SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended February 28,
2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from
_________ to _________.
EMMIS COMMUNICATIONS CORPORATION EMMIS OPERATING COMPANY
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
charter) charter)
INDIANA INDIANA
(State of incorporation or organization) (State of incorporation or organization)
0-23264 333-62172-13
(Commission file number) (Commission file number)
35-1542018 35-2141064
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
ONE EMMIS PLAZA ONE EMMIS PLAZA
40 MONUMENT CIRCLE 40 MONUMENT CIRCLE
SUITE 700 SUITE 700
INDIANAPOLIS, INDIANA 46204 INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices) (Address of principal executive offices)
(317) 266-0100 (317) 266-0100
(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value; 6.25% Series A Cumulative
Convertible Preferred Stock, $.01 par value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
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, 2002, was
approximately $1,363,568,000.
1
The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 2002, was:
47,790,845 Class A Common Shares, $.01 par value
5,100,127 Class B Common Shares, $.01 par value
0 Class C Common Shares, $.01 par value
Emmis Operating Company has 1,000 shares of common stock outstanding as of April 30, 2002, and all of these shares are owned
by Emmis Communications Corporation.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Proxy Statement for 2002 Annual Meeting Part III
2
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
Page
PART I .................................................................................. 4
Item 1. Business............................................................... 4
Item 2. Properties............................................................. 18
Item 3. Legal Proceedings...................................................... 21
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................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 34
Item 8. Financial Statements and Supplementary Data........................... 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................... 85
PART III .................................................................................. 85
Item 10. Directors and Executive Officers of the Registrant..................... 85
Item 11. Executive Compensation................................................. 86
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................................... 86
Item 13. Certain Relationships and Related Transactions......................... 86
PART IV .................................................................................. 86
Item 14. Exhibits and Reports on Form 8-K....................................... 86
Signatures ................................................................................. 89
3
PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We
operate the sixth largest publicly traded radio portfolio in the United States based on total listeners. Giving effect to the
sale of our two stations in Denver, we operate eighteen FM radio stations and three AM radio stations in the United States that
serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as Phoenix, St. Louis,
Indianapolis and Terre Haute, Indiana. The fifteen television stations we operate serve geographically diverse mid-sized markets
in the U.S. as well as the large markets of Portland and Orlando and have a variety of television network affiliations, including
five with CBS, five with FOX, three with NBC, one with ABC and one with WB.
Our strategy is to selectively acquire underdeveloped media properties in desirable markets and then to create value by
developing those properties to increase their cash flow. We find such underdeveloped properties attractive because they offer
greater potential for revenue and cash flow growth than mature properties. We have been successful in acquiring these types of
media properties and improving their ratings, revenues and cash flow with our marketing focus and innovative programming
expertise. We have created top-performing radio stations which rank, in terms of primary demographic target audience share, among
the top ten stations in the New York City, Los Angeles and Chicago radio markets according to the Fall 2001 Arbitron Survey. We
believe that our strong large-market radio presence and diversity of station formats makes us attractive to a diverse base of
radio advertisers and reduces our dependence on any one economic sector or specific advertiser. Since acquisition, we have
generally improved the margins of our television stations and we believe there is further room for margin improvement.
In addition to our domestic broadcasting properties, we operate news and agriculture information radio networks in Indiana,
publish Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati, and Country Sampler and related magazines, have a
59.5% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos Aires, Argentina.
We also engage in various businesses ancillary to our broadcasting business, such as consulting and broadcast tower leasing.
The following discussion pertains to Emmis Communications Corporation ("ECC") and its subsidiaries (collectively, "Emmis" or
the "Company") and to Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a wholly owned subsidiary of
ECC in connection with the Company's reorganization (see Note 1c. to our consolidated financial statements) on June 22, 2001.
Unless otherwise noted, all disclosures contained in this Form 10-K apply to Emmis and EOC.
BUSINESS STRATEGY
We are committed to maintaining our leadership position in broadcasting, enhancing the performance of our broadcast and
publishing properties, and distinguishing ourselves through the quality of our operations. Our strategy is to maximize
shareholder value by focusing on the following principles:
DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets and innovative programming developed to target
specific demographic groups are the most important determinants of individual radio and television station success. We conduct
extensive market research to identify underserved segments of the markets we serve or to assure that we are meeting the needs of
our target audience. Utilizing the research results, we concentrate on providing a focused programming format carefully tailored
to the demographics of our markets and our audiences' preferences.
EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and national sales efforts based on advertiser demand and
our programming compared to the competitive formats within each market. We provide our sales force with extensive training and the
technology for sophisticated inventory management techniques, which provide frequent price adjustments based on regional and
market conditions. Furthermore, additional company resources have been allocated to locate, hire, train and retain top sales
people. In fiscal 2002, we implemented the Emmis Sales Assault Plan (ESAP), a company-wide initiative geared toward attracting
and developing sales leaders in the radio, television and magazine industries. Through February 28, 2002, nearly 100 sales people
were added to our workforce under this program, which was incremental to hirings in the normal course of business.
4
DEVELOP STRONG LOCAL STATION IDENTITIES FOR OUR TELEVISION STATIONS. We strive to create television stations with a strong
local "brand" within the station's market, allowing viewers and advertisers to identify with the station while building the
station's franchise value. We believe that aggressive promotion and strong local station management, strategies which we have
found successful in our radio operations, are critical to the creation of strong local television stations as well. Additionally,
we believe that the production and broadcasting of local news and events programming can be an important link to the community and
an aid to the station's efforts to expand its viewership. Local news and events programming can provide access to advertising
sources targeted specifically to the local or regional community. We believe that strong local news generates high viewership and
results in higher ratings both for programs preceding and following the news.
PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. We have built our portfolio by
selectively acquiring underdeveloped media properties in desirable markets at reasonable purchase prices where our experienced
management team has been able to enhance value. We intend to pursue acquisitions of radio stations, where we believe we can
increase broadcast cash flow, in our current markets. We will also consider acquisitions of individual radio stations or groups
of radio stations in new markets where we expect we can achieve a leadership position. We believe that continued consolidation in
the radio broadcasting industry will create attractive acquisition opportunities as the number of potential buyers for radio
assets declines due to government regulations on the number of stations a company can own in one market. We believe that
attractive acquisition opportunities are also increasingly available in the television broadcasting industry. We intend to
evaluate acquisitions of 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 A PERFORMANCE BASED, ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business
and that much of its success is the result of the efforts of regional and local management and staff. We have attracted and
retained an experienced team of broadcast professionals who understand the viewing and listening preferences, demographics and
competitive opportunities of their particular market. Our decentralized approach to station management gives local management
oversight of station spending, long-range planning and resource allocation at their individual stations, and rewards all employees
based on those stations' performance. In addition, we encourage our managers and employees to own a stake in the company, and
over 95% of all full-time employees have an equity ownership position in Emmis. We believe that our performance based,
entrepreneurial management approach has created a distinctive corporate culture, making Emmis a highly desirable employer in the
broadcasting industry and significantly enhancing our ability to attract and retain experienced and highly motivated employees and
management.
5
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 (2001 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 2001 Arbitron Survey. A "t"
indicates the station tied with another station for the stated ranking. "Station Audience Share" represents a percentage generally
computed by dividing the average number of persons over age 12 listening to a particular station during specified time periods by
the average number of such persons for all stations in the market area as determined by Arbitron.
RANKING IN
STATION MARKET PRIMARY PRIMARY STATION
AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE
MARKET REVENUE FORMAT TARGET AGES TARGET SHARE
- ---------------- ----------- ---------------------- ---------------- ---------------- ------------
Los Angeles, CA 1
KPWR-FM Contemporary Hit/Urban 12-24 1 4.0
KZLA-FM Country 25-54 17t 2.2
New York, NY 2
WQHT-FM Contemporary Hit/Urban 12-24 1 5.7
WQCD-FM Contemporary Jazz 25-54 4 3.4
WRKS-FM Classic Soul/Smooth R&B 25-54 12t 2.7
Chicago, IL 3
WKQX-FM Alternative Rock 18-34 4 2.8
Phoenix, AZ 14
KTAR-AM News/Talk/Sports 35-64 1 6.8
KKFR-FM Contemporary Hit/Urban 18-34 2 4.4
KKLT-FM Soft Adult/Contemporary 25-54 7 3.7
KMVP-AM Sports 25-54 24t 0.4
St. Louis, MO 18
KSHE-FM Album Oriented Rock 25-54 3 4.5
KPNT-FM Alternative Rock 18-34 1 4.1
KIHT-FM 70's Rock 25-54 6 3.3
WMLL-FM 80's Rock 18-34 13 1.8
KFTK-FM Talk 25-54 21 0.8
Indianapolis, IN 31
WIBC-AM News/Talk/Sports 35-64 4 8.9
WYXB-FM Soft Adult/Contemporary 25-54 3t 5.6
WNOU-FM Contemporary Hit 18-34 4 5.5
WENS-FM Adult Contemporary 25-54 8 3.8
Terre Haute, IN 171
WTHI-FM Country 25-54 1 20.5
WWVR-FM Classic Rock 25-54 2 12.1
In addition to our other domestic radio broadcasting operations, we own and operate two radio networks. Network Indiana
provides news and other programming to nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides farm news,
weather information and market analysis to radio stations across Indiana.
