UNITED STATES 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, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from _________ to _________.
EMMIS COMMUNICATIONS CORPORATION EMMIS OPERATING COMPANY
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
INDIANA INDIANA
(State of incorporation or organization)(State of incorporation or organization)
0-23264 333-62172-13
(Commission file number) (Commission file number)
35-1542018 35-2141064
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
ONE EMMIS PLAZA ONE EMMIS PLAZA
40 MONUMENT CIRCLE 40 MONUMENT CIRCLE
SUITE 700 SUITE 700
INDIANAPOLIS, INDIANA 46204 INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)(Address of principal executive offices)
(317) 266-0100 (317) 266-0100
(REGISTRANT'S TELEPHONE NUMBER, (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common
stock, $.01 par value; 6.25% Series A Cumulative Convertible Preferred Stock,
$.01 par value.
Indicate by check mark 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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes [X] No [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of August 31, 2002, the Registrant's most recently-completed
second fiscal quarter, was approximately $738,955,000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of April 25, 2003, was:
49,134,869 Class A Common Shares, $.01 par value
5,030,002 Class B Common Shares, $.01 par value
0 Class C Common Shares, $.01 par value
Emmis Operating Company has 1,000 shares of common stock outstanding as of
April 30, 2003, and all of these shares are owned by Emmis Communications
Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Proxy Statement for 2003 Annual Meeting Part III
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
PART I ..................................................................... 4
Item 1. Business........................................................ 4
Item 2. Properties......................................................18
Item 3. Legal Proceedings...............................................21
Item 4. Submission of Matters to a Vote of Security Holders.............21
PART II .....................................................................21
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters.............................................21
Item 6. Selected Financial Data.........................................22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation..............................25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......40
Item 8. Financial Statements and Supplementary Data....................42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................93
Item 10. Directors and Executive Officers of the Registrant .............93
PART III
Item 11. Executive Compensation..........................................94
Item 12. Security Ownership of Certain Beneficial Owners,
and Management, and Related Stockholder Matters.................94
Item 13. Certain Relationships and Related Transactions..................94
Item 14. Controls and Procedures.........................................94
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 96.................................................96
Signatures ...................................................99
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.
We operate eighteen FM radio stations and three AM radio stations in the United
States that serve the nation's three largest radio markets of New York City, Los
Angeles and Chicago, as well as Phoenix, St. Louis, Indianapolis and Terre
Haute, Indiana. In addition, we expect to close on our purchase of a controlling
interest in six stations in Austin, Texas during the second quarter of our
fiscal 2004. The sixteen 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 two with WB.
Our strategy is to selectively acquire underdeveloped media properties in
desirable markets and then to create value by developing those properties to
increase their cash flow. We find such underdeveloped properties attractive
because they offer greater potential for revenue and cash flow growth than
mature properties. We have been successful in acquiring these types of media
properties and improving their ratings, revenues and cash flow with our
marketing focus and innovative programming expertise. We have created
top-performing radio stations which rank, in terms of primary demographic target
audience share, among the top ten stations in the New York City, Los Angeles and
Chicago radio markets according to the Fall 2002 Arbitron Survey. We believe
that our strong large-market radio presence and diversity of station formats
makes us attractive to a diverse base of radio advertisers and reduces our
dependence on any one economic sector or specific advertiser. Since acquisition,
we have generally improved the margins of our television stations and we believe
there is further room for margin improvement.
In addition to our domestic broadcasting properties, we operate news and
agriculture information radio networks in Indiana, publish Texas Monthly, Los
Angeles, Atlanta, Indianapolis Monthly, Cincinnati, and Country Sampler and
related magazines, have a 59.5% interest in a national radio station in Hungary
and own 75% of one FM and one AM radio station in Buenos Aires, Argentina. We
also engage in various businesses ancillary to our broadcasting business, such
as consulting and broadcast tower leasing.
The following discussion pertains to Emmis Communications Corporation
("ECC") and its subsidiaries (collectively, "Emmis" or the "Company") and to
Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a
wholly owned subsidiary of ECC in connection with the Company's reorganization
(see Note 1c. to our consolidated financial statements) on June 22, 2001. Unless
otherwise noted, all disclosures contained in this Form 10-K apply to Emmis and
EOC.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting,
enhancing the performance of our broadcast and publishing properties, and
distinguishing ourselves through the quality of our operations. Our strategy is
to maximize shareholder value by focusing on the following principles:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets
and innovative programming developed to target specific demographic groups are
the most important determinants of individual radio and television station
success. We conduct extensive market research to identify underserved segments
of the markets we serve or to assure that we are meeting the needs of our target
audience. Utilizing the research results, we concentrate on providing a focused
programming format carefully tailored to the demographics of our markets and our
audiences' preferences.
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and
national sales efforts based on advertiser demand and our programming compared
to the competitive formats within each market. We provide our sales force with
extensive training and the technology for sophisticated inventory management
techniques, which provide frequent price adjustments based on regional and
market conditions. Furthermore, additional company resources have been allocated
to locate, hire, train and retain top sales people. Under the Emmis Sales
Assault Plan (ESAP), a company-wide initiative geared toward attracting and
developing sales leaders in the radio, television and magazine industries, we
have added nearly 200 sales people to our workforce in the last two years, which
was incremental to hirings in the normal course of business.
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 operating income, in our current markets. We will also consider
acquisitions of individual radio stations or groups of radio stations in new
markets where we expect we can achieve a leadership position. We believe that
continued consolidation in the radio broadcasting industry will create
attractive acquisition opportunities as the number of potential buyers for radio
assets declines due to government regulations on the number of stations a
company can own in one market. We believe that attractive acquisition
opportunities are also increasingly available in the television broadcasting
industry. We intend to evaluate acquisitions of magazine publishing properties
and international broadcasting properties that present opportunities to
capitalize on our management expertise to enhance cash flow at attractive
purchase price multiples with minimal capital requirements.
ENCOURAGE A PERFORMANCE BASED, ENTREPRENEURIAL MANAGEMENT APPROACH. We
believe that broadcasting is primarily a local business and that much of its
success is the result of the efforts of regional and local management and staff.
We have attracted and retained an experienced team of broadcast professionals
who understand the viewing and listening preferences, demographics and
competitive opportunities of their particular market. Our decentralized approach
to station management gives local management oversight of station spending,
long-range planning and resource allocation at their individual stations, and
rewards all employees based on those stations' performance. In addition, we
encourage our managers and employees to own a stake in the company, and over 95%
of all full-time employees have an equity ownership position in Emmis. We
believe that our performance based, entrepreneurial management approach has
created a distinctive corporate culture, making Emmis a highly desirable
employer in the broadcasting industry and significantly enhancing our ability to
attract and retain experienced and highly motivated employees and management.
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 (2002 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 2002 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
MARKET PRIMARY PRIMARY STATION
STATION AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
------ ------- ------ ----------- ------ -----
Los Angeles, CA 1
KPWR-FM Hip-Hop/R&B 12-24 1 5.4
KZLA-FM Country 25-54 21 1.9
New York, NY 2
WQHT-FM Hip-Hop 12-24 1 4.8
WQCD-FM Smooth Jazz 25-54 7 3.7
WRKS-FM Classic Soul / Today's R&B 25-54 3 4.1
Chicago, IL 3
WKQX-FM Alternative Rock 18-34 6 2.4
Phoenix, AZ 14
KTAR-AM News/Talk/Sports 35-64 5 4.9
KKFR-FM Rythmic CHR 18-34 4 3.8
KKLT-FM Adult Contemporary 25-54 6t 3.6
KMVP-AM Sports 25-54 21t 0.8
St. Louis, MO 18
KSHE-FM Album Oriented Rock 25-54 1 5.5
KPNT-FM Alternative Rock 18-34 2 3.7
KIHT-FM Classic Hits 25-54 3 4.1
WMLL-FM 80's and 90's 18-34 11 2.8
KFTK-FM Talk 25-54 18 1.6
Indianapolis, IN 31
WIBC-AM News/Talk/Sports 35-64 5 7.4
WYXB-FM Soft Adult Contemporary 25-54 4 5.0
WNOU-FM CHR 18-34 5 5.3
WENS-FM Hot Adult Contemporary 25-54 11 2.8
Austin, TX 34
KLBJ-AM News/Talk 25-54 3 6.8
KLBJ-FM Album Oriented Rock 25-54 4 4.5
KXMG-FM CHR 18-34 6 3.2
KGSR-FM Adult Alternative 25-54 5 4.1
KROX-FM Alternative Rock 18-34 3 4.0
KEYI-FM Oldies 25-54 9 3.4
Terre Haute, IN 171
WTHI-FM Country 25-54 1 23.3
WWVR-FM Classic Rock 25-54 3 12.5
In addition to our other domestic radio broadcasting operations, we own and
operate two radio networks. Network Indiana provides news and other programming
to nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides
farm news, weather information and market analysis to radio stations across
Indiana.
