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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
As filed with the Securities and Exchange Commission on May 29, 1997
(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, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934 for the Transition
Period from _____ to _____.
Commission file number 0-23264
EMMIS BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1542018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
950 North Meridian Street, Suite 1200
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
317/266-0100
Registrant's Telephone Number
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, $.01 par value
Title of Class
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's Knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ].
The aggregate market value of the voting stock held by
non-affiliates of the registrant, as of April 30, 1997, was approximately
$266,360,710.
The number of shares outstanding of each of the registrant's classes
of common stock, as of April 30, 1997, was:
8,428,596 Class A Common Shares, $.01 par value
2,574,470 Class B Common Shares, $.01 par value
Documents Incorporated by Reference: See Page 2
1
DOCUMENTS INCORPORATED BY REFERENCE
Documents
---------
Form 10-K Reference
-------------------
Proxy Statement Dated May 27, 1997 Part III
2
EMMIS BROADCASTING CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation . . . . . . . . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 42
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 10. Directors and Executive Officers of the Registrant. . . . . . 43
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 13. Certain Relationships and Related Transactions. . . . . . . . 44
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company owns and operates nine FM radio stations and two AM
radio stations serving the nation's three largest radio markets, Los
Angeles, New York and Chicago, and the major markets of St. Louis and
Indianapolis. Three of these stations were acquired on March 31, 1997, and were
operated by the Company under a time brokerage agreement from December 1,1996
through March 31, 1997. The Company has successfully created top-
performing radio stations that are ranked among the top five stations in terms
of total audience share in three of the Company's markets and among the top ten
stations in terms of total audience share in one of the other two markets
according to the Winter 1997 Ratings (the "Winter 1997 Arbitron Survey")
published by The Arbitron Company ("Arbitron"). The Company has also
received awards from organizations such as the National Association of
Broadcasters and Billboard and Rolling Stone magazines. The Company has
achieved this success primarily as a result of its ability to attract and
retain an experienced team of broadcast professionals who have focused
on creating innovative programming and developing effective marketing and
sales programs.
The five markets served by the Company's stations accounted for
approximately $1.5 billion in radio advertising revenues in calendar year
1996. The Company's stations in these markets have consistently produced
positive Broadcast Cash Flow in each of the past five years. The
Broadcast Cash Flow of these eleven stations including three months of
operating results of the stations acquired in March 1997, was $50.4 million for
the fiscal year ended February 28, 1997. The Company believes that its
presence in large markets makes it attractive to advertisers and that the
geographic diversity of its markets reduces its dependence on any
economic sector or specific advertiser.
The Company began business in 1981 with one radio station in
Indianapolis. Historically, the Company's operating strategy has been
to acquire underperforming radio stations and improve their ratings,
revenues and Broadcast Cash Flow by utilizing the Company's programming
and marketing skills. The Company also publishes Indianapolis Monthly
magazine and Atlanta magazine, and engages in certain businesses
ancillary to its radio business, such as advertising and program
consulting and broadcast tower leasing.
COMPANY STRATEGY
The Company has developed and implements several operating
strategies to enhance its audience and advertising revenue shares.
Innovative Programming. The Company's primary strategy has been and
will continue to be to use innovative programming to create valuable new
radio station niches. For example, the Company introduced the
Dance/Contemporary Hit format at KPWR-FM in Los Angeles which attracted
the young Hispanic, white and African-American audiences of Southern
California. When the Company purchased WRKS-FM in New York City, it
developed a new "Classic Soul/Smooth R&B" format which specifically
targeted the adult African American audience. The Company also developed
the first all-sports radio station at WFAN-AM in New York prior to the sale
of this station in 1992. At WKQX-FM in Chicago, the Company created a new
niche by identifying and exploiting a variation of Alternative Rock (or "New
Rock") which had broader audience appeal than existing Alternative Rock
formats. Once a programming niche has been developed, the Company's general
strategy for maintaining ratings and increasing revenue is to build franchise
value through creative music programming, rather than relying on particular
high-profile on-air talent. The Company also routinely conducts market
research to assist in refining and improving the programming of each of
its stations.
Distinctive Corporate Culture. The Company believes its distinctive
corporate culture has contributed significantly to its ability to create
and successfully operate innovative radio stations. Each of the
Company's stations is managed by a team of experienced broadcasters who
understand the musical tastes, demographics and competitive opportunities
of their particular market. The Company has decentralized station
operations to local management who are rewarded based on the performance
of the individual station. Corporate management oversees and controls
station spending, directs long-range planning, establishes Company
policies and allocates resources. The Company believes that its
entrepreneurial management approach has made it a highly desirable
employer in the radio broadcasting industry and has significantly
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enhanced the Company's ability to attract and retain experienced and
highly motivated employees, management and on-air talent.
Focused Marketing Strategy. In recent years, radio advertising
revenues have generally grown at a more rapid rate than total advertising
revenues. The Company expects that this trend will continue to create
potential for growth in advertising revenues for the radio broadcasting
industry. In order to increase its share of these revenues, the
Company's programming in each market is designed to appeal to a specific
demographic group which the Company believes can result in increased
revenues by attracting advertisers interested in reaching the targeted
group. Within each radio market, the Company targets key demographic
groups based on advertiser demand and the competitive formats in the
market. Local and national sales efforts are designed to maximize the
Company's share of advertising budgets allocated to its targeted
demographic groups.
The Company's strategy is to be a leader in creating marketing and
sales development programs in each of its markets to attract new sources
of advertising revenue. The Company has won numerous awards for its
marketing efforts, particularly at KSHE-FM in St. Louis. The Company
has led the industry in developing "vendor co-op" advertising revenue
(i.e., revenue from a manufacturer or distributor which is used to
promote its particular goods together with local retail outlets for those
goods). Although this source of advertising revenue is common in the
newspaper and magazine industry, the Company was among the first radio
broadcasters to recognize the potential of vendor co-op advertising and
implement a program to take advantage of this potential. The Company has
also formed a national association of radio stations focusing on the age
12 to 24 demographic group to develop additional advertising revenue.
Expansion Strategy. The Company believes it can enhance its ability
to dominate a programming format by acquiring two or more stations in a
particular market, because the Company can then program each station to
deliver a larger share of a targeted demographic group to advertisers,
while being less vulnerable to programming format competition.
Accordingly, the Company has acquired additional stations in New York
City, Indianapolis, and St. Louis, and it intends to pursue additional
attractive acquisition opportunities in markets where it has existing
stations and can achieve the potential for significant increases in
Broadcast Cash Flow through programming enhancements and, to a lesser
extent, through cost savings. The Company will also consider
acquisitions of individual stations or groups of stations in other
attractive markets where it expects that it can ultimately achieve a
dominant position with one or more stations. The Company has entered
into a noncompetition agreement, however, in connection with the sale of
a radio station which restricts the Company from entering the Boston
market until May 1998.
In analyzing potential acquisitions in new markets, the Company
generally considers (i) the amount of money spent on radio advertising
each year in the relevant market and the growth rate for this pool of
revenue, (ii) the number of competitive stations in the market, including
whether there is a niche in the local spectrum of programming formats or
whether one of the competitors has a perceived vulnerability, (iii)
whether the station proposed to be acquired has a competitive signal,
(iv) whether value can be achieved through ownership of multiple
stations, and (v) the minimum level of performance which can be expected
from the station under the Company's management.
BROADCAST PROPERTIES
The Company's strategy is to focus on a limited number of radio
markets judged to have the greatest long-term growth potential. The
Company's ongoing broadcasting operations are summarized in the following
table:
Overall
STATION RANKING IN
STATION MARKET MARKET STATION RANKING PRIMARY PRIMARY
AND REVENUE RANK BY AUDIENCE IN DEMOGRAPHIC DEMOGRAPHIC
MARKET SIZE (1) REVENUE(1) SHARE(2) MARKET(2) TARGET FORMAT TARGET(3)
- ------ ------- ---------- -------- --------- ---------- ------ ------------
KPWR-FM $526.0 1 4.6 3 Ages Dance/ 1
Los Angeles 12-24 Contemporary
5 Hit
WQHT-FM 475.0 2 6.1 1 Ages Dance/ 1
New York 12-24 Contemporary
Hit
WRKS-FM 475.0 2 4.3 6 Ages Classic Soul/ 3
New York 25-54 Smooth R & B
WKQX-FM 337.6 3 2.8 14 Ages New Rock 7
Chicago 18-34
KSHE-FM 94.8 18 4.0 9 Ages Album 6
St. Louis 18-34 Oriented
Rock
WKKX-FM 94.8 18 4.5 7 Ages Country 9
St. Louis 25-54
WALC-FM 94.8 18 4.0 9 Ages Modern- 8
St. Louis 18-44 Adult
Contemporary
WKBQ-AM 94.8 18 (4) (4) Ages Country (4)
St. Louis 25-54
WENS-FM 65.6 28 5.4 7 Ages Adult 3
Indianapolis 25-54 Contemporary
WIBC-AM 65.6 28 9.1 3 Ages News/Talk 5
Indianapolis 25-54
WNAP-FM 65.6 28 4.2 10 Ages 70s Oldies 6
Indianapolis 25-54
(1) "Market Revenue Size" is based on aggregate gross radio revenue for
calendar year 1996. "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 (1997 ed.). Market
revenues are in millions.
