ITEM 1. BUSINESS.
GENERAL
The Company owns and operates nine FM radio stations and two AM radio stations serving the nation's three largest radio markets, Los Angeles, New York and Chicago, and the major markets of St. Louis and Indianapolis. Three of these stations were acquired on March 31, 1997, and were operated by the Company under a time brokerage agreement from December 1,1996 through March 31, 1997. The Company has successfully created top- performing radio stations that are ranked among the top five stations in terms of total audience share in three of the Company's markets and among the top ten stations in terms of total audience share in one of the other two markets according to the Winter 1997 Ratings (the "Winter 1997 Arbitron Survey") published by The Arbitron Company ("Arbitron"). The Company has also received awards from organizations such as the National Association of Broadcasters and Billboard and Rolling Stone magazines. The Company has achieved this success primarily as a result of its ability to attract and retain an experienced team of broadcast professionals who have focused on creating innovative programming and developing effective marketing and sales programs.
The five markets served by the Company's stations accounted for approximately $1.5 billion in radio advertising revenues in calendar year 1996. The Company's stations in these markets have consistently produced positive Broadcast Cash Flow in each of the past five years. The Broadcast Cash Flow of these eleven stations including three months of operating results of the stations acquired in March 1997, was $50.4 million for the fiscal year ended February 28, 1997. The Company believes that its presence in large markets makes it attractive to advertisers and that the geographic diversity of its markets reduces its dependence on any economic sector or specific advertiser.
The Company began business in 1981 with one radio station in Indianapolis. Historically, the Company's operating strategy has been to acquire underperforming radio stations and improve their ratings, revenues and Broadcast Cash Flow by utilizing the Company's programming and marketing skills. The Company also publishes Indianapolis Monthly magazine and Atlanta magazine, and engages in certain businesses ancillary to its radio business, such as advertising and program consulting and broadcast tower leasing.
COMPANY STRATEGY
The Company has developed and implements several operating strategies to enhance its audience and advertising revenue shares.
Innovative Programming. The Company's primary strategy has been and will continue to be to use innovative programming to create valuable new radio station niches. For example, the Company introduced the Dance/Contemporary Hit format at KPWR-FM in Los Angeles which attracted the young Hispanic, white and African-American audiences of Southern California. When the Company purchased WRKS-FM in New York City, it developed a new "Classic Soul/Smooth R&B" format which specifically targeted the adult African American audience. The Company also developed the first all-sports radio station at WFAN-AM in New York prior to the sale of this station in 1992. At WKQX-FM in Chicago, the Company created a new niche by identifying and exploiting a variation of Alternative Rock (or "New Rock") which had broader audience appeal than existing Alternative Rock formats. Once a programming niche has been developed, the Company's general strategy for maintaining ratings and increasing revenue is to build franchise value through creative music programming, rather than relying on particular high-profile on-air talent. The Company also routinely conducts market research to assist in refining and improving the programming of each of its stations.
Distinctive Corporate Culture. The Company believes its distinctive corporate culture has contributed significantly to its ability to create and successfully operate innovative radio stations. Each of the Company's stations is managed by a team of experienced broadcasters who understand the musical tastes, demographics and competitive opportunities of their particular market. The Company has decentralized station operations to local management who are rewarded based on the performance of the individual station. Corporate management oversees and controls station spending, directs long-range planning, establishes Company policies and allocates resources. The Company believes that its entrepreneurial management approach has made it a highly desirable employer in the radio broadcasting industry and has significantly
enhanced the Company's ability to attract and retain experienced and highly motivated employees, management and on-air talent.
Focused Marketing Strategy. In recent years, radio advertising revenues have generally grown at a more rapid rate than total advertising revenues. The Company expects that this trend will continue to create potential for growth in advertising revenues for the radio broadcasting industry. In order to increase its share of these revenues, the Company's programming in each market is designed to appeal to a specific demographic group which the Company believes can result in increased revenues by attracting advertisers interested in reaching the targeted group. Within each radio market, the Company targets key demographic groups based on advertiser demand and the competitive formats in the market. Local and national sales efforts are designed to maximize the Company's share of advertising budgets allocated to its targeted demographic groups.
