Back to GetFilings.com
1
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 29, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from to .
Commission file number 0-23264
EMMIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1542018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Monument Circle, Suite 700
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
(317) 266-0100
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common
stock, $.01 par value; 6.25% Series A Cumulative Convertible Preferred Stock,
$.01 par value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part II I of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of April 30, 2000, was approximately $1,965,683,000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of April 30, 2000, was:
41,312,781 Class A Common Shares, $.01 par value
4,938,582 Class B Common Shares, $.01 par value
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
--------- -------------------
Proxy Statement for 2000 Annual Meeting Part III
1
2
EMMIS COMMUNICATIONS CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I .................................................................................. 3
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 19
Item 3. Legal Proceedings....................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................... 21
PART II .................................................................................. 22
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................................... 22
Item 6. Selected Financial Data................................................. 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation...................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 31
Item 8. Financial Statements and Supplementary Data............................. 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................. 70
PART III .................................................................................. 71
Item 10. Directors and Executive Officers of the Registrant..................... 71
Item 11. Executive Compensation................................................. 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................................... 72
Item 13. Certain Relationships and Related Transactions......................... 72
PART IV .................................................................................. 72
Item 14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K............................................................ 72
Signatures .................................................................................. 75
2
3
PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television
broadcasting and magazine publishing operations. We are the eleventh largest
radio broadcaster in the United States based on total revenues. The thirteen FM
radio stations and two AM radio stations we own in the United States serve the
nation's three largest radio markets of New York City, Los Angeles and Chicago,
as well as St. Louis, Indianapolis and Terre Haute, Indiana. Our seven
television stations are located in Orlando, Florida, New Orleans, Louisiana,
Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and
Terre Haute, Indiana.
Our strategy is to selectively acquire underdeveloped media properties in
desirable markets and then to create value by developing those properties to
increase their cash flow. We find such underdeveloped properties attractive
because they offer greater potential for revenue and cash flow growth than
mature properties. We have been successful in acquiring these types of radio
stations and improving their ratings, revenues and cash flow with our marketing
focus and innovative programming expertise. We have created top-performing radio
stations which rank, in terms of primary demographic target audience share,
among the top ten stations in the New York City, Los Angeles and Chicago radio
markets according to the Winter 1999 Arbitron Survey. We believe that our strong
large-market radio presence and diversity of station formats makes us attractive
to a diverse base of radio advertisers and reduces our dependence on any one
economic sector or specific advertiser.
More recently, we began applying our advertising sales and programming
expertise to our television stations. We view our entry into television as a
logical outgrowth of our radio business and as a platform for diversification.
Like the radio stations we previously acquired, our television stations are
underdeveloped properties located in desirable markets, which can benefit from
innovative, research-based programming and our experienced management team. We
believe we can further improve the ratings, revenues and broadcast cash flow of
our television stations with a more market-focused, research-based programming
approach and other related strategies, which have proven successful with our
radio properties.
In addition to our domestic broadcasting properties, we operate news and
agriculture information radio networks in Indiana, publish Indianapolis Monthly,
Atlanta, Cincinnati, Texas Monthly, L.A. Magazine, Country Sampler, Country
Marketplace and related magazines, have a 54% interest in a national radio
station in Hungary and own 75% of one FM and one AM radio station in Buenos
Aires, Argentina. We also engage in various businesses ancillary to our
broadcasting business, such as consulting and broadcast tower leasing.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting,
enhancing the performance of our broadcast and publishing properties, and
distinguishing ourselves through the quality of our operations. Our strategy has
the following principal components:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets
and innovative programming developed to target specific demographic groups are
the most important determinants of individual radio and television station
success. We conduct extensive market research to identify underserved segments
of the markets we serve or to assure that we are meeting the needs of our target
audience. Utilizing the research results, we concentrate on providing a focused
programming format carefully tailored to the demographics of our markets and our
audiences' preferences.
3
4
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and
national sales efforts based on advertiser demand and our programming compared
to the competitive formats within each market. We provide our sales force with
extensive training and the technology for sophisticated inventory management
techniques which provide frequent price adjustments based on regional and market
conditions. We seek to maximize sources of non-traditional, non-spot revenue and
have led the industry in developing "vendor co-op" advertising revenue. Although
this source of advertising revenue is common in the newspaper and magazine
industry, we were among the first radio broadcasters to recognize and take
advantage of the potential of vendor co-op advertising.
PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING
STATION PERFORMANCE. We have built our portfolio by selectively acquiring
underdeveloped media properties in desirable markets at reasonable purchase
prices where our experienced management team has been able to enhance value. We
intend to pursue acquisitions of radio stations in those of our current markets
where we believe we can increase broadcast cash flow. We will also consider
acquisitions of individual radio stations or groups of radio stations in new
markets where we expect we can achieve a leadership position. We believe that
continued consolidation in the radio broadcasting industry will create
attractive acquisition opportunities as the number of potential buyers for radio
assets declines due to government regulations on the number of stations a
company can own in one market. We believe that attractive acquisition
opportunities are also increasingly available in the television broadcasting
industry. We intend to evaluate acquisitions of international broadcasting
stations (typically in conjunction with strong local minority-interest partners)
and magazine publishing properties that present opportunities to capitalize on
our management expertise to enhance cash flow at attractive purchase price
multiples with minimal capital requirements.
ENCOURAGE AN ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that
broadcasting is primarily a local business and that much of its success is the
result of the efforts of regional and local management and staff. We have
attracted and retained an experienced team of broadcast professionals who
understand the viewing and listening preferences, demographics and competitive
opportunities of their particular market. Our decentralized approach to station
management gives local management oversight of station spending, long-range
planning and resource allocation at their individual stations, and rewards all
employees based on those stations' performance. In addition, we encourage our
managers and employees to own a stake in the company, and over 95% of all
full-time employees have an equity ownership position in Emmis. We believe that
our entrepreneurial management approach has created a distinctive corporate
culture, making Emmis a highly desirable employer in the broadcasting industry
and significantly enhancing our ability to attract and retain experienced and
highly motivated employees and management.
4
5
RADIO AND TELEVISION STATIONS
The following tables set forth certain information regarding our radio and
television stations and their broadcast markets.
RADIO STATIONS
In the following table, "Market Rank by Revenue" is the ranking of the
market revenue size of the principal radio market served by the station among
all radio markets in the United States. Market revenue and ranking figures are
from Duncan's Radio Market Guide (1999 ed.). We own a 40% equity interest in the
publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic
Target" is the ranking of the station among all radio stations in its market
based on the Fall 1999 Arbitron Survey. A "t" indicates the station tied with
another station for the stated ranking. "Station Audience Share" represents a
percentage generally computed by dividing the average number of persons over age
12 listening to a particular station during specified time periods by the
average number of such persons for all stations in the market area as determined
by Arbitron.
RANKING IN
STATION MARKET PRIMARY PRIMARY STATION
AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
- --------------- -------- ---------------------- ----------- ------------ --------
LOS ANGELES, CA 1
KPWR-FM Dance/Contemporary Hit 12-24 2 3.8
NEW YORK, NY 2
WQHT-FM Dance/Contemporary Hit 12-24 1 5.2
WRKS-FM Classic Soul/Smooth R&B 25-54 3 4.0
WQCD-FM Contemporary Jazz 25-54 8t 3.0
Chicago, IL 3
WKQX-FM New Rock 18-34 4 3.4
St. Louis, MO 18
KSHE-FM Album Oriented Rock 25-54 9 2.9
WKKX-FM Country 25-54 6 4.6
WXTM-FM Extreme Rock 18-34 6 3.0
Indianapolis, IN 30
WENS-FM Adult Contemporary 25-54 7 5.0
WIBC-AM News/Talk 35-64 3 8.4
WNAP-FM* Classic Rock 18-34 8 2.9
WTLC-FM Urban Contemporary 25-54 5 6.0
WTLC-AM Solid Gold Soul, Gospel 25-54 24 0.8
and Talk
Terre Haute, IN 171
WTHI-FM Country 25-54 1 17.2
WWVR-FM Classic Rock 25-54 3 7.9
*On March 28, 2000, Emmis changed the call letters of WNAP-FM to WNOU-FM
and changed the format to Top 40.
5
6
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company
("Nielsen") as of January 2000. Rankings are based on the relative size of a
station's market among the 210 generally recognized Designated Market Areas
("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the
number of television stations ("Reportable Stations") designated by Nielsen as
"local" to the DMA, excluding public television stations and stations which do
not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience
of less than 2.5%) for reporting in the Sunday through Saturday, 6:00 a.m. to
2:00 a.m. time period. "Station Rank" reflects the station's rank relative to
other Reportable Stations based upon the DMA rating as reported by Nielsen from
6:00 a.m. to 2:00 a.m., Sunday through Saturday during November 1999. "Station
Audience Share" reflects an estimate of the share of DMA households viewing
television received by a local commercial station in comparison to other local
commercial stations in the market as measured from 6:00 a.m. to 2:00 a.m.,
Sunday through Saturday.