(2) "Station Audience Share" is from the Winter 1997 Arbitron Survey.
The generally accepted method of measuring the relative size of a radio
station's audience is by reference to total persons, age 12 and older,
Monday--Sunday, 6 a.m.--Midnight Average Quarter Hour shares as published
by Arbitron. Arbitron periodically samples radio listeners in defined
market areas, principally through the use of diaries returned by selected
listeners. A station's AQH share is a percentage computed by dividing
the average number of persons listening to a particular station for at
least five minutes during an average quarter hour in a given time period
by the average number of such persons for all stations in the market
area. Arbitron compiles ratings data for various demographic groups as
well as for total persons age 12 and older. "Overall Station Ranking in
Market" is the ranking of the station among all radio stations in its
market based on the station's AQH share according to the Winter 1997
Arbitron Survey.
(3) "Ranking in Primary Demographic Target" is the ranking of the station
among all radio stations in its market and is based on the station's AQH
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share in the primary demographic target according to the Winter 1997
Arbitron Survey.
(4) Station Audience Share is not significant and therefore not reflected
on the Winter 1997 Arbitron Survey. The station simulcasts all
programming from sister station WKKX-FM.
ADVERTISING SALES
Virtually all of the revenue of a radio station is derived from
local, regional and national advertising. Advertising rates charged by
a radio station are a function of the station's ability to attract
audiences in the demographic groups which advertisers wish to reach, and
the number of stations competing in the market area. A station's
listenership is reflected in rating service surveys of the number of
listeners tuned to the station and the time spent listening. The Company
believes that its presence in the nation's three largest radio markets
and its strong position in its targeted demographic groups in those
markets make it attractive to national, regional and local advertisers.
The number of advertisements that can be broadcast without
jeopardizing listening levels (and the resulting ratings) is limited, in
part, by the format of a particular station and the local competitive
environment. The Company strives to maximize revenue by constantly
managing the number of commercials available and adjusting prices based
upon demand by advertisers to reach the station's target demographic
group.
The Company has led the industry in developing "vendor co-op"
advertising revenue (i.e., revenue from a manufacturer or distributor
which is used to promote its particular goods together with local retail
outlets for those goods). Although this source of advertising revenue
is common in the newspaper and magazine industry, the Company was among
the first radio broadcasters to recognize, and take advantage of, the
potential of vendor co-op advertising. The Company's Revenue Development
Systems division has established a network of radio stations which share
information about sources of vendor co-op revenue. In addition, each of
the Company stations has a salesperson devoted exclusively to the
development of cooperative advertising.
In addition to the sale of advertising time for cash, radio stations
typically exchange advertising time for goods or services which can be
used by the station in its business operations, including television and
billboard advertising and such items as travel and entertainment
services. 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.
Local and most regional sales are made by a station's sales staff.
National sales are made by firms specializing in such sales which are
compensated on a commission-only basis. The majority of national and
local advertising contracts are short-term, generally running for only
a few weeks.
COMMUNITY INVOLVEMENT
The Company believes that to be successful in radio broadcasting,
its stations must be integrally involved in the communities they serve.
To that end, each of the Company's stations participates in many
community programs, fundraisers and activities that benefit a wide
variety of organizations. Charitable organizations that have been the
beneficiaries of the Company's marathons, walkathons, dance-a-thons,
concerts, fairs and festivals include, among others, The March of Dimes,
American Cancer Society, Riley Children's Hospital and research
foundations seeking cures for cystic fibrosis, leukemia and AIDS and
helping to fight drug abuse.
In addition to its planned activities, the Company's stations take
leadership roles in community responses to natural disasters.
INDUSTRY INVOLVEMENT
The Company has taken an active leadership role in a wide range of
radio industry organizations. The Company's senior managers have served
7
in various capacities with radio industry associations, including as
directors of the National Association of Broadcasters, the Radio
Advertising Bureau, the Radio Futures Committee and the Arbitron Advisory
Council and as founding members of the Radio Operators Caucus. In
addition, managers of the Company have been voted Radio President of the
Year and General Manager of the Year, and at various times the Company
was voted Most Respected Broadcaster in polls of radio industry chief
executive officers and managers.
COMPETITION
The Company's radio broadcasting stations compete with the other
broadcasting stations in their respective market areas, as well as with
other advertising media such as newspapers, television, magazines,
outdoor advertising, transit advertising and direct mail marketing.
Competition within the radio broadcasting industry occurs primarily in
individual market areas, so that a station in one market does not
generally compete with stations in other market areas. In each of its
markets, the Company's stations face competition from other stations with
substantial financial resources, including stations targeting the same
demographic groups. In addition to management experience, factors which
are material to competitive position include the station's rank in its
market, authorized power, assigned frequency, audience characteristics,
local program acceptance and the number and characteristics of other
stations in the market area. The Company attempts to improve its
competitive position with promotional campaigns aimed at the demographic
groups targeted by its stations, and through sales efforts designed to
attract advertisers that have done little or no radio advertising by
emphasizing the effectiveness of radio advertising in increasing the
advertisers' revenues. Recent changes in the policies and rules of the
Federal Communications Commission (the "FCC") permit increased joint
ownership and joint operation of local radio stations. Those stations
taking advantage of these joint arrangements may in certain circumstances
have lower operating costs and may be able to offer advertisers more
attractive rates and services. Although the Company believes that each
of its stations can compete effectively in its market, there can be no
assurance that any of the Company's stations will be able to maintain or
increase its current audience ratings or advertising revenue market
share.
Although the radio broadcasting industry is highly competitive, some
barriers to entry exist. The operation of a radio broadcasting station
requires a license from the FCC, and the number of radio stations that
can operate in a given market is limited by the availability of the FM
and AM radio frequencies that the FCC will license in that market.
The radio broadcasting industry historically has grown in terms of
total revenues despite the introduction of new technologies for the
delivery of entertainment and information, such as television
broadcasting, cable television, audio tapes and compact discs. The
Company believes that radio's portability 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 broadcasting industry.
PUBLISHING OPERATIONS
The Company publishes two regional magazines which were acquired in 1988
and 1993.
Indianapolis Monthly. The Company has published Indianapolis
Monthly magazine since 1988. Indianapolis Monthly covers matters of
interest in the Indianapolis area and currently has a paid monthly
circulation of approximately 45,000. Over the last few years the
performance of the magazine has steadily improved despite a nationwide
downturn in the city and regional magazine business largely attributable
to unfavorable economic conditions. Competition for Indianapolis Monthly
comes from other local publications, although Indianapolis Monthly is now
the only general interest magazine focusing on the Indianapolis area.
Atlanta. The Company acquired the assets of and began publishing
Atlanta magazine on August 1, 1993. Atlanta covers matters of interest
in the Atlanta area and currently has a paid monthly circulation of
approximately 65,000. The magazine was unprofitable for several years
8
before it was acquired by the Company for a nominal investment. Certain
initiatives, including decreasing the number of employees at the magazine
and changing the sales focus of the magazine from national advertising
to local advertising, have contributed to improving profitability.
EMPLOYEES
As of February 28, 1997 the Company had approximately 379 full-time
employees and approximately 177 part-time employees. The Company's
on-air employees at its New York and Chicago radio stations, totaling
approximately 53 persons, are covered by a union contract with the
American Federation of Television and Radio Artists. The Company
considers relations with its employees to be excellent.
FEDERAL REGULATION
Radio broadcasting is subject to the jurisdiction of the FCC under
The Communications Act of 1934, as amended (the "Communications Act").
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 radio licenses in such manner as
will provide a fair, efficient and equitable distribution of service
throughout the United States. The FCC determines the location of
stations, regulates the apparatus used by stations, and regulates
numerous other areas of radio broadcasting pursuant to rules, regulations
and policies adopted under authority of the Communications Act. The
Communications Act, among other things, prohibits the assignment of a
broadcast license or the transfer of control of a corporation holding a
license without the prior approval of the FCC. The Telecommunications
Act of 1996 (the "Telecom Act") amended the Communications Act in a
number of important respects. 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. The Company cannot predict whether any such
legislation will be enacted or new or amended FCC regulations adopted or
what their effect would be on the Company.