We also have a 59.5% interest in a national radio station in Hungary and
own 75% of one FM and one AM radio station in Buenos Aires, Argentina.
We expect to close on our purchase of a controlling interest in six
stations in Austin, Texas during the second quarter of our fiscal 2004.
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company
("Nielsen") as of January 2002. Rankings are based on the relative size of a
station's market among the 210 generally recognized Designated Market Areas
("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the
number of television stations ("Reportable Stations") designated by Nielsen as
"local" to the DMA, excluding public television stations and stations which do
not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience
of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to
midnight time period. "Station Rank" reflects the station's rank relative to
other Reportable Stations based upon the DMA rating as reported by Nielsen from
9:00 a.m. to midnight, Sunday through Saturday during November 2002. "Station
Audience Share" reflects an estimate of the share of DMA households viewing
television received by a local commercial station in comparison to other local
commercial stations in the market as measured from 9:00 a.m. to midnight, Sunday
through Saturday.
NUMBER OF STATION
TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE AFFILIATION
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE EXPIRATION
-------- ------------ ----- -------- ---------- ----- ------ ----------
WKCF-TV Orlando, FL 20 WB/18 6 4 7 December 31, 2009
KOIN-TV Portland, OR 23 CBS/6 7 1t 13 September 18, 2006
WVUE-TV New Orleans, LA 42 Fox/8 7 3 9 March 5, 2006
KRQE-TV Albuquerque, NM 49 CBS/13 7 1t 11 September 18, 2006
WSAZ-TV Huntington, WV/
Charleston, WV 61 NBC/3 4 1 22 January 1, 2009
WALA-TV Mobile, AL/
Pensacola, FL 63 Fox/10 6 4 10 August 24, 2006
WBPG-TV (1) Mobile, AL/
Pensacola, FL 63 WB/55 6 6 NM August 31, 2006
KSNW-TV Wichita, KS 66 NBC/3 4 2 14 January 1, 2009
WLUK-TV Green Bay, WI 69 Fox/11 6 3 13 November 1, 2005
WFTX-TV Fort Myers, FL 70 Fox/36 6 3t 8 N/A
KGMB-TV (2) Honolulu, HI 71 CBS/9 5 1 13 September 18, 2006
KHON-TV (2) Honolulu, HI 71 Fox/2 5 2 12 August 2, 2006
KGUN-TV Tucson, AZ 73 ABC/9 7 1t 14 February 6, 2005
KMTV-TV Omaha, NE 74 CBS/3 5 3 14 September 18, 2006
KSNT-TV Topeka, KS 138 NBC/27 4 2 15 January 1, 2009
WTHI-TV Terre Haute, IN 146 CBS/10 3 1 23 December 31, 2005
(1) We purchased this station on March 1, 2003
(2) We are currently operating KGMB-TV under a temporary waiver issued by the
FCC. We may be required to sell one of these stations. See Management's
Discussion and Analysis of Financial Condition and Results of Operations
for further discussion.
Emmis also owns and operates nine satellite stations that primarily
re-broadcast the signal of certain of our local stations. A local station and
its satellite station are considered one station for FCC and multiple ownership
purposes, provided that the stations are in the same market.
Each of our television stations is affiliated with CBS, NBC, ABC, Fox or WB
(each a "Network") pursuant to a written network affiliation agreement, except
WFTX in Ft. Myers, FL, which is affiliated with Fox pursuant to an oral
affiliation agreement. Each affiliation agreement provides the affiliated
television station with the right to rebroadcast all programs transmitted by the
Network with which the television station is affiliated. In return, the Network
has the right to sell a substantial portion of the advertising time during such
broadcasts.
The long established Networks (ABC, CBS and NBC) have historically paid the
affiliated station to broadcast the Network's programming. This Network
compensation payment used to vary depending on the time of day that a station
broadcasts the network programming. Typically, prime-time programming generated
the highest hourly network compensation payments. In the recent years, however,
ABC, CBS and NBC have begun to eliminate or sharply reduce compensation payments
to stations for clearance of Network programming. In some cases, Networks have
undertaken to cut compensation when a station is to be sold and the affiliation
agreement is to be assigned or transferred, or when an old affiliation agreement
has expired. The more recently established Networks (Fox and WB) generally pay
little or no cash compensation for the clearance of network programming. They
tend, however, to offer the affiliated station more advertising availability for
local sale within Network programming than do the long established networks. In
the years ended February 2001, 2002 and 2003, we received approximately $2.5
million, $4.6 million and $3.3 million in network compensation payments, which
represented less than 1% of our total net revenues in each year.
PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Monthly
Paid
Circulation
Regional Magazines:
Texas Monthly 303,000
Los Angeles 158,000
Atlanta 68,000
Indianapolis Monthly 43,000
Cincinnati Magazine 28,000
Specialty Magazines*:
Country Sampler 391,000
Country Sampler Decorating Ideas 185,000
Country Sampler Decorating with Paint 119,000
Country Marketplace 160,000
* Our specialty magazines are circulated bimonthly.
INTERNET AND NEW TECHNOLOGIES
We believe that the development and explosive growth of the Internet
present not only a challenge, but an opportunity for broadcasters and
publishers. The primary challenge is increased competition for the time and
attention of our listeners, viewers and readers. The opportunity is to further
enhance the relationships we already have with our listeners, viewers and
readers by expanding products and services offered by our stations and
magazines. For that reason, we have individuals at each of our properties
dedicated to website maintenance and generating revenues from the property's
website.
We believe that there are opportunities to improve and expand our
television operations utilizing new technologies such as those that capitalize
on the digital spectrum and the Internet. Along with several other major
television broadcasters and local stations, we have invested in iBlast Networks,
the nation's largest network for over-the-air distribution of digital content,
applications and services.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the
communities we serve. To that end, each of our stations participates in many
community programs, fundraisers and activities that benefit a wide variety of
organizations. Charitable organizations that have been the beneficiaries of our
marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, United Way's September 11th Fund, The March of Dimes, American
Cancer Society, Riley Children's Hospital and research foundations seeking cures
for ALS, cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In
addition to our planned activities, our stations and magazines take leadership
roles in community responses to natural disasters, such as commercial-free news
broadcasts covering the events of September 11th and the war in Iraq. The
National Association of Broadcasters Education Foundation honored us with the
Hubbard Award, honoring a broadcaster "for extraordinary involvement in serving
the community." Emmis was only the second broadcaster to receive this
prestigious honor.
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 Television Operators Caucus, the Radio Advertising Bureau, the
Radio Futures Committee, the Arbitron Advisory Council, and as founding members
of the Radio Operators Caucus. Our chief executive has been honored with the
National Association of Broadcasters' "National Radio Award" and as Radio Ink's
"Radio Executive of the Year." At various times we have been voted Most
Respected Broadcaster in polls of radio industry chief executive officers and
managers and our management and on-air personalities have won numerous
prestigious industry awards.