The Company's strategy is to be a leader in creating marketing and sales development programs in each of its markets to attract new sources of advertising revenue. The Company has won numerous awards for its marketing efforts, particularly at KSHE-FM in St. Louis. The Company has led the industry in developing "vendor co-op" advertising revenue (i.e., revenue from a manufacturer or distributor which is used to promote its particular goods together with local retail outlets for those goods). Although this source of advertising revenue is common in the newspaper and magazine industry, the Company was among the first radio broadcasters to recognize the potential of vendor co-op advertising and implement a program to take advantage of this potential. The Company has also formed a national association of radio stations focusing on the age 12 to 24 demographic group to develop additional advertising revenue.
Expansion Strategy. The Company believes it can enhance its ability to dominate a programming format by acquiring two or more stations in a particular market, because the Company can then program each station to deliver a larger share of a targeted demographic group to advertisers, while being less vulnerable to programming format competition. Accordingly, the Company has acquired additional stations in New York City, Indianapolis, and St. Louis, and it intends to pursue additional attractive acquisition opportunities in markets where it has existing stations and can achieve the potential for significant increases in Broadcast Cash Flow through programming enhancements and, to a lesser extent, through cost savings. The Company will also consider acquisitions of individual stations or groups of stations in other attractive markets where it expects that it can ultimately achieve a dominant position with one or more stations. The Company has entered into a noncompetition agreement, however, in connection with the sale of a radio station which restricts the Company from entering the Boston market until May 1998.
In analyzing potential acquisitions in new markets, the Company generally considers (i) the amount of money spent on radio advertising each year in the relevant market and the growth rate for this pool of revenue, (ii) the number of competitive stations in the market, including whether there is a niche in the local spectrum of programming formats or whether one of the competitors has a perceived vulnerability, (iii) whether the station proposed to be acquired has a competitive signal, (iv) whether value can be achieved through ownership of multiple stations, and (v) the minimum level of performance which can be expected from the station under the Company's management.
BROADCAST PROPERTIES
The Company's strategy is to focus on a limited number of radio markets judged to have the greatest long-term growth potential. The Company's ongoing broadcasting operations are summarized in the following table:
(1) "Market Revenue Size" is based on aggregate gross radio revenue for calendar year 1996. "Market Rank by Revenue" is the ranking of the Market Revenue Size of the principal radio market served by the station among all radio markets in the United States. Market revenue and ranking figures are from Duncan's Radio Market Guide (1997 ed.). Market revenues are in millions.
(2) "Station Audience Share" is from the Winter 1997 Arbitron Survey. The generally accepted method of measuring the relative size of a radio station's audience is by reference to total persons, age 12 and older, Monday--Sunday, 6 a.m.--Midnight Average Quarter Hour shares as published by Arbitron. Arbitron periodically samples radio listeners in defined market areas, principally through the use of diaries returned by selected listeners. A station's AQH share is a percentage computed by dividing the average number of persons listening to a particular station for at least five minutes during an average quarter hour in a given time period by the average number of such persons for all stations in the market area. Arbitron compiles ratings data for various demographic groups as well as for total persons age 12 and older. "Overall Station Ranking in Market" is the ranking of the station among all radio stations in its market based on the station's AQH share according to the Winter 1997 Arbitron Survey.
(3) "Ranking in Primary Demographic Target" is the ranking of the station among all radio stations in its market and is based on the station's AQH
share in the primary demographic target according to the Winter 1997 Arbitron Survey.
(4) Station Audience Share is not significant and therefore not reflected on the Winter 1997 Arbitron Survey. The station simulcasts all programming from sister station WKKX-FM.
ADVERTISING SALES
Virtually all of the revenue of a radio station is derived from local, regional and national advertising. Advertising rates charged by a radio station are a function of the station's ability to attract audiences in the demographic groups which advertisers wish to reach, and the number of stations competing in the market area. A station's listenership is reflected in rating service surveys of the number of listeners tuned to the station and the time spent listening. The Company believes that its presence in the nation's three largest radio markets and its strong position in its targeted demographic groups in those markets make it attractive to national, regional and local advertisers.
The number of advertisements that can be broadcast without jeopardizing listening levels (and the resulting ratings) is limited, in part, by the format of a particular station and the local competitive environment. The Company strives to maximize revenue by constantly managing the number of commercials available and adjusting prices based upon demand by advertisers to reach the station's target demographic group.