License Renewal. Radio station licenses are currently issued for
maximum terms of seven years and are renewable for maximum terms of seven
years. The Telecom Act authorizes maximum license terms of eight years,
and the FCC has initiated a proceeding looking toward implementing that
change. The Company's licenses currently have the following expiration
dates, until renewed:
WENS-FM (Indianapolis) August 1, 1996*
WKQX-FM (Chicago) December 1, 2003
KSHE-FM (St. Louis) February 1, 2004
KPWR-FM (Los Angeles) December 1, 1997
WQHT-FM (New York) June 1, 1998
WIBC-AM (Indianapolis) August 1, 1996*
WNAP-FM (Indianapolis) August 1, 1996*
WRKS-FM (New York) June 1, 1998
WKBQ-AM (St. Louis) February 1, 2004
WKKX-FM (St. Louis) December 1, 2003
WALC-FM (St. Louis) December 1, 2003
*License renewal applications pending at the FCC
Under the Telecom Act, at the time an application is filed for
renewal for a radio 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 grant of denial
of the application. A competing application for authority to operate a
station and replace the incumbent licensee may not be filed against a
renewal application and considered by the FCC in deciding whether to
grant a renewal application. The statute modified the license renewal
process to provide for the grant of a renewal application upon a finding
by the FCC that the licensee (i) has served the public interest,
convenience and necessity; (ii) has committed no serious violations of
the Communications Act or the FCC's rules; and (iii) has committed no
other violations of the Communications Act or the FCC's rules which would
constitute a pattern of abuse. If the FCC cannot make such a finding,
it may deny a renewal application, and only then may the FCC accept
9
other applications to operate the station of the former licensee. In a
vast majority of cases, broadcast licenses are renewed by the FCC even
when petitions to deny applications are filed against broadcast license
renewal applications.
On July 1, 1996, the National Rainbow Coalition and Operation Push
filed with the FCC a petition to deny renewal of the licenses of WENS-FM,
WNAP-FM and WIBC-AM for alleged deficiencies in minority hiring
practices. The Company opposed the petition. The Company and the
petitioners subsequently entered into an agreement as a result of which
the petition was withdrawn. However, under FCC policy, notwithstanding
the withdrawal of the petition the allegations contained therein will be
considered by the FCC. The FCC has not yet issued a ruling on the
allegations.
Ownership Matters. Under the Telecom Act, the number of radio
stations that may be owned by one entity in a given radio market is
dependent on the number of commercial stations in that market: if the
market has 45 or more stations, one entity may own not more than eight
stations, of which not more than five may be in one service (AM or FM);
if the market has between 33 and 44 stations, one entity may own not more
than seven stations, of which not more than four may be in one service;
if the market has between 15 and 29 stations, a single entity may own not
more than six stations, of which not more than four may be in one
service; and if the market has fourteen or fewer stations, one entity may
own not more than five stations, of which not more than three may be in
one service, except that in such a market one entity may not own more
than fifty percent of the stations in the market. Each of the five
markets in which the Company's radio stations are located has at least
15 commercial radio stations. The Telecom Act eliminated restrictions
on the number of radio stations that may be owned by one entity
nationwide. One entity may not own a radio station together with a
television station or daily newspaper in the same market, although common
ownership of a radio station and a television station in the same market
is permitted upon a finding by the FCC that such ownership is in the
public interest. The FCC has established a liberal waiver policy to
permit common ownership of a radio station and a television station in
any of the nation's 25 largest markets; the Telecom Act directs the FCC
to extend that policy to the 50 largest markets.
In the case of all of these ownership rules, the FCC requires the
attribution of broadcast licenses between a broadcasting company and
certain of its stockholders, officers or directors so that there would
be a violation of FCC regulations where such a stockholder, officer or
director and the broadcasting company together held more than the
permitted number of stations or a prohibited combination of media outlets
in the same market. Under FCC rules, with certain exceptions,
attribution of broadcast licenses occurs where any five percent voting
stockholder or officer or director of a broadcasting company directly or
indirectly owns, operates, controls or has a five percent voting interest
in or is an officer or director of any other broadcasting company.
Attribution also occurs in the case of general partnership interests and
in the case of limited partnership interests where a limited partner is
"materially involved" in the media-related activities of the partnership.
Passive investments of less than ten percent of the voting interest in
a broadcasting company held by certain categories of financial
institutions are generally not cognizable for purposes of the foregoing
rules of attribution. In cases involving competing media in the same
market, however, FCC policy in certain instances prohibits common
ownership interests under its "cross-interest" policy even where they are
non-voting interests or fall below the five percent and ten percent
"benchmarks" discussed above, although the FCC has initiated proceedings
to inquire whether this policy should be liberalized or eliminated. The
Company's Amended and Restated Articles of Incorporation and By-Laws
authorize the Board of Directors to prohibit any ownership, voting or
transfer of its capital stock which would cause the Company to violate
the Communications Act or FCC regulations.
For purposes of the local radio ownership rules described above, a
station is considered to have an attributable interest in another station
in the same market if the first station provides the programming for more
than 15% of the broadcast time, on a weekly basis, of the second
station. As a result, such programming arrangements may not be entered
into by station combinations that could not be commonly owned under FCC
rules.
In cases where one person or entity (such as Jeffrey H. Smulyan in
the case of the Company) holds more than 50% of the combined voting power
of the common stock of a broadcasting company, a minority shareholder of
the company generally would not acquire an "attributable" interest in the
company. However, any attributable interest by any such shareholder in
another broadcast station or daily newspaper in a market where such
company owns, or seeks to acquire, a station would still be subject to
10
review by the FCC under its "cross-interest" policy, and could result in
the company's being unable to obtain from the FCC one or more
authorizations needed to conduct its radio station business or being
unable to obtain FCC consents for future acquisitions. Further, in the
event that a majority shareholder of a company (such as Mr. Smulyan in
the case of the Company) were no longer to hold more than 50% of the
combined voting power of the common stock of the company, the interests
of minority shareholders which had theretofore been considered
nonattributable could become attributable, with the result that any other
media interests held by such shareholders would be combined with the
media interests of such company for purposes of determining compliance
with FCC ownership rules. In the case of the Company, Mr. Smulyan's
level of voting control could decrease to or below 50% as a result of
transfers of Common Stock pursuant to agreement or conversion of the
Class B Common Stock into Class A Common Stock. In the event of any
noncompliance, steps required to achieve compliance could include
divestitures by either the shareholder or the affected company. Further,
other media interests of shareholders having or acquiring an attributable
interest in such a company could result in the company being unable to
obtain from the FCC one or more authorizations needed to conduct its
radio station business or being unable to obtain FCC consents for future
acquisitions. Conversely, a company's media interests could operate to
restrict other media investments by shareholders having or acquiring an
interest in the company.
Under the Communications Act, no FCC license may be held by a
corporation of which more than one-fifth of its capital stock is owned
of record or voted by aliens or their representatives or by a foreign
government or representative thereof, or by any corporation organized
under the laws of a foreign country (collectively, "Aliens").
Furthermore, the Communications Act provides that no FCC license may be
granted to any corporation directly or indirectly controlled by any other
corporation of which more than one-fourth of its capital stock is owned
of record or voted by Aliens if the FCC finds the public interest will
be served by the refusal of such license. The FCC staff has interpreted
this provision to require an affirmative public interest finding to
permit the grant or holding of a license, and such a finding has been
made only in limited circumstances. The foregoing restrictions on alien
ownership apply in modified form to other forms of business organization,
including partnerships. The Company's Amended and Restated Articles of
Incorporation and Code of By-Laws authorize the Board of Directors to
prohibit such ownership, voting or transfer of its capital stock as would
cause the Company to violate the Communications Act or FCC regulations.
Programming and Operation. The Communications Act requires
broadcasters to serve the "public interest." Since the late 1970s, the
FCC gradually has relaxed or eliminated many of the more formalized
procedures it developed to promote the broadcast of certain types of
programming responsive to the needs of a station's community of license.
However, licensees continue to be required to present programming that
is responsive to community problems, needs and interests and to maintain
certain records demonstrating such responsiveness. Broadcast of obscene
or indecent material is regulated by the FCC as well as by state and
federal law. Complaints from listeners concerning a station's
programming often will be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any
time. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, political
advertising, sponsorship identifications, the advertisement of contests
and lotteries, and technical operations, including limits on radio
frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment
opportunities, and must submit reports to the FCC with respect to these
matters on an annual basis and in connection with a renewal application.
Failure to observe these or other rules and policies can result in
the imposition of various sanctions, including monetary forfeitures, the
grant of "short" (less than the full seven-year) renewal terms or, for
particularly egregious violations, the denial of a license renewal
application or the revocation of a license.