COMPETITION
Radio and television broadcasting stations compete with the other
broadcasting stations in their respective market areas, as well as with other
advertising media such as newspapers, magazines, outdoor advertising, transit
advertising, the Internet and direct mail marketing. Cable systems generally do
not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that otherwise would have been
offered to local television stations. Competition within the broadcasting
industry occurs primarily in individual market areas, so that a station in one
market (e.g., New York) does not generally compete with stations in other
markets (e.g., Chicago). In each of our markets, our stations face competition
from other stations with substantial financial resources, including stations
targeting the same demographic groups. In addition to management experience,
factors which are material to competitive position include the station's rank in
its market in terms of the number of listeners or viewers, authorized power,
assigned frequency, audience characteristics, local program acceptance and the
number and characteristics of other stations in the market area. We attempt to
improve our competitive position with programming and promotional campaigns
aimed at the demographic groups targeted by our stations, and through sales
efforts designed to attract advertisers that have done little or no broadcast
advertising by emphasizing the effectiveness of radio and television advertising
in increasing the advertisers' revenues. Changes in the policies and rules of
the FCC permit increased joint ownership and joint operation of local stations.
Those stations taking advantage of these joint arrangements (including our New
York, Los Angeles, Phoenix, St. Louis, Indianapolis and Terre Haute clusters)
may in certain circumstances have lower operating costs and may be able to offer
advertisers more attractive rates and services. Although we believe that each of
our stations can compete effectively in its market, there can be no assurance
that any of our stations will be able to maintain or increase its current
audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, barriers to entry
exist. The operation of a broadcasting station in the United States requires a
license from the FCC. Also, 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 and cross ownership rules which limit the types of media properties in
any given market that can be owned by the same person.
The broadcasting industry historically has grown in terms of total revenues
despite the introduction of new technology for the delivery of entertainment and
information, such as cable television, the Internet, satellite television, audio
tapes and compact discs. We believe that radio's portability in particular makes
it less vulnerable than other media to competition from new methods of
distribution or other technological advances. There can be no assurance,
however, that the development or introduction in the future of any new media
technology will not have an adverse effect on the radio or television
broadcasting industry.
ADVERTISING SALES
Our stations and magazines derive their advertising revenue from local and
regional advertising in the marketplaces in which they operate, as well as from
the sale of national advertising. Local and most regional sales are made by a
station's or magazine's sales staff. National sales are made by firms
specializing in such sales which are compensated on a commission-only basis. We
believe that the volume of national advertising revenue tends to adjust to
shifts in a station's audience share position more rapidly than does the volume
of local and regional advertising revenue. During the year ended February 28,
2003, approximately 27% of our total net revenues were derived from national
sales and 73% were derived from local and regional sales. For the year ended
February 28, 2003, our radio stations derived a higher percentage of their
revenues from local and regional sales (80%) than our television (67%) and
publishing entities (77%).
EMPLOYEES
As of February 28, 2003 Emmis had approximately 2,400 full-time employees
and approximately 680 part-time employees. We have approximately 280 employees
at various radio and television stations represented by unions. We consider
relations with our employees to be good.
INTERNET ADDRESS AND INTERNET ACCESS TO SEC REPORTS
Our Internet address is www.emmis.com. You may obtain through our Internet
website, free of charge, copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act. These reports will be available the same day we electronically file such
material with, or furnish such material to, the SEC. We have been making such
reports available on the same day as they are filed during the period covered by
this report.
FEDERAL REGULATION OF BROADCASTING
Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (in part 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 a 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.
LICENSE RENEWAL. Radio and television stations operate pursuant to
broadcast licenses that are ordinarily granted by the FCC for maximum terms of
eight years and are subject to renewal upon application to the FCC. Our licenses
currently have the following expiration dates, until renewed:
WENS(FM) (Indianapolis) August 1, 2004
WIBC(AM) (Indianapolis) August 1, 2004
WNOU(FM) (Indianapolis) August 1, 2004
WYXB(FM) (Indianapolis) August 1, 2004
WTHI-FM (Terre Haute) August 1, 2004
WWVR(FM) (Terre Haute) August 1, 2004
WSAZ-TV (Huntington) October 1, 2004
WKQX(FM) (Chicago) December 1, 2004
WMLL(FM) (St. Louis) December 1, 2004
KSHE(FM) (St. Louis) February 1, 2005
WFTX-TV (Fort Myers) February 1, 2005
WKCF(TV) (Orlando) February 1, 2005
KFTK(FM) (St. Louis) February 1, 2005
KIHT(FM) (St. Louis) February 1, 2005
KPNT(FM) (St. Louis) February 1, 2005
WALA-TV (Mobile) April 1, 2005
WBPG(TV) (Mobile) April 1, 2005
WVUE(TV) (New Orleans) June 1, 2005
WTHI-TV (Terre Haute) August 1, 2005
KKLT(FM) (Phoenix) October 1, 2005
KKFR(FM) (Phoenix) October 1, 2005
KTAR(AM) (Phoenix) October 1, 2005
KMVP(AM) (Phoenix) October 1, 2005
KPWR(FM) (Los Angeles) December 1, 2005
WLUK-TV (Green Bay) December 1, 2005
KZLA-FM (Los Angeles) December 1, 2005
KREZ-TV (Durango) April 1, 2006
WQHT(FM) (New York) June 1, 2006
WQCD(FM) (New York) June 1, 2006
WRKS(FM) (New York) June 1, 2006
KSNW(TV) (Wichita) June 1, 2006
KMTV(TV) (Omaha) June 1, 2006
KSNT(TV) (Topeka) June 1, 2006
KSNG(TV) (Garden City) June 1, 2006
KSNC(TV) (Great Bend) June 1, 2006
KSNK(TV) (McCook-Oberlin) June 1, 2006
KRQE(TV) (Albuquerque) October 1, 2006
KGUN(TV) (Tucson) October 1, 2006
KBIM-TV (Roswell) October 1, 2006
KHON-TV (Honolulu) February 1, 2007
KAII-TV (Maui) February 1, 2007
KHAW-TV (Hawaii) February 1, 2007
KOIN(TV) (Portland) February 1, 2007
KGMB(TV) (Honolulu) February 1, 2007
KGMD-TV (Hawaii) February 1, 2007
KGMV(TV) (Maui) February 1, 2007
Emmis also has filed applications with the FCC to acquire controlling
interests in six additional radio stations. The FCC licenses for these stations,
which are located in the Austin, Texas, market, will expire on August 1, 2005.
Under the Communications Act, at the time an application is filed for
renewal of a station license, parties in interest, as well as members of the
public, may apprise the FCC of the service the station has provided during the
preceding license term and urge the denial of the application. If such a
petition to deny presents information from which the FCC concludes (or if the
FCC concludes on its own motion) that there is a "substantial and material"
question as to whether grant of the renewal application would be in the public
interest under applicable rules and policy, the FCC may conduct a hearing on
specified issues to determine whether the renewal application should be granted.
The Communications Act provides for the grant of a renewal application upon a
finding by the FCC that the licensee:
o has served the public interest, convenience and necessity;
o has committed no serious violations of the Communications Act or the
FCC rules; and
o has committed no other violations of the Communications Act or the FCC
rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny the renewal application,
and only then may the FCC consider competing applications for the same
frequency. In a vast majority of cases, the FCC renews a broadcast license even
when petitions to deny have been filed against the renewal application.
REVIEW OF OWNERSHIP RESTRICTIONS. The 1996 Act requires the FCC to review
all of its broadcast ownership rules every two years in a so-called "biennial
review proceeding" and to repeal or modify any of its rules that are no longer
"necessary in the public interest." The 2002 biennial review proceeding was
initiated by the Commission in September 2002; the FCC anticipates that it will
issue a decision in the proceeding in the spring of 2003. Each of the radio and
television ownership restrictions detailed below is under consideration in this
proceeding.