We also have a 59.5% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos
Aires, Argentina.
6
TELEVISION STATIONS
In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 2002. Rankings are based
on the relative size of a station's market among the 210 generally recognized Designated Market Areas ("DMAs"), as defined by
Nielsen. "Number of Stations in Market" represents the number of television stations ("Reportable Stations") designated by Nielsen
as "local" to the DMA, excluding public television stations and stations which do not meet minimum Nielsen reporting standards
(i.e., a weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to midnight time
period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by
Nielsen from 9:00 a.m. to midnight, Sunday through Saturday during November 2001. "Station Audience Share" reflects an estimate of
the share of DMA households viewing television received by a local commercial station in comparison to other local commercial
stations in the market as measured from 9:00 a.m. to midnight, Sunday through Saturday.
NUMBER OF STATION
TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE AFFILIATION
STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE EXPIRATION
- -------------- ---------------------- ------- --------------- ------------- ---------- ----------- --------------
WKCF-TV Orlando, FL 20 WB/18 6 4t 7 December 31, 2009
KOIN-TV Portland, OR 23 CBS/6 6 2t 12 September 18, 2002(2)
WVUE-TV New Orleans, LA 43 Fox/8 7 3 8 March 5, 2006
KRQE-TV Albuquerque, NM 48 CBS/13 7 3 10 September 18, 2002(2)
WSAZ-TV Huntington, WV-
Charleston, WV 61 NBC/3 4 1 19 October 1, 2002 (2)
WALA-TV Mobile, AL-
Pensacola, FL 63 Fox/10 5 4 10 September 1, 2005
KSNW-TV Wichita, KS 65 NBC/3 4 2 15 September 1, 2005
WLUK-TV Green Bay, WI 69 Fox/11 6 2t 15 November 1, 2005
KGMB-TV (1) Honolulu, HI 72 CBS/9 5 2 13 September 18, 2002(2)
KHON-TV (1) Honolulu, HI 72 Fox/2 5 1 14 August 2, 2006
KGUN-TV Tucson, AZ 73 ABC/9 7 2t 12 February 6, 2005
KMTV-TV Omaha, NE 75 CBS/3 5 2 15 September 18, 2002(2)
WFTX-TV Fort Myers, FL 76 Fox/36 4 3t 9 N/A
KSNT-TV Topeka, KS 138 NBC/27 4 2 12 September 1, 2005
WTHI-TV Terre Haute, IN 145 CBS/10 3 1 22 December 31, 2005
(1) We are currently operating KGMB-TV under a temporary waiver issued by the FCC. We may be required to sell one of these
stations. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
(2) We are currently in negotiations to extend or renew this affiliation agreement and expect the extension or renewal to be
on terms that are reasonably acceptable to us.
Emmis also owns and operates nine satellite stations that primarily re-broadcast the signal of certain of our local stations.
A local station and its satellite station are considered one station for FCC and multiple ownership purposes, provided that the
stations are in the same market.
Each of our television stations is affiliated with CBS, NBC, ABC, Fox or WB (each a "Network") pursuant to a written network
affiliation agreement, except WFTX in Ft. Myers, FL, which is affiliated with Fox pursuant to an oral affiliation agreement. Each
affiliation agreement provides the affiliated television station with the right to rebroadcast all programs transmitted by the
Network with which the television station is affiliated. In return, the Network has the right to sell a substantial portion of
the advertising time during such broadcasts.
The long established networks (ABC, CBS and NBC) have historically paid the affiliated station to broadcast the network's
programming. This network compensation payment varies depending on the time of day that a station broadcasts the network
programming. Typically, prime-time programming generates the highest hourly network compensation payments. In the recent years,
however, ABC, CBS and NBC have begun to eliminate or sharply reduce compensation payments to stations for clearance of network
programming. In some cases, networks have undertaken to cut compensation when a station is to be sold and the affiliation
agreement is to be assigned or transferred, or when an old affiliation agreement has expired. The more recently established
networks (Fox and WB) generally pay little or no cash compensation for the clearance of network programming. They tend, however,
to offer the affiliated station more advertising availability for local sale within network programming than do the long
established networks.
In the twelve months ended February 2000, 2001 and 2002, we received approximately $1.9 million, $2.5 million and $4.6 million
in network compensation payments, which represented less than 1% of our total net revenues in each year.
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PUBLISHING OPERATIONS
We publish the following magazines through our publishing division:
Monthly
Paid
Circulation
------------
Regional Magazines:
Texas Monthly 300,000
Los Angeles 174,000
Atlanta 68,000
Indianapolis Monthly 44,000
Cincinnati Magazine 28,000
Specialty Magazines*:
Country Sampler and Country Marketplace 426,000
* Our specialty magazines are circulated bimonthly.
INTERNET AND NEW TECHNOLOGIES
We believe that the development and explosive growth of the Internet present not only a challenge, but an opportunity for
broadcasters and publishers. The primary challenge is increased competition for the time and attention of our listeners, viewers
and readers. The opportunity is to further enhance the relationships we already have with our listeners, viewers and readers by
expanding products and services offered by our stations and magazines. For that reason, we worked with other media companies to
put together a local media internet venture (LMIV), which provides content, website development and hosting services for our radio
stations. In addition, we have individuals at each of our properties dedicated to website maintenance and generating revenues
from the property's website.
We believe that there are opportunities to improve and expand our television operations utilizing new technologies such as
those that capitalize on the digital spectrum and the Internet. Along with several other major television broadcasters and local
stations, we have invested in iBlast Networks, the nation's largest network for over-the-air distribution of digital content,
applications and services.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the communities we serve. To that end, each of our stations
participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable
organizations that have been the beneficiaries of our marathons, walkathons, dance-a-thons, concerts, fairs and festivals include,
among others, United Way's September 11th Fund, The March of Dimes, American Cancer Society, Riley Children's Hospital and
research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In addition to our
planned activities, our stations and magazines take leadership roles in community responses to natural disasters, such as
commercial-free news broadcasts covering the events of September 11th.
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.
8
COMPETITION
Radio and television broadcasting stations compete with the other broadcasting stations in their respective market areas, as
well as with other advertising media such as newspapers, magazines, outdoor advertising, transit advertising, the Internet and
direct mail marketing. Cable systems generally do not compete with local stations for programming, although various national cable
networks from time to time have acquired programs that otherwise would have been offered to local television stations.
Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market (e.g.,
New York) does not generally compete with stations in other markets (e.g., Chicago). In each of our markets, our stations face
competition from other stations with substantial financial resources, including stations targeting the same demographic groups.
In addition to management experience, factors which are material to competitive position include the station's rank in its market
in terms of the number of listeners or viewers, authorized power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive
position with programming and promotional campaigns aimed at the demographic groups targeted by our stations, and through sales
efforts designed to attract advertisers that have done little or no broadcast advertising by emphasizing the effectiveness of
radio and television advertising in increasing the advertisers' revenues. Changes in the policies and rules of the FCC permit
increased joint ownership and joint operation of local stations. Those stations taking advantage of these joint arrangements
(including our New York, Los Angeles, Phoenix, St. Louis, Indianapolis and Terre Haute clusters) may in certain circumstances have
lower operating costs and may be able to offer advertisers more attractive rates and services. Although we believe that each of
our stations can compete effectively in its market, there can be no assurance that any of our stations will be able to maintain or
increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, 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 broadcasting industry historically has grown in terms of total revenues despite the introduction of new technology for the
delivery of entertainment and information, such as cable television, the Internet, satellite television, audio tapes and compact
discs. We believe that radio's portability in particular makes it less vulnerable than other media to competition from new
methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction
in the future of any new media technology will not have an adverse effect on the radio or television broadcasting industry.
ADVERTISING SALES
Our stations and magazines derive their advertising revenue from local and regional advertising in the marketplaces in which
they operate, as well as from the sale of national advertising. Local and most regional sales are made by a station's or
magazine's sales staff. National sales are made by firms specializing in such sales which are compensated on a commission-only
basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station's audience share
position more rapidly than does the volume of local and regional advertising revenue. During the twelve months ended February 28,
2002, approximately 27% of our total net revenues were derived from national sales and 73% were derived from local and regional
sales. For the year ended February 28, 2002, our radio stations derived a higher percentage of their revenues from local and
regional sales (79%) than our television (63%) and publishing entities (76%).