NUMBER OF STATION
TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE
- -------------- ---------------------- ------- --------------- ------------- ---------- ---------
WKCF-TV Orlando, FL 22 WB/18 7 4t 7
WVUE-TV New Orleans, LA 41 Fox/8 8 3 9
WALA-TV Mobile, AL-Pensacola, 62 Fox/10 6 3 10
FL
WLUK-TV Green Bay, WI 69 Fox/11 6 3 13
KHON-TV Honolulu, HI 71 Fox/2 7 1 16
WFTX-TV Fort Myers, FL 81 Fox/36 5 4 7
WTHI-TV Terre Haute, IN 139 CBS/10 3 1 21
Emmis also owns KAII-TV and KHAW-TV, which operate as satellite stations of
KHON-TV and primarily re-broadcast the signal of KHON-TV. The stations are
considered one station for FCC multiple ownership purposes. Low power television
translators W40AN and K55D2 retransmit stations WLUK-TV and KHON-TV,
respectively.
RADIO NETWORKS
In addition to our other radio broadcasting operations, we own and operate
two radio networks. Network Indiana provides news and other programming to
nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides
farm news, weather information and market analysis to radio stations across
Indiana.
PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Indianapolis Monthly. We have published Indianapolis Monthly magazine since
September 1988. Indianapolis Monthly covers local personalities, homes and
lifestyles and currently has a paid monthly circulation of approximately 45,000.
With a large advertising base and a popular editorial focus, Indianapolis
Monthly is the market's leading general interest magazine focusing on the
Indianapolis area.
Atlanta. We acquired and began publishing Atlanta magazine in August 1993.
Atlanta covers area personalities, issues and style and currently has a paid
monthly circulation of approximately 65,000. The magazine was unprofitable for
several years before we acquired it for a nominal investment. Certain
initiatives, including downsizing staff, increasing sales efforts and
repositioning the editorial focus, have contributed to improving profitability.
6
7
Cincinnati. We acquired Cincinnati magazine in October 1997. Cincinnati
magazine was founded by the Greater Cincinnati Chamber of Commerce in 1967 and,
under its prior owners, the magazine grew to a paid monthly circulation of
approximately 22,000. We repositioned the editorial product to an up-to-date
city/regional magazine covering people and entertainment in Cincinnati, doubled
the existing sales staff and marketed the newly designed magazine to the
Cincinnati area. The magazine currently has a paid monthly circulation of
approximately 28,000.
Texas Monthly. We acquired Texas Monthly magazine in February 1998. The
critically acclaimed magazine, which has received eight National Magazine
Awards, has a paid monthly circulation of approximately 300,000, and we believe
it is read by more than 2,436,000 people. Since acquiring the magazine, we have
worked to increase Texas Monthly's operating efficiencies while leaving the
highly regarded editorial product intact.
Country Sampler. We acquired Country Sampler magazine in April 1999.
Country Sampler focuses on country craft and home decorating ideas and products,
and we believe it is read by more than two million people. In connection with
the acquisition of Country Sampler, we also acquired other related magazines
focusing on particular segments of the country craft and home decorating market.
To complement Country Sampler, we acquired Country Marketplace in December 1999.
Country Marketplace serves the general craft market, providing projects to
crafters of all skill levels. Like Country Sampler magazine, Country Marketplace
carries a substantial amount of crafter advertising, allowing for great
efficiencies in the sales arena.
L.A. Magazine. We acquired L.A. Magazine in March 2000. This high-profile
city magazine in the nation's second-largest metropolis maintains a circulation
base of approximately 180,000. With the acquisition of L.A. Magazine, Emmis
secured a franchise, brand-name product in the country's trend-setting capital.
We intend to enhance and upgrade the editorial product, currently a mix of
star-coverage, Hollywood insider information and regional service, by including
renown columnists, improving lifestyle and service coverage, and exploring
hard-hitting stories that make a difference to Angelenos. In addition, we intend
to increase the sales force with a renewed emphasis on local retailers.
INTERNET
We believe that the development and explosive growth of the Internet
present not only a challenge, but an opportunity for broadcasters and
publishers. The challenge is, primarily, increased competition for the time and
attention of our listeners, viewers and readers. The opportunity is to further
enhance the relationships we already have with our listeners, viewers and
readers by expanding products and services offered by our stations and
magazines. For that reason, we have been working with other broadcasters and
publishers to put together a local media internet venture (LMIV). The LMIV is
premised on the idea that each station's or magazine's website would be the
entry way into a backbone of internet content provided by a national, or even
international, aggregation of broadcasters and publishers. The LMIV would
capitalize on the individual relationships between each station or magazine and
its listeners, viewers or readers by allowing each station's or magazine's
website to reflect the character of the station or magazine. The LMIV would also
capitalize on the potentially tremendous economies of scale provided by the
stations' and magazines' aggregated websites. Bringing a group of broadcasters
and publishers together is almost always a difficult proposition. However, we
remain optimistic that the LMIV will be formalized.
7
8
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the
communities we serve. To that end, each of our stations participates in many
community programs, fundraisers and activities that benefit a wide variety of
organizations. Charitable organizations that have been the beneficiaries of our
marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, The March of Dimes, American Cancer Society, Riley Children's
Hospital and research foundations seeking cures for cystic fibrosis, leukemia
and AIDS and helping to fight drug abuse. In addition to our planned activities,
our stations and magazines take leadership roles in community responses to
natural disasters.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry
organizations. Our senior managers have served in various capacities with
industry associations, including as directors of the National Association of
Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the
Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding
members of the Radio Operators Caucus. In addition, our managers have been voted
Radio President of the Year and General Manager of the Year, and at various
times we have been voted Most Respected Broadcaster in polls of radio industry
chief executive officers and managers.
FEDERAL REGULATION
Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (and, as amended by the Telecommunications Act of 1996 (the
"1996 Act"), the "Communications Act"). Television or radio broadcasting is
prohibited except in accordance with a license issued by the FCC upon a finding
that the public interest, convenience and necessity would be served by the grant
of such license. The FCC has the power to revoke licenses for, among other
things, false statements made in applications or willful or repeated violations
of the Communications Act or of FCC rules. In general, the Communications Act
provides that the FCC shall allocate television and radio licenses in such
manner as will provide a fair, efficient and equitable distribution of service
throughout the United States. The FCC determines the location of stations,
regulates the apparatus used by stations, and regulates numerous other areas of
television and radio broadcasting pursuant to rules, regulations and policies
adopted under authority of the Communications Act. The Communications Act, among
other things, prohibits the assignment of a broadcast license or the transfer of
control of a corporation holding a license without the prior approval of the
FCC. Under the Communications Act, the FCC also regulates certain aspects of the
operation of cable television systems and other electronic media that compete
with broadcast stations.
The 1996 Act represented the most comprehensive overhaul of the country's
telecommunications laws in more than 60 years. The 1996 Act significantly
changed both the process for renewal of broadcast station licenses and the
broadcast ownership rules. The following is a brief summary of certain
provisions of the Communications Act and of specific FCC regulations and
policies. Reference should be made to the Communications Act, FCC rules and the
public notices and rulings of the FCC for further information concerning the
nature and extent of federal regulation of radio and television stations.
The 1996 Act established a "two-step" renewal process that limits the FCC's
discretion to consider applications filed in competition with an incumbent's
renewal application. The 1996 Act also substantially liberalized the national
broadcast ownership rules, eliminating the national radio limits and easing the
national restrictions on TV ownership; it also relaxed local radio ownership
restrictions.
8
9
This new regulatory flexibility has engendered aggressive local, regional,
and/or national acquisition campaigns. Removal of previous station ownership
limitations on leading incumbents (i.e., existing networks and major station
groups) has sharply increased the competition for and the prices of attractive
stations.
Other legislation has been introduced from time to time which would amend
the Communications Act in various respects and the FCC from time to time
considers new regulations or amendments to its existing regulations. We cannot
predict whether any such legislation will be enacted or new or amended FCC
regulations adopted or what their effect would be on Emmis.
LICENSE RENEWAL. Radio and television stations operate pursuant to
broadcasting licenses that are ordinarily granted by the FCC for maximum terms
of eight years and are subject to renewal upon application to the FCC. Our
licenses currently have the following expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 2004
WKQX-FM (Chicago) December 1, 2004
KSHE-FM (St. Louis) February 1, 2005
KPWR-FM (Los Angeles) December 1, 2005
WQHT-FM (New York) June 1, 2006
WQCD-FM (New York) June 1, 2006
WIBC-AM (Indianapolis) August 1, 2004
WNOU-FM (Indianapolis) August 1, 2004
WRKS-FM (New York) June 1, 2006
WKKX-FM (St. Louis) December 1, 2004
WXTM-FM (St. Louis) December 1, 2004
WTLC-AM (Indianapolis) August 1, 2004
WTLC-FM (Indianapolis) August 1, 2004
WTHI-FM (Terre Haute) August 1, 2004
WWVR-FM (Terre Haute) August 1, 2004
WTHI-TV (Terre Haute) August 1, 2005
WFTX-TV (Fort Myers) February 1, 2005
WALA-TV (Mobile) April 1, 2005
WVUE-TV (New Orleans) June 1, 2005
WLUK-TV (Green Bay) December 1, 2005
KHON-TV (Honolulu) February 1, 2007
KAII-TV (Maui) February 1, 2007
KHAW-TV (Hawaii) February 1, 2007
WKCF-TV (Orlando) February 1, 2005
Under the 1996 Act, at the time an application is filed for renewal for a
station license, parties in interest, as well as members of the public, may
apprise the FCC of the service the station has provided during the preceding
license term and urge the denial of the application. If such a petition to deny
presents information from which the FCC concludes (or if the FCC concludes on
its own) that there is a "substantial and material" question whether grant of
the renewal application would be in the public interest under applicable rules
and policy, the FCC may conduct a hearing on specified issues to determine
whether renewal should be granted. The 1996 Act modified the license renewal
process to provide for the grant of a renewal application upon a finding by the
FCC that the licensee:
- has served the public interest, convenience and necessity;
- has committed no serious violations of the Communications Act or the
FCC's rules; and
- has committed no other violations of the Communications Act or the
FCC's rules which would constitute a pattern of abuse.