Recent Developments and Proposed Changes. The Telecom Act
authorizes local telephone companies to offer video and audio programming
to their customers over their phone lines under certain circumstances.
The FCC has initiated a proceeding looking toward a broad review of
its ownership attribution rules and its cross-interest policy. Possible
changes include (i) raising the benchmarks for attributing ownership to
both active and passive investors in a corporate licensee, (ii)
restricting the availability of the attribution exemption for minority
shareholders in corporations having a "single majority shareholder,"
(iii) limiting the attribution exemption for holders of nonvoting stock
who possess other rights giving them potential influence over a licensee,
and (iv) extension of the cross-interest policy to situations where a
creditor or other holder of a nonattributable interest holds, through
contractual or other relationships, the ability to influence the
operations of a licensee.
11
The Congress and the FCC have under consideration, and may in the
future consider and adopt, new laws, regulations and policies regarding
a wide variety of matters that could, directly or indirectly, affect the
operation, ownership and profitability of the Company's radio broadcast
stations, result in the loss of audience share and advertising revenues
for the Company's radio broadcast stations and affect the ability of the
Company to acquire additional radio broadcast stations or finance such
acquisitions. Such matters include: proposals to impose spectrum use or
other fees on FCC licensees; the FCC's equal employment opportunity rules
and other matters relating to minority and female involvement in the
broadcasting industry; proposals to change rules relating to political
broadcasting, including the reinstatement of the so-called "fairness
doctrine"; technical and frequency allocation matters; AM stereo
broadcasting; proposals to permit expanded use of FM translator stations;
proposals to restrict or prohibit the advertising of beer, wine and other
alcoholic beverages on radio; changes in the FCC's cross-interest,
multiple ownership and cross-ownership policies; proposals to reimpose
holding periods for licenses; changes to broadcast technical
requirements; proposals to tighten safety guidelines relating to radio
frequency radiation exposure; proposals to limit the tax deductibility
of advertising expenses by advertisers; and proposals to auction the
right to use the radio broadcast spectrum to the highest bidder, instead
of granting FCC licenses and subsequent license renewals without such
bidding.
In March of 1997, the FCC adopted rules authorizing delivery of
digital audio radio service ("DARS") on a nationwide basis by satellite;
at the same time, the FCC put out for comment a proposal to permit
satellite-delivered DARS to be supplemented by terrestrial transmitters
designed to fill "gaps" in satellite coverage. The FCC has also awarded
two nationwide licenses for satellite-delivered DARS. It is anticipated
that DARS, when implemented, will be capable of delivering multiple
channels of compact-disc quality sound which will be receivable through
the use special receiving antennas. There is ongoing research exploring
the feasiblility of additional delivery of DARS on a local basis by
terrestrial stations ulilizing either existing broadcasting frequencies
or other frequencies.
The Company cannot predict whether any proposed changes will be
adopted nor can it predict what other matters might be considered in the
future, nor can it judge in advance what impact, if any, the
implementation of any of these proposals or changes might have on its
business.
The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference is made
to the Communications Act, FCC regulations and the public notices and
rulings of the FCC for further information concerning the nature and
extent of federal regulation of broadcast stations.
ITEM 2. PROPERTIES.
The following table sets forth information with respect to the
Company's offices and studios and its broadcast tower locations.
Management believes that the Company's properties are in good condition
and are suitable for the Company's operations.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
- -------- ----------- -------- ----------
WENS-FM/WNAP-FM/Corporate Headquarters 1990 Leased February 2000(1)(4)
Indianapolis Monthly
950 North Meridian Street
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNAP-FM Tower 1981 Owned --
12
KSHE-FM 1986 Leased August 1996(5)
700 St. Louis Union Station
St. Louis, Missouri
KSHE-FM Tower 1984 Leased May 2000(1)
KPWR-FM 1988 Leased February
1998(2)
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased March 2003(3)
WQHT-FM/WRKS-FM 1996 Leased June, 2012(2)
395 Hudson Street
New York, New York
WQHT-FM Tower 1988 Leased April 1996(5)
WRKS-FM Tower 1984 Leased November 2005
WKQX-FM 1988 Leased July 1999
Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1988 Leased September
1999(2)
Atlanta Magazine Office 1993 Leased July 1997(6)
1360 Peachtree Street
Atlanta, Georgia
WIBC-AM 1983 Leased November
1998(1)
9292 North Meridian Street
Indianapolis, Indiana
WIBC-AM Tower 1966 Owned --
WKKX-FM/WALC-FM/WKBQ-AM 1996 Leased August 2003
638 Westport Plaza
St. Louis, Missouri
WKKX-FM Tower 1989 Leased September 2009
WALC-FM/WKBQ-FM Tower 1988 Owned --
(1) The lease provides for two renewal options of five years each
following the expiration date.
(2) The lease provides for one renewal option of five years following the
expiration date.
(3) The lease provides for one renewal option of ten years following the
expiration date. The Company also owns a tower site which it placed in
service in 1984 and currently uses as a back-up facility and on which it
leases space to other broadcasters.
(4) In August 1996, the Company announced its plan to build and own an
office building in downtown Indianapolis for its corporate office and its
Indianapolis operations. The project is expected to be completed in
1999.
(5) The lease expired in 1996 and the station is currently
negotiating a new long term lease at the same location. Payments are on
a month to month basis.
(6) The magazine signed a new lease at a different location and will be
moving at the end of the current lease. The new lease expires in July
2003.
13
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in
litigation incidental to the conduct of its business, but the Company is
not a party to any lawsuit or proceeding which, in the opinion of
management, is likely to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to shareholders during the Company's
fourth quarter.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Class A Common Stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers
Automated Quotation (NASDAQ) National Market System under the symbol
EMMS.
The following table sets forth the high and low sale prices of the
Class A Common Stock for the periods indicated. No dividends were paid
during any such periods.
QUARTER ENDED HIGH LOW
- ------------- ---- ----
May 1995 22.25 16.375
August 1995 31.75 21.25
November 1995 35.00 25.25
February 1996 40.25 26.75
May 1996 46.75 35.00
August 1996 52.50 41.25
November 1996 53.50 31.75
February 1997 39.50 30.00
At May 1, 1997, there were approximately 194 record holders of the
Class A Common Stock, and there was one holder of the Company's Class B
Common Stock.
The Company 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.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
OPERATING DATA:
Net broadcasting revenues $49,724 $50,311 $66,815 $99,830 $103,292
Broadcasting operating expenses 34,431 29,368 38,794 53,948 52,839
Publication and other revenue,
net of operating expenses 954 657 593 896 834
International business development expense - - 313 1,264 1,164
Corporate expense 2,867 2,766 3,700 4,419 5,929
Depreciation and amortization 3,561 2,812 3,827 5,677 5,481
Noncash compensation 1,517 1,724 600 3,667 3,465
Operating income 8,302 14,298 20,174 31,751 35,248
Interest expense 19,334 13,588 7,849 13,540 9,633
Gain on disposition of radio stations 40,007 - - - -
Other income (expense), net (1,761) (367) (170) (303) 325
Income before income taxes and extraordinary item 27,214 343 12,155 17,908 25,940
Income (loss) before extraordinary item 25,114 (957) 7,627 10,308 15,440
Net income (loss) 25,114 (4,365) 7,627 10,308 15,440
Net income (loss) available to common shareholders 24,388 (5,853) 7,627 10,308 15,440
Net income (loss) per common and common
equivalent share $0.70 $0.92 $1.35
Weighted average shares outstanding 10,831,695 11,208,862 11,451,590
15
OTHER DATA:
Broadcast cash flow 15,293 20,943 28,021 45,882 50,453
Operating cash flow 13,380 18,836 24,601 41,095 44,194
Capital expenditures 549 659 1,081 1,396 7,559
Number of radio stations owned at end of period 5 5 8 8 8
FEBRUARY 28 (29),
-----------------
(Dollars in thousands, except per share data)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash $3,142 $1,607 $3,205 $1,218 $1,191
Working capital (39,723) 6,210 10,088 14,761 15,463
Net intangible assets 31,556 30,751 139,729 135,830 131,743
Total assets 67,588 57,849 183,441 176,566 189,716
Total debt 98,177 92,345 152,322 124,257 115,172
Redeemable preferred stock 5,515 11,250 - - -
Shareholders' equity (deficit) (54,303) (54,229) (2,661) 13,884 34,422
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
GENERAL
The performance of a radio group, such as Emmis, is customarily
measured by the ability of its stations to generate Broadcast Cash
Flow. Although Broadcast Cash Flow is not a measure of performance
calculated in accordance with generally accepted accounting principles,
and should be viewed as a supplement to and not as a substitute for the
Company's results of operations presented on the basis of generally
accepted accounting principles, the Company believes that Broadcast
Cash Flow is useful because it is generally recognized by the radio
broadcasting industry as a measure of performance and is used by
analysts who report on the performance of broadcasting companies. The
main components of Broadcast Cash Flow are advertising revenues net of
agency commissions and operating expenses. The primary source of
advertising revenues is the sale of advertising time to local and
national advertisers. The most significant operating expenses are
employee salaries and commissions, costs associated with programming,
advertising and promotion, and station general and administrative
costs.