The Company has led the industry in developing "vendor co-op" advertising revenue (i.e., revenue from a manufacturer or distributor which is used to promote its particular goods together with local retail outlets for those goods). Although this source of advertising revenue is common in the newspaper and magazine industry, the Company was among the first radio broadcasters to recognize, and take advantage of, the potential of vendor co-op advertising. The Company's Revenue Development Systems division has established a network of radio stations which share information about sources of vendor co-op revenue. In addition, each of the Company stations has a salesperson devoted exclusively to the development of cooperative advertising.
In addition to the sale of advertising time for cash, radio stations typically exchange advertising time for goods or services which can be used by the station in its business operations, including television and billboard advertising and such items as travel and entertainment services. The Company generally confines the use of such "trade" transactions to promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade.
Local and most regional sales are made by a station's sales staff. National sales are made by firms specializing in such sales which are compensated on a commission-only basis. The majority of national and local advertising contracts are short-term, generally running for only a few weeks.
COMMUNITY INVOLVEMENT
The Company believes that to be successful in radio broadcasting, its stations must be integrally involved in the communities they serve. To that end, each of the Company's stations participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable organizations that have been the beneficiaries of the Company's marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, The March of Dimes, American Cancer Society, Riley Children's Hospital and research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse.
In addition to its planned activities, the Company's stations take leadership roles in community responses to natural disasters.
INDUSTRY INVOLVEMENT
The Company has taken an active leadership role in a wide range of radio industry organizations. The Company's senior managers have served
in various capacities with radio industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee and the Arbitron Advisory Council and as founding members of the Radio Operators Caucus. In addition, managers of the Company have been voted Radio President of the Year and General Manager of the Year, and at various times the Company was voted Most Respected Broadcaster in polls of radio industry chief executive officers and managers.
COMPETITION
The Company's radio broadcasting stations compete with the other broadcasting stations in their respective market areas, as well as with other advertising media such as newspapers, television, magazines, outdoor advertising, transit advertising and direct mail marketing. Competition within the radio broadcasting industry occurs primarily in individual market areas, so that a station in one market does not generally compete with stations in other market areas. In each of its markets, the Company's stations face competition from other stations with substantial financial resources, including stations targeting the same demographic groups. In addition to management experience, factors which are material to competitive position include the station's rank in its market, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. The Company attempts to improve its competitive position with promotional campaigns aimed at the demographic groups targeted by its stations, and through sales efforts designed to attract advertisers that have done little or no radio advertising by emphasizing the effectiveness of radio advertising in increasing the advertisers' revenues. Recent changes in the policies and rules of the Federal Communications Commission (the "FCC") permit increased joint ownership and joint operation of local radio stations. Those stations taking advantage of these joint arrangements may in certain circumstances have lower operating costs and may be able to offer advertisers more attractive rates and services. Although the Company believes that each of its stations can compete effectively in its market, there can be no assurance that any of the Company's stations will be able to maintain or increase its current audience ratings or advertising revenue market share.
Although the radio broadcasting industry is highly competitive, some barriers to entry exist. The operation of a radio broadcasting station requires a license from the FCC, and the number of radio stations that can operate in a given market is limited by the availability of the FM and AM radio frequencies that the FCC will license in that market.
The radio broadcasting industry historically has grown in terms of total revenues despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes and compact discs. The Company believes that radio's portability makes it less vulnerable than other media to competition from new methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio broadcasting industry.
PUBLISHING OPERATIONS
The Company publishes two regional magazines which were acquired in 1988 and 1993.
Indianapolis Monthly. The Company has published Indianapolis Monthly magazine since 1988. Indianapolis Monthly covers matters of interest in the Indianapolis area and currently has a paid monthly circulation of approximately 45,000. Over the last few years the performance of the magazine has steadily improved despite a nationwide downturn in the city and regional magazine business largely attributable to unfavorable economic conditions. Competition for Indianapolis Monthly comes from other local publications, although Indianapolis Monthly is now the only general interest magazine focusing on the Indianapolis area.
Atlanta. The Company acquired the assets of and began publishing Atlanta magazine on August 1, 1993. Atlanta covers matters of interest in the Atlanta area and currently has a paid monthly circulation of approximately 65,000. The magazine was unprofitable for several years
before it was acquired by the Company for a nominal investment. Certain initiatives, including decreasing the number of employees at the magazine and changing the sales focus of the magazine from national advertising to local advertising, have contributed to improving profitability.