9
10
If the FCC cannot make such a finding, it may deny a renewal application,
and only then may the FCC accept other applications to operate the station of
the former licensee. In a vast majority of cases, the FCC renews broadcast
licenses even when petitions to deny applications are filed against broadcast
license renewal applications.
OWNERSHIP RESTRICTIONS. The 1996 Act eliminated restrictions on the number
of radio stations that may be owned by one entity nationwide. Under the 1996
Act, with limited exceptions, the number of radio stations that may be owned by
one entity in a given radio market is dependent on the number of commercial
stations in that market:
- if the market has 45 or more stations, one entity may own not more
than eight stations, of which not more than five may be in one service
(AM or FM);
- if the market has between 30 and 44 stations, one entity may own not
more than seven stations, of which not more than four may be in one
service;
- if the market has between 15 and 29 stations, a single entity may own
not more than six stations, of which not more than four may be in one
service; and
- if the market has fourteen or fewer stations, one entity may own not
more than five stations, of which not more than three may be in one
service, except that in such a market one entity may not own more than
fifty percent of the stations in the market.
Each of the six markets in which our radio stations are located has at
least 15 commercial radio stations.
In August 1999, the FCC substantially revised its ownership rules
concerning the common ownership of radio and television stations in the same
market. Previously, the FCC had generally prohibited common ownership of a
television station and one or more radio stations in the same market, though
waivers of the rule were granted frequently; one such waiver was granted to
permit our common ownership of WTHI-TV, WTHI-FM and WWVR-FM in Terre Haute,
Indiana. The FCC also generally prohibited common ownership of two or more
television stations in the same market. Under the new rules, the Commission will
permit the common ownership of one television station, along with:
- up to six radio stations in any market where at least 20 independent
voices remain post-merger;
- up to four radio stations in any market where at least 10 independent
voices remain post-merger; and
- one radio station regardless of the number of independent voices
remaining post-merger.
Additionally, the new rules provide that an entity may own two television
stations in the same Designated Market Area (DMA) if:
- the coverage areas of the stations do not overlap, or
- there will remain eight, independently-owned and-operated full-power
noncommercial and commercial operating stations, and one of the two
commonly-owned stations is not a top 4-ranked station in the market
(based on audience).
Furthermore, the Commission will consider waiving these restrictions, if:
- one of the stations is a "failed station," i.e., off-air for more than
four months, or involved in an involuntary bankruptcy proceeding;
- one of the stations is a "failing station," i.e., having a low
audience share and financially struggling; or
- one of the stations is an unbuilt facility, where the permittee has
made substantial progress towards constructing the facility.
10
11
The 1996 Act and the FCC's subsequently issued rules restrict the ownership
of television stations on a nationwide basis to no more than 35% of the national
audience; the FCC is considering raising that limit.
Current FCC rules prohibit common ownership of a daily newspaper and a
radio or television station in the same market; the FCC is considering possible
liberalization or elimination of that prohibition. There is also a prohibition
on common ownership of a television station and a cable television system in the
same market; however, the FCC is considering possible elimination of that ban.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the
FCC requires the "attribution" of broadcast licenses between a broadcasting
company and certain of its stockholders, officers or directors, such that there
would be a violation of FCC regulations where such a stockholder, officer or
director and the broadcasting company together held more than the permitted
number of stations or a prohibited combination of media outlets in the same
market. Under FCC rules, with certain exceptions, attribution of broadcast
licenses occurs where any five percent voting stockholder or officer or director
of a broadcasting company directly or indirectly owns, operates, controls or has
a five percent voting interest in or is an officer or director of any other
broadcasting company; for passive investments by mutual funds, insurance
companies and bank trust departments, voting interests of twenty per cent or
more are attributable. Attribution also occurs in the case of all general
partnership interests and in the case of limited partnership interests and
interests in limited liability companies where a limited partner or member is
"materially involved" in the media-related activities of the partnership or LLC.
To assess whether a voting stock interest in a direct or indirect parent
corporation of a broadcast licensee is attributable, the FCC uses a "multiplier"
analysis in which non-controlling voting stock interests are deemed
proportionally reduced at each non-controlling link in a multi-corporation
ownership chain. Emmis' Amended and Restated Articles of Incorporation and
By-Laws authorize the Board of Directors to prohibit any ownership, voting or
transfer of its capital stock which would cause Emmis to violate the
Communications Act or FCC regulations.
In cases where one person or entity (such as Jeffrey H. Smulyan in the case
of Emmis) holds more than 50% of the combined voting power of the common stock
of a broadcasting company, a minority shareholder of the company generally would
not be deemed to hold an "attributable" interest in the company. However, any
attributable interest by any such shareholder in another broadcast station or
other media in a market where such company owns, or seeks to acquire, a station
would still be subject to review by the FCC under its "equity/debt plus policy"
(described below), and could result in the company's being unable to obtain from
the FCC one or more authorizations needed to conduct its broadcast business or
being unable to obtain FCC consents for future acquisitions. Further, in the
event that a majority shareholder of a company (such as Mr. Smulyan in the case
of Emmis) were no longer to hold more than 50% of the combined voting power of
the common stock of the company, the interests of minority shareholders which
had theretofore been considered nonattributable could become attributable, with
the result that any other media interests held by such shareholders would be
combined with the media interests of such company for purposes of determining
compliance with FCC ownership rules. In the case of Emmis, Mr. Smulyan's level
of voting control could decrease to or below 50% as a result of transfers of
common stock pursuant to agreement or conversion of the Class B Common Stock
into Class A Common Stock. In the event of any noncompliance, steps required to
achieve compliance could include divestitures by either the shareholder or the
affected company. Further, other media interests of shareholders having or
acquiring an attributable interest in such a company could result in the company
being unable to obtain from the FCC one or more authorizations needed to conduct
its broadcast business or being unable to obtain FCC consents for future
acquisitions. Conversely, a company's media interests could operate to restrict
other media investments by shareholders having or acquiring an interest in
Emmis.
11
12
The FCC will also find that a person or entity has an attributable interest
in a broadcast (radio or television) station if the person or entity (i) owns a
broadcast station, cable television system or newspaper in the same market and
(ii) is party to a time brokerage agreement (also known as a local marketing
agreement) whereby it programs more than 15% of the programming of another
station in the market. In such cases, the brokering person or entity would be
considered to "own" such other station for purposes of the FCC's ownership
rules.
Under a recent change in the FCC's ownership attribution rules, an investor
in a television or radio station will also be considered to have an attributable
interest in another station where his or her interest in the other station,
including both debt and equity holdings, exceeds 33% or the total asset value of
the entity owning the other station, and either:
- - the investor is a "major program supplier," including all programming
entities such as networks and time brokers which supply more than 15% of
the station's total weekly broadcast time; or
- - the investor is a same-market media owner subject to the FCC's ownership
rules, i.e., a broadcaster, cable operator or newspaper owner.
TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast licensee without the
prior approval of the FCC. In determining whether to grant such approval, the
FCC considers a number of factors, including compliance with the various rules
limiting common ownership of media properties, the "character" of the licensee
and those persons holding "attributable" interests therein, and compliance with
the Communications Act's limitations on alien ownership as well as compliance
with other FCC policies. When passing on an assignment or transfer application,
the FCC is prohibited from considering whether the public interest might be
served by an assignment or transfer of the broadcast license to any party other
than the assignee or transferee specified in the application.
A transfer of control of a corporation controlling a broadcast license may
occur in various ways. For example, a transfer of control occurs if an
individual stockholder gains or loses "affirmative" or "negative" control of
such corporation through issuance, redemption or conversion of stock.
"Affirmative" control would consist of control of more than 50% of such
corporation's outstanding voting power and "negative" control would consist of
control of exactly 50% of such voting power. To obtain the FCC's prior consent
to assign or transfer control of a broadcast license, appropriate applications
must be filed with the FCC. If the application involves a "substantial change"
in ownership or control, the application must be placed on public notice for a
period of 30 days during which petitions to deny the application may be filed by
interested parties, including members of the public. If the application does not
involve a "substantial change" in ownership or control, it is a "pro forma"
application. The "pro forma" application is nevertheless subject to having
informal objections filed against it. If the FCC grants an assignment or
transfer application, interested parties have 30 days from public notice of the
grant to seek reconsideration of that grant. Generally, parties that do not file
initial petitions to deny or informal objections against the application face a
high hurdle in seeking reconsideration of the grant. The FCC normally has an
additional ten days to set aside such grant on its own motion. (FCC rules for
computation of time may cause more variation in the actual time for action and
response.)
Under the 1996 Act, the FCC is required to review all of its broadcast
ownership rules every two years to determine whether the public interest
dictates that such rules be repealed or modified. We cannot predict the outcome
of any such reviews or the impact they may have on our business.
