remaining net book value of the intangible asset to its fair value. For this purpose, fair value is determined using quoted market prices (if available), appraisals or appropriate valuation techniques. In fiscal 2001, the Company determined an intangible balance related to WTLC-AM was impaired and as a result incurred a $2.0 million impairment charge to record the intangible asset at its fair value. This impairment charge is reflected in corporate restructuring fees and other in the accompanying consolidated statements of operations. l. Advertising and Subscription Acquisition Costs Advertising and subscription acquisition costs are expensed the first time the advertising takes place, except for certain direct-response advertising related to the identification of new magazine subscribers, the primary purpose of which is to elicit sales from customers who can be shown to have responded specifically to the advertising and that results in probable future economic benefits. These direct-response advertising costs are capitalized as assets and amortized over the estimated period of future benefit, ranging from six months to two years subsequent to the promotional event. On an interim basis, the Company defers major advertising campaigns for which future benefits can be demonstrated. These costs are amortized over the shorter of the period benefited or the remainder of the fiscal year. 46 m. Investments Emmis has a 50% ownership interest (approximately $5,114 as of February 28, 2001) in a partnership in which the sole asset is land on which a transmission tower is located. The other owner has voting control of the partnership. Emmis has a 28% ownership interest (approximately $1,655 as of February 28, 2001) in a local media internet venture. Emmis has a 25% ownership interest (approximately $2,401 as of February 28, 2001) in a company that operates a tower site in Portland, Oregon. Emmis has a 51% ownership interest (approximately $915 as of February 28, 2001) in a company that operates crafting stores, but Emmis does not control the operations of the entity. These investments are accounted for using the equity method of accounting. During fiscal 2001, Emmis reduced the carrying value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be other than temporary. This expense is reflected in other income in the accompanying consolidated statements of operations. n. Deferred Revenue and Barter Transactions Deferred revenue includes deferred magazine subscription revenue and deferred barter revenue. Deferred magazine subscription revenue is recognized when the publication is shipped. Barter transactions are recorded at the estimated fair value of the product or service received. Broadcast revenue from barter transactions is recognized when commercials are broadcast. The appropriate expense or asset is recognized when merchandise or services are used or received. Barter revenues for the years ended February 1999, 2000 and 2001 were $10.0 million, $10.2 million and $12.0 million, respectively, and barter expenses were $8.9 million, $9.8 million and $12.0 million, respectively. o. Foreign Currency Translation The functional currency of Slager Radio is the Hungarian forint. Slager Radio's balance sheet has been translated from forints to the U.S. dollar using the current exchange rate in effect at the subsidiary's balance sheet date. Slager Radio's results of operations have been translated using an average exchange rate for the period. The translation adjustment resulting from the conversion of Slager Radio's financial statements was $648, $811, and ($861) for the years ended February 1999, 2000 and 2001, respectively. This adjustment is reflected in shareholders' equity in the accompanying consolidated balance sheet. The functional currency of the two stations in Argentina is the Argentinean peso. The peso is tied to the U.S. dollar through the Argentine government's convertibility plan. Thus, translation adjustments resulting from the conversion of these stations' financial statements were immaterial for the years ended February 1999, 2000 and 2001. p. Earnings Per Share Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period (28,905,640, 36,155,982, and 46,869,050 shares for the years ended February 28 (29), 1999, 2000 and 2001, respectively). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at February 28, 1999 consisted solely of stock options. Potentially dilutive securities at February 28 (29), 2000 and 2001 consisted of stock options and the 6.25% Series A cumulative convertible preferred stock. The conversion of the preferred stock is not included in the calculation of diluted net income per common share for the years ended February (28) 29, 2000 and 2001 as the effect of these conversions would be antidilutive. Additionally, the conversion of stock options is not included in the calculation of diluted net income per common share for the year ended February 29, 2000 as the effect of their conversion would be antidilutive. Weighted average common equivalent shares 47 outstanding for the period for purposes of computing diluted EPS are 29,696,342, 36,155,982, and 47,940,265 for the years ended February 28 (29), 1999, 2000 and 2001, respectively. Excluded from the calculation of diluted net income per share are 2.7 and 3.7 million weighted average shares that would result from the conversion of the stock options and preferred shares for the years ended February 28 (29), 2000 and 2001, respectively. q. Stock Splits In February 2000, the Company effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data shown in the accompanying consolidated financial statements and notes has been retroactively adjusted to reflect the stock split. r. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. s. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the short maturity of these financial instruments. Except for the Senior Subordinated Notes, the carrying amounts of long-term debt approximate fair value due to the variable interest rate on such debt. The fair value of the Senior Subordinated Notes on February 28, 2001 was approximately $286.9 million. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. t. Recent Accounting Pronouncement On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June of 2000 by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." These statements, which are effective for Emmis on March 1, 2001, establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. These statements require that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in the other comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges must be recognized in earnings in the current period. These new standards will result in additional volatility in reported assets, liabilities, earnings and other comprehensive income. SFAS No. 133 requires that as of the date of initial adoption the difference between the fair value of the derivative instruments to be recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20 "Accounting Changes." On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No. 133, which resulted in an immaterial impact to the results of operations and the financial position of Emmis. 48 SFAS No. 133 further requires that the fair value and effectiveness of each hedging instrument must be measured quarterly. The result of each measurement could result in fluctuations in reported assets, liabilities, other comprehensive income and earnings as these changes in fair value and effectiveness are recorded to the financial statements. Emmis anticipates, on an ongoing basis, the fluctuations to the aforementioned areas will be immaterial to the financial statements taken as a whole. u. Reclassifications Certain reclassifications have been made to the prior years financial statements to be consistent with the February 28, 2001 presentation. 2. COMMON STOCK Emmis has authorized 170,000,000 shares of Class A common stock, par value $.01 per share, 30,000,000 shares of Class B common stock, par value $.01 per share, and 30,000,000 shares of Class C common stock, par value $.01 per share. The rights of these three classes are essentially identical except that each share of Class A common stock has one vote with respect to substantially all matters, each share of Class B common stock has 10 votes with respect to substantially all matters, and each share of Class C common stock has no voting rights with respect to substantially all matters. Class B common stock is owned by the principal shareholder (Jeffrey H. Smulyan). All shares of Class B common stock convert to Class A common stock upon sale or other transfer to a party unaffiliated with the principal shareholder. At February 28 (29), 2000 and 2001, no shares of Class C common stock were issued or outstanding. The financial statements presented reflect the issuance of Class A and Class B common stock. In June 1998, Emmis completed the sale of 9.2 million shares of its Class A common stock at $21.00 per share resulting in total proceeds of $193.2 million. Net proceeds from the offering were used to repay outstanding obligations under the credit facility. On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the credit facility. At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the credit facility. 3. PREFERRED STOCK Emmis has authorized 10,000,000 shares of preferred stock, which may be issued with such designations, preferences, limitations and relative rights as Emmis' Board of Directors may authorize. On October 29, 1999, the Company completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the credit facility. 