EMPLOYEES
As of February 28, 2002 Emmis had approximately 2,500 full-time employees and approximately 550 part-time employees. We have
approximately 215 employees at various radio and television stations represented by unions. We consider relations with our
employees to be good.
9
FEDERAL REGULATION OF BROADCASTING
Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission (the "FCC") under
the Communications Act of 1934, as amended (and, as amended by the Telecommunications Act of 1996 (the "1996 Act") (the
"Communications Act"). Television or radio broadcasting is prohibited except in accordance with a license issued by the FCC upon
a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power
to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the
Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate broadcast licenses
for television and radio stations in such manner as will provide a fair, efficient and equitable distribution of service
throughout the United States. The FCC determines the operating frequency, location and power of stations; regulates the equipment
used by stations; and regulates numerous other areas of television and radio broadcasting pursuant to rules, regulations and
policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment
of a broadcast license or the transfer of control of an entity holding such a license without the prior approval of the FCC.
Under the Communications Act, the FCC also regulates certain aspects of the operation of cable television systems and other
electronic media that compete with broadcast stations.
The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies.
Reference should be made to the Communications Act as well as FCC rules, public notices and rulings for further information
concerning the nature and extent of federal regulation of radio and television stations. Other legislation has been introduced
from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new
regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or new or
amended FCC regulations will be adopted or what their effect would be on Emmis.
10
LICENSE RENEWAL. Radio and television stations operate pursuant to broadcast licenses that are ordinarily granted by the FCC for
maximum terms of eight years and are subject to renewal upon application to the FCC. Our licenses currently have the following
expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 2004
WIBC-AM (Indianapolis) August 1, 2004
WNOU-FM (Indianapolis) August 1, 2004
WYXB-FM (Indianapolis) August 1, 2004
WTHI-FM (Terre Haute) August 1, 2004
WWVR-FM (Terre Haute) August 1, 2004
WSAZ-TV (Huntington) October 1, 2004
WKQX-FM (Chicago) December 1, 2004
WMLL-FM (St. Louis) December 1, 2004
KSHE-FM (St. Louis) February 1, 2005
WFTX-TV (Fort Myers) February 1, 2005
WKCF-TV (Orlando) February 1, 2005
KFTK-FM (St. Louis) February 1, 2005
KIHT-FM (St. Louis) February 1, 2005
KPNT-FM (St. Louis) February 1, 2005
WALA-TV (Mobile) April 1, 2005
WVUE-TV (New Orleans) June 1, 2005
WTHI-TV (Terre Haute) August 1, 2005
KKLT-FM (Phoenix) October 1, 2005
KKFR-FM (Phoenix) October 1, 2005
KTAR-AM (Phoenix) October 1, 2005
KMVP-AM (Phoenix) October 1, 2005
KPWR-FM (Los Angeles) December 1, 2005
WLUK-TV (Green Bay) December 1, 2005
KZLA-FM (Los Angeles) December 1, 2005
KREZ-TV (Durango) April 1, 2006
WQHT-FM (New York) June 1, 2006
WQCD-FM (New York) June 1, 2006
WRKS-FM (New York) June 1, 2006
KSNW-TV (Wichita) June 1, 2006
KMTV-TV (Omaha) June 1, 2006
KSNT-TV (Topeka) June 1, 2006
KSNG-TV (Garden City) June 1, 2006
KSNC-TV (Great Bend) June 1, 2006
KSNK-TV (McCook-Oberlin) June 1, 2006
KRQE-TV (Albuquerque) October 1, 2006
KGUN-TV (Tucson) October 1, 2006
KBIM-TV (Roswell) October 1, 2006
KHON-TV (Honolulu) February 1, 2007
KAII-TV (Maui) February 1, 2007
KHAW-TV (Hawaii) February 1, 2007
KOIN-TV (Portland) February 1, 2007
KGMB-TV (Honolulu) February 1, 2007
KGMD-TV (Hawaii) February 1, 2007
KGMV-TV (Maui) February 1, 2007
11
Under the Communications Act, at the time an application is filed for renewal for a station license, parties in interest, as
well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and
urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC
concludes on its own motion) that there is a "substantial and material" question as to whether grant of the renewal application
would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine
whether the renewal application should be granted. The Communications Act provides for the grant of a renewal application upon a
finding by the FCC that the licensee:
o has served the public interest, convenience and necessity;
o has committed no serious violations of the Communications Act or the FCC rules; and
o has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny the renewal application, and only then may the FCC consider competing
applications for the same frequency. In a vast majority of cases, the FCC renews a broadcast license even when petitions to deny
have been filed against the renewal application.
REVIEW OF OWNERSHIP RESTRICTIONS. The 1996 Act requires the FCC 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. The first biennial review concluded on
June 20, 2000. In its first biennial review report, the FCC stated its intention to commence several separate proceedings to
examine various ownership rules. The upcoming 2002 biennial review will generate similar proceedings.
RADIO OWNERSHIP. Under FCC rules, with limited exceptions, the number of radio stations that may be owned by one entity in a
given radio market is dependent upon the number of commercial radio stations in that market:
o if the market has 45 or more commercial radio stations, one entity may own up to eight stations, not more than five of
which may be in the same service (AM or FM);
o if the market has between 30 and 44 commercial radio stations, one entity may own up to seven stations, not more than
four of which may be in the same service;
o if the market has between 15 and 29 commercial radio stations, a single entity may own up to six stations, not more than
four of which may be in the same service; and
o if the market has fourteen or fewer commercial radio stations, one entity may own up to five stations, not more than
three of which may be in the same service, except that one entity may not own more than fifty percent of the stations in the
market.
Each of the markets in which our radio stations are located has at least 15 commercial radio stations.
The FCC has been aggressive in examining issues of market concentration when considering radio station acquisitions, even where
the numerical limits described above are not violated. In some instances, the FCC has delayed its approval of proposed radio
station purchases because of market concentration concerns, and in one recent case, the FCC ordered an evidentiary hearing to
determine whether a proposed transaction would result in excessive concentration. Additionally, in its biennial review report,
the FCC stated its intention to launch a proceeding to examine possible revisions to the manner in which the FCC counts stations
and defines a radio "market" for purposes of determining compliance with the local radio multiple ownership restrictions. The FCC
initiated the proceeding in December 2000. In November 2001 the FCC subsumed this proceeding into a more comprehensive proceeding
to review all aspects of the agency's local radio multiple ownership rules, including, among other things, whether it may or
should modify its local radio multiple ownership rules to address concerns of undue market concentration. The FCC has also
requested comment on future regulatory treatment of radio time brokerage agreements (also known as "local marketing agreements" or
"LMA's") and radio joint sales agreements.
12
TELEVISION OWNERSHIP. Pursuant to the 1996 Act, the FCC substantially revised its local television ownership rules (including
its television "duopoly" rule and radio/television cross-ownership rule) in an August 2000 decision, as modified by a January 2002
reconsideration order. The FCC's revised television duopoly rule permits an entity to own two or more television stations in
separate Designated Market Areas ("DMAs"). The rule also permits an entity to own two or more television stations in the same DMA
if:
o the coverage areas of the stations do not overlap, or
o at least eight, independently-owned and -operated full-power non-commercial and commercial operating stations (known as
"voices") will remain in the market post-merger, and one of the two commonly-owned stations is not among the top four
television stations in the market (based on audience share ratings).
The Commission will consider permanent waivers of its television duopoly rule where one of the stations is:
o a "failed station," i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding;
o a "failing station," i.e., having a low audience share and financially struggling; or
o an unbuilt facility, where the permittee has made substantial progress towards constructing the facility.
The television duopoly rule was appealed to the United States Court of Appeals for the District of Columbia Circuit ("D.C.
Circuit"). In April 2002 the D.C. Circuit issued a decision remanding the rule to the FCC for further consideration. The court
found that the FCC had not justified excluding media other than television stations as "voices" to be counted for purposes of
determining compliance with the rule.
Our acquisition of the Lee Enterprises stations required a waiver of the television duopoly rule because the signals of KHON-TV
and KGMB-TV (one of the Lee Enterprises stations) overlap, the stations serve the same market, and both stations are rated among
the top four in that market. In approving the acquisition, the FCC granted a temporary waiver of the rule, ordering that an
application for divestiture of either KHON-TV or KGMB-TV (plus associated "satellite" stations) be filed on or before April 1,
2001; that deadline was subsequently extended at our request to April 1, 2002. We have filed a request for a further extension to
and including April 1, 2003. That request has been opposed by a Honolulu broadcaster, and the FCC has required us to file
additional information concerning our divestiture efforts, which we have done. The FCC has extended our waiver to and including
July 1, 2002, pending its review of the information we have submitted. In addition to responding to the FCC's request for
information, we have filed a request for interim relief, asking that the divestiture requirement be stayed, pending review of the
duopoly rule that will be undertaken pursuant to the court remand described above and the 2002 biennial review. We cannot predict
whether either the extension request or the request for interim relief will be granted.