The Company's revenues are affected primarily by the advertising
rates its radio stations charge. These rates are in large part based on
the stations' ability to attract audiences in demographic groups
targeted by their advertisers, as measured principally on a quarterly
basis by Arbitron Radio Market Reports. 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 listeners in each station's chosen
demographic target group. In addition to the sale of advertising time
for cash, radio stations typically exchange advertising time for goods
16
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.
SIGNIFICANT EVENTS
On June 9, 1994, the Company completed its acquisition of
substantially all of the assets of radio stations WIBC-AM and WNAP-FM
(formerly WKLR-FM) for approximately $26.6 million. The acquisition was
financed through additional borrowings under the Company's existing
Credit Facility.
On July 7, 1994, the Company invested approximately $2.5 million
for a 24.5% interest in TalkRadio UK Limited (TRUK). Subsequently, the
Company invested an additional $1.0 million to support the operations
of TRUK. In conjunction with this investment, the Company organized
Emmis International Corporation as a wholly owned subsidiary for the
purpose of identifying, investigating and developing international
broadcast investment or other international business opportunities.
Emmis reported losses from the operations of TRUK since inception of
approximately $3.5 million ($3.1 million for the year ended February
29, 1996). On November 7, 1995, the Company sold its 24.5% interest in
TRUK for approximately $3.0 million and recorded a gain on sale of
approximately $2.7 million.
On December 1, 1994, the Company acquired all of the outstanding
capital stock and working capital of Summit Broadcasting Holding
Company (including $4.5 million of net working capital) for
approximately $72.5 million in cash. Summit Broadcasting Holding
Company owns all the outstanding capital stock of Summit-New York
Broadcasting Corporation which, in turn, owns and operates WRKS-FM in
New York City (WRKS-FM together with WIBC-AM and WNAP-FM, are hereafter
referred to as the Acquired Stations). The Company amended its Credit
Facility to add an $80 million revolver/term loan facility which was
utilized to finance this purchase.
In June 1996, the Company sold 60% of its ownership interest in
Duncan's American Radio, Inc. for $0.5 million and recorded a gain of
$0.2 million. The Company also paid $0.3 million to buy out a
management contract.
On March 31, 1997, Emmis completed its acquisition of
substantially all of the assets of radio stations of WALC-FM (formerly
WKBQ-FM), WKBQ-AM and WKKX-FM in St. Louis from Zimco, Inc. for
approximately $43.1 million in cash, plus an agreement to broadcast
approximately $1.0 million in trade spots, for Zimco, Inc., over a
period of several years. In accordance with the asset purchase
agreement, Emmis made an escrow payment of $6.0 million and paid
$600,000 in non-refundable prepayments. The purchase price was
financed through additional borrowings under the Company's existing
Credit Facility.
RESULTS OF OPERATION
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29,
1996. Net broadcasting revenues for the year ended February 28, 1997
were $103.3 million compared to $99.8 million for the same period of
the prior year, an increase of $3.5 million or 3.5%. This increase is
due principally to the ability to realize higher advertising rates at
the Company's broadcasting properties, resulting from higher ratings at
certain broadcasting properties, as well as increases in general radio
spending in the markets in which the Company operates.
Total broadcasting operating expenses for the year ended February
28, 1997, were $52.8 million compared to $53.9 million for the same
period of the prior year, a decrease of $1.1 million or 2.1%. This
decrease is attributable to a decrease in rent expense as a result of
the recognition of a loss associated with property no longer used for
operating purposes in the prior year, and a decrease in compensation as
a result of a reallocation of management personnel to corporate
operations, which was partially offset by operating expenses incurred
under the time brokerage agreement related to the St. Louis
acquisition.
17
Publication and other revenues net of operating expenses for the
year ended February 28, 1997, were $0.8 million compared to $0.9
million for same period of the prior year, a decrease of $0.1 million
or 6.9%. This decrease is principally a result of an increase in
operating expenses at Atlanta magazine, which was not fully offset by
the total increase in publishing revenue of $0.8 million.
Corporate expenses for the year ended February 28, 1997, were $5.9
million compared to $4.4 million for the same period of the prior year,
an increase of $1.5 million or 34.2%. This increase is primarily due to
an increase in the number of management personnel allocated to the
corporate division as well as an overall increase in compensation.
International business development expenses reflect costs
associated with Emmis International Corporation. The purpose of this
wholly owned subsidiary is to identify, investigate and develop
international broadcast investments or other international business
opportunities. Expenses consist primarily of salaries, travel and
various administrative costs. Such expenses were $1.2 million for the
fiscal year ended February 28, 1997, compared to $1.3 million for the
same period of the prior year, a decrease of $0.1 million or 7.9%. This
decrease is due to decreased need for outside consulting services.
Depreciation and amortization expense for the year ended February
28, 1997, was $5.5 million compared to $5.7 million for the same period
of the prior year, a decrease of $0.2 million or 3.5%. This decrease is
due to fully depreciated assets at the Company's broadcasting
properties.
Noncash compensation expense for year ended February 28, 1997, was
$3.5 million compared to $3.7 million for the same period of the prior
year, a decrease of $0.2 million or 5.5%. Noncash compensation includes
compensation expense associated with stock options granted, restricted
common stock issued under employment agreements and common stock
contributed to the Company's Profit Sharing Plan. This decrease is due
primarily to the decrease in stock price from February 29, 1996 to
February 28, 1997.
Interest expense for the fiscal year ended February 28, 1997, was
$9.6 million compared to $13.5 million for the same period of the prior
year, a decrease of $3.9 million or 28.9%. This decrease reflects lower
outstanding debt due to voluntary repayments made under the Company's
Credit Facility and lower effective interest rates.
Accounts receivable at February 28, 1997, were $20.8 million
compared to $19.2 million at February 29, 1996, an increase of $1.6
million or 8.7%. This increase in accounts receivable is due primarily
to increases in net broadcasting revenues at the Company's broadcasting
properties during the fourth quarter as compared to the same period a
year ago.
YEAR ENDED FEBRUARY 29, 1996 COMPARED TO YEAR ENDED FEBRUARY 28,
1995. Net broadcasting revenues for the year ended February 29, 1996,
were $99.8 million compared to $66.8 million for the same period of the
prior year, an increase of $33.0 million or 49.4%. This increase is due
to increases in net broadcasting revenues at the Company's broadcasting
properties as well as the Indianapolis and New York acquisitions.
Total broadcasting operating expenses for the year ended February
29, 1996, were $53.9 million compared to $38.8 million for the same
period of the prior year, an increase of $15.1 million or 39.1%. This
increase is principally due to the addition of the WNAP-FM, WIBC-AM and
WRKS-FM.
Publication and other revenues net of operating expenses for the
year ended February 29, 1996, were $0.9 million compared to $0.6
million for same period of the prior year, an increase of $0.3 million
or 51.1%. This increase is principally a result of an increase in
revenue net of operating expenses from Atlanta magazine and
Indianapolis Monthly magazine.
Corporate expenses for the year ended February 29, 1996, were $4.4
million compared to $3.7 million for the same period of the prior year,
an increase of $0.7 million or 19.4%. This increase is primarily due to
increased compensation, increased professional fees and additional
costs associated with the legal requirements of and transacting
business as a public company.
18
International business development expenses reflect costs
associated with Emmis International Corporation. Such expenses were
$1.3 million for the fiscal year ended February 29, 1996, compared to
$0.3 million for the same period of the prior year, an increase of $1.0
million or 303.8%. This increase is due to the formation of Emmis
International Corporation during the quarter ended February 28, 1995.
Depreciation and amortization expense for the year ended February
29, 1996, was $5.7 million compared to $3.8 million for the same period
of the prior year, an increase of $1.9 million or 48.3%. This increase
is due to the addition of the WNAP-FM, WIBC-AM, and WRKS-FM.
Noncash compensation expense for year ended February 29, 1996, was
$3.7 million compared to $0.6 million for the same period of the prior
year, an increase of $3.1 million or 511.2%. Noncash compensation
includes compensation expense associated with stock options granted,
restricted common stock issued under employment agreements and common
stock contributed to the Company's Profit Sharing Plan. This increase
is due primarily to an increase in compensation expense related to
options granted and restricted common stock issued to employees of the
Company and a larger contribution to the Profit Sharing Plan.