RADIO OWNERSHIP: Under FCC rules, with limited exceptions, the number of radio
stations that may be owned by one entity in a given radio market is dependent
upon the number of commercial radio stations in that market:
o if the market has 45 or more commercial radio stations, one entity may
own up to eight stations, not more than five of which may be in the
same service (AM or FM);
o if the market has between 30 and 44 commercial radio stations, one
entity may own up to seven stations, not more than four of which may
be in the same service;
o if the market has between 15 and 29 commercial radio stations, a
single entity may own up to six stations, not more than four of which
may be in the same service; and
o if the market has fourteen or fewer commercial radio stations, one
entity may own up to five stations, not more than three of which may
be in the same service, except that one entity may not own more than
fifty percent of the stations in the market.
Each of the markets in which our radio stations are located has at least 15
commercial radio stations.
The FCC has been aggressive in examining issues of market concentration
when considering radio station acquisitions, even where the numerical limits
described above are not violated. In some instances, the FCC has delayed its
approval of proposed radio station purchases because of market concentration
concerns, and in several recent cases, the FCC has ordered evidentiary hearings
to determine whether a proposed transaction would result in excessive
concentration. Additionally, in December 2000, the FCC launched a proceeding to
examine possible revisions to the manner in which the agency counts stations and
defines a radio "market" for purposes of determining compliance with the local
radio multiple ownership restrictions. In November 2001, the FCC subsumed this
proceeding into a more comprehensive proceeding to review all aspects of the
agency's local radio multiple ownership rules, including, among other things,
whether it may or should modify its local radio multiple ownership rules to
address concerns of undue market concentration. The FCC has also requested
comment on future regulatory treatment of radio time brokerage agreements (also
known as "local marketing agreements" or "LMA's") and radio joint sales
agreements. That proceeding, in turn, has been incorporated into the
Commission's currently pending biennial review proceeding.
TELEVISION OWNERSHIP: Pursuant to the 1996 Act, the FCC substantially
revised its local television ownership rules (including its television "duopoly"
rule and radio/television cross-ownership rule) in an August 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 (known as "voices")
will remain in the market post-merger, and one of the two
commonly-owned stations is not among the top four television stations
in the market (based on audience share ratings).
The Commission will consider permanent waivers of its television duopoly
rule where one of the stations is:
o a "failed station," i.e., off-air for more than four months, or
involved in an involuntary bankruptcy proceeding;
o a "failing station," i.e., having a low audience share and financially
struggling; or
o an unbuilt facility, where the permittee has made substantial progress
towards constructing the facility.
The television duopoly rule was appealed to the United States Court of
Appeals for the District of Columbia Circuit ("D.C. Circuit"). In April 2002,
the D.C. Circuit issued a decision remanding the rule to the FCC for further
consideration. The court found that the FCC had not justified excluding media
other than television stations as "voices" to be counted for purposes of
determining compliance with the rule. The court-ordered remand has been
incorporated into the FCC's 2002 biennial review proceeding.
Our acquisition of the Lee Enterprises stations required a waiver of the
television duopoly rule because the signals of KHON-TV and KGMB-TV (one of the
Lee Enterprises stations) overlap, the stations serve the same market, and both
stations are rated among the top four in that market. In approving the
acquisition, the FCC granted a temporary waiver of the rule, ordering that an
application for divestiture of either KHON-TV or KGMB-TV (plus associated
"satellite" stations) be filed on or before April 1, 2001; that deadline was
subsequently extended at our request to April 1, 2002. In February 2002, we
filed a request for a further extension to April 1, 2003, which was opposed by a
Honolulu broadcaster. In response to our further extension request, the FCC
required us to file additional information concerning our divestiture efforts.
Pending its review of the information we submitted, the FCC granted us an
interim extension of our waiver until July 1, 2002. To date, the Commission has
not taken any additional action with respect to our further extension request.
In addition, in May 2002, we filed a request for interim relief with the
Commission, asking that the divestiture requirement be stayed pending the
outcome of the 2002 biennial review. That request was apposed by the same
Honolulu broadcaster who opposed the February extension request, as well as by
two local public interest groups. In September 2002, we supplemented the request
for interim relief with additional information. The request remains pending, and
we cannot predict whether it will be granted.
The FCC's revised radio/television cross-ownership rule generally permits
the common ownership of the following combinations in the same market, to the
extent permitted under the FCC's television duopoly rule:
o up to two commercial television stations and six commercial radio
stations or one commercial television station and seven commercial
radio stations in a market where at least 20 independent media voices
will remain post-merger;
o up to two commercial television stations and four commercial radio
stations in a market where at least 10 independent media voices will
remain post-merger; and
o two commercial television stations and one commercial radio station in
a market regardless of the number of independent media voices that
will remain post-merger.
For purposes of this rule, the FCC counts as "voices" commercial and
non-commercial broadcast television and radio stations as well as some daily
newspapers and cable operators. The Commission will consider permanent waivers
of its revised radio/television cross-ownership rule only if one of the stations
is a "failed station."
The 1996 Act required the FCC to relax its restriction on the number of
television stations that a single entity may own nationwide. Specifically, the
rule was adjusted to restrict ownership to stations reaching, in the aggregate,
no more than 35 percent of the total national audience. In its 1998 biennial
review decision, the FCC decided to retain the 35 percent limit, rejecting
requests to further relax the ownership cap. In response, certain TV group
owners filed comments with the FCC and/or appeals in the D.C. Circuit seeking
elimination, or at least relaxation, of this limit. In February 2002, the D.C.
Circuit issued a decision requiring the FCC to initiate further proceedings to
justify its decision to retain the 35 percent cap. In the same decision, the
court also vacated the FCC's rule prohibiting common ownership of a television
station and a cable television system in the same market; that rule subsequently
was repealed by the FCC. As a result of the court's decision, in early April
2002, the FCC granted Viacom/CBS a stay of the May 2002 deadline that the FCC
had set for the network to divest certain of its television stations in order to
come into compliance with the 35 percent cap; the stay will remain in effect
until one year after the FCC completes review of the national cap as required by
the court's decision. Fox has obtained a similar stay.
Current FCC rules also prohibit common ownership of a daily newspaper and a
radio or television station in the same market. In September 2001, the FCC
initiated a proceeding requesting comment on whether to eliminate, or at least
relax, this restriction. That proceeding subsequently was rolled into the 2002
biennial review proceeding.
We cannot predict the ultimate outcome of the proceedings described above,
future biennial reviews or other agency or legislative initiatives or the
impact, if any, that they will have on our business.
ALIEN OWNERSHIP. Under the Communications Act, no FCC license may be held
by a corporation if more than one-fifth of its capital stock is owned or voted
by aliens or their representatives, a foreign government or representative
thereof, or an entity organized under the laws of a foreign country
(collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides
that no FCC license may be granted to an entity directly or indirectly
controlled by another entity of which more than one-fourth of its capital stock
is owned or voted by Non-U.S. Persons if the FCC finds that the public interest
will be served by the denial of such license. The FCC staff has interpreted this
provision to require an affirmative public interest finding to permit the grant
or holding of a license, and such a finding has been made only in limited
circumstances. The foregoing restrictions on alien ownership apply in modified
form to other types of business organizations, including partnerships and
limited liability companies. Our Second Amended and Restated Articles of
Incorporation and Amended and Restated 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 has developed specific criteria in order to determine whether a certain
ownership interest or other relationship with a Commission licensee is
significant enough to be "attributable" or "cognizable" under its rules.
Specifically, among other relationships, certain stockholders, officers, and
directors of a broadcasting company are deemed to have an attributable interest
in the licenses held by that company, such that there would be a violation of
the Commission's rules where the broadcasting company and such a stockholder,
officer, or director together hold attributable interests in more than the
permitted number of stations or a prohibited combination of outlets in the same
market. The FCC's regulations generally deem the following relationships and
interests to be attributable for purposes of its ownership restrictions:
o all officer and director positions in a licensee or its (in)direct
parent(s);
o voting stock interests of at least five percent (or twenty percent, if
the holder is a passive institutional investor, i.e., a mutual fund, ,
insurance company, or bank);
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 and has not been
"insulated" from such activities pursuant to specific FCC criteria;
o equity and/or debt interests which, in the aggregate, exceed 33
percent of the total asset value of a station or other media entity
(the "equity/debt plus policy"), if the interest holder supplies more
than 15 percent of the station's total weekly programming (usually
pursuant to a time brokerage, local marketing or network affiliation
agreement) or is a same-market media entity (i.e., broadcast company
or newspaper).