49 The 6.25% Series A cumulative convertible preferred stock has a liquidation preference of $50 per share and a par value of $.01 per share. Each preferred share is convertible at the option of the holder into 1.28 shares of Class A common stock, subject to certain events. Dividends are cumulative and payable quarterly in arrears on January 15, April 15, July 15, and October 15 of each year at an annual rate of $3.125 per preferred share. The Company may not redeem the preferred stock prior to April 15, 2001. From April 15, 2001 to October 15, 2002, the Company may redeem the preferred stock at a redemption premium equal to 104.911% of the stated liquidation preference (plus accumulated and unpaid dividends, if any) if certain conditions are met. Beginning on October 15, 2002, and each October 15 thereafter, the Company may redeem the preferred stock for cash at the following redemption premiums (which are expressed as a percentage of the liquidation preference per share), plus in each case accumulated and unpaid dividends, if any, whether or not declared to the redemption date: Year Amount ---- -------- 2002 103.571% 2003 102.679% 2004 101.786% 2005 100.893% 2006 and thereafter 100.000% 4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT The credit facility and senior subordinated debt was comprised of the following at February 28 (29), 2000 and 2001: 2000 2001 ----------- ---------- Credit Facility Revolver $ - $ - Term Note A - 480,000 Term Note B - 600,000 8 1/8% Senior Subordinated Notes Due 2009 300,000 300,000 ----------- ---------- Total Debt $ 300,000 $1,380,000 =========== ========== Credit Facility On December 29, 2000 the Company entered into an amended and restated credit facility for $1.4 billion, which includes a provision allowing Emmis to increase the commitment by $500.0 million under circumstances described in the credit facility. The credit facility consists of a $320.0 million revolver, a $480.0 million term note A and a $600.0 million term note B. The revolver and term note A mature February 28, 2009 and the term note B matures August 31, 2009. Net deferred debt costs of approximately $22.0 million relating to the credit facility are reflected in deposits and other in the accompanying consolidated balance sheets as of February 28, 2001, and are amortized over the life of the credit facility as a component of interest expense. Prior to the existing credit facility, Emmis entered into a bridge financing arrangement in October 2000 that provided up to $1.0 billion in capacity. The bridge financing was replaced by the existing credit facility and accordingly $3.4 million of fees associated with the bridge financing were amortized into interest expense during the year ended February 28, 2001. The amended and restated credit facility provides for letters of credit to be made available to the Company not to exceed $100.0 million. The aggregate amount of outstanding letters of credit and amounts borrowed under the revolver cannot exceed the revolver commitment. At February 28, 2001, $6.6 million in letters of credit were outstanding. 50 All outstanding amounts under the credit facility bear interest, at the option of Emmis, at a rate equal to the Eurodollar Rate or an alternative base rate (as defined in the credit facility) plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies (ranging from 0% to 2.9%), depending on Emmis' ratio of debt to operating cash flow, as defined in the agreement. The weighted-average interest rate on borrowings outstanding under the credit facility at February 28, 2001 was approximately 8.0% and there were no borrowings outstanding as of February 29, 2000. Interest is due on a calendar quarter basis under the alternative base rate and at least every three months under the Eurodollar Rate. The credit facility requires the Company to have fixed interest rates for a two year period on at least 50% of its total outstanding debt, as defined (including the senior subordinated debt), by June 27, 2001. Emmis plans to accomplish this by purchasing interest rate swap agreements. After the first two years, this ratio of fixed to floating rate debt must be maintained if Emmis' total leverage ratio, as defined, is greater than 6:1 at any quarter end. The notional amount of interest rate protection agreements at February 28, 2001 totaled $120.0 million. The interest rate swap agreements, which expire in February 2003, establish interest rates on the credit facility's underlying base rate approximating a weighted average rate of 5.27% on the three-month LIBOR interest rate. The aggregate amount of term notes A and B begin amortizing in December 2003. The annual amortization and reduction schedules for debt outstanding as of February 28, 2001, are as follows: SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY Year Ended Term Loan A Term Loan B Total February 28 (29), Amortization Amortization Amortization 2002 $ - $ - $ - 2003 - - - 2004 20,400 1,500 21,900 2005 84,000 6,000 90,000 2006 88,800 6,000 94,800 2007 91,200 6,000 97,200 2008 96,000 6,000 102,000 2009 99,600 6,000 105,600 2010 - 568,500 568,500 -------- -------- --------- Total $480,000 $600,000 $1,080,000 ======== ======== ========== Proceeds from raising additional equity, issuing additional subordinated debt, or from asset sales, as well as excess cash flow beginning in February 29, 2004, may be required to repay amounts outstanding under the credit facility. These mandatory repayment provisions may apply depending on Emmis' total leverage ratio, as defined under the credit facility. Additionally, Emmis may reborrow amounts paid in accordance with these provisions under certain circumstances. The credit facility contains various financial and operating covenants and other restrictions with which Emmis must comply, including, among others, restrictions on additional indebtedness, incurrence of liens, engaging in businesses other than its primary business, paying cash dividends on common stock, redeeming or repurchasing capital stock of Emmis, acquisitions and asset sales, as well as requirements to maintain certain financial ratios. The Company was in compliance with these covenants at February 28, 2001. The credit facility provides that an event of default will occur if there is a change of control of Emmis, as defined. A change of control includes, but is not limited to, Jeffrey H. Smulyan or any beneficial holder ceasing to own at least 35% of the general voting rights of the capital stock of Emmis. Substantially all of Emmis' assets, including the stock of Emmis' wholly-owned subsidiaries, are pledged to secure he credit facility. 51 SENIOR SUBORDINATED NOTES On February 12, 1999, the Company issued $300 million of 8 1/8% senior subordinated notes. The senior subordinated notes were sold at 100% of the face amount. In March 1999, the Company filed an Exchange Offer Registration Statement with the SEC to exchange the senior subordinated notes for new series B notes ("the Notes") registered under the Securities Act. The terms of the new series B notes are identical to the terms of the senior subordinated notes. Prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined), to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 108.125% plus accrued and unpaid interest, provided that at least $195.0 million of the aggregate principal amount of the Notes originally issued remains outstanding after such redemption. On or after March 15, 2004 and until March 14, 2007, the Notes may be redeemed at the option of the Company in whole or in part at prices ranging from 104.063% to 101.354% plus accrued and unpaid interest. On or after March 15, 2007, the Notes may be redeemed at 100% plus accrued and unpaid interest. Upon a change of control (as defined), the Company is required to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. Interest on the Notes is payable semi-annually. The Notes have no sinking fund requirements and are due in full on March 15, 2009. The Notes are guaranteed by certain subsidiaries of the Company and expressly subordinated in right of payment to all existing and future senior indebtedness (as defined) of the Company. The Notes will rank pari passu with any future senior subordinated indebtedness (as defined) and senior to all subordinated indebtedness (as defined) of the Company. The indenture relating to the Notes contains covenants with respect to the Company which include limitations of indebtedness, restricted payments, transactions with affiliates, issuance and sale of capital stock of restricted subsidiaries, sale/leaseback transactions and mergers, consolidations or sales of substantially all of the Company's assets. The Company was in compliance with these covenants at February 28, 2001. 5. OTHER LONG-TERM DEBT Other long-term debt was comprised of the following at February 28 (29), 2000 and 2001: 2000 2001 ----------- ---------- Hungary: License Obligation $ 14,147 $ 10,605 Bonds Payable 2,497 2,207 Notes Payable 784 1,872 Other 2,558 3,187 ----------- ---------- Total Other Long-Term Debt 19,986 17,871 Less: Current Maturities 5,379 4,187 Other Long-Term Debt, Net of Current Maturities $ 14,607 $ 13,684 =========== ========== The License Obligation is payable to the Hungarian government in Hungarian forints, by Emmis' Hungarian subsidiary in four equal annual installments that commenced in November 2000. The License Obligation of $10.6 million as of February 28, 2001, is reflected net of an unamortized discount of $0.4 million. The obligation is non-interest bearing; however, in accordance with the license purchase agreement, a Hungarian cost of living adjustment is calculated annually and is payable, concurrent with the principal payments, on the outstanding obligation. The cost of living adjustment is estimated each reporting period and is included in interest expense. Prevailing market interest rates in Hungary exceed inflation by approximately 3%. Accordingly, the License Obligation has been discounted at an imputed interest rate of approximately 3% to reflect the obligation at its fair value. 52 The Hungarian Bonds and Notes Payable are payable by Emmis' Hungarian subsidiary to the minority shareholders of the subsidiary. The Bonds, payable in Hungarian forints, are due on maturity at November 2004 and bear interest at the Hungarian State Bill rate plus 3% (approximately 17.5% and 13.7% at February 28 (29), 2000 and 2001, respectively). Interest is payable semi-annually. The Notes Payable and accrued interest, payable in U.S. dollars, are due December 31, 2002 and bear interest at the prime rate plus 2%. 6. TV PROGRAM RIGHTS PAYABLE Future payments required under TV program rights payable as of February 28, 2001, are as follows: 2002 $ 28,192 2003 14,260 2004 10,569 2005 9,252 2006 6,610 2007 and thereafter 6,876 ------------- 75,759 Less: Current Portion of TV Program Rights Payable 28,192 ------------- TV Program Rights Payable, Net of Current Portion $ 47,567 ============= ACQUISITIONS, DISPOSITONS, DONATIONS AND INVESTMENTS On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the intellectual property of WTLC-FM (both located in Indianapolis, Indiana) to Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and the AM sale occurred on April 25, 2001. Emmis retained the FCC license at 105.7 and reformatted the station as WYXB-FM. On January 17, 2001, Emmis completed its acquisition of substantially all of the assets of radio station KALC-FM in Denver, Colorado from Salem Communications Corporation for $98.8 million in cash plus a commitment fee of $1.2 million and transaction related costs of $0.9 million. The acquisition, which was accounted for as a purchase, was financed through borrowings under the credit facility. Emmis began operating the station under a time brokerage agreement in October 2000. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as KFTK-FM) and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. ("Sinclair") for $220.0 million in cash, plus transaction related costs of $10.9 million. The agreement also included the settlement of outstanding lawsuits by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquisition was financed through borrowings under Emmis' credit facility and was accounted for as a purchase. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. On October 6, 2000, Emmis acquired certain assets of KZLA-FM in Los Angeles, California from Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). Since the fair value of WKKX exceeded the book value of the station at the date of the exchange, Emmis recorded a gain on exchange of assets of $22.0 million. This gain is included in other income, net in the accompanying consolidated statements of operations. From August 1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The exchange was 53 accounted for as a purchase. The total purchase price of $185.0 million was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $559.5 million in cash, the payment of $21.3 million for working capital and transaction related costs of $2.2 million (the "Lee Acquisition"). In connection with the acquisition, Emmis recorded $31.3 million of deferred tax liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a severance related liability of $1.8 million and the entire severance liability remained outstanding as of February 28, 2001. Emmis expects the remaining amount to be fully utilized during the year ended February 28, 2002. This transaction was financed through borrowings under Emmis' credit facility and was accounted for as a purchase. The Lee Acquisition consisted of the following stations: - KOIN-TV (CBS) in Portland, Oregon - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango, Colorado-Farmington, New Mexico) - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas and KSNK-TV, Oberlin, Kansas-McCook, Nebraska) - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii) - KGUN-TV (ABC) in Tucson, Arizona - KMTV-TV (CBS) in Omaha, Nebraska and - KSNT-TV (NBC) in Topeka, Kansas. The total purchase price was allocated to property and equipment, television program rights, working capital related items and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. As a result of the Lee Acquisition, Emmis owns more television stations in the Hawaiian market than is currently permitted by FCC regulations. Emmis is currently operating the stations under an FCC waiver that requires Emmis to file an application to sell one of its Hawaiian television stations by October 1, 2001. Emmis is currently exploring various possibilities. On August 24, 2000, Emmis acquired the assets of radio stations KKFR-FM in Phoenix, Arizona and KXPK-FM in Denver, Colorado from AMFM, Inc. for $108.0 million in cash, less purchase price adjustments of $1.0 million, plus liabilities recorded of $1.2 and transaction related costs of $0.9 million. Emmis financed the acquisition through borrowings under its existing credit facility. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being amortized over 40 years. In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia. Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000, the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the right of first refusal on August 31, 2000, which is included in other income in the accompanying consolidated statements of operations. 54 On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.8 million in cash plus liabilities recorded of $2.7 million (the "Los Angeles Magazine Acquisition"). Los Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The acquisition was accounted for as a purchase and was financed through additional borrowings under Emmis' existing credit facility. The excess of the purchase price over the estimated fair value of identifiable assets was $36.0 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6 million. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. The excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. On November 16, 1999 Emmis purchased an interest in BuyItNow.com L.L.C. for $5.0 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the carrying value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be other than temporary. On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis consists of one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years. On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the credit facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets and are being amortized over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through December 2009. On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the credit facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. 55 Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the credit facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV, a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25.0 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25.0 million promissory note and borrowings under the credit facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii and KHAW-TV, Hilo, Hawaii). On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. Effective July 1, 1997 through the date of closing, the Company operated WQCD-FM under a time brokerage agreement. 8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Unaudited pro forma summary information is presented below for the years ended February 28 (29), 2000 and 2001, assuming the following events all had occurred on the first day of the pro forma periods presented below: (a) the acquisition of (i) KKLT-FM, KTAR-AM and KMVP-AM in March 2001, (ii) KALC-FM in January 2001, (iii) KZLA-FM, eight network-affiliated television stations from Lee Enterprises, Inc. and KPNT-FM, KXOK-FM AND KIHT-FM in October 2000, (iv) KKFR-FM and KXPK-FM in August 2000, (v) Los Angeles Magazine in March 2000, (vi) two radio stations in Argentina in November 1999, (vii) WKCF-TV in October 1999 and (viii) Country Sampler Magazine in April 1999; (b) the disposition of WKKX in October 2000; (c) the refinancing of the credit facility and (d) the use of proceeds from the Company's common and preferred stock offerings in October 1999 and the investment from an affiliate of Liberty Media Corporation in November 1999 to reduce outstanding borrowings. Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company's management. The pro forma summary information presented below is not necessarily indicative of the results that actually would have occurred if the transactions indicated above had been consummated at the beginning of the periods presented, and is not intended to be a projection of future results. 56 Pro Forma 2000 2001 -------------- -------------- Net revenues $ 545,849 $ 573,100 ============== ============== Broadcast/publishing cash flow $ 196,112 $ 211,733 ============== ============== Loss before extraordinary item $ (44,363) $ (15,638)(A) ============== ============== Net loss available to common shareholders before extraordinary loss $ (53,347) $ (24,622)(A) =============== ============== Basic and diluted net loss available to common shareholders before extraordinary loss $ (1.48) $ (0.53)(A) ============== =============== Weighted average shares outstanding: Basic 36,155,982 46,869,050 Diluted 36,155,982 46,869,050 (A) Includes approximately $39 million of nonrecurring pre-tax other income. 9. EMPLOYEE BENEFIT PLANS a. 1994 Equity Incentive Plan At the 1994 annual meeting, the shareholders of Emmis approved the 1994 Equity Incentive Plan. Under this Plan, awards equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights, performance units or limited stock appreciation rights. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 218,000 shares of common stock are available for grant at February 28, 2001. b. 1995 Equity Incentive Plan At the 1995 annual meeting, the shareholders of Emmis approved the 1995 Equity Incentive Plan. Under this Plan, awards equivalent to 1,300,000 shares of common stock may be granted pursuant to employment agreements. Under the Plan, awards equivalent to 200,000 shares of common stock are available for grant at February 28, 2001. Certain stock options awarded remain outstanding as of February 28 (29), 2000 and 2001. c. Non-Employee Director Stock Option Plan At the 1995 annual meeting, the shareholders of Emmis approved a Non-Employee Director Stock Option Plan. Under this Plan, each non-employee director, as of January 24, 1995, was granted an option to acquire 10,000 shares of the Company's Class A common stock. Thereafter, upon election or appointment of any non-employee director or upon a continuing director becoming a non-employee director, such individual will also become eligible to receive a comparable option. In addition, an equivalent option will be automatically granted on an annual basis to each non-employee director. All awards are granted with an exercise price equal to the fair market value of the stock on the date of grant. Under this Plan, awards equivalent to 60,000 shares of Class A common stock are available for grant at February 28, 2001. Certain stock options awarded remain outstanding as of February 28 (29), 2000 and 2001. 57 d. 1997 Equity Incentive Plan At the 1997 annual meeting, the shareholders of Emmis approved the 1997 Equity Incentive Plan. Under this plan, awards equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 136,000 shares of common stock are available for grant at February 28, 2001. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 2000 and 2001. e. 1999 Equity Incentive Plan At the 1999 annual meeting, the shareholders of Emmis approved the 1999 Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 1,178,000 shares of common stock are available for grant at February 28, 2001. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 2000 and 2001. f. Other Disclosures Related to Stock Option and Equity Incentive Plans The Company has historically accounted for its Stock Option Plans in accordance with APB Opinion No. 25 ("APB 25"), under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of the share of stock at the date of grant. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123), which considers the stock options as compensation expense to the Company, based on their fair value at the date of grant. Under this standard, the Company has the option of accounting for employee stock option plans as it currently does or under the new method. The Company has elected to continue to use the APB 25 method for accounting, but has adopted the disclosure requirements of SFAS 123. Accordingly, compensation expense reflected in non-cash compensation in the consolidated statements of operations related to the plans summarized above was $4,269, $7,357 and $5,400 for the years ended February 1999, 2000 and 2001, respectively. Had compensation expense related to these plans been determined based on fair value at date of grant, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 58