EMPLOYEES
As of February 28, 1997 the Company had approximately 379 full-time employees and approximately 177 part-time employees. The Company's on-air employees at its New York and Chicago radio stations, totaling approximately 53 persons, are covered by a union contract with the American Federation of Television and Radio Artists. The Company considers relations with its employees to be excellent.
FEDERAL REGULATION
Radio broadcasting is subject to the jurisdiction of the FCC under The Communications Act of 1934, as amended (the "Communications Act"). Radio broadcasting is prohibited except in accordance with a license issued by the FCC upon a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate radio licenses in such manner as will provide a fair, efficient and equitable distribution of service throughout the United States. The FCC determines the location of stations, regulates the apparatus used by stations, and regulates numerous other areas of radio broadcasting pursuant to rules, regulations and policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment of a broadcast license or the transfer of control of a corporation holding a license without the prior approval of the FCC. The Telecommunications Act of 1996 (the "Telecom Act") amended the Communications Act in a number of important respects. Other legislation has been introduced from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new regulations or amendments to its existing regulations. The Company cannot predict whether any such legislation will be enacted or new or amended FCC regulations adopted or what their effect would be on the Company.
License Renewal. Radio station licenses are currently issued for maximum terms of seven years and are renewable for maximum terms of seven years. The Telecom Act authorizes maximum license terms of eight years, and the FCC has initiated a proceeding looking toward implementing that change. The Company's licenses currently have the following expiration dates, until renewed:
WENS-FM (Indianapolis) August 1, 1996* WKQX-FM (Chicago) December 1, 2003 KSHE-FM (St. Louis) February 1, 2004 KPWR-FM (Los Angeles) December 1, 1997 WQHT-FM (New York) June 1, 1998 WIBC-AM (Indianapolis) August 1, 1996* WNAP-FM (Indianapolis) August 1, 1996* WRKS-FM (New York) June 1, 1998 WKBQ-AM (St. Louis) February 1, 2004 WKKX-FM (St. Louis) December 1, 2003 WALC-FM (St. Louis) December 1, 2003
*License renewal applications pending at the FCC
Under the Telecom Act, at the time an application is filed for renewal for a radio station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the grant of denial of the application. A competing application for authority to operate a station and replace the incumbent licensee may not be filed against a renewal application and considered by the FCC in deciding whether to grant a renewal application. The statute modified the license renewal process to provide for the grant of a renewal application upon a finding by the FCC that the licensee (i) has served the public interest, convenience and necessity; (ii) has committed no serious violations of the Communications Act or the FCC's rules; and (iii) has committed no other violations of the Communications Act or the FCC's rules which would constitute a pattern of abuse. If the FCC cannot make such a finding, it may deny a renewal application, and only then may the FCC accept
other applications to operate the station of the former licensee. In a vast majority of cases, broadcast licenses are renewed by the FCC even when petitions to deny applications are filed against broadcast license renewal applications.
On July 1, 1996, the National Rainbow Coalition and Operation Push filed with the FCC a petition to deny renewal of the licenses of WENS-FM, WNAP-FM and WIBC-AM for alleged deficiencies in minority hiring practices. The Company opposed the petition. The Company and the petitioners subsequently entered into an agreement as a result of which the petition was withdrawn. However, under FCC policy, notwithstanding the withdrawal of the petition the allegations contained therein will be considered by the FCC. The FCC has not yet issued a ruling on the allegations.
Ownership Matters. Under the Telecom Act, the number of radio stations that may be owned by one entity in a given radio market is dependent on the number of commercial stations in that market: if the market has 45 or more stations, one entity may own not more than eight stations, of which not more than five may be in one service (AM or FM); if the market has between 33 and 44 stations, one entity may own not more than seven stations, of which not more than four may be in one service; if the market has between 15 and 29 stations, a single entity may own not more than six stations, of which not more than four may be in one service; and if the market has fourteen or fewer stations, one entity may own not more than five stations, of which not more than three may be in one service, except that in such a market one entity may not own more than fifty percent of the stations in the market. Each of the five markets in which the Company's radio stations are located has at least 15 commercial radio stations. The Telecom Act eliminated restrictions on the number of radio stations that may be owned by one entity nationwide. One entity may not own a radio station together with a television station or daily newspaper in the same market, although common ownership of a radio station and a television station in the same market is permitted upon a finding by the FCC that such ownership is in the public interest. The FCC has established a liberal waiver policy to permit common ownership of a radio station and a television station in any of the nation's 25 largest markets; the Telecom Act directs the FCC to extend that policy to the 50 largest markets.