To assess whether a voting stock interest in a direct or indirect
parent corporation of a broadcast licensee is attributable, the FCC uses a
"multiplier" analysis in which non-controlling voting stock interests are
deemed proportionally reduced at each non-controlling link in a
multi-corporation ownership chain.
In a January 2001 order, the FCC eliminated its "single majority
shareholder exemption" for purposes of the broadcast attribution rules. The
exemption had provided that, in cases where one person or entity (such as
Jeffrey H. Smulyan in the case of Emmis) held more than 50 percent of the
combined voting power of the common stock of a broadcasting company, a
minority shareholder of the company generally would not be deemed to hold
an attributable interest in the company. Although the FCC eliminated the
single majority shareholder exemption, it grandfathered minority interests
in broadcasting companies with single majority shareholders where the
interests were acquired prior to December 14, 2000, the adoption date of
the FCC's order. The FCC's decision to eliminate the single majority
shareholder exemption was called into question by a March 2001 federal
court decision, which reversed and remanded the FCC's decision to eliminate
the corresponding exemption for purposes of the cable television
attribution rules. In light of that decision, the Commission initiated a
proceeding to review the single majority shareholder exemption in both the
cable and broadcast contexts. The FCC also issued an order suspending
enforcement of the elimination of the exemption until a decision is reached
in its review proceeding, which remains pending. Accordingly, the single
majority shareholder exemption remains in force.
Should the FCC ultimately eliminate the exemption, any minority interests
in Emmis of at least five percent that were acquired on or after December 14,
2000 will not be exempt from attribution, despite Mr. Smulyan's majority
interest. Moreover, in the event that Mr. Smulyan no longer holds more than 50
percent of the voting power, the interests of grandfathered minority
shareholders which had theretofore been considered nonattributable would become
attributable, such that any other media interests held by these shareholders
would be combined with Emmis' media interests for purposes of determining
compliance with FCC ownership rules. Mr. Smulyan's level of voting control could
decrease to or below 50 percent as a result of transfers of common stock
pursuant to agreement, exercise of options to acquire common stock, 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
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, and
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 had 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 and
the lack of qualified tall-tower builders to construct the facilities necessary
for DTV operations, among other factors, including the pace of DTV production
and sales, may cause delays in the DTV transition. The FCC has announced that it
will review the progress of DTV every two years and make adjustments to the 2006
target date, if necessary. The FCC is also considering cable operators'
obligations to carry the digital signals of broadcast television stations,
including the obligations that should exist during the DTV transition period,
when broadcasters' analog and digital signals will be operating simultaneously.
Television broadcasters are allowed to use their DTV channels according to
their best business judgment, provided that they continue to offer at least one
free programming service that is at least comparable to today's analog service.
Digital services and programming can include multiple standard definition
program channels, data transfer, subscription video, interactive materials, and
audio signals (so-called "ancillary" services). The FCC has imposed a fee of
five percent of the annual gross revenues for television broadcasters' use of
the DTV spectrum to offer ancillary services. The form and amount of these fees
may have a significant effect on the profitability of such services.
Broadcasters will not be required to air "high definition" programming.
Beginning April 1, 2003, broadcasters operating in digital mode were required to
simulcast at least 50 percent of 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 were required to be on the air with
a digital signal by May 1, 2002, absent an extension on a station-by-station
basis. All Emmis' stations met the November 1, 1999 application deadline.
Stations WALA, WKCF, and WFTX met the May 1, 2002 on-air deadline, and all other
stations subsequently initiated DTV service prior to their extended deadlines,
except WVUE(TV), KGUN(TV), KSNK(TV), and the Hawaii stations. KSNK(TV) and the
Hawaii stations have obtained further extensions, and extension requests are
pending for WVUE(TV) and KGUN(TV). Additionally, all of the Emmis stations filed
timely applications to "maximize" (expand the coverage of) the DTV facilities to
ensure the DTV coverage is equal to or better than the coverage of our analog
channels.
WBPG is not subject to the usual DTV deadlines because it was not issued a
second channel for DTV operation; rather, WBPG will be required to convert to
DTV operation by the conclusion of the DTV transition period. Further, since
Channel 55, on which WBPG operates, is to be reallocated by the FCC for other
use at the end of the DTV transition period, the FCC will assign the station to
a different channel at that time unless it has already changed its channel.
In January 2001, the FCC issued a further order on DTV transition issues,
setting a number of deadlines for commercial broadcasters. The order required
commercial stations with both analog and digital channel assignments within the
DTV core spectrum (channels 2-51) to elect by the end of December 2003 the
channel they will use for broadcasting after the transition is complete.
Similarly, the FCC decided in the order that, 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. The order further held that, by the end of
December 2004, commercial broadcasters must provide a stronger digital signal to
their communities of license than was previously required.
In November 2001, the FCC issued a reconsideration order on DTV transition
issues, which modified many of the rules established in January 2001.
Specifically, the reconsideration order temporarily defers the FCC's previously
established deadlines for broadcasters to: (1) choose their permanent
post-transition DTV channel; (2) provide a DTV signal that replicates their
analog service area; and (3) build maximized DTV facilities. The order also
permits broadcasters to request special temporary authority to construct initial
minimal DTV facilities (i.e., facilities that only cover their cities of
license) while retaining interference protection for their allotted and
maximized facilities. In addition, the order allows commercial stations subject
to the May 1, 2002 construction deadline (i.e., stations not in the top 30
markets) to initially broadcast a digital signal during prime time hours only.
In April 2002 the FCC Chairman challenged the broadcast, cable, satellite,
and consumer electronics industries to take certain voluntary actions designed
to speed the DTV transition. Although members of the broadcast, cable, and
satellite industries were quick to make commitments to comply with Chairman
Powell's proposals, the consumer electronics industry was reluctant to embrace
the plan. Consequently, the Commission found it necessary to formally mandate a
phased-in DTV tuner requirement. As a result, all new television sets 13 inches
and larger and all TV interface devices (VCRs, etc.) must include the capability
of tuning and decoding over-the-air digital signals by 2007.
In January 2003, the FCC launched its second periodic review of its DTV
rules and proposed new deadlines for stations to choose their post-transition
digital channels, to replicate their analog service areas and maximize their
digital facilities in order to maintain protection of their allotted and/or
expanded service areas. The Commission proposed July 1, 2005 as the date for
affiliates of ABC, NBC, CBS and Fox in the top 100 markets to build out their
full facilities or lose protection for the "unused" areas. This deadline would
apply to all the Emmis television stations except WTHI, KSNT and WKCF. All other
stations, including WTHI, KSNT and WKCF, would be required to build out their
full facilities by July 1, 2006 under the Commission's proposal. The FCC
proposed May 1, 2005 as the deadline for choosing a permanent DTV channel. The
FCC also will decide in the proceeding how to evaluate when the transition to
digital television has been achieved and, accordingly, when broadcasters will be
required to operate exclusively in digital mode and turn in the channel not used
for digital broadcasting. Under current law, that date is set at December 31,
2006 or the date by which 85 percent of the television households in a
licensee's market are capable of receiving the signals of DTV stations.
Another area of concern for the DTV transition is the technical standards
needed to ensure that digital television sets can connect to cable systems. At
the request of the FCC, the cable and consumer electronics industries entered
into a Memorandum of Understanding ("MOU") setting forth an agreement on a cable
compatibility standard. The Commission put the MOU out for public comment in
January of 2003.