12
13
ALIEN OWNERSHIP RESTRICTIONS. Under the Communications Act, no FCC license
may be held by a corporation if more than one-fifth of its capital stock is
owned of record or voted by aliens or their representatives or by a foreign
government or representative thereof, or by any corporation organized under the
laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the
Communications Act provides that no FCC license may be granted to any
corporation directly or indirectly controlled by any other corporation of which
more than one-fourth of its capital stock is owned of record or voted by
Non-U.S. Persons if the FCC finds the public interest will be served by the
refusal of such license. The FCC staff has interpreted this provision to require
an affirmative public interest finding to permit the grant or holding of a
license, and such a finding has been made only in limited circumstances. The
foregoing restrictions on alien ownership apply in modified form to other forms
of business organizations, including partnerships and limited liability
companies. Our Amended and Restated Articles of Incorporation and Code of
By-Laws authorize the Board of Directors to prohibit such ownership, voting or
transfer of its capital stock as would cause Emmis to violate the Communications
Act or FCC regulations.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has relaxed
or eliminated many of the more formalized procedures it developed to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. However, licensees continue to be required to present
programming that is responsive to community problems, needs and interests and to
maintain certain records demonstrating such responsiveness. Broadcast of obscene
or indecent material is regulated by the FCC as well as by state and federal
law. Complaints from listeners concerning a station's programming often will be
considered by the FCC when it evaluates renewal applications of a licensee,
although such complaints may be filed and considered by the FCC at any time.
Stations also must pay regulatory and application fees and follow various rules
promulgated under the Communications Act that regulate, among other things,
political advertising, sponsorship identifications, the advertisement of
contests and lotteries, and technical operations, including limits on radio
frequency radiation.
In February 2000, the FCC adopted new rules requiring licensees to develop
and implement affirmative action programs designed to promote equal employment
opportunities. The new rules require all broadcasters to implement broad
outreach programs that will lead to the widest possible dissemination of job
vacancies. In addition, the rules require additional measures for stations
employing five or more full-time employees which extend beyond the recruitment
efforts for a particular job vacancy. The new rules also require most
broadcasters to file periodic reports with the Commission regarding their
recruitment efforts.
The FCC has adopted rules to implement the Children's Television Act of
1990, which, among other provisions, limits the permissible amount of commercial
matter in children's programs and requires each television station to present
"educational and informational" children's programming. The FCC also has adopted
renewal processing guidelines effectively requiring television stations to
broadcast an average of at least three hours per week of children's educational
programming. In addition, the FCC has adopted rules that require television
stations to broadcast, over an 8 to 10 year transition period which commenced on
January 1, 1998, increasing and set percentages of closed captioned programming
for the hearing-impaired.
Over the past few years, a number of radio and television stations,
including certain Emmis stations, have entered into what commonly are referred
to as "local marketing agreements" or "time brokerage agreements" (together,
"LMAs"). These agreements take various forms. Separately-owned and licensed
stations may agree to function cooperatively in terms of programming,
advertising sales and other matters, subject to compliance with the antitrust
laws and the FCC's rules and policies, including the requirement that the
licensee of each station maintain independent control over the programming and
other operations of its own station. As already noted, a station that brokers
more than 15% of the broadcast time of another station in the same market will
be deemed to have an
13
14
attributable interest in that station. Further, FCC rules prohibit a radio
station from "simulcasting" more than 25% of its programming from another
station in the same market in the same broadcast service (i.e., AM-AM or FM-FM)
where the two stations serve substantially the same geographic area, and where
the stations are commonly owned or the owner of one station programs the other
through an LMA.
Another example of a cooperative agreement between differently owned
broadcast stations in the same market is a joint sales agreement ("JSA"),
whereby one station sells advertising time in combination, both on itself and on
a station under separate ownership. The FCC has determined that JSA's should
generally be left to antitrust enforcement, though it has reserved the right to
examine JSA's on a case-by-case basis. Generally, JSA's are not deemed by the
FCC to be attributable for purposes of its ownership rules.
In 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"). Certain provisions of this law,
such as signal carriage and retransmission consent, have a direct effect on
television broadcasting. The signal carriage, or "must carry," provisions
require cable operators to carry the signals of local commercial and
non-commercial television stations and certain low power television stations.
Systems with 12 or fewer usable activated channels and more than 300 subscribers
must carry the signals of at least three local commercial television stations. A
cable system with more than 12 usable activated channels, regardless of the
number of subscribers, must carry the signals of all local commercial television
stations, up to one-third of the aggregate number of usable activated channels
of such a system. The 1992 Cable Act also includes a retransmission consent
provision that prohibits cable operators and other multi-channel video
programming distributors ("MVPDs") from carrying broadcast signals without
obtaining the station's consent in certain circumstances. The "must carry" and
retransmission consent provisions are related in that a local television
broadcaster, on a cable system-by-cable system basis, must make a choice once
every three years whether to proceed under the "must carry" rules or to waive
the right to mandatory but uncompensated carriage and negotiate a grant of
retransmission consent to permit the cable system to carry the station's signal,
in most cases in exchange for some form of consideration from the cable
operator. Cable systems and other MVPDs must obtain retransmission consent to
carry all distant commercial stations other than "super stations" delivered via
satellite.
In April 1997, the FCC adopted rules that require television broadcasters
to provide digital television ("DTV") to consumers. The FCC also adopted a table
of allotments for DTV, which provides eligible existing broadcasters with a
second channel on which to provide DTV service. The FCC's DTV allotment plan is
based on the use of a "core" DTV spectrum between channels 2-51. The
Communications Act mandates that unless certain benchmarks are not satisfied, by
the end of 2006 the FCC must recover one of the two channels from each
television station. Television broadcasters will be allowed to use their
channels according to their best business judgment. Such uses can include
multiple standard definition program channels, data transfer, subscription
video, interactive materials, and audio signals (so-called "ancillary"
services), although broadcasters will be required to provide a free digital
video programming service that is at least comparable to today's analog service.
The FCC has imposed a fee of 5% of the annual gross revenues for television
broadcasters' use of the DTV spectrum to offer ancillary services (i.e.,
services other than free, over-the-air, advertiser-supported television). The
form and amount of these fees may have a significant effect on the profitability
of such services. Broadcasters will not be required to air "high definition"
programming or, initially, to simulcast their analog programming on the digital
channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets
were required to be on the air with a digital signal by May 1, 1999, and
affiliates of those networks in markets 11-30 were required to be on the air
with digital signals by November 1, 1999. The remaining commercial stations,
including those owned by Emmis, were required to file DTV construction permit
applications by November 1, 1999 and to be on the air with digital signals by
May 1, 2002. Emmis timely filed DTV construction permit applications for all
14
15
its television stations. The FCC also has released a Notice of Inquiry to
determine the extent of broadcasters' future public interest obligations.
Whether and to what extent the cable "must-carry" rights discussed earlier
will extend to the new DTV signals is still a matter to be determined by a rule
making proceeding initiated by the FCC in July 1998. The rule making proceeding
also seeks comment on related issues, including how to resolve technical
compatibility problems, whether the FCC should modify its signal quality
requirement during the transition, how to regulate channel placement of digital
television signals and whether such signals must be carried on the basic cable
tier. We cannot predict at this time whether the FCC will adopt "must carry"
requirements for digital television signals or the effect of an FCC decision on
our television stations.
The FCC has authorized the provision of video programming directly to home
subscribers through high-powered direct broadcast satellites ("DBS"). DBS
systems currently are capable of broadcasting as many as 175 channels of digital
television service directly to subscribers' equipment with 18-inch receiving
dishes and decoders. Currently, several entities provide DBS service to
consumers throughout the country. Other DBS operators hold licenses, but have
not yet commenced service. DBS operators may not import distant network signals
into local television markets unless the individual household that would receive
the distant network signal is not capable of receiving a sufficiently strong
"over-the-air" signal of the local affiliate of the given network. In November
1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which
authorizes DBS companies to provide local television signals to their
subscribers. During the first six months following enactment of the law, the
signal could be provided without the consent of the station. Upon the expiration
of that period, the signal may now be provided only pursuant to a retransmission
consent agreement with the station. In addition, effective January 1, 2002, a
local television station will be entitled to "must-carry" rights on a DBS system
if the system is providing any local television stations to its subscribers. The
legislation also requires broadcasters to negotiate nonexclusive retransmission
consent agreements in good faith until January 1, 2006; however, the law
explicitly provides that broadcasters may enter into agreements with competing
DBS carriers on different terms. SHVIA also "grandfathered" delivery of the
signals of television stations via DBS to certain subscribers who may have been
receiving such signals in violation of prior law.
SHVIA also created a new category of television stations, Class A stations,
which are afforded a measure of protection from new full-service and low-power
television stations. Only certain low-power stations qualify for the new Class A
status, i.e., those low power television stations certifying that, from
September 1, 1999 to November 29, 1999, they (1) operated a minimum of 18 hours
per day; (2) produced an average of at least 3 hours per week of programming
within the service market; and (3) complied with all applicable low power
television (Part 74) rules. Furthermore, the licensee of a Class A station will
be required to comply with all applicable full power television station rules as
of the date of application for Class A status, including all political
advertising restrictions, local public inspection file rules, and the location
of the main studio. Finally, SHVIA permitted full-service stations to file
applications to "maximize" (expand the coverage of) their DTV facilities by (i)
filing a notice of intent to maximize with the FCC on or before December 31,
1999, and (ii) file a bona fide application to maximize on or before May 1,
2000. Stations meeting those requirements will have their "maximized" DTV
facilities protected from interference by Class A stations. Emmis timely filed a
Notice of Intent and a "maximization application" for each of its television
stations.