Interest expense for the fiscal year ended February 29, 1996, was
$13.5 million compared to $7.8 million for the same period of the prior
year, an increase of $5.7 million or 72.5%. This increase is
principally due to the Indianapolis and New York acquisitions and
higher interest rates than experienced in the prior year under the
Company's Credit Facility.
Accounts receivable at February 29, 1996, were $19.2 million
compared to $16.8 million at February 28, 1995, an increase of $2.4
million or 13.9%. This increase in accounts receivable is due primarily
to increases in net broadcasting revenues at stations owned and
operated for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
On December 20, 1993, the Company entered into a $100 million
Credit Facility comprised of a $40 million revolver/term loan and a $60
million reducing revolving Credit Facility. During the fiscal year
ended February 28, 1995 this Credit Facility was amended to add an $80
million revolver/term loan facility, a portion of the proceeds of which
were used to acquire the stock of the corporation which owns and
operates WRKS-FM in New York City. In connection with this amendment,
the $40 million revolver/term loan was converted to a term loan and the
quarterly commitment reduction schedule of the $60 million reducing
revolving Credit Facility was revised. In the fiscal year ended
February 28, 1997, the Company made voluntary payments of $9.0 million
under its Credit Facility. As of February 28, 1997, the Company had
$47.8 million available for borrowing under the Credit Facility. A
full discussion of the Company's long-term debt is contained in Note 5
to the Company's audited consolidated financial statements. On March
2, 1994, Emmis received approximately $40.4 million of proceeds from
its initial public offering of 2.8 million shares of Class A Common
Stock. The Company used approximately $9.2 million of the proceeds to
redeem its Series B Preferred Stock and associated detachable warrants.
The remaining proceeds were used principally to reduce amounts
outstanding under the Credit Facility. A complete discussion of the
Company's initial public offering and related transactions is contained
in Note 2 to the audited consolidated financial statements contained
herein.
In the fiscal years ended February 28, 1997, February 29, 1996
and February 28, 1995, the Company had capital expenditures of $7.6
million, $1.4 million and $1.1 million, respectively. The Company's
capital expenditures consist primarily of broadcasting equipment
purchases and tower upgrades; however, for the fiscal year ending
February 28, 1997, capital expenditures consisted primarily of
leasehold improvements to office and studio facilities in connection
with the move of its New York broadcast properties to a new location.
The Company expects that cash flow from operating activities will
be sufficient to fund all debt service, working capital and capital
expenditure requirements. As part of its business strategy, the Company
frequently evaluates potential acquisitions of radio stations. In
19
connection with future acquisition opportunities, the Company may incur
additional debt or issue additional equity or debt securities depending
on market conditions and other factors.
In August 1996, Emmis announced its plan to build an office
building in downtown Indianapolis for its corporate office and its
Indianapolis operations. The project is expected to be completed in
1999 for an estimated cost of $20 million, net of reimbursable
construction costs of $2 million. Certain factors such as additional
studio costs related to digital technology and historical landmark
requirements may cause the cost of this project to increase. The
Company plans to fund this project through additional borrowings under
the Credit Facility.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high
rate of inflation in the future would not have an adverse effect on the
Company's operating results.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of
EMMIS BROADCASTING CORPORATION (an Indiana corporation) and
Subsidiaries as of February 28, 1997 and February 29, 1996, and the
related consolidated statements of operations, changes in shareholders'
equity (deficit) and cash flows for each of the three years in the
period ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Emmis
Broadcasting Corporation and Subsidiaries as of February 28, 1997 and
February 29, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended February 28, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
April 2, 1997.
21
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28 (29),
-----------------
ASSETS
1996 1997
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CURRENT ASSETS:
Cash and cash equivalents $ 1,218 $ 1,191
Accounts receivable, net of allowance for doubtful
accounts of $799 and $820 at February 29, 1996
and February 28, 1997, respectively 19,172 20,831
Prepaid expenses 1,283 2,376
Current income tax receivable 1,501 2,482
Other 1,048 1,867
-------- --------
Total current assets 24,222 28,747
-------- --------
PROPERTY AND EQUIPMENT:
Land and buildings 1,009 1,009
Leasehold improvements 1,391 5,509
Broadcasting equipment 13,252 14,356
Furniture and fixtures 6,108 7,154
Construction in progress 515 1,363
-------- --------
22,275 29,391
Less- Accumulated depreciation
and amortization 15,204 16,400
-------- --------
Total property and equipment, net 7,071 12,991
-------- --------
INTANGIBLE ASSETS:
FCC licenses 126,116 126,116
Trademarks and organization costs 1,400 1,073
Excess of cost over fair value of net
assets of purchased businesses 20,371 20,371
Other intangibles 2,633 1,277
-------- --------
150,520 148,837
Less- Accumulated amortization 14,690 17,094
-------- --------
Total intangible assets, net 135,830 131,743
-------- --------
OTHER ASSETS:
Deferred debt issuance costs and cost of
interest rate cap agreements, net of
accumulated amortization of $2,554 and
and $3,625 at February 29, 1996 and
February 28, 1997, respectively 2,555 1,541
Investments 5,113 5,470
Deposits and other 1,775 9,224
-------- --------
Total other assets, net 9,443 16,235
-------- --------
Total assets $176,566 $189,716
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
22
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
FEBRUARY 28 (29),
-----------------
1996 1997
---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Current Liabilities:
Current maturities of long-term debt $ 77 $ 2,868
Book cash overdraft - 1,942
Accounts payable 2,872 3,687
Accrued salaries and commissions 3,560 1,561
Accrued interest 320 174
Deferred revenue 1,198 1,593
Other 1,434 1,459
-------- --------
Total current liabilities 9,461 13,284
LONG-TERM DEBT, NET OF CURRENT MATURITIES 124,180 112,304
OTHER NONCURRENT LIABILITIES 1,361 436
DEFERRED INCOME TAXES 27,680 29,270
-------- --------
Total liabilities 162,682 155,294
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value; authorized
34,000,000 shares; issued and outstanding 8,264,940
shares and 8,410,956 shares at February 29, 1996
and February 28, 1997, respectively 83 84
Class B common stock, $.01 par value; authorized
6,000,000 shares; issued and outstanding 2,606,332
shares and 2,574,470 shares at February 29, 1996
and February 28, 1997, respectively 26 26
Additional paid-in capital 65,852 70,949
Accumulated deficit (52,077) (36,637)
-------- --------
Total shareholders' equity 13,884 34,422
-------- --------
Total liabilities and shareholders' equity $176,566 $189,716
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
--------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1996 1997
---- ---- ----
GROSS BROADCASTING REVENUES $78,811 $117,562 $122,739
LESS AGENCY COMMISSIONS 11,996 17,732 19,447
------- -------- --------
NET BROADCASTING REVENUES 66,815 99,830 103,292
Broadcasting operating expenses 38,794 53,948 52,839
Publication and other revenue,
net of operating expenses 593 896 834
International business
development expenses 313 1,264 1,164
Corporate expenses 3,700 4,419 5,929
Depreciation and amortization 3,827 5,677 5,481
Noncash compensation 600 3,667 3,465
------- -------- --------
OPERATING INCOME 20,174 31,751 35,248
------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (7,849) (13,540) (9,633)
Equity in loss of
unconsolidated affiliate (348) (3,111) -
Gain on sale of investment in
TalkRadio UK - 2,729 -
Other income, net 178 79 325
------- -------- --------
Total other income (expense) (8,019) (13,843) (9,308)
------- -------- --------
INCOME BEFORE INCOME TAXES 12,155 17,908 25,940
PROVISION FOR INCOME TAXES 4,528 7,600 10,500
------- -------- --------
NET INCOME $ 7,627 $ 10,308 $ 15,440
======= ======== ========
Net income per common and common
equivalent share $.70 $.92 $1.35
======= ======== ========
Net income per common share
assuming full dilution $.70 $.91 $1.35
======= ======== ========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, 1997
CLASS A CLASS B
COMMON STOCK COMMON STOCK
ADDI- TOTAL
SHARES SHARES TIONAL ACCUM- CUMULATIVE SHAREHOLDERS'
OUT- OUT- PAID-IN ULATED TRANSLATION EQUITY
STANDING AMOUNT STANDING AMOUNT CAPITAL DEFICIT ADJUSTMENTS (DEFICIT)
------- ------ -------- ------ ------- ------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE, FEBRUARY 28, 1994 3,385,041 $ 34 3,569,500 $ 36 $15,713 $(70,012) $ - $(54,229)
Conversion of Series A
Preferred Stock 765,963 8 - - 6,498 - - 6,506
Initial public offering, net of