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. In order to protect network-affiliated
broadcast stations from the effects of satellite importation of non-local
network signals into their markets, DBS operators are permitted to deliver
distant network signals only to unserved households in so-called "white areas"
(i.e., locations too distant from a local network affiliate to receive a
sufficiently strong "over-the-air" signal). In addition, in November 1999,
Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA"), which
authorizes DBS companies to provide local television signals to their
subscribers pursuant to a retransmission consent agreement with the station. In
March 2000, the FCC adopted regulations governing the statutory requirements for
"good faith" negotiations and non-exclusive agreements in retransmission consent
contracts between broadcasters (and all multichannel video program
distributors). Broadcasters are required to negotiate non-exclusive
retransmission consent agreements in good faith until January 1, 2006; however,
the law explicitly provides that broadcasters may enter into agreements with
competing DBS carriers on different terms.
Moreover, effective January 1, 2002, local television stations became
entitled to "must-carry" rights on a DBS system if the system is providing any
local television station(s) to its subscribers. In such markets, stations now
can choose whether to demand carriage on a DBS system by electing must-carry
status or to negotiate with the DBS operator for specific carriage terms by
electing retransmission consent status. SHVIA also "grandfathered" delivery of
the signals of television stations via DBS to certain subscribers who may have
been receiving such signals in violation of prior law. In November 2000, the FCC
adopted rules to implement SHVIA provisions regarding "local-into-local"
satellite service, must-carry election cycle rules and related policies for
satellite carriage of broadcast signals. Under the new FCC rules, a broadcast
television station must affirmatively elect must-carry status to require a DBS
operator to carry its station; the first elections were due by July 1, 2001. In
response to a challenge to certain provisions of SHVIA, a panel of the U.S.
Court of Appeals for the Fourth Circuit upheld the requirement that DBS
operators carry the signal of all local television stations in markets where
they elect to carry any local signals. The court also upheld an FCC rule that
permits DBS operators to offer all local television stations on a single tier or
on an a la carte basis. The rule allows consumers to choose between the two
options. In response to broadcasters' first elections, DBS operators issued a
large number of carriage denial letters, prompting the FCC to issue an order in
September 2001 clarifying the DBS mandatory carriage rules. In particular, the
FCC emphasized that a satellite carrier must have a "reasonable basis" for
rejecting a broadcast station's carriage request.
There are FCC rules and policies, and rules and policies of other federal
agencies, that regulate matters such as the use of auctions to resolve mutually
exclusive application requests, network-affiliate relations, the ability of
stations to obtain exclusive rights to air syndicated programming, cable
systems' carriage of syndicated and network programming on distant stations,
political advertising practices, application procedures and other areas
affecting the business or operations of broadcast stations.
Failure to observe FCC rules and policies can result in the imposition of
various sanctions, including monetary fines, the grant of "short" (less than the
maximum term) license renewals or, for particularly egregious violations, the
denial of a license renewal application or the revocation of a license.
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission has adopted
rules implementing a new low power FM ("LPFM") service. The FCC has begun
accepting applications for LPFM stations and has granted some of those
applications. We cannot predict whether any LPFM stations will interfere with
the coverage of our radio stations.
The FCC has also authorized two companies to launch and operate satellite
digital audio radio service ("SDARS") systems. Both companies--Sirius Satellite
Radio, Inc. and XM Radio--are now providing nationwide service. Currently, the
FCC is considering a proposal to permit SDARS to be supplemented by terrestrial
"repeating" transmitters designed to fill "gaps" in satellite coverage. We
cannot predict the impact of SDARS on our radio stations' listenership.
In October 2002, the FCC issued an order selecting a technical standard for
terrestrial digital audio broadcasting ("DAB"). The in-band, on-channel ("IBOC")
technology chosen by the agency allows AM and FM radio broadcasters to introduce
digital operations and permits existing stations to operate on their current
frequencies in either full analog mode, full digital mode, or a combination of
both (at reduced power).
In January 2001, the D.C. Circuit concluded that the FCC's Equal Employment
Opportunity ("EEO") regulations were unconstitutional. The FCC adopted new EEO
rules in November 2002, which went into effect in March 2003.
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;
o proposals to tighten safety guidelines relating to radio frequency
radiation exposure;
o proposals permitting FM stations to accept formerly impermissible
interference;
o proposals to reinstate holding periods for licenses;
o changes to broadcast technical requirements, including those relative
to the implementation of SDARS and DAB;
o proposals to limit the tax deductibility of advertising expenses by
advertisers.
We cannot predict whether any proposed changes will be adopted, what other
matters might be considered in the future, or what impact, if any, the
implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference should be made to
the Communications Act as well as FCC regulations, public notices and rulings
for further information concerning the nature and extent of federal regulation
of broadcast stations.
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one
national radio station located in Hungary and two radio stations located in
Argentina. The following tables summarize relevant financial information by
geographic area:
For the year ended February 28,
Net Revenues: 2001 2002 2003
---- ---- ----
(In Thousands)
Domestic $ 458,767 $ 523,124 $ 550,553
International 14,578 16,698 11,810
------ ------ ------
Total $ 473,345 $ 539,822 $ 562,363
========= ========= =========
As of February 28,
Noncurrent Assets: 2001 2002 2003
---- ---- ----
(In Thousands)
Domestic $ 2,263,796 $ 2,229,680 $ 1,942,069
International 27,970 16,867 14,663
------ ------ ------
Total $ 2,291,766 $ 2,246,547 $ 1,956,732
=========== =========== ===========
With respect to EOC, the above information would be identical, except
domestic noncurrent assets would be $2,218,750 and $1,934,540 and total
noncurrent assets would be $2,235,617 and $1,949,203 as of February 28, 2002 and
2003, respectively.
ITEM 2. PROPERTIES.
The following table sets forth information as of February 28, 2003 with
respect to offices, studios and broadcast towers of stations and magazines
currently owned by Emmis. Management believes that the properties are in good
condition and are suitable for Emmis' operations.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ---------- ------ --------