There are FCC rules and policies, and rules and policies of other federal
agencies, that regulate matters such as network-affiliate relations, the ability
of stations to obtain exclusive rights to air syndicated programming, cable
systems' carriage of syndicated and network programming on distant stations,
political advertising practices, application procedures and other areas
affecting the business or operations of broadcast stations.
15
16
Failure to observe FCC rules and policies can result in the imposition of
various sanctions, including monetary fines, the grant of "short" (less than the
maximum term) license renewal terms or, for particularly egregious violations,
the denial of a license renewal application or the revocation of a license.
Recent Developments and Proposed Changes. In February 2000, the Commission
adopted rules implementing a Low Power ("Microradio") FM service. The new
service is comprised of two classes of stations. First, "LP-100" Class stations
will be authorized to operate with 50 - 100 watts effective radiated power
("ERP"), at a maximum height above average terrain ("HAAT") of 30 meters.
Second, "LP-10" Class stations will be authorized to operate with one to ten
watts ERP, at a maximum of 30 meters HAAT. The LP-100 stations are expected to
have a service radius of up to 3 1/2 miles, and the LP-10 stations will have a
service radius of up to two miles. Both classes of stations will be restricted
to non-commercial operation. We cannot predict whether any such stations will
interfere with the coverage of any of our radio stations. Currently, Congress is
considering legislation with a view to ensuring interference protection for
existing radio stations.
In April 1997, the FCC adopted rules authorizing delivery of digital audio
radio service on a nationwide basis by satellite ("SDARS"). At the same time,
the FCC put out for comment a proposal to permit SDARS to be supplemented by
terrestrial transmitters designed to fill "gaps" in satellite coverage. The FCC
has awarded two nationwide licenses for SDARS. It is anticipated that SDARS,
when implemented, will be capable of delivering multiple channels of
compact-disc quality sound which will be receivable through the use of special
receiving antennas.
In November 1999, the Commission released proposed rules regarding the
adoption of rules for terrestrial digital audio broadcasting ("DAB"). The
proposed rules would permit existing AM and FM stations to operate on their
current frequencies in either full analog mode, full digital mode, or (at
reduced power) a combination of both. DAB technology is still evolving, and it
is not yet certain whether DAB transmission as proposed will be feasible.
In August 1998, the FCC adopted rules to govern the use of auctions to
resolve competing applications for initial licenses and construction permits and
competing applications for major modifications to existing commercial broadcast
facilities. The rules apply to full power commercial radio and analog television
stations, as well as to all secondary commercial broadcast services (e.g., low
power television, FM translator and television translator services). In
September 1999, the Commission conducted the first of its auctions for
long-frozen applications. Any future applications we may file for major
modifications to our facilities may become subject to auction proceedings if
they are found to be mutually exclusive with major modification applications
filed by other radio or television licensees or applications for new stations.
On March 13, 1998, the FCC approved a television programming rating system
developed by the television industry which will allow parents to "black-out"
programs that contain material they consider inappropriate for children. On
March 13, 1998, the FCC also adopted technical requirements for the
implementation of so-called "v-chip technology" which will enable parents to
program television sets so that certain programming will be inaccessible to
children.
16
17
The Congress and the FCC have under consideration, and may in the future
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect the operation, ownership
and profitability of our broadcast stations, result in the loss of audience
share and advertising revenues for our broadcast stations and affect our ability
to acquire additional broadcast stations or finance such acquisitions. Such
matters include:
- - proposals to impose spectrum use or other fees on FCC licensees;
- - proposals to repeal or modify some or all of the FCC's multiple ownership
rules and/or policies;
- - proposals to change rules relating to political broadcasting, including the
reinstatement of the so-called "fairness doctrine";
- - technical and frequency allocation matters;
- - AM stereo broadcasting;
- - proposals to permit expanded use of FM translator stations;
- - proposals to restrict or prohibit the advertising of beer, wine and other
alcoholic beverages on radio;
- - proposals permitting FM stations to accept formerly impermissible
interference;
- - proposals to reimpose holding periods for licenses;
- - changes to broadcast technical requirements, including those relative to
the implementation of digital audio broadcasting and satellite digital
audio radio service;
- - proposals to tighten safety guidelines relating to radio frequency
radiation exposure; and
- - proposals to limit the tax deductibility of advertising expenses by
advertisers.
We cannot predict whether any proposed changes will be adopted, what other
matters might be considered in the future, or what impact, if any, the
implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference is made to the
Communications Act, FCC regulations and the public notices and rulings of the
FCC for further information concerning the nature and extent of federal
regulation of broadcast stations.
ADVERTISING SALES
Our stations derive their advertising revenue from local and regional
advertising in the marketplaces in which they operate, as well as from the sale
of national advertising. Local and most regional sales are made by a station's
sales staff. National sales are made by firms specializing in such sales which
are compensated on a commission-only basis. We believe that the volume of
national advertising revenue tends to adjust to shifts in a station's audience
share position more rapidly than does the volume of local and regional
advertising revenue.
We have led the industry in developing "vendor co-op" advertising revenue
(i.e., revenue from a manufacturer or distributor which is used to promote its
particular goods together with local retail outlets for those goods). Although
this source of advertising revenue is common in the newspaper and magazine
industry, we were among the first radio broadcasters to recognize, and take
advantage of, the potential of vendor co-op advertising. Our Revenue Development
Systems division has established a network of radio stations which share
information about sources of vendor co-op revenue. In addition, each of our
stations has a salesperson devoted exclusively to the development of cooperative
advertising. We also use this approach at our television stations. In March
1999, we acquired substantially all of the assets of the Co-Opportunities
division of Jefferson-Pilot Communications. We believe that the business of
Co-Opportunities (which focuses more on co-op advertising for television
stations and cable systems) provides an excellent complement to Revenue
Development Systems.
17
18
COMPETITION
Radio and television broadcasting stations compete with the other
broadcasting stations in their respective market areas, as well as with other
advertising media such as newspapers, magazines, outdoor advertising, transit
advertising, the Internet and direct mail marketing. Competition within the
broadcasting industry occurs primarily in individual market areas, so that a
station in one market does not generally compete with stations in other market
areas. In each of our markets, our stations face competition from other stations
with substantial financial resources, including stations targeting the same
demographic groups. In addition to management experience, factors which are
material to competitive position include the station's rank in its market,
authorized power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other stations in the market
area. We attempt to improve our competitive position with programming and
promotional campaigns aimed at the demographic groups targeted by our stations,
and through sales efforts designed to attract advertisers that have done little
or no broadcast advertising by emphasizing the effectiveness of radio and
television advertising in increasing the advertisers' revenues. Changes in the
policies and rules of the FCC permit increased joint ownership and joint
operation of local stations. Those stations taking advantage of these joint
arrangements (including our New York, St. Louis, Indianapolis and Terre Haute
clusters) may in certain circumstances have lower operating costs and may be
able to offer advertisers more attractive rates and services. Although we
believe that each of our stations can compete effectively in its market, there
can be no assurance that any of our stations will be able to maintain or
increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, some barriers to
entry exist. The operation of a broadcasting station in the United States
requires a license from the FCC, and the number of stations that can operate in
a given market is limited by the availability of the frequencies that the FCC
will license in that market, as well as by the FCC's multiple ownership rules
regulating the number of stations that may be owned and controlled by a single
entity. The FCC's multiple ownership rules have changed significantly as a
result of the Telecommunications Act of 1996.
The broadcasting industry historically has grown in terms of total revenues
despite the introduction of new technology for the delivery of entertainment and
information, such as cable television, The Internet, satellite television, audio
tapes and compact discs. We believe that radio's portability in particular makes
it less vulnerable than other media to competition from new methods of
distribution or other technological advances. There can be no assurance,
however, that the development or introduction in the future of any new media
technology will not have an adverse effect on the radio or television
broadcasting industry.
EMPLOYEES
As of February 29, 2000 Emmis had approximately 1,440 full-time employees
and approximately 270 part-time employees. We have approximately 214 employees
at various radio and television stations represented by unions. We consider
relations with our employees to be good.
18
19
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one
radio station located in Hungary and two radio stations located in Argentina.
The following tables summarize relevant financial information by geographic
area:
FOR THE YEAR ENDED FEBRUARY 28 (29),
----------------------------------------------------
1998 1999 2000
----------- ----------- -------------
(IN THOUSANDS)
Net Revenues:
Domestic $ 140,583 $ 229,582 $ 316,454
International - 3,254 8,811
----------- ----------- -------------
Total 140,583 232,836 325,265
=========== =========== =============
AS OF FEBRUARY 28 (29),
----------------------------------------------------
1998 1999 2000
----------- ----------- -------------
(IN THOUSANDS)
Noncurrent Assets:
Domestic $ 261,352 $ 925,161 $ 1,181,640
International 20,884 18,588 32,950
--------- ---------- -------------
Total 282,236 943,749 1,214,590
========= ========== =============
ITEM 2. PROPERTIES.
The following table sets forth information as of February 29, 2000 with
respect to Emmis' offices and studios and its broadcast tower locations.
Management believes that the properties are in good condition and are suitable
for Emmis' operations.