The FCC's revised radio/television cross-ownership rule generally permits the common ownership of the following combinations in
the same market, to the extent permitted under the FCC's television duopoly rule:
o up to two commercial television stations and six commercial radio stations or one commercial television station and seven
commercial radio stations in a market where at least 20 independent media voices will remain post-merger;
o up to two commercial television stations and four commercial radio stations in a market where at least 10 independent
media voices will remain post-merger; and
o two commercial television stations and one commercial radio station in a market regardless of the number of independent
media voices that will remain post-merger.
The Commission will consider permanent waivers of its revised radio/television cross-ownership rule only if one of the stations is
a "failed station."
13
Pursuant to the 1996 Act, the FCC also revised its restriction on the national ownership of television stations in an August
2000 decision, as reaffirmed by a January 2002 order. The revised FCC rules restrict the ownership of television stations on a
nationwide basis to stations reaching, in the aggregate, no more than 35 percent of the total national audience. In response,
certain TV group owners filed comments with the FCC and/or appeals in the D.C. Circuit seeking elimination, or at least
relaxation, of this limit. In February 2002, the D.C. Circuit issued a decision requiring the FCC to initiate further proceedings
to justify its decision to retain the 35 percent national television reach limitation. In the same decision, the court also
vacated the FCC's rule prohibiting common ownership of a television station and a cable television system in the same market. In
early April 2002, the FCC granted Viacom/CBS a stay of the May 2002 deadline that the FCC had set for the network to divest
certain of its television stations in order to come into compliance with the 35 percent cap; the stay will remain in effect until
one year after the FCC completes review of the "national cap" as required by the court's decision. Fox has obtained a similar
stay. The FCC and certain private parties have asked the court to reconsider its decision, arguing in part that the decision
imposes too stringent a standard on the Commission for retention of existing rules in the context of the agency's biennial
reviews.
Current FCC rules also prohibit common ownership of a daily newspaper and a radio or television station in the same market.
Pursuant to its biennial review report, the FCC has initiated a proceeding requesting comment on whether to eliminate, or at least
relax, this restriction.
We cannot predict the ultimate outcome of the proceedings described above, future biennial reviews or other agency or
legislative initiatives or the impact, if any, that they will have on our business.
=
ALIEN OWNERSHIP. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its
capital stock is owned or voted by aliens or their representatives, a foreign government or representative thereof, or an entity
organized under the laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides
that no FCC license may be granted to an entity directly or indirectly controlled by another entity of which more than one-fourth
of its capital stock is owned or voted by Non-U.S. Persons if the FCC finds that the public interest will be served by the denial
of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the
grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on
alien ownership apply in modified form to other types of business organizations, including partnerships and limited liability
companies. Our Amended and Restated Articles of Incorporation and Code of By-Laws authorize the Board of Directors to prohibit
such restricted alien ownership, voting or transfer of capital stock as would cause Emmis to violate the Communications Act or FCC
regulations.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC requires the "attribution" of broadcast licenses
held by a broadcasting company to certain of the company's stockholders, officers or directors, such that there would be a
violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than
the permitted number of stations or a prohibited combination of media outlets in the same market. The FCC's attribution rules
generally deem the following relationships and interests to be attributable for purposes of the FCC's ownership restrictions:
o all officers and directors of a licensee and its (in)direct parent(s);
o voting stock interests of at least five percent;
o stock interests of at least 20 percent, if the holder is a passive institutional investor (i.e., investment companies,
insurance companies, banks);
o any equity interest in a limited partnership or limited liability company where the limited partner or member is
"materially involved" in the media-related activities of the LP or LLC;
o equity and/or debt interests which, in the aggregate, exceed 33 percent of the total asset value of a station or other
media entity (the "equity/debt plus policy"), if the interest holder supplies more than 15 percent of the station's total
weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a
same-market media entity (i.e., broadcast company or newspaper).
To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable,
the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each
non-controlling link in a multi-corporation ownership chain.
14
In the January 2001 attribution reconsideration order, the FCC eliminated its "single majority shareholder exemption" for
purposes of the broadcast attribution rules. The exemption had provided that, in cases where one person or entity (such as
Jeffrey H. Smulyan in the case of Emmis) held more than 50 percent of the combined voting power of the common stock of a
broadcasting company, a minority shareholder of the company generally would not be deemed to hold an attributable interest in the
company. Although the FCC eliminated the single majority shareholder exemption, it grandfathered minority interests in
broadcasting companies with single majority shareholders where the interests were acquired prior to December 14, 2000 (the
adoption date of the January 2001 reconsideration order). The FCC's decision to eliminate the single majority shareholder
exemption was called into question by a recent federal court decision, which reversed and remanded the FCC's decision to eliminate
the corresponding exemption for purposes of the cable television attribution rules. In light of that decision, the Commission
initiated a proceeding to review the single majority shareholder exemption in both the cable and broadcast contexts. The FCC also
has issued an order suspending enforcement of the elimination of the single majority shareholder exemption for the broadcast and
MDS industries pending resolution of the cable ownership/attribution proceeding. Thus, the single majority shareholder exemption
is still technically in force.
Should the FCC ultimately eliminate the exemption, any minority interests in Emmis acquired on or after December 14, 2000, will
not be exempt from attribution, despite Mr. Smulyan's majority interest. Moreover, in the event that Mr. Smulyan no longer holds
more than 50 percent of the voting power, the interests of grandfathered minority shareholders which had theretofore been
considered nonattributable would become attributable, such that any other media interests held by these shareholders would be
combined with Emmis' media interests for purposes of determining compliance with FCC ownership rules. Mr. Smulyan's level of
voting control could decrease to or below 50 percent as a result of transfers of common stock pursuant to agreement or conversion
of the Class B Common Stock into Class A Common Stock. In the event of noncompliance with the FCC's attribution rules, steps
required to achieve compliance could include divestitures by either the shareholder or Emmis, as the situation dictates. Further,
an attributable interest of any shareholder (including grandfathered minority interests) in another broadcast station or other
media entity in a market where Emmis owns or seeks to acquire a station is still subject to review by the FCC under its
"equity/debt plus policy," and could result in Emmis being unable to obtain one or more FCC authorizations needed to conduct its
broadcast business or FCC consents necessary for future acquisitions. Conversely, Emmis' media interests could operate to
restrict other media investments by shareholders having or acquiring an interest in Emmis.
ASSIGNMENTS AND TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer
of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC
considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the
"character" of the licensee and those persons holding attributable interests therein, compliance with the Communications Act's
limitations on alien ownership as well as other statutory and regulatory requirements. When evaluating an assignment or transfer
of control application, the FCC is prohibited from considering whether the public interest might be served by an assignment of the
broadcast license or transfer of control of the licensee to a party other than the assignee or transferee specified in the
application.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s,
the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of
certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be
required to present programming that is responsive to community problems, needs and interests and to maintain certain records
demonstrating such responsiveness. Federal law prohibits the broadcast of obscene material and regulates the broadcast of
indecent material, which is subject to enforcement action by the FCC. Complaints from listeners concerning a station's
programming often will be considered by the FCC when it evaluates the licensee's renewal applications, although such complaints
may be filed by concerned parties and considered by the FCC at any time. Stations also must pay regulatory and application fees
and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising,
sponsorship identification, contest and lottery advertisements, and technical operations, including limits on radio frequency
radiation.
In 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). Certain
provisions of this law, such as signal carriage and retransmission consent, have a direct effect on television broadcasting.
15
In April 1997, the FCC adopted rules that require television broadcasters to provide digital television ("DTV") to consumers.
The FCC also adopted a table of allotments for DTV, which assigns eligible broadcasters a second channel on which to provide DTV
service. The FCC's DTV allotment plan is based on the use of a "core" DTV spectrum between channels 2-51. Although the
Communications Act mandates that each television station return one of its two channels to the FCC by the end of 2006, the
Balanced Budget Act of 1997 may effectively extend the transition deadline in some markets by allowing broadcasters to keep both
their analog and digital licenses until at least 85 percent of television households in their respective markets can receive a
digital signal. Local zoning laws and the lack of qualified tall-tower builders to construct the facilities necessary for DTV
operations, among other factors, including the pace of DTV production and sales, may cause delays in the DTV transition. The FCC
has announced that it will review the progress of DTV every two years and make adjustments to the 2006 target date, if necessary.
The FCC is also considering cable operators' obligations to carry the digital signals of broadcast television stations, including
the obligations that should exist during the DTV transition period, when broadcasters' analog and digital signals will be
operating simultaneously.