Year Ended February 28 (29), 1999 2000 2001 Net Income Available to Common Shareholders: As Reported $ 1,248 $ (3,177) $ 4,752 Pro Forma $ (2,056) $ (8,741) $ 113 Basic EPS: As Reported $ .04 $ (.09) $ .10 Pro Forma $ (.07) $ (.24) $ - Diluted As Reported $ .04 $ (.09) $ .10 Pro Forma $ (.07) $ (.24) $ -
Because the fair value method of accounting has not been applied to options granted prior to March 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model utilizing the following weighted average assumptions: Year Ended February 28 (29), 1999 2000 2001 Risk-Free Interest Rate: 5.21% 6.12% 4.54% Expected Life (Years): 8.0 5.2 6.4 Expected Volatility: 42.12% 44.31% 56.79% Expected dividend yields were zero for fiscal 1999, 2000 and 2001. A summary of the status of options and restricted stock at February 1999, 2000 and 2001 and the related activity for the year, including the adoption of the 1999 Equity Incentive Plan, is as follows:
1999 2000 2001 -------------------- --------------------- -------------------- Number of Weighted Number of Weighted Number of Weighted Options/ Average Options/ Average Options/ Average Restricted Exercise Restricted Exercise Restricted Exercise Stock Price Stock Price Stock Price Outstanding at Beginning of Year 2,663,110 13.57 3,485,386 14.63 4,559,168 18.07 Granted 1,183,000 16.43 2,012,000 23.39 814,629 34.66 Exercised (290,724) 10.95 (922,298) 16.20 (1,092,688) 9.78 Lapsing of restricted stock (50,000) - - - (101,805) - Expired and other (20,000) 8.00 (15,920) 18.57 (76,704) 20.32 Outstanding at End of Year 3,485,386 14.87 4,559,168 18.07 4,102,600 23.25 Exercisable at End of Year 2,570,536 13.32 2,537,168 13.92 2,008,680 19.26 Total Available for Grant 1,526,405 2,530,325 1,792,400
During the year ended February 1999, options were granted with an exercise price equal to or less than fair market value of the stock on the date of grant. During the years ended February 2000 and 2001, all options were granted with an exercise price equal to fair market value of the stock on the date of grant. A summary of the weighted average fair value and exercise price of options granted during 1999, 2000 and 2001 is as follows: 59
1999 2000 2001 --------------------- --------------------- -------------------- Weighted Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Average Fair Exercise Fair Exercise Fair Exercise Value Price Value Price Value Price OPTIONS GRANTED WITH AN EXERCISE PRICE: Equal to Fair Market Value of the Stock on the Date of Grant $10.37 $18.39 $12.95 $26.59 $20.59 $34.66 Less Than Fair Market Value of the Stock on the Date of Grant $18.62 $ 7.75 $ - $ - $ - $ -
During fiscal 1999, 2000 and 2001, the Company entered into employment agreements providing for grants of 10,000, 135,600 and 9,200 shares, respectively, at a weighted average fair value of $22.38, $22.70 and $35.51, respectively. The following information relates to options outstanding and exercisable at February 28, 2001: Options Outstanding Options Exercisable Weighted Weighted Weighted Range of Average Average Average Exercise Number of Exercise Remaining Number of Exercise Prices Options Price Contract Life Options Price ----------- ---------- ---------- ------------- --------- -------- 40,800 $ 6.91 2.0 years 40,800 $ 6.91 $3.80-$7.60 7.60-11.40 221,520 7.83 2.0 years 221,520 7.83 11.40-15.20 53,170 14.44 3.0 years 53,170 14.44 15.20-19.00 598,793 16.58 4.7 years 598,793 16.58 19.00-22.80 1,279,837 21.38 4.0 years 706,437 22.23 22.80-26.60 187,960 24.63 4.0 years 187,960 24.63 26.60-30.40 1,040,000 28.20 8.5 years 200,000 28.25 30.40-34.20 - - - years - - 34.20-38.00 680,520 35.40 9.0 years - - In addition to the benefit plans noted above, Emmis has the following employee benefit plans: g. Profit Sharing Plan In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with one year of service. Contributions to the plan are at the discretion of the Emmis Board of Directors and can be made in the form of newly issued Emmis common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions reflected in non-cash compensation in the consolidated statements of operations for the years ended February 1999, 2000 and 2001 were $1,000, $1,250, and $1,250 respectively. h. 401(k) Retirement Savings Plan Emmis sponsors two Section 401(k) retirement savings plans. One covers substantially all nonunion employees age 18 years and older who have at least six months of service and the other covers substantially all union employees that meet the same qualifications. Employees may make pretax contributions to the plans up to 15% of their compensation, not to exceed the annual limit prescribed by the Internal Revenue Service. Emmis may make discretionary matching contributions to the plans in the form of shares of the Company's Class A common stock. Effective March 1, 1996, Emmis began to match 50% of employee contributions up to $2 thousand. Emmis' contributions to the plans totaled $599, $807 and $1,337 for the years ended February 1999, 2000 and 2001, respectively. 60 i. Defined Contribution Health and Retirement Plan Emmis contributes to a multi-employer defined contribution health and retirement plan for employees who are members of a certain labor union. Amounts charged to expense related to the multi-employer plan were approximately $344, $345, and $441 for the years ended February 1999, 2000 and 2001, respectively. j. Employee Stock Purchase Plan Effective March 1, 1995, the Company implemented an employee stock purchase plan which permits employees to purchase, via payroll deduction, shares of the Company's Class A common stock, at fair market value, up to an amount not to exceed 10% of an employee's annual gross pay. Effective March 1, 2000, the Company replaced its previous employee stock purchase plan with a new plan that allows employees to purchase shares of the Company's Class A common stock at the lesser of 90% of the fair value of such shares at the beginning or end of each semi-annual offering period. Purchases are subject to a maximum limitation of $22.5 annually per employee. The Company will not record compensation expense pursuant to this plan as it is designed to meet the requirements of Section 423(b) of the Internal Revenue Code. 10. COMMITMENTS AND CONTINGENCIES a. Operating Leases Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through December 2021. Some of the lease agreements contain renewal options and annual rental escalation clauses (generally tied to the Consumer Price Index or increases in the lessor's operating costs), as well as provisions for payment of utilities and maintenance costs. The future minimum rental payments (exclusive of future escalation costs) required by noncancelable operating leases, which have remaining terms in excess of one year as of February 28, 2001, are as follows: Payable in Year Ending February, Payments ---------------- ------------ 2002 $ 7,483 2003 6,891 2004 5,079 2005 4,576 2006 3,928 Thereafter 19,494 ------------ $ 47,451 ============ Minimum payments have not been reduced by minimum sublease rentals of approximately $185 due in the future under noncancelable subleases. Rent expense totaled $5,945, $4,404, and $6,457 for the years ended February 1999, 2000 and 2001, respectively. Rent expense for the years ended February 1999, 2000 and 2001 is net of sublease income of approximately $148 each year. b. Radio Broadcast Agreements Emmis has entered into agreements to broadcast certain syndicated programs and sporting events. Future payments related to these radio broadcast rights are summarized as follows: Year ended February 2002 - $2,556, 2003 - $674, 2004 - $235, 2005 - $237, 2006 - $237 and thereafter - $723. Expense related to these broadcast rights totaled $1,492, $1,780, and $2,376 for the years ended February 1999, 2000 and 2001, respectively. 61 In connection with reformatting one of its radio stations, the Company terminated a syndicated program agreement in fiscal 2000. The contract required continued payments in the event of termination, and these payments are included in the future payments disclosed above. The discounted present value of these payments of $896 is reflected in the accompanying consolidated statements of operations as corporate restructuring fees and other. c. Litigation Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. d. Employment Agreements The Company enters into employment agreements with certain officers and employees. These agreements generally specify base salary, along with bonuses and grants of stock and/or stock options based on certain criteria. At February 28, 2001, 41,199 shares of common stock and options to purchase 1,178,250 shares of common stock have been granted in connection with current employment agreements. Additionally, up to 79,000 shares and options to purchase up to 302,750 shares of common stock may be granted (or have been granted subject to forfeiture) under the contracts in the next two years. e. Construction of Office Building Emmis is constructing new operating facilities for WALA-TV in Mobile, Alabama. The project is expected to be completed in December of 2001 for an estimated cost of $11.3 million of which $1.9 million has been incurred through February 28, 2001. 