EXPIRATION
YEAR PLACED OWNED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
-------- ---------- -------- ----------
Corporate and Publishing Headquarters/ 1998 Owned --
WENS-FM/ WIBC-AM/WNOU-FM/
WTLC-AM & 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 --
WTLC-AM Tower 1968 Leased December 2021
WTLC-FM Tower 1965 Leased December 2000
KSHE-FM 1986 Leased September 2007
700 St. Louis Union Station
St. Louis, Missouri
KSHE-FM Tower 1985 Leased April 2009
WXTM-FM/WKKX-FM 1998 Leased December 2007
800 St. Louis Union Station
St. Louis, Missouri
WXTM-FM Tower 1984 Owned --
WKKX-FM Tower 1989 Leased September 2009
KPWR-FM 1988 Leased February 2003(1)
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased October 2002
WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1988 Leased January 2010
WRKS-FM Tower 1984 Leased November 2005
WQCD-FM Tower 1984 Leased February 2007
19
20
WKQX-FM 1979 Leased August 2015(2)
Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 2009
Atlanta Magazine Office 1997 Leased July 2003
1360 Peachtree Street
Atlanta, Georgia
Cincinnati Magazine 1996 Leased December 2001
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2009
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1999 Owned --
88 Piikoi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2008
WALA-TV 1952 Leased May 2001
210 Government Street
Mobile, AL
WALA-TV Tower 1962 Owned --
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1987 Owned --
WLUK-TV 1966 Owned --
787 Lombardi Avenue
Green Bay, WI
WLUK-TV Tower 1961 Owned --
WTHI-TV/FM/WWVR-FM 1954 Owned --
918 Ohio Street
Terre Haute, IN
WTHI-TV Tower 1965 Owned --
WTHI-FM Tower 1954 Owned --
WWVR-FM Tower 1954 Owned --
WVUE-TV 1972 Owned --
1025 South Jefferson Davis Highway
New Orleans, LA
WVUE-TV Tower 1963 Owned --
WKCF-TV Offices 1998 Owned --
31 Skyine Drive
Lake Mary, FL
WKCF-TV Tower 1991 Leased September 2006
Los Angeles Magazine Offices 1995 Leased November 2000
11100 Santa Monica Blvd.
7th Floor
Los Angeles, CA
Country Sampler 1988 Owned --
707 Kautz Road
St. Charles, IL 60174
RDS/Co-Opportunities 1989 Leased December 2000
324 Campus Lane, Suite B
Suisun, CA 94585
Emmis West (Corporate) 1999 Leased January 2004
15821 Ventura Blvd., #685
Encino, CA 91436
Slager Radio 1998 Leased December 2004
Szabadsag Ut 117 (Atronyx Bldg. B)
H-2040 Budaors, Hungary
Slager Tower 1998 Leased December 2000(3)
20
21
Argentina 1996 Owned --
Uriarte 1899 (1414) Capital Federal
Buenos Aires, Argentina
Argentina Tower 1996 Owned --
- --------------
(1) The lease provides for one renewal option of ten years following the
expiration date. Emmis also owns a tower site which it placed in
service in 1984 and currently uses as a back-up facility and on which
it leases space to other broadcasters.
(2) The Company is in the process of building out a studio and office space
in the Merchandise Mart. The lease is for this new space, but gives the
Company the right to stay in its current space during construction.
(3) The lease provides for annual renewal options.
ITEM 3. LEGAL PROCEEDINGS.
Emmis currently and from time to time is involved in litigation incidental
to the conduct of its business, but Emmis is not currently a party to any
lawsuit or proceeding which, in the opinion of management, is likely to have a
material adverse effect on the financial position or results of operations of
Emmis. See Note 7 in Item 8, "Financial Statements and Supplementary Data" for
discussion of litigation with Sinclair Broadcast Group, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a special meeting of shareholders of the Company held on February
21, 2000, the following matters received the following votes:
MATTER DESCRIPTION VOTES FOR VOTES AGAINST ABSTAINING
- ------------------ --------- ------------- ----------
Increase authorized shares
of Class A and Class B
common stock
Class A 8,626,729 6,313,588 3,747
Class B 23,692,910 - -
Creation of non-voting class
of common stock
Class A 12,744,500 2,183,060 16,504
Class B 23,692,910 - -
Creation of classified board
of directors and other
matters
(Class A and B voted as one group) 29,378,911 8,254,898 1,003,165
21
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Emmis' Class A common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) National Market System under the symbol EMMS.
The following table sets forth the high and low sale prices of the Class A
common stock for the periods indicated. No dividends were paid during any such
periods.
QUARTER ENDED HIGH* LOW*
May 1998 28.56 20.75
August 1998 24.56 18.25
November 1998 19.75 11.06
February 1999 25.94 16.94
May 1999 25.13 19.50
August 1999 29.56 22.00
November 1999 42.38 27.25
February 2000 62.34 35.63
*All prices adjusted for the two-for-one stock split on February 24,2000.
At April 30, 2000, there were approximately 2,122 record holders of the
Class A common stock, and there were two record holders, but only one beneficial
owner, of the Class B common stock.
Emmis intends to retain future earnings for use in its business and does not
anticipate paying any dividends on shares of its common stock in the foreseeable
future.
On October 25, 1999 Emmis sold 2,700,000 shares of its Class A Common Stock
(5,400,000 shares after the subsequent stock split) to Liberty EMMS, Inc., a
wholly owned subsidiary of Liberty Media Corporation, in a transaction not
registered under the Securities Act of 1933. The cash purchase price of the
stock was $148,500,000.
The sale was exempt from registration under Section 4(2) of the Securities
Act. Liberty Media Group holds interests in a broad range of video programming,
communications, technology and internet businesses in the United States, Europe,
South America and Asia. Its common stock is traded on the New York Stock
Exchange.
22
23
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- ---------
OPERATING DATA:
Net revenues $ 109,244 $ 113,720 $ 140,583 $ 232,836 $ 325,265
Operating expenses 62,466 62,433 81,170 143,348 199,818
International business development
Expenses 1,264 1,164 999 1,477 1,558
Corporate expenses 4,419 5,929 6,846 10,427 13,872
Time brokerage fee - - 5,667 2,220 -
Depreciation and amortization 5,677 5,481 7,536 28,314 44,161
Non-cash compensation 3,667 3,465 1,482 4,269 7,357
Programming restructuring cost - - - - 896
Operating income 31,751 35,248 36,883 42,781 57,603
Interest expense 13,540 9,633 13,772 35,650 51,986
Loss on donation of radio station - - 4,833 - 956
Other income (expense), net (303) 325 6 1,914 4,203
Income before income taxes
and extraordinary item 17,908 25,940 18,284 9,045 8,864
Income before extraordinary item 10,308 15,440 11,084 2,845 1,989
Net income (loss) 10,308 15,440 11,084 1,248 (33)
Net income (loss) available to common
shareholders 10,308 15,440 11,084 1,248 (3,177)
Net income (loss) per share
available to common shareholders:
Basic $ 0.48 $ 0.71 $ 0.51 $ 0.04 $ (0.09)
Diluted $ 0.46 $ 0.68 $ 0.49 $ 0.04 $ (0.09)
Weighted average common shares
outstanding (1):
Basic 21,382 21,886 21,806 28,906 36,156
Diluted 22,168 22,582 22,724 29,696 36,156
FEBRUARY 28 (29),
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- --------
BALANCE SHEET DATA:
Cash $ 1,218 $ 1,191 $ 5,785 $ 6,117 $ 17,370
Working capital 14,761 15,463 21,635 1,249 28,274
Net intangible assets 135,830 131,743 234,558 802,307 1,033,970
Total assets 176,566 189,716 333,388 1,014,831 1,327,306
Credit facility and senior
subordinated debt 124,000 115,000 215,000 577,000 300,000
Shareholders' equity 13,884 34,422 43,910 235,549 776,367
YEAR ENDED FEBRUARY 28 (29),
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1997 1998 1999 2000
------------ ------------ ------------ ------------ -----------
OTHER DATA:
Broadcast/publishing cash flow (2) $ 46,778 $ 51,287 $ 59,413 $ 89,488 $ 125,447
EBITDA before certain charges (2) 41,095 44,194 51,568 77,584 110,017
Cash flows from (used in):
Operating activities 23,221 21,362 22,487 35,121 26,360
Investing activities 222 (13,919) (116,693) (541,470) (271,946)
Financing activities (25,430) (7,470) 98,800 506,681 256,839
Capital expenditures 1,396 7,559 16,991 37,383 29,316
(1) In February 2000, Emmis effected a 2 for 1 stock split of the
outstanding shares of common stock. Accordingly, all data shown has
been retroactively adjusted to reflect the stock split.
(2) Broadcast/publishing cash flow and EBITDA before certain charges are
not measures of liquidity or of performance in accordance with
generally accepted accounting principles, and should be viewed as a
supplement to and not a substitute for Emmis' results of operations
presented on the basis of generally accepted accounting principles.