Television broadcasters are allowed to use their DTV channels according to their best business judgment, provided that they
continue to offer at least one free programming service that is at least comparable to today's analog service. Digital services
and programming can include multiple standard definition program channels, data transfer, subscription video, interactive
materials, and audio signals (so-called "ancillary" services). The FCC has imposed a fee of five percent of the annual gross
revenues for television broadcasters' use of the DTV spectrum to offer ancillary services. The form and amount of these fees may
have a significant effect on the profitability of such services. Broadcasters will not be required to air "high definition"
programming or, initially, to simulcast their analog programming on the digital channel. Affiliates of ABC, CBS, NBC and Fox in
the top 10 television markets were required to be on the air with a digital signal by May 1, 1999, and affiliates of those
networks in markets 11-30, including KOIN-TV, were required to be on the air with a digital signal by November 1, 2000; KOIN-TV
complied with this deadline. The remaining commercial stations, including all other television stations owned by Emmis, were
required to file DTV construction permit applications by November 1, 2000, and were required to be on the air with a digital
signal by May 1, 2002, absent an extension on a station-by-station basis. All Emmis' stations met the November 1, 2000,
application deadline. Stations WALA, WKCF, and WFTX met the May 1, 2002 on-air deadline, and the deadline for all other Emmis
stations has been extended by the FCC to and including November 1, 2002. Additionally, all of the Emmis stations filed timely
applications to "maximize" (expand the coverage of) the DTV facilities in those cases where it was deemed appropriate to protect
the stations from interference from low power television broadcasters.
In January 2001, the FCC issued a further order on DTV transition issues, setting a number of deadlines for commercial
broadcasters. By the end of December 2002, commercial stations with both analog and digital channel assignments within the DTV
core spectrum (channels 2-51) must elect the channel they will use for broadcasting after the transition is complete. By the end
of December 2004, commercial broadcasters not replicating their existing analog service areas will lose interference protection in
those portions of their existing service areas not covered by their digital signals. Also by the end of December 2004, commercial
broadcasters must provide a stronger digital signal to their communities of license than was previously required.
In November 2001, the FCC issued a reconsideration order on DTV transition issues, which modified many of the rules established
in January 2001. Specifically, the reconsideration order temporarily defers the FCC's previously established deadlines for
broadcasters to: (1) choose their permanent post-transition DTV channel; (2) provide a DTV signal that replicates their analog
service area; and (3) build maximized DTV facilities. The FCC intends to establish deadlines for these requirements in its next
periodic review of the DTV transition and emphasized that none of the deadlines will be after the later of December 31, 2006 or
the date by which 85 percent of the television households in a licensee's market are capable of receiving the signals of DTV
stations. The order also permits broadcasters to request special temporary authority to construct initial minimal DTV facilities
(i.e., facilities that only cover their cities of license) while retaining interference protection for their allotted and maximized
facilities. The order further allows commercial stations subject to the May 1, 2002 construction deadline (i.e., stations not in
the top 30 markets) to initially broadcast a digital signal during prime time hours only.
The FCC has authorized the provision of video programming directly to home subscribers through high-powered direct broadcast
satellites ("DBS"). DBS systems currently are capable of broadcasting over 500 channels of digital television service directly to
subscribers' equipment with 18-inch receiving dishes and decoders. At this time, several entities provide DBS service to
consumers throughout the country. Other entities hold DBS licenses, but have not yet commenced service. DBS operators may import
distant network signals into local television markets where 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 network affiliate of the given network. In
November 1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which authorizes DBS companies also to provide
16
local television signals to their subscribers pursuant to a retransmission consent agreement with the station. In March 2000, the
FCC adopted regulations governing the statutory requirements for "good faith" negotiations and non-exclusive agreements in
retransmission consent contracts between broadcasters (and all multichannel video program distributors). Broadcasters are
required to negotiate non-exclusive retransmission consent agreements in good faith until January 1, 2006; however, the law
explicitly provides that broadcasters may enter into agreements with competing DBS carriers on different terms.
Moreover, effective January 1, 2002, local television stations became entitled to "must-carry" rights on a DBS system if the
system is providing any local television station(s) to its subscribers. SHVIA also "grandfathered" delivery of the signals of
television stations via DBS to certain subscribers who may have been receiving such signals in violation of prior law. In
November 2000, the FCC adopted rules to implement SHVIA provisions regarding "local-into-local" satellite service, must-carry
election cycle rules and related policies for satellite carriage of broadcast signals. Under the new FCC rules, a broadcast
television station must affirmatively elect must-carry status to require a DBS operator to carry its station; the first elections
were due by July 1, 2001. In response to a challenge to certain provisions of SHVIA, a panel of the U.S. Court of Appeals for the
Fourth Circuit upheld the requirement that DBS operators carry the signal of all local television stations in markets where they
elect to carry any local signals. The court also upheld an FCC rule that permits DBS operators to offer all local television
stations on a single tier or on an a la carte basis. The rule allows consumers to choose between the two options. In response to
broadcasters' first elections, DBS operators issued a large number of carriage denial letters, prompting the FCC to issue an order
in September 2001 clarifying the DBS mandatory carriage rules. In particular, the FCC emphasized that a satellite carrier must
have a "reasonable basis" for rejecting a broadcast station's carriage request.
There are FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as the use of
auctions to resolve mutually exclusive application requests, network-affiliate relations, the ability of stations to obtain
exclusive rights to air syndicated programming, cable systems' carriage of syndicated and network programming on distant stations,
political advertising practices, application procedures and other areas affecting the business or operations of broadcast stations.
Failure to observe FCC rules and policies can result in the imposition of various sanctions, including monetary fines, the
grant of "short" (less than the maximum term) license renewal terms or, for particularly egregious violations, the denial of a
license renewal application or the revocation of a license.
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission has adopted rules implementing a new low power FM ("LPFM")
service. The FCC has begun accepting applications for LPFM stations and has granted some of those applications. We cannot
predict whether any LPFM stations will interfere with the coverage of our radio stations.
The FCC has also authorized two companies to launch and operate satellite digital audio radio service ("SDARS") systems on a
nationwide basis. One of those companies, Sirius Satellite Radio, Inc. has launched three satellites and began commercial service
in a few cities in February 2002. The other company, XM Radio, has launched two satellites and is now providing nationwide
service. Currently, the FCC is considering a proposal to permit SDARS to be supplemented by terrestrial "repeating" transmitters
designed to fill "gaps" in satellite coverage. Also, the FCC has undertaken an inquiry regarding rules for the terrestrial
broadcast of digital signals. Among other issues, this inquiry addresses the need for spectrum outside the existing FM band and
the role of existing broadcasters. A technical standard for the provision of terrestrial digital radio broadcasting has been
developed and is currently before the FCC. We cannot predict the impact of SDARS on our radio stations' listenership.
In November 1999, the Commission released proposed rules for terrestrial digital audio broadcasting ("DAB"). The proposed
rules would permit existing AM and FM stations to operate on their current frequencies in either full analog mode, full digital
mode, or a combination of both (at reduced power). DAB technology is still evolving, and it is not yet certain whether DAB
transmission as proposed will be feasible.
In January 2001, the D.C. Circuit concluded that the FCC's Equal Employment Opportunity ("EEO") regulations were
unconstitutional. Accordingly, broadcasters are currently not subject to FCC-imposed EEO regulations. In December 2001, the FCC
solicited public comment on proposed new EEO affirmative action rules. This proceeding remains pending,.
Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies
regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our
broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and/or affect our
ability to acquire additional broadcast stations or finance such acquisitions. Such matters include, but are not limited to:
17
o proposals to impose spectrum use or other fees on FCC licensees;
o proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies;
o proposals to change rules relating to political broadcasting;
o technical and frequency allocation matters;
o AM stereo broadcasting;
o proposals to permit expanded use of FM translator stations;
o proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
o proposals to tighten safety guidelines relating to radio frequency radiation exposure;
o proposals permitting FM stations to accept formerly impermissible interference;
o proposals to reinstate holding periods for licenses;
o changes to broadcast technical requirements, including those relative to the implementation of SDARS and DAB;
o proposals to limit the tax deductibility of advertising expenses by advertisers.
We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what
impact, if any, the implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations.
Reference should be made to the Communications Act as well as FCC regulations, public notices and rulings for further information
concerning the nature and extent of federal regulation of broadcast stations.