costs incurred of $214 2,800,000 28 - - 40,120 - - 40,148
Redemption and retirement of
Series B Preferred Stock and
associated detachable warrants - - - - (4,467) - - (4,467)
Issuance of Class A Common
Stock in exchange for Class B
Common Stock 914,378 9 (914,378) (9) - - - -
Issuance of Class A Common
Stock in exchange for Emmis
Publishing Corporation
common stock 45,624 - - - 582 - - 582
Exercise of stock options and
related income tax benefits 52,311 1 - - 506 - - 507
Compensation related to granting
of stock options - - - - 50 - - 50
Issuance of Class A Common
Stock to profit sharing plan 34,375 - - - 550 - - 550
Translation adjustments - - - - - - 65 65
Net income - - - - - 7,627 - 7,627
--------- --- --------- ------- ------- -------- ----- --------
BALANCE, FEBRUARY 28, 1995 7,997,692 80 2,655,122 27 59,552 (62,385) 65 (2,661)
Issuance of Class A Common Stock in
exchange for Class B Common Stock 48,790 1 (48,790) (1) - - - -
Exercise of stock options and
related income tax benefits 198,850 2 - - 2,633 - - 2,635
Compensation related to granting
of stock and stock otions - - - - 2,917 - - 2,917
Issuance of Class A Common
Stock to profit sharing plan 19,608 - - - 750 - - 750
Translation adjustments - - - - - - (65) (65)
Net income - - - - - 10,308 - 10,308
--------- --- --------- ------- ------- -------- ----- --------
BALANCE, FEBRUARY 29, 1996 8,264,940 83 2,606,332 26 65,852 (52,077) - 13,884
Issuance of Class A Common Stock in
exchange for Class B Common Stock 31,862 - (31,862) - - - - -
Exercise of stock options and
related income tax benefits 92,415 1 - - 1,632 - - 1,633
Compensation related to granting
of stock and stock otions - - - - 2,715 - - 2,715
Issuance of Class A Common
Stock to profit sharing plan 21,739 - - - 750 - - 750
Net income - - - - - 15,440 - 15,440
--------- --- --------- ----- ------- -------- ----- --------
BALANCE, FEBRUARY 28, 1997 8,410,956 $ 84 2,574,470 $ 26 $ 70,949 $ (36,637) - $ 34,422
========= === ========= ===== ======= ======== ===== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
--------------------------------------------
(DOLLARS IN THOUSANDS)
1995 1996 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 7,627 $ 10,308 $ 15,440
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization of property and equipment 1,556 1,636 1,639
Amortization of debt issuance costs and cost of
interest rate cap agreements 660 1,742 1,071
Amortization of intangible assets 2,271 4,041 3,842
Provision for deferred income taxes 4,253 4,870 1,590
Gain on sale of TalkRadio UK - (2,729) -
Gain on sale of 60% ownership in Duncan's American Radio, Inc. - - (195)
Compensation related to stock and stock options granted 50 2,917 2,715
Contribution to profit sharing plan paid with common stock 550 750 750
Equity in loss of unconsolidated affiliate 348 3,111 -
(Increase) decrease in certain current assets
(net of dispositions and acquisitions)-
Accounts receivable (3,745) (2,341) (1,659)
Prepaid expenses and other current assets (298) (751) (3,041)
Increase (decrease) in certain current liabilities
(net of dispositions and acquisitions)-
Accounts payable and book cash overdraft 46 (569) 2,757
Accrued salaries and commissions 1,066 830 (1,999)
Accrued interest 1,479 (1,272) (146)
Deferred revenue 290 (349) 395
Other current liabilities 139 390 26
(Increase) decrease in deposits and other assets 31 (108) (898)
Increase (decrease) in other noncurrent liabilities (843) 745 (925)
-------- -------- --------
Net cash provided by operating activities 15,480 23,221 21,362
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of WIBC-AM and WNAP-FM (26,576) - -
Costs incurred for WRKS-FM Acquisition (72,536) (131) -
Escrow deposit and non-refundable payments for WALC-FM,
WKBQ-AM and WKKX-FM - - (6,600)
Purchases of property and equipment (1,081) (1,396) (7,559)
Investment in and advances to TalkRadio UK (2,489) (980) -
Net proceeds from disposition of investment in TalkRadio UK - 2,729 -
Net proceeds from sale of 60% ownership interest in Duncan's
American Radio, Inc. - - 240
-------- --------- ---------
Net cash provided (used) by investing activities (102,682) 222 (13,919)
-------- --------- ---------
26
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28,
--------------------------------------------
(DOLLARS IN THOUSANDS)
1995 1996 1997
---- ---- ----
FINANCING ACTIVITIES:
Proceeds from initial public offering 40,362 - -
Costs incurred for initial public offering (214) - -
Proceeds from exercise of stock options and related
income tax benefits 267 2,635 1,632
Redemption and retirement of Series B Preferred
Stock and associated detachable warrants (9,211) - -
Proceeds of long-term debt 100,000 29,518 19,000
Payments on long-term debt (40,079) (57,583) (28,102)
Payment of loan fees (1,533) - -
Purchase of interest rate cap agreements (792) - -
-------- -------- --------
Net cash provided (used) by financing activities 88,800 (25,430) (7,470)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,598 (1,987) (27)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,607 3,205 1,218
-------- -------- --------
End of year $ 3,205 $ 1,218 $ 1,191
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 5,710 $ 13,112 $ 8,708
Income taxes 264 2,931 9,180
Noncash investing and financing transactions-
Fair value of assets acquired by incurring debt 50 17 17
ACQUISITION OF WIBC-AM AND WNAP-FM:
Fair value of assets acquired $ 26,873
Cash paid 26,576
--------
Liabilities assumed $ 297
========
ACQUISITION OF WRKS-FM:
Fair value of assets acquired $ 91,940
Cash paid 72,536
--------
Liabilities assumed $ 19,404
========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
27
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Emmis Broadcasting Corporation owns and operates FM radio
stations in Los Angeles, New York City (2 stations), Chicago, St.
Louis and Indianapolis (2 stations) and an AM radio station in
Indianapolis, and on March 31, 1997 acquired three additional radio
stations in St. Louis (Note 6). Emmis Broadcasting Corporation also
publishes Indianapolis Monthly magazine and Atlanta magazine, and
engages in certain businesses ancillary to its radio businesses, such
as advertising, program consulting and broadcast tower leasing.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Emmis Broadcasting Corporation and its wholly owned Subsidiaries.
Unless the content otherwise requires, references to Emmis or the
Company in these financial statements mean Emmis Broadcasting
Corporation and its Subsidiaries. All significant intercompany
balances and transactions have been eliminated.
C. REVENUE RECOGNITION
Broadcasting revenue is recognized as advertisements are aired.
Publication revenue is recognized in the month of issue.
D. PUBLICATION AND OTHER REVENUE, NET OF OPERATING EXPENSES
Publication revenue of $8,037,000, $9,924,000 and $10,428,000
for the years ended February 1995, 1996 and 1997, respectively, is
reflected net of operating expenses in the consolidated statements of
operations. Other revenues of $828,000, $703,000 and $935,000 for the
years ended February 1995, 1996 and 1997, respectively, are also
reflected net of operating expenses in the consolidated statements of
operations.
E. INTERNATIONAL BUSINESS DEVELOPMENT EXPENSES
International business development expenses includes the cost
of the Company's efforts to identify, investigate and develop
international broadcast investments or other international business
opportunities.
F. NONCASH COMPENSATION
Noncash compensation includes compensation expense associated
with stock options granted, restricted common stock issued under
employment agreements and common stock contributed to the Company's
Profit Sharing Plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." Pro forma disclosure
of net income and earnings per share under SFAS No. 123 is presented
in Note 8.
G. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization are generally computed by the straight-line method over
the estimated useful lives of the related assets which are 31.5 years
for buildings, not more than 32 years for leasehold improvements, 5
to 7 years for broadcasting equipment and 7 years for furniture and
fixtures. Maintenance, repairs and minor renewals are expensed;
improvements are capitalized. On a continuing basis, the Company
reviews the financial statement carrying value of property and
equipment for impairment. Whenever events or changes or circumstances
indicate that the carrying value may not be recoverable, a write down
of the asset would be recorded through a charge to operations.
28
H. INTANGIBLE ASSETS
Intangible assets are recorded at cost. FCC licenses, trademarks
and the excess of cost over fair value of net assets of purchased
businesses are being amortized using the straight-line method over 40
years. Other intangibles are amortized using the straight-line method
over varying periods, not in excess of 10 years.
On a continuing basis, the Company reviews the financial
statement carrying value of these assets for impairment. Specifically,
this process includes a comparison of the carrying amounts of the
operating units to their estimated fair values, an analysis of
estimated future operating cash flows and an evaluation as to whether
an operating unit might be sold in the near future. If this process
were to result in the conclusion that the carrying value of an
intangible asset would not be recovered, a writedown of the operating
unit's assets would be recorded through a charge to operations.