23
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Emmis ("the Company") evaluates performance of its operating entities based
on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes
that BCF and PCF are useful because they provide a meaningful comparison of
operating performance between companies in the industry and serve as an
indicator of the market value of a group of stations or publishing entities. BCF
and PCF are generally recognized by the broadcast and publishing industries as a
measure of performance and are used by analysts who report on the performance of
broadcasting and publishing groups. BCF and PCF do not take into account Emmis'
debt service requirements and other commitments and, accordingly, BCF and PCF
are not necessarily indicative of amounts that may be available for dividends,
reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance
with generally accepted accounting principles, and should be viewed as a
supplement to and not a substitute for our results of operations presented on
the basis of generally accepted accounting principles. Moreover, BCF and PCF are
not standardized measures and may be calculated in a number of ways. Emmis
defines BCF and PCF as revenues net of agency commissions and operating
expenses. The primary source of broadcast advertising revenues is the sale of
advertising time to local and national advertisers. Publishing entities derive
revenue from subscriptions and sale of print advertising. The most significant
broadcast operating expenses are employee salaries and commissions, costs
associated with programming, advertising and promotion, and station general and
administrative costs. Significant publishing operating expenses are employee
salaries and commissions, costs associated with producing the magazine, and
general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its
entities charge. These rates are in large part based on the entities' ability to
attract audiences/subscribers in demographic groups targeted by their
advertisers. Broadcast entities' ratings are measured principally four times a
year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen
Company for television stations. Because audience ratings in a station's local
market are critical to the station's financial success, the Company's strategy
is to use market research and advertising and promotion to attract and retain
audiences in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically
exchange advertising time for goods or services which can be used by the station
in its business operations. The Company generally confines the use of such trade
transactions to promotional items or services for which the Company would
otherwise have paid cash. In addition, it is the Company's general policy not to
pre-empt advertising spots paid for in cash with advertising spots paid for in
trade.
ACQUISITIONS, DONATIONS AND INVESTMENTS
On May 7, 2000, the Company entered into an agreement to purchase eight
network-affiliated and seven satellite television stations from Lee Enterprises,
Inc. for $562.5 million (the "Lee Acquisition"). The Lee Acquisition consists of
the following stations: KOIN-TV (CBS) in Portland, Oregon, KRQE-TV (CBS) in
Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New
Mexico, and KREZ-TV, Durango, Colorado - Farmington, New Mexico), WSAZ-TV (NBC)
in Charleston-Huntington, West Virginia, KSNW-TV (NBC) in Wichita, Kansas
(including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend,
Kansas, and KSNK-TV, Oberlin, Kansas - McCook, Nebraska), KGMB-TV (CBS) in
Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii, and
KGMV-TV, Wailuku, Hawaii), KGUN-TV (ABC) in Tucson, Arizona, KMTV-TV (CBS) in
Omaha, Nebraska, and
24
25
KSNT-TV (NBC) in Topeka, Kansas. The acquisition will be accounted for as a
purchase and is subject to obtaining various regulatory, network and other
approvals prior to closing. In connection with the Lee Acquisition, management
intends to separate the Company's television and radio businesses. Management is
evaluating structural and financing alternatives to effect this separation of
businesses.
On March 3, 2000, the Company acquired all of the outstanding capital stock
of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in
cash plus liabilities recorded of $1.4 million. Los Angeles Magazine Holding
Company, Inc. owns and operates Los Angeles Magazine, a city magazine. The
acquisition will be accounted for as a purchase and was financed through
borrowings under the Company's credit facility (the "Credit Facility").
On December 14, 1999, the Company completed its acquisition of
substantially all of the assets of Country Marketplace and related publications
from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities
recorded of approximately $.6 million. The acquisition was accounted for as a
purchase and was financed through borrowings under the Credit Facility. The
excess of the purchase price over the estimated fair value of identifiable
assets was $2.3 million, which is included in intangible assets in the
accompanying consolidated balance sheets and is being amortized over 15 years.
On November 16, 1999 Emmis purchased one million shares of BuyItNow.com
L.L.C. for $5 million in cash, which represented an original investment of 2.49%
of the outstanding equity of BuyItNow.com L.L.C. This investment is accounted
for using the cost method of accounting and is reflected in other assets in the
accompanying consolidated balance sheets. In a separate transaction,
BuyItNow.com L.L.C. agreed to a cash purchase of $2.5 million of advertisements
from Emmis through February 2001.
On November 9, 1999, the Company completed its acquisition of 75% of the
outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in
cash plus liabilities recorded of $5.6 million. Additional consideration of up
to $2.2 million will be paid if certain conditions are met. Votionis consists of
one FM and one AM radio station located in Buenos Aires, Argentina (the
"Votionis Acquisition"). The acquisition was accounted for as a purchase and was
financed with proceeds from the Company's October 1999 Common and Preferred
Equity Offerings. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets. This broadcast license is being
amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially
all of the assets of television station WKCF in Orlando, Florida ( the "WKCF
Acquisition") from Press Communications, L.L.C. for approximately $197.1 million
in cash. The purchase price included the purchase of land and a building for
$2.2 million. The Company financed the acquisition through a $12.5 million
advance payment borrowed under the Credit Facility and proceeds from the
Company's October 1999 Common and Preferred Equity Offerings. In connection with
the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was
allocated to property and equipment, television program rights and broadcast
licenses based on a preliminary appraisal. Broadcast licenses are included in
intangible assets in the accompanying consolidated balance sheet and are being
amortized over 40 years. WKCF is an affiliate of the WB Television Network. As
part of the WKCF Acquisition, the Company entered into an agreement with the WB
Television Network which, among other things, extends the existing network
affiliation agreement through December 2009.
In June 1999, the Company entered into an agreement with a former executive
of Sinclair Broadcast Group, Inc. ("Sinclair") to purchase the executive's right
to acquire the assets of certain broadcast properties in St. Louis, Missouri
under an option agreement (the "St. Louis Acquisition"). The right was exercised
and allows the Company to purchase, at fair market value, six radio stations
(five FM and one AM) and one ABC-affiliated television station from Sinclair.
25
26
In November 1999, through completion of an appraisal process, the purchase
price of the St. Louis Acquisition was determined to be $366.5 million. Sinclair
has since filed a lawsuit in which it alleges, among other things, that the
option agreement is not enforceable and that Emmis is not a proper designee of
the executive's rights. The Company has denied the allegations made by Sinclair
and believes that it has meritorious defenses to Sinclair's allegations. In
addition, the Company has filed counterclaims against Sinclair, seeking, among
other things, that the court order Sinclair to complete the sale of its St.
Louis broadcast properties to the Company.
The St. Louis Acquisition will be subject to approval by both the Federal
Communications Commission and the Department of Justice; it will be accounted
for as a purchase and will be financed through available cash, additional debt
or equity securities, depending on market conditions and other factors.
Under FCC regulations, Emmis can own no more than five FM and three AM
stations in the St. Louis market. Since Emmis already owns three FM stations in
the St. Louis market, concurrently with the consummation of the St. Louis
Acquisition, Emmis must divest three FM stations. Management intends to divest
the stations in the St. Louis market with the three weakest transmitting
signals.
On April 1, 1999, the Company completed its acquisition of substantially
all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition")
for approximately $20.9 million plus liabilities recorded of approximately $4.7
million. The purchase price was payable with $18.5 million in cash at closing,
which was financed through additional borrowings under the Credit Facility, $2.0
million payable under a contract with the principal shareholder through April
2003, and $.5 million paid in October 1999. The acquisition was accounted for as
a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in
the accompanying consolidated balance sheets and is being amortized over 15
years.
Effective October 1, 1998, the Company completed its acquisition of
substantially all of the assets of Wabash Valley Broadcasting Corporation (the
"Wabash Acquisition") for a cash purchase price of $88.9 million (including
transaction costs), plus liabilities recorded of approximately $12.2 million.
The Company financed the acquisition through borrowings under the Credit
Facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated
television station in Ft. Myers, Florida, WTHI-TV a CBS network affiliated
television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio
stations located in the Terre Haute, Indiana area. In December 1999, the Company
donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million
net book value of the station at the time of donation was recognized as a loss
on donation of radio station.
On July 16, 1998, the Company completed its acquisition of substantially all
of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc.
and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price
of $287.3 million (including transaction costs), a $25 million promissory note
due to the former owner, plus liabilities recorded of approximately $34.7
million. The Company financed the acquisition through a $25 million promissory
note and borrowings under the Credit Facility. The promissory note was paid in
full in February 1999. The SF Acquisition consists of four Fox network
affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New
Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii
(including satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo,
Hawaii).
On June 5, 1998, the Company completed its acquisition of radio station
WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio,
Inc. for a cash purchase price of $141.6 million (including transaction costs)
less approximately $13.0 million for cash purchase price adjustments relating to
taxes, plus $20.0 million of net current tax liabilities, $52.5 million of
deferred tax liabilities and $0.3 million of liabilities associated with the
acquisition. The acquisition was accounted for as a purchase and was financed
through borrowings under the Credit Facility. Effective July 1, 1997 through the
26
27
date of closing, the Company operated WQCD-FM under a time brokerage agreement.
On February 1, 1998, the Company acquired all of the outstanding capital
stock of Mediatex Communications Corporation for approximately $37.4 million in
cash plus liabilities recorded of $8.0 million (the "Mediatex Acquisition").
Mediatex Communications Corporation owns and operates Texas Monthly, a regional
magazine. The acquisition was accounted for as a purchase and was financed
through borrowings under the Credit Facility.
On November 1, 1997, the Company acquired substantially all of the net
assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million
in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through
borrowings under the Credit Facility. The acquisition was accounted for as a
purchase.
On November 1, 1997, the Company completed its acquisition of substantially
all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting,
L.P. for approximately $15.3 million in cash (the "Indianapolis Acquisition").
Emmis financed the acquisition through borrowings under the Credit Facility. The
acquisition was accounted for as a purchase.
Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.) which
was formed in August 1997. In November 1997, Slager Radio acquired a radio
broadcasting license from the Hungarian government at a cost of approximately
$19.2 million. The broadcast license has an initial term of seven years and may
be renewed, subject to governmental approval, for an additional five years.