GEOGRAPHIC FINANCIAL INFORMATION
The Company's segments operate primarily in the United States with one national radio station located in Hungary and two radio
stations located in Argentina. The following tables summarize relevant financial information by geographic area:
For the year ended February 28 (29),
2000 2001 2002
----------------- --------------- ---------------
(In Thousands)
Net Revenues:
Domestic $ 316,454 $ 456,040 $ 517,082
International 8,811 14,578 16,698
----------------- --------------- ---------------
Total 325,265 470,618 533,780
================= =============== ===============
As of February 28 (29),
2000 2001 2002
----------------- --------------- ---------------
(In Thousands)
Noncurrent Assets:
Domestic $ 1,181,640 $ 2,263,796 $ 2,229,680
International 32,950 27,970 16,867
----------------- --------------- ---------------
Total 1,214,590 2,291,766 2,246,547
================= =============== ===============
With respect to EOC, the above information would be identical, except domestic noncurrent assets would be $2,218,750 and total
noncurrent assets would be $2,235,617 as of February 28, 2002.
ITEM 2. PROPERTIES.
The following table sets forth information as of February 28, 2002 with respect to offices, studios and broadcast towers of
stations and magazines currently owned by Emmis. Management believes that the properties are in good condition and are suitable
for Emmis' operations.
18
OWNED EXPIRATION
YEAR PLACED OR DATE
PROPERTY IN SERVICE LEASED OF LEASE
- -------------------------------------------- ---------------- ---------- ----------
Corporate and Publishing Headquarters/ 1998 Owned --
WENS-FM/ WIBC-AM/WNOU-FM/
WYXB-FM/ Indianapolis Monthly
One Emmis Plaza
40 Monument Circle
Indianapolis, Indiana
WENS-FM Tower 1985 Owned --
WNOU-FM Tower 1979 Owned --
WIBC-AM Tower 1966 Owned --
WYXB-FM Tower 1965 Leased Month-to-month
WMLL-FM/KFTK-FM/KIHT-FM/KPNT-FM/KSHE-FM 1998 Leased December 2007
800 St. Louis Union Station
St. Louis, Missouri
WMLL-FM Tower 1984 Owned --
KFTX-FM Tower 1987 Leased August 2009 with option to March 2023
KIHT-FM Tower 1995 Leased September 2005 with two 5-year options
KPNT-FM Tower 1987 Owned --
KSHE-FM Tower 1985 Leased April 2009
KPWR-FM 1988 Leased February 2003
2600 West Olive
Burbank, California
KPWR-FM Tower 1993 Leased October 2002 (1)
WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013
395 Hudson Street, 7th Floor
New York, New York
WQHT-FM Tower 1984 Leased January 2010
WRKS-FM Tower 1984 Leased November 2005
WQCD-FM Tower 1984 Leased February 2007
WKQX-FM 2000 Leased December 2015 with 5 year option
230 Merchandise Mart Plaza
Chicago, Illinois
WKQX-FM Tower 1975 Leased September 2009
Atlanta Magazine Office 1997 Leased July 2003
1330 Peachtree Street, N.E.
Atlanta, Georgia
Cincinnati Magazine 1996 Leased November 2006
One Centennial Plaza
Cincinnati, OH
Texas Monthly 1989 Leased August 2009
701 Brazos, Suite 1600
Austin, TX
KHON-TV 1999 Owned --
88 Piikoi Street
Honolulu, HI
KHON-TV Tower 1978 Leased December 2008 with 10 year option
--
WALA-TV 2002 Owned
1501 Satchel Paige Dr.
Mobile, AL
WALA-TV Tower 1962 Owned --
WFTX-TV 1987 Owned --
621 Pine Island Road
Cape Coral, FL
WFTX-TV Tower 1985 Owned --
19
WLUK-TV 1966 Owned -- 787 Lombardi Avenue Green Bay, WI WLUK-TV Tower 1961 Owned -- WTHI-TV/FM/WWVR-FM 1954 Owned -- 918 Ohio Street Terre Haute, IN WTHI-TV Tower 1965 Owned -- WTHI-FM Tower 1954 Owned -- WWVR-FM Tower 1966 Owned -- WVUE-TV 1972 Owned -- 1025 South Jefferson Davis Highway New Orleans, LA WVUE-TV Tower 1963 Owned -- WKCF-TV 1998 Owned -- 31 Skyine Drive Lake Mary, FL WKCF-TV Tower 2001 Leased September 2006 Los Angeles Magazine 2000 Leased November 2010 5900 Wilshire Blvd., Suite 1000 Los Angeles, CA 90036 Country Sampler 1988 Owned -- 707 Kautz Road St. Charles, IL 60174 RDS/Co-Opportunities 1989 Leased December 2003 324 Campus Lane, Suite B Suisun, CA 94585 Emmis West (Corporate) 1999 Leased January 2004 15821 Ventura Blvd., #685 Encino, CA 91436 Slager Radio 1998 Leased December 2004 Szabadsag Ut 117 (Atronyx Bldg. B) H-2040 Budaors, Hungary Slager Tower 1998 Leased November 2004 KOIN-TV 1984 Leased June 2083 with 99 year option 222 S.W. Columbia St. Portland, OR 97221 KOIN-TV Tower 1953 Owned -- KSNT-TV 1967 Owned -- 6835 N.W. U.S. Hwy 24 Topeka, KS 66618 KSNT-TV Tower 1967 Owned -- WSAZ-TV 1971 Owned -- 645 5th Avenue Huntington, WV 25701 WSAZ-TV Tower 1954 Owned -- KZLA-FM 1997 Owned -- 7755 Sunset Blvd. Los Angeles, CA 90045 KZLA-FM Tower 1991 Leased June 30, 2003 KGMB-TV 1952 Owned -- 1534 Kapiolani Blvd. Honolulu, HI 96814 KGMB-TV Tower 1962 Owned --
20
KMTV-TV 1978 Owned --
10714 Mockingbird Dr.
Omaha, NE 68127
KMTV-TV Tower 1967 Owned --
KGUN-TV 1990 Owned --
7280 E. Rosewood
Tucson, AZ 85710
KGUN-TV Tower 1956 Leased July 2016
KRQE-TV 1953 Owned --
13 Broadcast Plaza S.W.
Albuquerque, NM 87104
KRQE-TV Tower 1959 Owned --
KTAR-AM/KMVP-AM/KKLT-FM/KKFR-FM 1994 Owned --
5300 N. Central Ave.
Phoenix, AZ 85012
KTAR-AM Tower 1958 Owned --
KMVP-AM Tower 1996 Leased December 2008
KKLT-FM Tower 1990 Owned --
KKFR-FM Tower 1998 Leased April 2003
KSNW-TV 1955 Owned --
833 N. Main St.
Wichita, KS 67203
KSNW-TV Tower 1955 Owned --
Argentina 1996 Owned --
Uriarte 1899 (1414) Capital Federal
Buenos Aires, Argentina
Argentina Tower 1996 Owned --
- --------------
(1) In April 2002, Emmis exercised its option to extend the lease until October 2012. The lease contains one additional
ten-year renewal option. 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.
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. However, instead of making a required license payment to the Hungarian
government in November 2001, our 59.5% owned national radio station in Hungary requested a modification of the broadcast contract
and ultimately filed suit in arbitration court seeking reformation of the contract and requesting that the payments be reduced.
The Hungarian government then issued an order revoking our station's broadcast license for non-payment of the license fee, and we
appealed the order in the Hungarian ordinary court. The Hungarian government has also filed an action seeking to liquidate our
Hungarian broadcast company. We are vigorously prosecuting the actions in the arbitration court and ordinary court and are
vigorously opposing the action seeking liquidation. However, we cannot predict the outcome of these actions. We do not plan to
continue to operate the station under the present fee arrangement. We do not expect an adverse material financial impact to Emmis
or EOC if the station does not continue to operate.
21
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 2000 47.38 27.00
August 2000 49.13 31.38
November 2000 34.25 17.38
February 2001 37.88 22.13
May 2001 33.95 20.06
August 2001 33.65 23.32
November 2001 24.95 12.27
February 2002 27.37 15.85
At April 30, 2002, there were 3,932 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.