11. INCOME TAXES The provision for income taxes for the years ended February 1999, 2000 and 2001, consisted of the following: 1999 2000 2001 ------- -------- ------ Current: Federal $ 1,247 $ 105 $ 1,540 State - 100 300 ------- -------- ------- 1,247 205 1,840 ------- -------- ------- Deferred: Federal 3,953 6,010 14,360 State 1,000 660 1,450 ------- -------- ------- 4,953 6,670 15,810 ------- -------- ------- Provision for income taxes 6,200 6,875 17,650 Tax benefit of extraordinary item 1,750 1,250 - -------- -------- -------- Net provision for income taxes $ 4,450 $ 5,625 $ 17,650 ======== ======== ======== 62 The provision for income taxes for the years ended February 1999, 2000 and 2001, differs from that computed at the Federal statutory corporate tax rate as follows: 1999 2000 2001 ------- -------- -------- Computed income taxes at 35% $ 3,166 $ 3,102 $ 10,985 State income tax 650 494 1,138 Nondeductible foreign losses 1,334 893 1,778 Nondeductible goodwill 1,324 1,394 1,537 Nondeductible donations - 363 172 Other (274) 629 2,040 ------- -------- -------- Provision for income taxes $ 6,200 $ 6,875 $ 17,650 ======= ======== ======== The accompanying balance sheet shows an income tax receivable of $4,685 and $13,970 as of February 2000 and 2001, respectively, primarily attributable to income tax benefits from the exercise of stock options. The components of deferred tax assets and deferred tax liabilities at February 2000 and 2001 are as follows: 2000 2001 Deferred tax assets: Capital loss carryforwards $ 147 $ - Net operating loss carryforwards 1,394 2,183 Compensation relating to stock options 2,356 3,373 Other 2,847 5,257 Valuation allowance (858) (1,506) --------- --------- Total deferred tax assets 5,886 9,307 --------- --------- Deferred tax liabilities Intangible assets (87,756) (136,526) Other (5,269) (8,249) --------- --------- Total deferred tax liabilities (93,025) (144,775) --------- --------- Net deferred tax liability $ (87,139) $(135,468) ========= ========= In connection with the acquisition of WQCD-FM, the deferred tax liability was decreased by $4,548 in 2000. In connection with the Lee Acquisition and L.A. Magazine Acquisition, the deferred tax liability was increased by $31,305 and $1,214, respectively, in 2001. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. A valuation allowance has been provided for 100% of the capital loss carryforwards available as of February 2000 and 2001 since these loss carryforwards can only be utilized to offset future capital gains. Additionally, a valuation allowance has been provided for the net operating loss carryforwards related to the Company's foreign subsidiaries since these subsidiaries have not yet generated taxable income against which the net operating losses could be utilized. The expiration of net operating loss carryforwards, excluding those at the Company's Hungarian subsidiary, which do not expire, approximate $1,177 in 2005, and $1,877 thereafter. 12. SEGMENT INFORMATION The Company's operations are aligned into four business segments: Radio, Television, Publishing, and Interactive. These business segments are consistent with the Company's management of these businesses and its financial reporting structure. Corporate represents expense not allocated to reportable segments. 63 The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. Total revenues of the radio station in Hungary for the years ended February 1999, 2000 and 2001 were $3.3 million, $7.4 million and $6.2 million, respectively. This station's long lived assets as of February 28 (29), 2000 and 2001 were $13.5 million and $9.6 million, respectively. Total revenues of the radio stations in Argentina for the year ended February 28, 2001 were $8.4 million. Total revenues for these stations were not material for the year ended February 29, 2000. Long lived assets for these stations as of February 28 (29), 2000 and 2001 were $19.5 million and $18.4 million, respectively. The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses. BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to, and not a substitute for, our results of operations presented on the basis of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising inventory. Interactive derives revenue from the sale of advertisements on the websites of the Company's stations. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing a magazine, and general and administrative costs. Significant interactive operating expenses are employee salaries and general and administrative costs. 64
YEAR ENDED FEBRUARY 28,2001 Radio Television Publishing Interactive Corporate Consolidated Net revenues $ 239,590 $ 156,835 $ 74,088 $ 105 $ - $ 470,618 Operating expenses 132,918 97,327 65,538 622 - 296,405 --------- ----------- --------- --------- --------- ----------- Broadcast/publishing cash flow 106,672 59,508 8,550 (517) - 174,213 International business development expenses - - - - 1,553 1,553 Corporate expenses - - - - 16,048 16,048 Depreciation and amortization 21,470 33,574 14,941 5 4,028 74,018 Time brokerage fees 7,344 - - - - 7,344 Non-cash compensation - - - - 5,400 5,400 Corporate restructuring fee and other 2,000 - - - 2,057 4,057 --------- ----------- ---------- --------- ---------- ---------- Operating income (loss) $ 75,858 $ 25,934 $ (6,391) $ (522) $ ( 29,086) $ 65,793 ========= =========== ========== ========= ========== =========== Total assets $ 920,002 $ 1,312,270 $ 96,550 $ 26 $ 178,024 $ 2,506,872 ========= =========== ========== ========= ========== =========== YEAR ENDED FEBRUARY 29,2000 Radio Television Publishing Interactive Corporate Consolidated Net revenues $ 189,000 $ 82,160 $ 54,105 $ - $ - $ 325,265 Operating expenses 100,184 53,178 46,456 - - 199,818 --------- ----------- ---------- --------- ---------- ----------- Broadcast/publishing cash flow 88,816 28,982 7,649 - - 125,447 International business development expenses - - - - 1,558 1,558 Corporate expenses - - - - 13,872 13,872 Depreciation and amortization 16,694 17,138 6,934 - 3,395 44,161 Time brokerage fees - - - - - - Non-cash compensation - - - - 7,357 7,357 Corporate restructuring fee and other 896 - - - - 896 --------- ----------- ---------- --------- ---------- ----------- Operating income (loss) $ 71,226 $ 11,844 $ 715 $ - $ (26,182) $ 57,603 ========= =========== ========== ========= ========== =========== Total assets $ 474,403 $ 701,672 $ 68,927 $ - $ 82,304 $ 1,327,306 ========= =========== ========== ========= ========== =========== YEAR ENDED FEBRUARY 28,1999 Radio Television Publishing Interactive Corporate Consolidated Net revenues $ 156,737 $ 39,623 $ 36,476 $ - $ - $ 232,836 Operating expenses 85,727 26,130 31,491 - - 143,348 --------- ----------- ---------- --------- ---------- ----------- Broadcast/publishing cash flow 71,010 13,493 4,985 - - 89,488 International business development expenses - - - - 1,477 1,477 Corporate expenses - - - - 10,427 10,427 Depreciation and amortization 13,990 8,352 4,813 - 1,159 28,314 Time brokerage fees 2,220 - - - - 2,220 Non-cash compensation - - - - 4,269 4,269 Corporate restructuring fee and other - - - - - - --------- ----------- ---------- --------- ---------- ----------- Operating income (loss) $ 54,800 $ 5,141 $ 172 $ - $ (17,332) $ 42,781 ========= =========== ========== ========= ========== =========== Total assets $ 460,065 $ 439,279 $ 44,171 $ - $ 71,316 $ 1,014,831 ========= =========== ========== ========= ========== ===========
65 13. RELATED PARTY TRANSACTIONS Two officers of Emmis are partners in a law firm which provides legal services to Emmis. Legal fees paid to this law firm were approximately $868, $756 and $926 for the years ended February 1999, 2000 and 2001, respectively. Emmis has made interest-bearing loans to various officers and employees. The approximate amount of such indebtedness outstanding at February 28 (29), 2000 and 2001, was $1,834 and $1,072, respectively, net of an allowance of $0 and $849, respectively. These loans bear interest at the Company's average borrowing rate of approximately 7.5% and 8.0% for the years ended February 2000 and 2001. During the year ended February 28, 2001, the Company purchased approximately $140 in corporate gifts and specialty items from a company owned by the spouse of Norman H. Gurwitz. Also during the last fiscal year, Emmis made payments of approximately $320 to a company owned by Mr. Smulyan for use of an airplane to transport employees to various trade shows and meetings. Furthermore, Emmis made payments of $484 to a management company for an allocation of operating and maintenance costs of the airplane. 14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTORS Emmis conducts a significant portion of its business through subsidiaries. The senior subordinated notes are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries (the "Subsidiary Guarantors"). As of February 28, 2001, subsidiaries holding Emmis' interest in its radio stations in Hungary and Argentina, as well as certain other subsidiaries conducting joint ventures with third parties, did not guarantee the senior subordinated notes (the "Subsidiary Non-Guarantors"). The claims of creditors of Emmis subsidiaries have priority over the rights of Emmis to receive dividends or distributions from such subsidiaries. Presented below is condensed consolidating financial information for the Parent Company Only, the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of February 28 (29), 2000 and 2001 and for each of the three years in the period ended February 28, 2001. Emmis uses the equity method with respect to investments in subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented based on management's determination that they do not provide additional information that is material to investors. 66 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 28, 2001