Corporate and Publishing Headquarters/ 1998 Owned --
WENS-FM/ WIBC-AM/WNOU-FM/
WYXB-FM/ Indianapolis Monthly
One Emmis Plaza
40 Monument Circle
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNOU-FM Tower 1979 Owned --
WIBC-AM Tower 1966 Owned --
WYXB-FM Tower 2003 Owned --
WMLL-FM/KFTK-FM/KIHT-FM/KPNT-FM/KSHE-FM 1998 Leased December 2007
800 St. Louis Union Station
St. Louis, Missouri
WMLL-FM Tower 1984 Owned --
KFTX-FM Tower 1987 Leased August 2009 with option to March 2023
KIHT-FM Tower 1995 Leased September 2005 with two 5-year options
KPNT-FM Tower 1987 Owned --
KSHE-FM Tower 1985 Leased April 2009
KPWR-FM 1988 Leased October 2017
KZLA-FM 2002 Leased October 2017
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased Month-to-Month
KZLA-FM tower 1991 Leased December 2004
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ---------- ------ --------
WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1984 Leased January 2010
WRKS-FM Tower 1984 Leased November 2005
WQCD-FM Tower 1984 Leased February 2007
WKQX-FM 2000 Leased December 2015 with 5 year option
230 Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 2009
Atlanta Magazine Office 1997 Leased July 20031
1330 Peachtree Street, N.E.
Atlanta, Georgia
Cincinnati Magazine 1996 Leased November 2006
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2009
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1999 Owned --
88 Piikoi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2008 with 10 year option
WALA-TV 2002 Owned --
WBPG-TV 2003 Owned --
1501 Satchel Paige Dr.
Mobile, AL
WALA-TV Tower 1962 Owned --
WBPG-TV Tower 2001 Leased July 2010
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1985 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 1966 Owned --
WVUE-TV 1972 Owned --
1025 South Jefferson Davis Highway
New Orleans, LA
WVUE-TV Tower 1963 Owned --
WKCF-TV 1998 Owned --
31 Skyline Drive
Lake Mary, FL
WKCF-TV Tower 2001 Leased April 2016
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
1New location and 10 year lease beginning August 1, 2003.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ---------- ------ --------
RDS/Co-Opportunities 1989 Leased December 2003
324 Campus Lane, Suite B
Suisun, CA 94585
Emmis West (Corporate) 1999 Leased January 2004
15821 Ventura Blvd., #685
Encino, CA 91436
Slager Radio 1998 Leased December 2004
Szabadsag Ut 117 (Atronyx Bldg. B)
H-2040 Budaors, Hungary
Slager Tower 1998 Leased November 2004
KOIN-TV 1984 Leased June 2083 with 99 year option
222 S.W. Columbia St.
Portland, OR 97221
KOIN-TV Tower 1953 Owned --
KSNT-TV 1967 Owned --
6835 N.W. U.S. Hwy 24
Topeka, KS 66618
KSNT-TV Tower 1967 Owned --
WSAZ-TV 1971 Owned --
645 5th Avenue
Huntington, WV 25701
WSAZ-TV Tower 1954 Owned --
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 --
KGUN-TV 1990 Owned --
7280 E. Rosewood
Tucson, AZ 85710
KGUN-TV Tower 1956 Leased July 2016
KRQE-TV 1953 Owned --
13 Broadcast Plaza S.W.
Albuquerque, NM 87104
KRQE-TV Tower 1959 Owned --
KTAR-AM/KMVP-AM/KKLT-FM/KKFR-FM 1994 Owned --
5300 N. Central Ave.
Phoenix, AZ 85012
KTAR-AM Tower 1958 Owned --
KMVP-AM Tower 1996 Leased December 2008
KKLT-FM Tower 1990 Owned --
KKFR-FM Tower 1998 Leased April 20032
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 - AM 1996 Owned --
Argentina Tower - FM 1996 Owned --
2 Verbal agreement to lease on month-to-month basis through end of calendar year
2003
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings arising in the ordinary
course of business. In the opinion of management of the Company, however, there
are no legal proceedings pending against the Company likely to have a material
adverse effect on the Company.
In December 2002, Emmis reached an agreement with the Hungarian
broadcasting authority, the National Radio and Television Board (ORTT), that
resolved pending legal issues and extended the national license for Slager, its
subsidiary in Hungary, through 2009. Slager agreed to pay the fees due under the
original broadcast contract in installments through November 2004, the date the
contract was set to expire. The license has been extended an additional five
years with payment terms more reflective of the current Hungarian advertising
environment
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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. There is no established
public trading market for Emmis' Class B common stock or Class C common stock or
for the common stock of EOC.
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 2001 $33.95 $20.06
August 2001 33.65 23.32
November 2001 24.95 12.27
February 2002 27.37 15.85
May 2002 31.85 26.15
August 2002 30.15 11.65
November 2002 24.05 14.25
February 2003 24.86 17.82
At April 25, 2003 there were 4,222 record holders of the Class A common
stock, and there was one record holder of the Class B common stock. As of April
25, 2003, there was one record holder of the EOC 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.
Equity Compensation Plan Information
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of February 28, 2003. These plans include
the 1994 Equity Incentive Plan, the 1995 Equity Incentive Plan, the Non-Employee
Director Stock Option Plan, the 1997 Equity Incentive Plan, the 1999 Equity
Incentive Plan, the 2001 Equity Incentive Plan, the 2002 Equity Compensation
Plan and the Employee Stock Purchase Plan. Our shareholders have approved all of
these plans.
Number of Securities
Number of Securities to Weighted-Average Remaining Available for Future
be Issued Upon Exercise Exercise Price of Issuance under Equity
of Outstanding Options, Outstanding Options, Compensation Plans (Excluding
Warrants and Rights Warrants and Rights Securities Reflected in Column (a))
Plan Category (a) (b) (c)
------------------------- --------------------- --------------------------------------
Equity Compensation Plans
Approved by Security Holders 5,933,692 (1) $ 26.53 (1) 4,933,846 (2)
Equity Compensation Plans
Not Approved by Security Holders -- -- --
Total 5,933,692 (1) $ 26.53 (1) 4,933,846 (2)
-----------------
(1) Includes 674,213 shares estimated to be issuable in 2004 to employees in
lieu of current salary pursuant to contract rights under our stock
compensation program. See Note 1h to our Consolidated Financial Statements.
The exact number and price of shares to be issued depends upon actual
compensation during the period prior to issuance and changes in our share
price and cannot be determined at this time. Thus, the weighted averages in
Column B do not reflect these shares. The amount in Column A excludes
obligations under employment contracts to issue bonus shares in the future.
(2) Includes 338,846 shares currently available under the initial authorization
for the Employee Stock Purchase Plan. The number of shares reserved for
issuance under this plan is automatically increased on the first day of
each fiscal year by the lesser of 0.5% of the common shares outstanding on
the last day of the immediately preceding fiscal year or a lesser amount
determined by our board of directors. On March 4, 2003, options were
granted to employees for an additional 1,095,310 shares.
ITEM 6. SELECTED FINANCIAL DATA
Emmis Communications Corporation
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
----------------------------
(Dollars in thousands, except share data)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
OPERATING DATA:
Net revenues $232,836 $325,265 $473,345 $539,822 $562,363
Station operating expenses, excluding
noncash compensation 143,348 199,818 299,132 354,157 349,251
Corporate expenses, excluding
noncash compensation 11,904 15,430 17,601 20,283 21,359
Time brokerage fees 2,220 - 7,344 479 -
Depreciation and amortization (1) 28,314 44,161 74,018 100,258 43,370
Non-cash compensation 4,269 7,357 5,400 9,095 22,528
Restructuring fees - - 2,057 768 -
Impairment loss and other (2) - 896 2,000 10,672 -
Operating income 42,781 57,603 65,793 44,110 125,855
Interest expense 35,650 51,986 72,444 129,100 103,835
Other income (loss), net (3) 1,914 3,247 38,037 (3,657) 5,294
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting change 9,045 8,864 31,386 (88,647) 27,314
Income (loss) before extraordinary item
and cumulative effect of accounting change 2,845 1,989 13,736 (63,024) 14,049
Net income (loss) (4) 1,248 (33) 13,736 (64,108) (164,468)
Net income (loss) available to
common shareholders 1,248 (3,177) 4,752 (73,092) (173,452)
Net income (loss) per share available
to common shareholders:
Basic:
Before accounting change and extraordinary loss $ 0.10 $ (0.03) $ 0.10 $ (1.52) $ 0.10
Extraordinary loss, net of tax (0.06) (0.06) - (0.02) (0.21)
Cumulative effect of accounting change, net of tax - - - - (3.16)
------ ------- ------ ------- ------
Net income (loss) available to common
shareholders $ 0.04 $ (0.09) $ 0.10 $ (1.54) $ (3.27)
====== ======= ====== ======= =======
Diluted:
Before accounting change and extraordinary loss $ 0.10 $ (0.03) $ 0.10 $ (1.52) $ 0.10
Extraordinary loss, net of tax (0.06) (0.06) - (0.02) (0.21)
Cumulative effect of accounting change, net of tax - - - - (3.16)
----- ----- ----- -----
Net income (loss) available to common
shareholders $ 0.04 $ (0.09) $ 0.10 $ (1.54) $ (3.27)
====== ======= ====== ======= =======
Weighted average common shares outstanding (5):
Basic 28,906 36,156 46,869 47,334 53,014
Diluted 29,696 36,156 47,940 47,334 53,014
FEBRUARY 28 (29),
--------------------------------------------------------------------
(Dollars in thousands)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash $ 6,117 $ 17,370 $ 59,899 $ 6,362 $ 16,079
Working capital (6) 1,249 28,274 97,885 19,828 28,024
Net intangible assets 802,307 1,033,970 1,852,259 1,953,331 1,676,733
Total assets 1,014,831 1,327,306 2,506,872 2,510,069 2,116,413
Long-term credit facility, senior subordinated
debt and senior discount notes (7) 577,000 300,000 1,380,000 1,343,507 1,194,789
Shareholders' equity 235,549 776,367 807,471 735,557 704,705
YEAR ENDED FEBRUARY 28 (29),
---------------------------------------------------------------
(Dollars in thousands)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
OTHER DATA:
Cash flows from (used in):
Operating activities $ 35,121 $ 26,360 $ 97,730 $ 69,377 $ 95,149
Investing activities (541,470) (271,946) (1,110,755) (175,105) 106,301
Financing activities 506,681 256,839 1,055,554 52,191 (191,733)
Capital expenditures 37,383 29,316 26,225 30,135 30,549
Cash paid for taxes 1,580 9,589 550 1,281 887
(1) We ceased amortization of our goodwill and FCC licenses in fiscal 2003 in
connection with our adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." Included in depreciation and amortization expense for
fiscal 1999, 2000, 2001 and 2002 is amortization expense of $16.9 million,
$28.4 million, $39.5 million and $58.2 million, respectively, related to
amortization of our goodwill and FCC licenses.