22
ITEM 6. SELECTED FINANCIAL DATA
Emmis Communications Corporation
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Net revenues $ 140,583 $ 232,836 $ 325,265 $ 470,618 $ 533,780
Operating expenses 81,170 143,348 199,818 296,405 348,115
Corporate expenses 7,845 11,904 15,430 17,601 20,283
Time brokerage fees 5,667 2,220 - 7,344 479
Depreciation and amortization 7,536 28,314 44,161 74,018 100,258
Non-cash compensation 1,482 4,269 7,357 5,400 9,095
Restructuring fees - - - 2,057 768
Impairment loss and other (1) - - 896 2,000 10,672
Operating income 36,883 42,781 57,603 65,793 44,110
Interest expense 13,772 35,650 51,986 72,444 129,100
Loss on donation of radio station 4,833 - 956 - -
Other income (loss), net (2) 6 1,914 4,203 38,037 (3,657)
Income (loss) before income taxes
and extraordinary item 18,284 9,045 8,864 31,386 (88,647)
Income (loss) before extraordinary item 11,084 2,845 1,989 13,736 (63,024)
Net income (loss) 11,084 1,248 (33) 13,736 (64,108)
Net income (loss) available to
common shareholders 11,084 1,248 (3,177) 4,752 (73,092)
Net income (loss) per share
available to common shareholders:
Basic $ 0.51 $ 0.04 $ (0.09) $ $0.10 $ (1.54)
Diluted $ 0.49 $ 0.04 $ (0.09) $ $0.10 $ (1.54)
Weight average common shares
Outstanding (3):
Basic 21,806 28,906 36,156 46,869 47,334
Diluted 22,724 29,696 36,156 47,940 47,334
FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash $ 5,785 $ 6,117 $ 17,370 $ 59,899 $ 6,362
Working capital (4) 21,635 1,249 28,274 97,885 19,828
Net intangible assets 234,558 802,307 1,033,970 1,852,259 1,953,331
Total assets 333,388 1,014,831 1,327,306 2,506,872 2,510,069
Long-term credit facility, senior subordinated
debt and senior discount notes (5) 215,000 577,000 300,000 1,380,000 1,343,507
Shareholders' equity 43,910 235,549 776,367 807,471 735,557
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OTHER DATA:
Broadcast/publishing cash flow (6) $ 59,413 $ 89,488 $ 125,447 $ 174,213 $ 185,665
EBITDA before certain charges (6) 51,568 77,584 110,017 156,612 165,382
Cash flows from (used in):
Operating activities 22,487 35,121 26,360 97,730 69,377
Investing activities (116,693) (541,470) (271,946) (1,110,755) (175,105)
Financing activities 98,800 506,681 256,839 1,055,554 52,191
Capital expenditures 16,991 37,383 29,316 26,225 28,416
(1) Year ended February 28, 2002 includes a $9.1 million asset impairment charge and a $1.6 million charge related to the
early termination of certain TV contracts.
(2) See Management's Discussion and Analysis of Financial Condition and Results of operations for a description of the
components of other income in the year ended February 28, 2001.
(3) In February 2000, Emmis effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data
shown has been retroactively adjusted to reflect the stock split.
(4) Excludes assets held for sale and credit facility debt to be repaid with proceeds of assets held for sale.
(5) February 28, 2002 balance excludes $135.0 million of credit facility debt to be repaid with proceeds of assets held for
sale.
(6) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in
accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and
not a substitute for Emmis' results of operations presented on the basis of accounting principles generally accepted in the
United States. See Management's Discussion and Analysis of Financial Condition and Results of operations for a more
detailed description of broadcast/publishing cash flow and EBITDA before certain charges.
23
Emmis Operating Company
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OPERATING DATA:
Net revenues $ 140,583 $ 232,836 $ 325,265 $ 470,618 $ 533,780
Operating expenses 81,170 143,348 199,818 296,405 348,115
Corporate expenses 7,845 11,904 15,430 17,601 20,283
Time brokerage fees 5,667 2,220 - 7,344 479
Depreciation and amortization 7,536 28,314 44,161 74,018 100,258
Non-cash compensation 1,482 4,269 7,357 5,400 9,095
Restructuring fees - - - 2,057 768
Impairment loss and other (1) - - 896 2,000 10,672
Operating income 36,883 42,781 57,603 65,793 44,110
Interest expense 13,772 35,650 51,986 72,444 (104,102)
Loss on donation of radio station 4,833 - 956 - -
Other income (loss), net (2) 6 1,914 4,203 38,037 (4,643)
Income (loss) before income taxes
and extraordinary item 18,284 9,045 8,864 31,386 (64,635)
Income (loss) before extraordinary item 11,084 2,845 1,989 13,736 (46,802)
Net income (loss) 11,084 1,248 (33) 13,736 (47,886)
FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Cash $ 5,785 $ 6,117 $ 17,370 $ 59,899 $ 6,362
Working capital (3) 21,635 1,249 28,274 97,885 20,951
Net intangible assets 234,558 802,307 1,033,970 1,852,259 1,953,331
Total assets 333,388 1,014,831 1,327,306 2,506,872 2,499,139
Long-term credit facility and senior
subordinated debt (4) 215,000 577,000 300,000 1,380,000 1,117,000
Shareholders' equity 43,910 235,549 776,367 807,471 944,467
YEAR ENDED FEBRUARY 28 (29),
-----------------------------------------------------------------------------------
(Dollars in thousands)
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
OTHER DATA:
Broadcast/publishing cash flow (5) $ 59,413 $ 89,488 $ 125,447 $ 174,213 $ 185,665
EBITDA before certain charges (5) 51,568 77,584 110,017 156,612 165,382
Cash flows from (used in):
Operating activities 22,487 35,121 23,471 86,871 67,393
Investing activities (116,693) (541,470) (271,946) (1,110,755) (175,105)
Financing activities 98,800 506,681 259,728 1,066,413 54,175
Capital expenditures 16,991 37,383 29,316 26,225 28,416
(1) Year ended February 28, 2002 includes a $9.1 million asset impairment charge and a $1.6 million charge related to the
early termination of certain TV contracts.
(2) See Management's Discussion and Analysis of Financial Condition and Results of operations for a description of the
components of other income in the year ended February 28, 2001.
(3) Excludes assets held for sale and credit facility debt to be repaid with proceeds of assets held for sale.
(4) February 28, 2002 balance excludes $135.0 million of credit facility debt to be repaid with proceeds of assets held for
sale.
(5) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in
accordance with accounting principles generally accepted in the United States, and should be viewed as a supplement to and
not a substitute for Emmis' results of operations presented on the basis of accounting principles generally accepted in the
United States. See Management's Discussion and Analysis of Financial Condition and Results of operations for a more
detailed description of broadcast/publishing cash flow and EBITDA before certain charges.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion pertains to Emmis Communications Corporation ("ECC") and its subsidiaries (collectively, "Emmis" or
the "Company") and to Emmis Operating Company and its subsidiaries (collectively "EOC"). EOC became a wholly owned subsidiary of
ECC in connection with the Company's reorganization (see Note 1c. to our consolidated financial statements) on June 22, 2001.
Unless otherwise noted, all disclosures contained in the Management's Discussion and Analysis of Financial Condition and Results
of Operations in the Form 10-K apply to Emmis and EOC.
Emmis generally evaluates the performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow
(PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance
between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities.
BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by
analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt
service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be
available for dividends, reinvestment in Emmis' business or other discretionary uses.
BCF and PCF are not measures of liquidity or of performance in accordance with accounting principles generally accepted in the
United States, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis
of accounting principles generally accepted in the United States. Moreover, BCF and PCF are not standardized measures and may be
calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The
primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing
entities derive revenue from subscriptions and sale of print advertising. Broadcasting revenue is recognized as advertisements
are aired. Publication revenue is recognized in the month of delivery of the publication. The most significant broadcast
operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and
station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs
associated with producing the magazine, and general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its entities charge. These rates are in large part
based on the entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. Broadcast
entities' ratings are measured principally four times a year by Arbitron Radio Market Reports for radio stations and by A.C.
Nielsen Company for television stations. Because audience ratings in a station's local market are critical to the station's
financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain audiences
in each station's chosen demographic target group.
In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services which
can be used by the station in its business operations. The Company generally confines the use of such trade transactions to
promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general
policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
During the three year period ended February 28, 2002, we acquired and retained ten radio stations, nine television stations and
three magazine publications for an aggregate cash purchase price of $1.4 billion. A recap of the transactions completed is
summarized hereafter. These transactions impact the comparability of operating results year over year.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KALC-FM in Denver, Colorado to Entercom
Communications Corporation for $88.0 million. Emmis had purchased KALC-FM on January 17, 2001, from Salem Communications
Corporation for $98.8 million in cash plus a commitment fee of $1.2 million and transaction related costs of $0.9 million. On
February 12, 2002, Emmis entered into a definitive agreement to sell KALC-FM to Entercom and Entercom began operating KALC-FM
under a time brokerage agreement on March 16, 2002. Proceeds were used to repay amounts outstanding under our credit facility.
The assets of KALC-FM are reflected as held for sale in the accompanying consolidated balance sheets. Since the agreed-upon sales
25
price for this station was less than its carrying amount as of February 28, 2002, we recognized an impairment loss of $9.1 million
in fiscal 2002, which is reflected in the accompanying consolidated statements of operations. The $87.7 million of credit
facility debt repaid with the net proceeds of the sale is reflected as a current liability in the accompanying consolidated
balance sheets.
Effective May 1, 2002 Emmis completed the sale of substantially all of the assets of KXPK-FM in Denver, Colorado to Entravision
Communications Corporation for $47.5 million. Emmis had purchased KXPK-FM on August 24, 2000, from AMFM, Inc. for an allocated
purchase price of $35.0 million in cash plus liabilities recorded of $1.2 million and transaction related costs of $0.4 million.