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CURRENT ASSETS: Cash and cash equivalents $ 55,175 $ 4,018 $ 706 $ - $ 59,899 Accounts receivable, net - 91,754 5,527 - 97,281 Current portion of TV program rights - 12,028 - - 12,028 Income tax refunds receivable 13,970 - - - 13,970 Prepaid expenses 2,032 14,737 327 - 17,096 Other 1,932 12,124 776 - 14,832 ---------- ---------- ---------- ----------- ---------- Total current assets 73,109 134,661 7,336 - 215,106 Property and equipment, net 38,151 195,404 4,332 - 237,887 Intangible assets, net - 1,959,341 21,756 - 1,981,097 Investment in affiliates 2,169,602 - - (2,169,602) - Other assets, net 68,113 9,706 1,882 (6,919) 72,782 --------- ----------- ---------- ----------- ----------- Total assets $2,348,975 $ 2,299,112 $ 35,306 $(2,176,521) $ 2,506,872 ========== =========== ========== =========== =========== CURRENT LIABILITIES: Accounts payable $ 6,908 $ 22,499 $ 4,799 $ - $ 34,206 Current portion of other long-term debt 34 18 4,135 - 4,187 Current portion of TV program rights payable - 28,192 - - 28,192 Accrued salaries and commissions 1,410 8,482 450 - 10,342 Accrued interest 16,236 - 802 - 17,038 Deferred revenue - 17,418 - - 17,418 Income taxes payable - - - - - Other 813 4,955 - - 5,768 ---------- ----------- ---------- ----------- ---------- Total current liabilities 25,401 81,564 10,186 - 117,151 Credit facility and senior subordinated notes 1,380,000 - - - 1,380,000 TV program rights payable, net of current portion - 47,567 - - 47,567 Other long-term debt, net of current portion 37 598 19,968 (6,919) 13,684 Other noncurrent liabilities - 4,884 647 - 5,531 Deferred income taxes 135,468 - - - 135,468 ---------- ----------- ---------- ----------- ---------- Total liabilities 1,540,906 134,613 30,801 (6,919) 1,699,401 Shareholders' equity Series A preferred stock 29 - - - 29 Class A common stock 419 - - - 419 Class B common stock 52 - - - 52 Additional paid-in capital 830,299 - 4,393 (4,393) 830,299 Subsidiary investment - 1,818,050 17,581 (1,835,631) - Retained earnings / (accumulated deficit) (22,730) 346,449 (16,871) (329,578) (22,730) Accumulated other comprehensive loss - - (598) - (598) ---------- ----------- ---------- ----------- ---------- Total shareholders' equity 808,069 2,164,499 4,505 (2,169,602) 807,471 ---------- ----------- ---------- ----------- ---------- Total liabilities and shareholders' equity $2,348,975 $ 2,299,112 $ 35,306 $(2,176,521) $2,506,872 ========== =========== ========== =========== ==========
67
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 2001 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 1,876 $ 454,164 $ 14,578 $ - $ 470,618 Operating expenses 1,692 281,409 13,304 - 296,405 International business development expenses - 1,553 - - 1,553 Corporate expenses 16,048 - - - 16,048 Depreciation and amortization 4,028 66,527 3,463 - 74,018 Non-cash compensation 4,050 1,350 - - 5,400 Time brokerage agreement fees - 7,344 - - 7,344 Corporate restructuring fees and other 2,057 2,000 - - 4,057 ----------- ----------- ---------- ----------- ---------- Operating income (loss) (25,999) 93,981 (2,189) - 65,793 ----------- ----------- ---------- ----------- ---------- Other income (expense) Interest income (expense) (69,608) (297) (3,221) 682 (72,444) Minority interest - - - 124 124 Other income (expense), net 11,972 26,977 (354) (682) 37,913 ----------- ----------- ---------- ----------- ---------- Total other income (expense) (57,636) 26,680 (3,575) 124 (34,407) ----------- ----------- ---------- ----------- ---------- Income (loss) before income taxes (83,635) 120,661 (5,764) 124 31,386 Provision (benefit) for income taxes (28,201) 45,851 - - 17,650 ----------- ----------- ---------- ----------- ---------- (55,434) 74,810 (5,764) 124 13,736 Equity in earnings (loss) of subsidiaries 69,170 - - (69,170) - ----------- ----------- ---------- ----------- ---------- Net income (loss) 13,736 74,810 (5,764) (69,046) 13,736 Less: Preferred stock dividends 8,984 - - - 8,984 ----------- ----------- ---------- ----------- ---------- Net income/(loss) available to common shareholders $ 4,752 $ 74,810 $ (5,764) $ (69,046) $ 4,752 =========== =========== ========== =========== ==========
68
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 2001 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 13,736 $ 74,810 $ (5,764) $ (69,046) $ 13,736 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation and amortization 9,758 81,233 3,463 - 94,454 Provision for bad debts - 3,713 - - 3,713 Provision for deferred income taxes 15,810 - - - 15,810 Tax benefits of exercise of stock options 10,859 - - - 10,859 Non-cash compensation 4,050 1,350 - - 5,400 Equity in earnings of subsidiaries (69,170) - - 69,170 - Gain on exchange of assets - (22,000) - - (22,000) Other 379 348 861 (124) 1,464 Changes in assets and liabilities - Accounts receivable - (7,114) (2,202) - (9,316) Prepaid expenses and other current assets (12,716) (11,527) (384) - (24,627) Other assets 10,435 1,216 448 - 12,099 Accounts payable and accrued liabilities 9,070 5,493 778 - 15,341 Deferred revenue - 569 - - 569 Other liabilities (220) (23,096) 3,544 - (19,772) ---------- ----------- ---------- ----------- --------- Net cash provided by (used in) operating activities (8,009) 104,995 744 - 97,730 ---------- ----------- ---------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3,683) (22,323) (219) - (26,225) Cash paid for acquisitions - (1,060,681) - - (1,060,681) Deposits on acquisitions and other (23,849) - - - (23,849) ---------- ----------- ---------- ----------- --------- Net cash used in investing activities (27,532) (1,083,004) (219) - (1,110,755) ---------- ----------- ---------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (1,048,388) - (3,161) - (1,051,549) Proceeds from long-term debt 2,128,388 - - - 2,128,388 Proceeds from issuance of class A common stock, net of transaction costs - - - - - Proceeds from issuance of Series A cumulative convertible preferred stock, net of transaction costs - - - - - Proceeds from sale of Class A common stock to Liberty Media Corporation, net of transaction costs - - - - - Intercompany (968,447) 979,463 (11,016) - - Preferred stock dividends (8,984) - - - (8,984) Debt related costs (21,095) - - - (21,095) Proceeds from exercise of stock options 8,794 - - - 8,794 ----------- ---------- ---------- ----------- --------- Net cash provided by financing activities 90,268 979,463 (14,177) - 1,055,554 ----------- ---------- ---------- ----------- ---------
69
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54,727 1,454 (13,652) - 42,529 CASH AND CASH EQUIVALENTS: Beginning of period 448 2,564 14,358 - 17,370 ----------- ---------- ---------- ----------- --------- End of period $ 55,175 $ 4,018 $ 706 $ - $ 59,899 =========== ========== ========== =========== =========
70
Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 29, 2000 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CURRENT ASSETS: Cash and cash equivalents $ 448 $ 2,564 $ 14,358 $ - $ 17,370 Accounts receivable, net - 63,146 3,325 - 66,471 Current portion of TV program rights - - - - - Prepaid expenses 1,197 8,434 422 - 10,053 Other 5,781 12,744 297 - 18,822 ----------- ---------- ---------- ----------- ----------- Total current assets 7,426 86,888 18,402 - 112,716 Property and equipment, net 38,611 85,587 4,706 - 128,904 Intangible assets, net 196 1,007,860 25,914 - 1,033,970 Investment in affiliates 1,098,183 - - (1,098,183) - Other assets, net 37,573 16,194 2,330 (4,381) 51,716 ----------- ---------- ---------- ----------- ------------ Total assets $ 1,181,989 $1,196,529 $ 51,352 $(1,102,564)$ 1,327,306 =========== ========== ========== =========== ============ CURRENT LIABILITIES: Accounts payable $ 2,973 $ 15,202 $ 4,782 $ - $ 22,957 Current portion of other long-term debt 34 17 5,328 - 5,379 Current portion of TV program rights payable - 16,816 - - 16,816 Accrued salaries and commissions 1,952 5,801 409 - 8,162 Accrued interest 10,995 - 82 - 11,077 Deferred revenue - 15,912 - - 15,912 Income taxes payable - - - - - Other 1,034 3,105 - - 4,139 ----------- ---------- ---------- ----------- ---------- Total current liabilities 16,988 56,853 10,601 - 84,442 Credit facility and senior subordinated notes 300,000 - - - 300,000 TV program rights payable, net of current portion - 58,585 - - 58,585 Other long-term debt, net of current portion 36 671 18,281 (4,381) 14,607 Other noncurrent liabilities - 5,408 758 - 6,166 Deferred income taxes 87,139 - - - 87,139 ----------- ---------- ---------- ----------- ---------- Total liabilities 404,163 121,517 29,640 (4,381) 550,939 Shareholders' equity Series A preferred stock 29 - - - 29 Class A common stock 412 - - - 412 Class B common stock 47 - - - 47 Additional paid-in capital 804,820 - 4,393 (4,393) 804,820 Subsidiary investment - 803,373 29,885 (833,258) - Retained earnings / (accumulated deficit) (27,482) 271,639 (11,107) (260,532) (27,482) Accumulated other comprehensive loss - - (1,459) - (1,459) ---------- ---------- ---------- ----------- ---------- Total shareholders' equity 777,826 1,075,012 21,712 (1,098,183) 776,367 ---------- ---------- ---------- ----------- ---------- Total liabilities and shareholders' equity $1,181,989 $1,196,529 $ 51,352 $(1,102,564) $1,327,306 ========== ========== ========== =========== ==========
71
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 29, 2000 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 1,810 $ 314,644 $ 8,811 $ - $ 325,265 Operating expenses 1,252 191,666 6,900 - 199,818 International business development expenses - 1,558 - - 1,558 Corporate expenses 13,872 - - - 13,872 Depreciation and amortization 3,395 37,733 3,033 - 44,161 Non-cash compensation 5,518 1,839 - - 7,357 Time brokerage agreement fees - - - - - Programming restructuring cost - 896 - - 896 Corporate restructuring fees and other - - - - - --------- ------------ --------- ----------- ---------- Operating income (loss) (22,227) 80,952 (1,122) - 57,603 --------- ------------ --------- ----------- ---------- Other income (expense) Interest income (expense) (49,257) (107) (3,363) 741 (51,986) Minority interest - - - - - Loss on donation of station - (956) - - (956) Other income (expense), net 3,428 13 (502) 1,264 4,203 --------- ------------ --------- ----------- ---------- Total other income (expense) (45,829) (1,050) (3,865) 2,005 (48,739) --------- ------------ --------- ----------- ---------- Income (loss) before income taxes (68,056) 79,902 (4,987) 2,005 8,864 Provision (benefit) for income taxes (22,689) 29,564 - - 6,875 --------- ------------ --------- ----------- ---------- (45,367) 50,338 (4,987) 2,005 1,989 Extraordinary item, net of tax (2,022) - - - (2,022) Equity in earnings (loss) of subsidiaries 47,356 - - (47,356) - --------- ------------ --------- ----------- ---------- Net income (loss) (33) 50,338 (4,987) (45,351) (33) Less: Preferred stock dividends 3,144 - - - 3,144 --------- ------------ --------- ----------- ---------- Net income/(loss) available to common shareholders $ (3,177) $ 50,338 $ (4,987) $ (45,351) $ (3,177) ========= ============ ========= =========== ==========