I. INVESTMENTS
Emmis has a 50% ownership interest in a partnership in which the
sole asset is land on which a transmission tower is located. The other
owner has voting control of the partnership. This investment is
reflected at cost of $5,113,000, which approximates the equity method
of accounting.
In June 1996, the Company sold 60% of its ownership interest in
Duncan's American Radio, Inc. for $0.5 million and recorded a gain of
$0.2 million. The Company also paid $0.3 million to buy out a
management contract. The Company's remaining 40% interest is accounted
for under the equity method of accounting and is reflected in other
assets in the consolidated balance sheet as of February 28, 1997.
Equity in earnings of this unconsolidated affiliate from June 1996
through February 28, 1997, was not signifianct.
On July 7, 1994, the Company invested approximately $2.5 million
for a 24.5% interest in TalkRadio UK Limited (TRUK). Subsequently, the
Company invested an additional $1.0 million to support the operations
of TRUK. This investment was accounted for utilizing the equity method
of accounting. Emmis reported losses from the operations of TRUK since
inception of approximately $3.5 million ($3.1 million for the year
ended February 29, 1996) which is included in equity in loss of
unconsolidated affiliate in the consolidated statements of operations.
On November 7, 1995, Emmis sold its 24.5% interest in TRUK for
approximately $3.0 million and recorded a gain on sale of approximately
$2.7 million.
J. DEPOSITS AND OTHER ASSETS
Deposits and other assets includes amounts due from officers of
$1,235,000 for February 28, 1997 and $1,205,000 at February 29, 1996.
Officer loans bear interest at the Company's borrowing rate (6.625% at
February 28, 1997).
K. DEFERRED REVENUE AND BARTER TRANSACTIONS
Deferred revenue includes deferred magazine subscription revenue
and deferred barter revenue. Barter transactions are recorded at the
estimated fair value of the product or service received. Broadcast
revenue from barter transactions is recognized when commercials are
broadcast. The appropriate expense or asset is recognized when
merchandise or services are used or received.
L. INCOME TAXES
Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." The liability method
measures the expected tax impact of future taxable income or deductions
resulting from differences in the tax and financial reporting bases of
assets and liabilities reflected in the consolidated balance sheets and
the expected tax impact of carryforwards for tax purposes.
29
M. FOREIGN CURRENCY TRANSLATION
The functional currency of TRUK is the pound sterling. The
Company's investment in and advances to TRUK has been translated from
the pound sterling to the U.S. dollar using current exchange rates in
effect at the balance sheet date and for the Company's equity in the
loss of TRUK using an average exchange rate for the period. The
applicable gains or losses, net of deferred income taxes, resulting
from the translation of the Company's investment in and advances to
TRUK are shown as cumulative translation adjustments in shareholders'
equity (deficit).
N. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed by
dividing net income by the weighted average number of common shares
outstanding during the year (11,208,862 shares for the year ended
February 29, 1996 and 11,451,590 shares for the year ended February 28,
1997). Weighted average common shares outstanding assumes the exercise
of stock options when the effect is dilutive.
Fully diluted earnings per common share assumes additional
dilution related to stock options due to the use of the market price
of common stock at the end of the year, when higher than the average
price for the year. The weighted average common shares assuming full
dilution are 11,305,553 shares for the year ended February 29, 1996 and
11,451,590 shares for the year ended February 28, 1997.
O. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, Emmis
considers time deposits, money market fund shares, and all highly
liquid debt instruments with original maturities of three months or
less to be cash equivalents.
P. ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Q. ACCOUNTING PRONOUNCEMENTS
In February 1997 Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share", was issued. This new statement
supersedes APB Opinion No.15, "Earnings Per Share", and supersedes or
amends other related accounting pronouncements. SFAS No. 128 must be
adopted by the Company in the fourth quarter of fiscal 1998. All prior
period earnings per share (EPS) data will be restated when the new
statement is adopted. SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures such as the
Company's. Basic EPS excludes dilution and is computed by dividing net
income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity.
30
Pro forma EPS, assuming the Company had adopted SFAS No. 128 as
of March 1, 1994 is as follows:
Year Ended February (29)28,
---------------------------
1995 1996 1997
------ ------ ------
Weighted Average Common Shares 10,557,328 10,690,677 10,942,996
Weighted Average Common Shares and
Potential Common Shares 10,831,695 11,083,504 11,291,225
Net income per common share $ .72 $ .96 $ 1.41
Net income per common share
- assuming dilution $ .70 $ .93 $ 1.37
2. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
Concurrent with the closing on March 1, 1994 of the initial public
offering of its Class A Common Stock discussed below, Emmis amended its
Articles of Incorporation to create two new separate classes of common
stock, Class A Common Stock and Class B Common Stock, and authorized
34,000,000 shares of Class A Common Stock, par value $.01 per share,
and 6,000,000 shares of Class B Common Stock, par value $.01 per share.
The rights of these two classes are essentially identical except that
each share of Class B Common Stock has 10 votes in respect to
substantially all matters. All current shares of common stock were
converted into shares of Class A Common Stock with the exception of
those shares owned by the principal shareholder (Jeffrey H. Smulyan),
which were converted into shares of Class B Common Stock. All shares
of Class B Common Stock convert to Class A Common Stock upon sale or
other transfer to a party unaffiliated with the principal shareholder.
The financial statements presented reflect the establishment of the two
classes of stock.
Also, on March 1, 1994, Emmis converted all outstanding shares of
its Series A Preferred Stock plus accrued dividends into 765,963 shares
of Class A Common Stock.
On March 2, 1994, Emmis received approximately $40.4 million of
proceeds (net of $3.0 million of underwriters' fees) from its initial
public offering of 2,800,000 shares of Class A Common Stock. Emmis
utilized approximately $9.2 million of the proceeds to redeem the
Series B Preferred Stock, which had a carrying value of $4.7 million,
and the associated detachable warrants, which had a carrying value of
$5.8 million, and recognized the $1.3 million difference as an increase
to additional paid-in capital. Also on March 2, 1994, the Company
utilized approximately $30.0 million of the proceeds to repay amounts
outstanding under the Credit Facility discussed in Note 5.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock which
may be issued with such designations, preferences, limitations and
relative rights as Emmis' Board of Directors may authorize. As of
February 29, 1996 and February 28, 1997, no shares of preferred stock
are issued and outstanding.
Emmis had authorized 100 shares of nonvoting Series A Convertible
Exchangeable Redeemable Preferred Stock (the "Series A Preferred
Stock"). On October 7, 1991, Emmis issued 44.63 shares of Series A
Preferred Stock, which were stated at the mandatory redemption value
of $100,000 per share. Dividends, which were paid in shares of Series
A Preferred Stock, were cumulative and accrued at an annual rate of
14.625% per share. As discussed in Note 2, on March 1, 1994 all shares
outstanding of Series A Preferred Stock plus accrued dividends were
converted into 765,963 shares of Class A Common Stock. Emmis had
authorized 200 shares of nonvoting Series B Preferred Stock (the
"Series B Preferred Stock"). On May 28, 1993, Emmis issued 100 shares
of the Series B Preferred Stock. The Series B Preferred Stock was
recorded at fair value which was $42,460 per share. The difference
between the fair value of $42,460 per share at issuance and the
mandatory redemption value of $100,000 per share was being accreted by
periodic charges to accumulated deficit over the eight-year life of the
Series B Preferred Stock issue. Dividends, which were paid in shares
of Series B Preferred Stock, were cumulative and accrued at an annual
rate of 4% per share. As discussed in Note 2, on March 2, 1994, Emmis
exercised an option to repurchase the Series B Preferred Stock and
associated detachable warrants (Note 4) for approximately $9.2 million.
31
4. WARRANTS
In connection with the issuance of the Series B Preferred Stock,
Emmis issued detachable warrants to acquire 1,172,875 shares of common
stock of Emmis. The warrants were exercisable at no additional cost
to the holder. The expiration date of the warrants was May 28, 2001.
As discussed in Notes 2 and 3, on March 2, 1994 Emmis repurchased these
warrants.
5. LONG-TERM DEBT
On December 20, 1993, Emmis entered into a $100 million credit
facility comprised of a $40 million revolver/term loan and a $60
million reducing revolving credit facility. During the year ended
February 28, 1995, the Credit Facility was amended to add an $80
million revolver/term loan facility, the proceeds of which were used
to acquire the stock of Summit Broadcasting Holding Company (Note 6).
In connection with this amendment the $40 million revolver/term loan
was converted to a term loan and the quarterly commitment reduction
schedule of the $60 million re