Emmis entered into a definitive agreement to sell KXPK-FM to Entravision on February 12, 2002. Proceeds were used to repay
amounts outstanding under our credit facility. We expect to record a gain on sale of approximately $12 million in our first
quarter of fiscal 2003. The assets of KXPK-FM are reflected as held for sale in the accompanying consolidated balance sheets.
The $47.3 million of credit facility debt repaid with the net proceeds of the sale is reflected as a current liability in the
accompanying consolidated balance sheets.
On March 28, 2001, Emmis completed its acquisition of substantially all of the assets of radio stations KTAR-AM, KMVP-AM and
KKLT-FM in Phoenix, Arizona from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus transaction related costs of $0.7
million. The Company financed the acquisition through a $20.0 million advance payment borrowed under the credit facility in June
2000 and the remainder with borrowings under the credit facility and proceeds from ECC's March 2001 senior discount notes
offering. The acquisition was accounted for as a purchase. Emmis began programming and selling advertising on the radio stations
on August 1, 2000 under a time brokerage agreement. The total purchase price was allocated to property and equipment and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
On January 15, 2001, Emmis entered into an agreement to sell WTLC-AM and the intellectual property of WTLC-FM (both located in
Indianapolis, Indiana) to Radio One, Inc., for $8.0 million. The FM sale occurred on February 15, 2001 and the AM sale occurred
on April 25, 2001. Emmis retained the FCC license at 105.7 and reformatted the station as WYXB-FM.
On October 6, 2000, Emmis acquired certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM (reformatted as
KFTK-FM) and KIHT-FM in St. Louis, Missouri from Sinclair Broadcast Group, Inc. for $220.0 million in cash, plus transaction
related costs of $10.9 million (the "Sinclair Acquisition"). The agreement also included the settlement of outstanding lawsuits
by and between Emmis and Sinclair. The settlement resulted in no gain or loss by either party. This acquisition was financed
through borrowings under Emmis' credit facility and was accounted for as a purchase. The total purchase price was allocated to
property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the
accompanying consolidated balance sheets and are being amortized over 40 years.
On October 6, 2000, Emmis acquired certain assets of KZLA-FM (the "KZLA Acquisition") in Los Angeles, California from
Bonneville International Corporation in exchange for radio stations WIL-FM, WRTH-AM and WVRV-FM, which Emmis acquired from
Sinclair, as well as radio station WKKX-FM which Emmis already owned (all in the St. Louis, Missouri market). Since the fair
value of WKKX exceeded the book value of the station at the date of the exchange, Emmis recorded a gain on exchange of assets of
$22.0 million. This gain is included in other income, net in the accompanying consolidated statements of operations. From August
1, 2000 through the date of acquisition, Emmis operated KZLA-FM under a time brokerage agreement. The exchange was accounted for
as a purchase. The total purchase price of $185.0 million was allocated to property and equipment and broadcast licenses based on
an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets and are being
amortized over 40 years.
Effective October 1, 2000 (closed October 2, 2000), Emmis purchased eight network-affiliated and seven satellite television
stations from Lee Enterprises, Inc. for $559.5 million in cash, the payment of $21.3 million for working capital and transaction
related costs of $2.2 million (the "Lee Acquisition"). In connection with the acquisition, Emmis recorded $31.3 million of
deferred tax liabilities and $17.5 million in contract liabilities. Also, Emmis recorded a severance related liability of $1.8
million, of which $1.5 million remains outstanding as of February 28, 2002. This transaction was financed through borrowings
under Emmis' credit facility and was accounted for as a purchase. The Lee Acquisition consisted of the following stations:
26
- - KOIN-TV (CBS) in Portland, Oregon
- - KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango,
Colorado-Farmington, New Mexico)
- - WSAZ-TV (NBC) in Charleston-Huntington, West Virginia
- - KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas
and KSNK-TV, Oberlin, Kansas-McCook, Nebraska)
- - KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Wailuku, Hawaii)
- - KGUN-TV (ABC) in Tucson, Arizona
- - KMTV-TV (CBS) in Omaha, Nebraska and
- - KSNT-TV (NBC) in Topeka, Kansas.
The total purchase price was allocated to property and equipment, television program rights, working capital related items and
broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated
balance sheets and are being amortized over 40 years.
Because we already own KHON-TV in Honolulu, and both KHON and KGMB were rated among the top four television stations in the
Honolulu market, FCC regulations prohibited us from owning both stations. However, we received a temporary waiver from the FCC
that has allowed us to operate both stations (and their related "satellite" stations). As a result of recent regulatory
developments, we have requested a stay of divestiture until the FCC completes its biennial review. We are currently awaiting the
FCC's decision. No assurances can be given that the FCC will grant us the stay of divestiture and we may need to sell one of the
two stations in Hawaii.
On August 24, 2000, Emmis acquired the assets of radio station KKFR-FM in Phoenix, Arizona from AMFM, Inc. for an allocated
$72.0 million in cash, plus transaction related costs of $0.5 million (the "AMFM Acquisition"). Emmis financed the acquisition
through borrowings under its credit facility. The acquisition was accounted for as a purchase. The total purchase price was
allocated to property and equipment and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible
assets in the accompanying consolidated balance sheets and are being amortized over 40 years.
In May, 2000, Emmis made an offer to purchase the stock of a company that owns and operates WALR-FM in Atlanta, Georgia.
Because an affiliate of Cox Radio, Inc. held a right of first refusal to purchase WALR-FM, Emmis' offer was made on the condition
that Emmis would receive a $17.0 million break-up fee if WALR-FM was sold pursuant to the right of first refusal. In June, 2000,
the Cox affiliate submitted an offer to purchase WALR-FM under the right of first refusal and an application to transfer the
station's FCC licenses was filed with the FCC. Emmis received the break-up fee upon the closing of the sale of WALR-FM under the
right of first refusal on August 31, 2000, which is included in other income in the accompanying consolidated statements of
operations.
On March 3, 2000, Emmis acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for
approximately $36.8 million in cash plus liabilities recorded of $2.7 million (the "Los Angeles Magazine Acquisition"). Los
Angeles Magazine Holding Company, Inc., through a wholly-owned subsidiary, owns and operates Los Angeles, a city magazine. The
acquisition was accounted for as a purchase and was financed through additional borrowings under its credit facility. The excess
of the purchase price over the estimated fair value of identifiable assets was $36.0 million, which is included in intangible
assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and
related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6
million. The acquisition was accounted for as a purchase and was financed through borrowings under the credit facility. The
excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in
intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years.
On November 16, 1999, Emmis purchased an interest in BuyItNow.com L.L.C. for $5.0 million in cash, which represented an
original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. During fiscal 2001, Emmis reduced the carrying
value of its investment in BuyItNow.com from $5.0 million to zero as the decline in the value of the investment was deemed to be
other than temporary.
27
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 $1.6 million was
paid subsequent to closing and up to an additional $0.6 million will be paid by November 2003 if certain conditions are met.
Votionis owns one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition
was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity
Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast
license is being amortized over 23 years.
On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in
Orlando, Florida (the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The
purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a
$12.5 million advance payment borrowed under the credit facility and proceeds from the Company's October 1999 Common and Preferred
Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The
acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program
rights and broadcast licenses based on an appraisal. Broadcast licenses are included in intangible assets and are being amortized
over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an
agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through
December 2009.
On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the
"Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The
purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the
credit facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in
October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of
identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and
is being amortized over 15 years.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 2002 COMPARED TO YEAR ENDED FEBRUARY 28, 2001. Net revenues for the year ended February 28, 2002 were
$533.8 million compared to $470.6 million for the same period of the prior year, an increase of $63.2 million or 13.4%. On a pro
forma basis (after giving effect to all acquisitions consummated since March 1, 2000), net revenues for the year ended February
28, 2002 would have decreased $38.2 million or 6.7%. This pro forma decrease in net revenues is generally due to a softening U.S.
economy resulting in an overall decrease in advertisement sales, coupled with the absence of political television advertisements
in the twelve months ended February 28, 2002. The decrease was partially offset by a $3.7 million increase in net revenues
primarily attributable to our television division earning a performance guaranty when our national sales rep agency did not
achieve certain performance targets in the second quarter.
Operating expenses for the year ended February 28, 2002 were $348.1 million compared to $296.4 million for the same period of
the prior year, an increase of $51.7 million or, 17.4%. On a pro forma basis, operating expenses decreased $12.3 million or
3.4%. This pro forma decrease is due to the elimination of certain operational positions in the television division and a
decrease in promotional spending, offset by sales personnel increases in all of our divisions. Also, in the quarter ended
February 28, 2002, we implemented a 10% wage cut which was supplemented with a corresponding 10% Emmis stock award. This
initiative redu