72
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 29, 2000 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (33) $ 50,338 $ (4,987) $ (45,351) $ (33) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Extraordinary item 2,022 - - - 2,022 Depreciation and amortization 5,805 44,980 3,033 - 53,818 Provision for bad debts - 2,550 - - 2,550 Provision for deferred income taxes 6,670 - - - 6,670 Non-cash compensation 5,518 1,839 - - 7,357 Equity in earnings of subsidiaries (47,356) - - 47,356 - Gain on exchange of assets - - - - - Tax benefits of exercise of stock options 2,889 - - - 2,889 Loss on donation of radio station - 956 - - 956 Other 2,033 - (811) (2,005) (783) Changes in assets and liabilities - Accounts receivable - (13,029) (290) - (13,319) Prepaid expenses and other current assets (1,258) (13,101) (187) - (14,546) Other assets (8,393) 7,382 (1,496) - (2,507) Accounts payable and accrued liabilities (391) 9,255 1,301 - 10,165 Deferred revenue - 4,332 - - 4,332 Other liabilities (13,278) (19,933) - - (33,211) -------- ----------- --------- ----------- ---------- Net cash provided by (used in) operating activities (45,772) 75,569 (3,437) - 26,360 -------- ----------- --------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (8,124) (21,170) (22) - (29,316) Cash paid for acquisitions - (217,828) (13,302) - (231,130) Deposits on acquisitions and other (5,000) (6,500) - - (11,500) ------- ------------- -------- ------------ ---------- Net cash used in investing activities (13,124) (245,498) (13,324) - (271,946) ------- ------------- -------- ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (426,668) - - - (426,668) Proceeds from long-term debt 149,668 - - - 149,668 Proceeds from issuance of class A common stock, net of transaction costs 383,570 - - - 383,570 Proceeds from issuance of Series A cumulative convertible preferred stock, net of transaction costs 138,409 - - - 138,409 Intercompany (199,781) 169,347 30,434 - - Preferred stock dividends (2,021) - - - (2,021) Debt related costs - - - - - Proceeds from exercise of stock options 13,881 - - - 13,881 -------- ------------- --------- ------------ ---------- Net cash provided by financing activities 57,058 169,347 30,434 - 256,839 -------- ------------- --------- ------------ ----------
73
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,838) (582) 13,673 - 11,253 CASH AND CASH EQUIVALENTS: Beginning of period 2,286 3,146 685 - 6,117 --------- ------------- --------- ------------ ---------- End of period $ 448 $ 2,564 $ 14,358 $ - $ 17,370 ========= ============= ========= ============ ==========
74
Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1999 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated Net revenues $ 1,709 $ 227,873 $ 3,254 $ - $ 232,836 Operating expenses 820 138,581 3,947 - 143,348 International business development expenses - 1,477 - - 1,477 Corporate expenses 10,427 - - - 10,427 Depreciation and amortization 1,159 24,336 2,819 - 28,314 Non-cash compensation 3,600 669 - - 4,269 Time brokerage agreement fees - 2,220 - - 2,220 Corporate restructuring fees and other - - - - - --------- ------------- -------- ------------- ---------- Operating income (loss) (14,297) 60,590 (3,512) - 42,781 --------- ------------- -------- ------------- ---------- Other income (expense) Interest income (expense) (33,667) (102) (3,171) 1,290 (35,650) Minority interest - - - - - Other income (expense), net 74,865 (73,957) 421 585 1,914 --------- ------------- -------- ------------- ---------- Total other income (expense) 41,198 (74,059) (2,750) 1,875 (33,736) --------- ------------- -------- ------------- ---------- Income (loss) before income taxes 26,901 (13,469) (6,262) 1,875 9,045 Provision (benefit) for income taxes 9,719 (3,377) (142) - 6,200 ---------- ------------- -------- ------------- ---------- 17,182 (10,092) (6,120) 1,875 2,845 Extraordinary item, net of tax (1,597) - - - (1,597) Equity in earnings (loss) of subsidiaries (14,337) - - 14,337 - ---------- ------------- -------- ------------- ---------- Net income (loss) 1,248 (10,092) (6,120) 16,212 1,248 Less: Preferred stock dividends - - - - - ---------- ------------- -------- ------------- ---------- Net income/(loss) available to common shareholders $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248 ========== ============= ======== ============ ==========
75
Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1999 Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Extraordinary item 1,597 - - - 1,597 Depreciation and amortization 1,998 27,341 2,819 - 32,158 Provision for bad debts - 1,745 - - 1,745 Provision for deferred income taxes 4,953 - - - 4,953 Non-cash compensation 3,600 669 - - 4,269 Equity in earnings of subsidiaries 14,337 - - (14,337) - Gain on exchange of assets - - - - - Tax benefits of exercise of stock options 486 - - - 486 Other 103 629 - (1,875) (1,143) Changes in assets and liabilities - Accounts receivable 345 (21,835) 386 - (21,104) Prepaid expenses and other current assets (4,725) 4,070 (72) - (727) Other assets 9,516 (6,408) 327 - 3,435 Accounts payable and accrued liabilities 8,183 (1,519) (1,111) 1,454 7,007 Deferred revenue - (747) - - (747) Other liabilities (2,515) 5,099 (640) - 1,944 --------- ----------- ---------- ------------ ----------- Net cash provided by (used in) operating activities 39,126 (1,048) (4,411) 1,454 35,121 --------- ----------- ---------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (21,363) (13,654) (2,366) - (37,383) Cash paid for acquisitions - (504,748) - - (504,748) Deposits on acquisitions and other 7 654 - - 661 --------- ----------- ---------- ------------ ----------- Net cash used in investing activities (21,356) (517,748) (2,366) - (541,470) --------- ----------- ---------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (723,500) - - - (723,500) Proceeds from long-term debt 1,063,000 - - - 1,063,000 Proceeds from issuance of class A common stock, net of transaction costs 182,640 - - - 182,640 Proceeds from issuance of Series A cumulative convertible preferred stock, net of transaction costs Purchase of interest rate cap agreements and other debt related costs (19,589) - - - (19,589) Intercompany (522,788) 521,699 2,543 (1,454) - Preferred stock dividends - - - - - Debt related costs - - - - - Proceeds from exercise of stock options 4,130 - - - 4,130 --------- ----------- --------- ------------- ----------- Net cash provided by financing activities (16,107) 521,699 2,543 (1,454) 506,681 --------- ----------- --------- ------------- -----------
76
Eliminations Parent Subsidiary and Company Subsidiary Non- Consolidating Only Guarantors Guarantors Entries Consolidated INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,663 2,903 (4,234) - 332 CASH AND CASH EQUIVALENTS: Beginning of period 623 243 4,919 - 5,785 -------- ---------- --------- --------------- --------- End of period $ 2,286 $ 3,146 $ 685 $ - $ 6,117 ======== ========== ========= =============== =========
77 15. SUBSEQUENT EVENTS - ACQUISITIONS On March 28, 2001, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash. The Company financed the acquisition through a $20.0 million advance payment borrowed under the credit facility in June 2000 and the remainder with borrowings under the credit facility and proceeds from the Company's March 2001 Senior Discount Notes Offering. The acquisition was accounted for as a purchase. Emmis began programming and selling advertising on the radio stations on August 1, 2000 under a time brokerage agreement. On March 27, 2001, Emmis received $202.6 million of proceeds from the issuance of senior discount notes due 2011, less approximately $10.8 million of debt issuance costs. The notes accrete interest at a rate of 12.5% per year, compounded semi-annually to an aggregate principle amount of $370.0 million on March 15, 2006. Commencing on September 15, 2006, interest is payable in cash on each March 15 and September 15,. A portion of the net proceeds were used to fund the acquisition of three radio stations in Phoenix, Arizona and the remaining net proceeds (approximately $93 million) were placed in escrow to ultimately reduce outstanding borrowings under the credit facility. The senior discount notes will automatically be exchanged for 13.25% Exchangeable PIK Preferred Stock unless Emmis can effect a corporate reorganization by July 24, 2001. Under this reorganization, Emmis will transfer all of its assets, as well as its obligations under the credit facility and the senior subordinated notes, to a wholly-owned subsidiary, Emmis Operating Company. Emmis Communications Corporation will still be the issuer of the Class A, Class B and Class C common stock, the convertible preferred stock and the senior discount notes, and Emmis Operating Company will be the obligor of the senior subordinated notes. Emmis does not expect the reorganization, which should be completed before the July 24, 2001 deadline, to materially affect its operations because it currently conducts substantially all of its business through subsidiaries. 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended Full May 31 Aug. 31 Nov. 30 Feb. 28 (29) Year --------- ---------- --------- ----------- --------- Year ended February 29, 2000 Net revenues $ 72,352 $ 81,529 $ 91,257 $ 80,127 $ 325,265 Operating income 12,949 18,041 20,929 5,684 57,603 Income (loss) before extraordinary item 241 1,216 2,456 (1,924) 1,989 Net income (loss) available to common shareholders 241 1,216 1,657 (6,291) (3,177) Basic earnings per common share: Before extraordinary item $ 0.01 $ 0.04 $ 0.05 $ (0.09) $ (0.03) Net income (loss) available to common Shareholders $ 0.01 $ 0.04 $ 0.05 $ (0.14) $ (0.09) Diluted earnings per common share: Before extraordinary item $ 0.01 $ 0.04 $ 0.04 $ (0.09) $ (0.03) Net income (loss) available to common Shareholders $ 0.01 $ 0.04 $ 0.04 $ (0.14) $ (0.09) Year ended February 28, 2001 Net revenues $ 100,519 $ 109,069 $ 143,606 $117,424 $ 470,618 Operating income 18,603 25,223 26,164 (4,197) 65,793 Income (loss) before extraordinary item 5,911 16,638 11,566 (20,379) 13,736 Net income (loss) available to common Shareholders 3,665 14,392 9,320 (22,625) 4,752 Basic earnings per common share: Before extraordinary item $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10 Net income (loss) available to common Shareholders $ 0.08 $ 0.31 $ 0.20 $ (0.48) $ 0.10 Diluted earnings per common share: Before extraordinary item $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10 Net income (loss) available to common Shareholders $ 0.08 $ 0.30 $ 0.20 $ (0.48) $ 0.10