In the case of all of these ownership rules, the FCC requires the attribution of broadcast licenses between a broadcasting company and certain of its stockholders, officers or directors so that there would be a violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than the permitted number of stations or a prohibited combination of media outlets in the same market. Under FCC rules, with certain exceptions, attribution of broadcast licenses occurs where any five percent voting stockholder or officer or director of a broadcasting company directly or indirectly owns, operates, controls or has a five percent voting interest in or is an officer or director of any other broadcasting company. Attribution also occurs in the case of general partnership interests and in the case of limited partnership interests where a limited partner is "materially involved" in the media-related activities of the partnership. Passive investments of less than ten percent of the voting interest in a broadcasting company held by certain categories of financial institutions are generally not cognizable for purposes of the foregoing rules of attribution. In cases involving competing media in the same market, however, FCC policy in certain instances prohibits common ownership interests under its "cross-interest" policy even where they are non-voting interests or fall below the five percent and ten percent "benchmarks" discussed above, although the FCC has initiated proceedings to inquire whether this policy should be liberalized or eliminated. The Company's Amended and Restated Articles of Incorporation and By-Laws authorize the Board of Directors to prohibit any ownership, voting or transfer of its capital stock which would cause the Company to violate the Communications Act or FCC regulations.
For purposes of the local radio ownership rules described above, a station is considered to have an attributable interest in another station in the same market if the first station provides the programming for more than 15% of the broadcast time, on a weekly basis, of the second station. As a result, such programming arrangements may not be entered into by station combinations that could not be commonly owned under FCC rules.
In cases where one person or entity (such as Jeffrey H. Smulyan in the case of the Company) holds more than 50% of the combined voting power of the common stock of a broadcasting company, a minority shareholder of the company generally would not acquire an "attributable" interest in the company. However, any attributable interest by any such shareholder in another broadcast station or daily newspaper in a market where such company owns, or seeks to acquire, a station would still be subject to
review by the FCC under its "cross-interest" policy, and could result in the company's being unable to obtain from the FCC one or more authorizations needed to conduct its radio station business or being unable to obtain FCC consents for future acquisitions. Further, in the event that a majority shareholder of a company (such as Mr. Smulyan in the case of the Company) were no longer to hold more than 50% of the combined voting power of the common stock of the company, the interests of minority shareholders which had theretofore been considered nonattributable could become attributable, with the result that any other media interests held by such shareholders would be combined with the media interests of such company for purposes of determining compliance with FCC ownership rules. In the case of the Company, Mr. Smulyan's level of voting control could decrease to or below 50% as a result of transfers of Common Stock pursuant to agreement or conversion of the Class B Common Stock into Class A Common Stock. In the event of any noncompliance, steps required to achieve compliance could include divestitures by either the shareholder or the affected company. Further, other media interests of shareholders having or acquiring an attributable interest in such a company could result in the company being unable to obtain from the FCC one or more authorizations needed to conduct its radio station business or being unable to obtain FCC consents for future acquisitions. Conversely, a company's media interests could operate to restrict other media investments by shareholders having or acquiring an interest in the company.
Under the Communications Act, no FCC license may be held by a corporation of which more than one-fifth of its capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country (collectively, "Aliens"). Furthermore, the Communications Act provides that no FCC license may be granted to any corporation directly or indirectly controlled by any other corporation of which more than one-fourth of its capital stock is owned of record or voted by Aliens if the FCC finds the public interest will be served by the refusal of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on alien ownership apply in modified form to other forms of business organization, including partnerships. The Company's Amended and Restated Articles of Incorporation and Code of By-Laws authorize the Board of Directors to prohibit such ownership, voting or transfer of its capital stock as would cause the Company to violate the Communications Act or FCC regulations.
Programming and Operation. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Broadcast of obscene or indecent material is regulated by the FCC as well as by state and federal law. Complaints from listeners concerning a station's programming often will be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed at any time. Stations also must follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identifications, the advertisement of contests and lotteries, and technical operations, including limits on radio frequency radiation. In addition, licensees must develop and implement affirmative action programs designed to promote equal employment opportunities, and must submit reports to the FCC with respect to these matters on an annual basis and in connection with a renewal application.