Slager Radio began broadcasting on February 16, 1998.
On October 1, 1997, the Company acquired the assets of Network Indiana and
AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash
(the "Network Acquisition"). Emmis financed the acquisition through borrowings
under the Credit Facility. The acquisition was accounted for as a purchase.
On March 31, 1997, Emmis completed its acquisition of substantially all of
the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM
(formerly WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from
Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to
broadcast approximately $1 million in trade spots, for Zimco, Inc., over a
period of years. The purchase price was financed through borrowings under the
Credit Facility and the acquisition was accounted for as a purchase. In February
1998, the Company donated radio station WALC-AM to a church. The $4.8 million
net book value of the station at the time of donation was recognized as a loss
on donation of radio station. Effective December 1, 1996 through the date of
closing, the Company operated the acquired stations under a time brokerage
agreement.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999. Net
revenues for the year ended February 29, 2000 were $325.3 million compared to
$232.8 million for the same period of the prior year, an increase of $92.5
million or 39.7%. The increase in net revenues for the year ended February 29,
2000 is primarily the result of the SF, Wabash and WKCF Acquisitions (the "TV
Acquisitions")($36.5 million) and Country Sampler Acquisition ($13.4 million).
Excluding these transactions, net revenues for the year ended February 29, 2000
would have increased $42.6 million or 21.8%. Included in this increase is a
decrease in political advertising revenue at our television stations as our
fiscal year ended February 29, 2000 was not a significant year for political
campaigns. The remaining increase in net revenues is due to the ability to
realize higher advertising rates resulting from higher ratings at certain
broadcasting properties, increases in general radio spending in the markets in
which the Company operates, the ability to sell more advertising in our
publications and an increase in single copy newsstand sales.
27
28
Operating expenses for the year ended February 29, 2000 were $199.8 million
compared to $143.3 million for the same period of the prior year, an increase of
$56.5 million or 39.4%. The increase in operating expenses for the year ended
February 29, 2000 is primarily the result of the TV Acquisitions ($25.0 million)
and Country Sampler Acquisition ($11.2 million). Excluding these transactions,
operating expenses for the year ended February 29, 2000 would have increased
$20.3 million or 17.0%. This increase is principally due to higher advertising
and promotional spending at certain of the Company's properties as well as an
increase in sales related costs.
Broadcast/publishing cash flow for the year ended February 29, 2000 was
$125.4 million compared to $89.5 million for the same period of the prior year,
an increase of $35.9 million or 40.2%. The increase in broadcast/publishing cash
flow for the year ended February 29, 2000 is primarily the result of the TV
Acquisitions ($11.5 million) and Country Sampler Acquisition ($2.2 million).
Excluding these transactions, broadcast/publishing cash flow for the year ended
February 29, 2000 would have increased $22.2 million or 29.3%. This increase is
principally due to increased net revenues partially offset by increased
operating expenses as discussed above.
International business development expenses for the year ended February 29,
2000 were $1.6 million compared to $1.5 million for the same period of the prior
year. These expenses reflect costs associated with Emmis International
Corporation. The purpose of this wholly owned subsidiary is to identify,
investigate and develop international broadcast investments or other
international business opportunities. Expenses consist primarily of salaries,
travel and various administrative costs.
Corporate expenses for the year ended February 29, 2000 were $13.9 million
compared to $10.4 million for the same period of the prior year, an increase of
$3.5 million or 33.0%. These increases are due to costs associated with year
2000 compliance, analysis of potential acquisitions and an increase in the
number of corporate employees in all departments as a result of the growth of
the Company.
EBITDA before certain charges is defined as broadcast/publishing cash flow
less corporate and international development expenses. EBITDA before certain
charges for the year ended February 29, 2000 was $110.0 million compared to
$77.6 million for the same period of the prior year, an increase of $32.4
million or 41.8%. This increase was principally due to the increase in
broadcast/publishing cash flow partially offset by an increase in corporate
expenses.
Interest expense was $52.0 million for the year ended February 29, 2000
compared to $35.7 million for the same period of the prior year, an increase of
$16.3 million or 45.8%. This increase reflected higher outstanding debt due to
the TV Acquisitions, WQCD Acquisition, which was previously operated under a
time brokerage agreement, and Country Sampler Acquisition and a higher rate of
interest paid by the Company on outstanding debt.
Depreciation and amortization expense for the year ended February 29, 2000
was $44.2 million compared to $28.3 million for the same period of the prior
year, an increase of $15.9 million or 56.0%. The increase in depreciation and
amortization expense for the year ended February 29, 2000 is primarily the
result of the TV Acquisitions ($8.0 million), WQCD Acquisition ($2.2 million)
and Country Sampler Acquisition ($2.3 million). The remaining increase relates
to depreciation of capital additions in recent years.
Non-cash compensation expense for the year ended February 29, 2000 was $7.4
million compared to $4.3 million for the same period of the prior year, an
increase of $3.1 million or 72.3%. Non-cash compensation includes compensation
expense associated with stock options granted, restricted common stock issued
under employment agreements and common stock contributed to the Company's Profit
Sharing Plan. This increase was due to shares granted to certain executives
under employment agreements for which the fair market value of the shares at the
date of grant was higher than the fair market value of shares granted under
previous employment agreements due to the appreciation in the Company's stock
price.
28
29
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998. Net
revenues for the year ended February 28, 1999 were $232.8 million compared to
$140.6 million for the same period of the prior year, an increase of $92.2
million or 65.6%. This increase was principally due to the Indianapolis,
Cincinnati and Mediatex Acquisitions that occurred toward the end of fiscal 1998
and the SF and Wabash Acquisitions that occurred in fiscal 1999 (collectively
the "98/99 Acquisitions"). Additionally, Emmis realized higher advertising rates
at its broadcasting properties, resulting from higher ratings at certain
broadcasting properties, as well as increases in general radio spending in the
markets in which the Company operates.
Operating expenses for the year ended February 28, 1999 were $143.3 million
compared to $81.2 million for the same period of the prior year, an increase of
$62.1 million or 76.6%. This increase was principally attributable to the 98/99
Acquisitions and increased promotional spending at the Company's broadcasting
properties.
Broadcast/publishing cash flow for the year ended February 28, 1999 was
$89.5 million compared to $59.4 million for the same period of the prior year,
an increase of $30.1 million or 50.6%. This increase was due to increased net
revenues partially offset by increased operating expenses as discussed above.
International business development expenses for the year ended February 28,
1999 were $1.5 million compared to $1.0 million for the same period of the prior
year. These expenses reflect costs associated with Emmis International
Corporation. The purpose of this wholly owned subsidiary is to identify,
investigate and develop international broadcast investments or other
international business opportunities. Expenses consist primarily of salaries,
travel and various administrative costs.
Corporate expenses for the year ended February 28, 1999 were $10.4 million
compared to $6.8 million for the same period of the prior year, an increase of
$3.6 million or 52.3%. This increase was primarily due to an increase in the
number of corporate employees as a result of the growth of the Company and
increased travel and other expenses related to potential acquisitions that were
not finalized.
EBITDA before certain charges is defined as broadcast/publishing cash flow
less corporate and international development expenses. EBITDA before certain
charges for the year ended February 28, 1999 was $77.6 million compared to $51.6
million for the same period of the prior year, an increase of $26.0 million or
50.4%. This increase was principally due to the increase in broadcast/publishing
cash flow partially offset by an increase in corporate expenses.
Interest expense was $35.7 million for the year ended February 28, 1999
compared to $13.8 million for the same period of the prior year, an increase of
$21.9 million or 158.9%. This increase reflected higher outstanding debt due to
the 98/99 Acquisitions and the WQCD Acquisition.
Depreciation and amortization expense for the year ended February 28, 1999
was $28.3 million compared to $7.5 million for the same period of the prior
year, an increase of $20.8 million or 275.7%. This increase was primarily due to
the 98/99 Acquisitions and the WQCD Acquisition.
Non-cash compensation expense for the year ended February 28, 1999 was $4.3
million compared to $1.5 million for the same period of the prior year, an
increase of $2.8 million or 188.1%. Non-cash compensation includes compensation
expense associated with stock options granted, restricted common stock issued
under employment agreements and common stock contributed to the Company's Profit
Sharing Plan. The increase in non-cash compensation relates primarily to options
awarded the CEO in fiscal 1999 under his employment contract while similar
options were not awarded in fiscal 1998.
29
30
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash provided by operations
and availability under its Credit Facility. At February 29, 2000, the Company
had cash and cash equivalents of $17.4 million, net working capital of $28.3
million and $398.9 million available under the Credit Facility, after
considering an outstanding letter of credit of $1.1 million. The Company expects
that cash flow from operating activities will be sufficient to fund all debt
service requirements for debt existing at February 29, 2000, and working capital
and capital expenditure requirements for the next year. In addition, the Company
also has access to public equity and debt markets.
On January 14, 2000, Emmis repaid the $250 million term note outstanding
under its Credit Facility. The repayment resulted in cancellation of the term
note portion of the Credit Facility.
On October 29, 1999, Emmis completed the sale of 7.984 million shares of
its Class A common stock at $31.25 per share resulting in total proceeds of
$249.5 million. Net proceeds of $238.3 million were used to fund the acquisition
of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina,
and to repay certain outstanding obligations under the Credit Facility.
At the s