78 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of EMMIS COMMUNICATIONS CORPORATION (an Indiana corporation) and Subsidiaries as of February 28 (29), 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended February 28, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Emmis Communications Corporation and Subsidiaries as of February 28 (29), 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Indianapolis, Indiana, March 29, 2001. 79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 80 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors or nominees to be directors of Emmis is incorporated by reference from the section entitled "Proposal No. 1: Election of Directors" in the Emmis 2001 Proxy Statement and the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Emmis 2001 Proxy Statement. Listed below is certain information about the executive officers of Emmis or its affiliates who are not directors or nominees to be directors. AGE AT YEAR FIRST FEBRUARY 28, ELECTED NAME POSITION 2001 OFFICER --------------- --------------------- --------- --------- Randy Bongarten President - Emmis Television 51 2000 Richard F. Cummings Executive Vice 49 1984 President-Programming Norman H. Gurwitz Executive Vice President- 53 1987 Human Resources and Secretary Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates who is not also a director. Randy Bongarten is employed as President of Emmis Television since October 2000 and President of Emmis International since June 1998. Mr.Bongarten has also served as President of GAF Broadcasting and as Executive Vice President of Operations for Emmis Radio Division. Richard F. Cummings was the Program Director of WENS from 1981 to March 1984, when he became the National Program Director and a Vice President of Emmis. He became Executive Vice President--Programming in 1988. Norman H. Gurwitz currently serves as Executive Vice President -- Human Resources, a position he assumed in 1998. Previously he served as Corporate Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995. He became Secretary of Emmis in 1989 and became an Executive Vice President in 1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott & Gurwitz. Mr. Gurwitz is the brother-in-law of Richard A. Leventhal, a director of the Company. 81 ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the section entitled "Executive Compensation" in the Emmis 2001 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the section entitled "Voting Securities and Beneficial Owners" in the Emmis 2001 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the section entitled "Certain Transactions" in the Emmis 2001 Proxy Statement. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K. Financial Statements The financial statements filed as a part of this report are set forth under Item 8. Reports on Form 8-K On December 18, 2000, the Company filed a Form 8-K to disclose quarterly pro forma financial information by business segment for the six quarters ended August 31, 2000. On January 24, 2001, the Company filed a Form 8-K to disclose quarterly pro forma financial information by business segment for the seven quarters ended November 30, 2000. Exhibits The following exhibits are filed or incorporated by reference as a part of this report: 3.1 Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation, incorporated by reference from Exhibit 3.1 to Emmis' Annual Report on Form 10-K/A for the fiscal year ended February 29, 2000. 3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference from Exhibit 3.2 to the Company's Form 10-K/A for the fiscal year ended February 29, 2000. 3.3 Form of stock certificate for Class A common stock, incorporated by reference from Exhibit 3.5 to the 1994 Emmis Registration Statement on Form S-1, File No. 33-73218, the "1994 Registration Statement". 4.1 Indenture dated February 12, 1999 among Emmis Communications Corporation, certain subsidiary guarantors and IBJ Whitehall Bank and Trust Company, as trustee, including as an exhibit thereto the form of note, incorporated by reference to Exhibit 4.1 to Emmis' Registration Statement on Form S-4, File No. 333-74377, as amended (the "1999 Registration Statement"). 82 10.1 Emmis Communications Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the 1994 Registration Statement.++ 10.2 Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the 1994 Registration Statement.++ 10.3 The Emmis Communications Corporation 1995 Non-Employee Director Stock Option Plan, incorporated by reference from Exhibit 10.15 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (the "1995 10-K").++ 10.4 The Emmis Communications Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 to the 1995 10-K.++ 10.5 Emmis Communications Corporation 1997 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1998 (the "1998 10-K").++ 10.6 Emmis Communications Corporation 1999 Equity Incentive Plan, incorporated by reference from the Company's proxy statement dated May 26, 1999.++ 10.7 Employment Agreement dated as of March 1, 1994, by and between Emmis Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.13 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1994 and amendment to Employment Agreement, effective March 1, 1999, between the Company and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.++ 10.8 Employment Agreement dated as of March 1, 1999, by and between Emmis Communications Corporation and Walter Z. Berger, incorporated by reference from Exhibit 10.9 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999.++ 10.9 Fourth Amended and Restated Revolving Credit and Term Loan Agreement, and First Amendment to Fourth Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibits 10.1 and 10.2, respectively, to Emmis' Form 8-K filed on April 12, 2001. 10.10 Second Amendment to Fourth Amended and Restated Revolving Credit and Term Loan Agreement.* 10.11 Stock Purchase Agreement dated October 25, 1999 by and between Liberty Media Corporation and Emmis Communications Corporation with Registration Rights Agreement as Exhibit A thereto, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999. 10.12 Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee Enterprises, Incorporated, New Mexico Broadcasting Co. and Emmis Communications Corporation, incorporated by reference from Exhibit 2.1 to Emmis' Form 8-K filed on October 16, 2000. 10.13 Asset Purchase Agreement, dated as of June 21, 2000, by and among Sinclair Radio of St. Louis, Inc., Sinclair Radio of St. Louis Licensee, LLC and Emmis Communications Corporation, incorporated by reference from Exhibit 2.2 to Emmis' Form 8-K filed on October 16, 2000. 10.14 Asset Exchange Agreement, dated as of October 6, 2000, between Emmis Communications Corporation, Emmis 106.5 FM Broadcasting Corporation of St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and Bonneville International 83 Corporation and Bonneville Holding Company, incorporated by reference from Exhibit 2.3 to Emmis' Form 8-K filed on October 16, 2000. 10.15 Asset Purchase Agreement, dated as of June 19, 2000, by and among Emmis Communications Corporation, AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM Radio Licenses, LLC, incorporated by reference from Exhibit 10.2 to Emmis' Form 8-K filed on October 16, 2000. 10.16 Asset Purchase Agreement dated June 3, 1999 between Emmis Communications Corporation and Press Communications Corporation, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999. 10.17 Asset Purchase Agreement by and between Emmis Broadcasting Corporation and Wabash Valley Broadcasting Corporation, dated March 20, 1998, incorporated by reference from Exhibit 10.15 to the 1998 10-K. 10.18 Asset Purchase Agreement by and among SF Broadcasting of Honolulu, Inc., SF Honolulu License Subsidiary, Inc., SF Broadcasting of New Orleans, Inc., SF New Orleans License Subsidiary, Inc., SF Broadcasting of Mobile, Inc., SF Mobile License Subsidiary, Inc., SF Broadcasting of Green Bay, Inc., SF Green Bay License Subsidiary, Inc. and Emmis Broadcasting Corporation, dated March 30, 1998, incorporated by reference from Exhibit 10.16 to the 1998 10-K. 10.19 Asset Purchase Agreement by and among Emmis Communications Corporation, Country Sampler, Inc. and Mark A. Nickel, dated as of February 23, 1999, together with associated Consulting Agreement and Letter Agreement, incorporated by reference from Exhibit 10.16 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999. 21 Subsidiaries of Emmis.* 23 Consent of Accountants.* 24 Powers of Attorney.* ------------------------ * Filed with this report. ++ Management contract or compensatory plan or arrangement. 84 Signatures. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMMIS COMMUNICATIONS CORPORATION Date: May 18, 2001 By: /s/ Jeffrey H. Smulyan ----------------------- Jeffrey H. Smulyan Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and on the dates indicated. SIGNATURE TITLE Date: May 18, 2001 /s/ Jeffrey H. Smulyan President, Chairman of the Board ---------------------- Jeffrey H. Smulyan and Director (Principal Executive Officer) Date: May 18, 2001 /s/ Walter Z. Berger Executive Vice President, -------------------- Walter Z. Berger Treasurer And Chief Financial Officer (Principal Accounting Officer) Date: May 18, 2001 Susan B. Bayh* Director ------------- Susan B. Bayh Date: May 18, 2001 Gary Kasseff* Executive Vice President, General ------------ Gary Kasseff Counsel and Director Date: May 18, 2001 Richard A. Leventhal* Director Richard A. Leventhal Date: May 18, 2001 Greg A. Nathanson* Director ----------------- Greg A. Nathanson Date: May 18, 2001 Doyle L. Rose* Radio Division President and ------------- Doyle L. Rose Director Date: May 18, 2001 Frank V. Sica* Director ------------- Frank V. Sica Date: May 18, 2001 Lawrence B. Sorrel* Director ------------------ Lawrence B. Sorrel *By: /s/ J. Scott Enright J. Scott Enright Attorney-in-Fact 85