(2) Year ended February 28, 2002 includes a $9.1 million asset impairment
charge and a $1.6 million charge related to the early termination of
certain TV contracts.
(3) See Management's Discussion and Analysis of Financial Condition and Results
of Operation for a description of the components of other income in the
year ended February 28, 2001.
(4) Year ended February 28, 2003 includes a charge of $167.4 million, net of
tax, to reflect the cumulative effect of an accounting change in connection
with our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
(5) 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.
(6) February 28, 2002 excludes assets held for sale of $123.4 million and
credit facility debt to be repaid with proceeds of assets held for sale of
$135.0 million.
(7) February 28, 2002 balance excludes $135.0 million of credit facility debt
to be repaid with proceeds of assets held for sale.
Emmis Operating Company
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
----------------------------
(Dollars in thousands, except share data)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
OPERATING DATA:
Net revenues $ 232,836 $ 325,265 $ 473,345 $ 539,822 $ 562,363
Station operating expenses,
excluding noncash compensation 143,348 199,818 299,132 354,157 349,251
Corporate expenses,
excluding noncash compensation 11,904 15,430 17,601 20,283 21,359
Time brokerage fees 2,220 - 7,344 479 -
Depreciation and amortization (1) 28,314 44,161 74,018 100,258 43,370
Non-cash compensation 4,269 7,357 5,400 9,095 22,528
Restructuring fees - - 2,057 768 -
Impairment loss and other (2) - 896 2,000 10,672 -
Operating income 42,781 57,603 65,793 44,110 125,855
Interest expense 35,650 51,986 72,444 104,102 78,058
Other income (loss), net (3) 1,914 3,247 38,037 (4,643) 5,293
Income (loss) before income taxes, extraordinary items
and cumulative effect of accounting change 9,045 8,864 31,386 (64,635) 53,090
Income (loss) before extraordinary item
and cumulative effect of accounting change 2,845 1,989 13,736 (46,802) 30,724
Net income (loss) (4) 1,248 (33) 13,736 (47,886) (139,565)
FEBRUARY 28 (29),
-----------------
(Dollars in thousands)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash $ 6,117 $ 17,370 $ 59,899 $ 6,362 $ 16,079
Working capital (5) 1,249 28,274 97,885 20,951 29,147
Net intangible assets 802,307 1,033,970 1,852,259 1,953,331 1,676,733
Total assets 1,014,831 1,327,306 2,506,872 2,499,139 2,108,884
Long-term credit facility and
senior subordinated debt (6) 577,000 300,000 1,380,000 1,117,000 996,945
Shareholder's equity 235,549 776,367 807,471 944,467 878,418
YEAR ENDED FEBRUARY 28 (29),
----------------------------
(Dollars in thousands)
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
OTHER DATA:
Cash flows from (used in):
Operating activities $ 35,121 $ 23,471 $ 86,871 $ 67,393 $ 94,189
Investing activities (541,470) (271,946) (1,110,755) (175,105) 106,301
Financing activities 506,681 259,728 1,066,413 54,175 (190,773)
Capital expenditures 37,383 29,316 26,225 30,135 30,549
Cash paid for taxes 1,580 9,589 550 1,281 887
(1) We ceased amortization of our goodwill and FCC licenses in fiscal 2003 in
connection with our adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." Included in depreciation and amortization expense for
fiscal 1999, 2000, 2001 and 2002 is amortization expense of $16.9 million,
$28.4 million, $39.5 million and $58.2 million, respectively, related to
amortization of our goodwill and FCC licenses.
(2) Year ended February 28, 2002 includes a $9.1 million asset impairment
charge and a $1.6 million charge related to the early termination of
certain TV contracts.
(3) See Management's Discussion and Analysis of Financial Condition and Results
of Operation for a description of the components of other income in the
year ended February 28, 2001.
(4) Year ended February 28, 2003 includes a charge of $167.4 million, net of
tax, to reflect the cumulative effect of an accounting change in connection
with our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."
(5) February 28, 2002 excludes assets held for sale of $123.4 million and
credit facility debt to be repaid with proceeds of assets held for sale of
$135.0 million.
(6) February 28, 2002 balance excludes $135.0 million of credit facility debt
to be repaid with proceeds of assets held for sale.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The following discussion pertains to Emmis Communications Corporation
("ECC") and its subsidiaries (collectively, "Emmis" or the "Company") and to
Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a
wholly owned subsidiary of ECC in connection with the Company's reorganization
(see Note 1c. to our consolidated financial statements) on June 22, 2001. Unless
otherwise noted, all disclosures contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operation in the Form 10-K apply
to Emmis and EOC.
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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that encompass
significant judgments and uncertainties, and potentially derive materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are those described below.
Impairment of Goodwill and Indefinite-lived Intangibles
The annual impairment tests for goodwill and indefinite-lived intangibles
under SFAS No. 142 require us to make certain assumptions in determining fair
value, including assumptions about the cash flow growth rates of our businesses.
Additionally, the fair values are significantly impacted by macro-economic
factors, including market multiples at the time the impairment tests are
performed. Accordingly, we may incur additional impairment charges in future
periods under SFAS No. 142 to the extent we do not achieve our expected cash
flow growth rates, or to the extent that market values decrease.
Allocations for Purchased Assets
We typically engage an independent appraisal firm to value assets acquired
in a material acquisition. We use the appraisal report to allocate the purchase
price of the acquisition. To the extent that purchased assets are not allocated
appropriately, depreciation and amortization expense could be materially
different.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts requires us to estimate losses
resulting from our customers' inability to make payments. We specifically review
historical write-off activity by market, large customer concentrations, and
changes in our customer payment patterns when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, then additional allowances may be required.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
Emmis has agreed to acquire, for a purchase price of $105.2 million, a
controlling interest of 50.1% in LBJS Broadcasting Company, L.P. LBJS owns radio
stations KLBJ-AM, KLBJ-FM, KXMG-FM, KROX-FM and KGSR-FM, all in the Austin,
Texas metropolitan area. The remaining 49.9% interest in LBJS will be held by
Sinclair Telecable, Inc. which will contribute to LBJS a sixth Austin radio
station, KEYI-FM. We expect this acquisition to close in the second quarter of
our fiscal 2004. We will finance the acquisition through borrowings under the
credit facility and the acquisition will be accounted for as a purchase. In
addition, Emmis will have the option, but not the obligation, to purchase
Sinclair's entire interest in LBJS after a period of approximately five years
based on an 18-multiple of trailing 12-month cash flow.
Effective March 1, 2003, Emmis completed its acquisition of substantially
all of the assets of television station WBPG-TV in Mobile, AL-Pensacola, FL from
Pegasus Communications Corporation for $11.5 million. We financed the
acquisition through borrowings under the credit facility and the acquisition was
accounted for as a purchase. This ac