Failure to observe these or other rules and policies can result in the imposition of various sanctions, including monetary forfeitures, the grant of "short" (less than the full seven-year) renewal terms or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license.
Recent Developments and Proposed Changes. The Telecom Act authorizes local telephone companies to offer video and audio programming to their customers over their phone lines under certain circumstances.
The FCC has initiated a proceeding looking toward a broad review of its ownership attribution rules and its cross-interest policy. Possible changes include (i) raising the benchmarks for attributing ownership to both active and passive investors in a corporate licensee, (ii) restricting the availability of the attribution exemption for minority shareholders in corporations having a "single majority shareholder," (iii) limiting the attribution exemption for holders of nonvoting stock who possess other rights giving them potential influence over a licensee, and (iv) extension of the cross-interest policy to situations where a creditor or other holder of a nonattributable interest holds, through contractual or other relationships, the ability to influence the operations of a licensee.
The Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of the Company's radio broadcast stations, result in the loss of audience share and advertising revenues for the Company's radio broadcast stations and affect the ability of the Company to acquire additional radio broadcast stations or finance such acquisitions. Such matters include: proposals to impose spectrum use or other fees on FCC licensees; the FCC's equal employment opportunity rules and other matters relating to minority and female involvement in the broadcasting industry; proposals to change rules relating to political broadcasting, including the reinstatement of the so-called "fairness doctrine"; technical and frequency allocation matters; AM stereo broadcasting; proposals to permit expanded use of FM translator stations; proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages on radio; changes in the FCC's cross-interest, multiple ownership and cross-ownership policies; proposals to reimpose holding periods for licenses; changes to broadcast technical requirements; proposals to tighten safety guidelines relating to radio frequency radiation exposure; proposals to limit the tax deductibility of advertising expenses by advertisers; and proposals to auction the right to use the radio broadcast spectrum to the highest bidder, instead of granting FCC licenses and subsequent license renewals without such bidding.
In March of 1997, the FCC adopted rules authorizing delivery of digital audio radio service ("DARS") on a nationwide basis by satellite; at the same time, the FCC put out for comment a proposal to permit satellite-delivered DARS to be supplemented by terrestrial transmitters designed to fill "gaps" in satellite coverage. The FCC has also awarded two nationwide licenses for satellite-delivered DARS. It is anticipated that DARS, when implemented, will be capable of delivering multiple channels of compact-disc quality sound which will be receivable through the use special receiving antennas. There is ongoing research exploring the feasiblility of additional delivery of DARS on a local basis by terrestrial stations ulilizing either existing broadcasting frequencies or other frequencies.
The Company cannot predict whether any proposed changes will be adopted nor can it predict what other matters might be considered in the future, nor can it judge in advance what impact, if any, the implementation of any of these proposals or changes might have on its business.
The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations. Reference is made to the Communications Act, FCC regulations and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of broadcast stations.
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth information with respect to the Company's offices and studios and its broadcast tower locations. Management believes that the Company's properties are in good condition and are suitable for the Company's operations.
(1) The lease provides for two renewal options of five years each following the expiration date.
(2) The lease provides for one renewal option of five years following the expiration date.
(3) The lease provides for one renewal option of ten years following the expiration date. The Company also owns a tower site which it placed in service in 1984 and currently uses as a back-up facility and on which it leases space to other broadcasters.
(4) In August 1996, the Company announced its plan to build and own an office building in downtown Indianapolis for its corporate office and its Indianapolis operations. The project is expected to be completed in 1999.
(5) The lease expired in 1996 and the station is currently negotiating a new long term lease at the same location. Payments are on a month to month basis.
(6) The magazine signed a new lease at a different location and will be moving at the end of the current lease. The new lease expires in July 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in litigation incidental to the conduct of its business, but the Company is not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to shareholders during the Company's fourth quarter.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Class A Common Stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol EMMS.
The following table sets forth the high and low sale prices of the Class A Common Stock for the periods indicated. No dividends were paid during any such periods.
At May 1, 1997, there were approximately 194 record holders of the Class A Common Stock, and there was one holder of the Company's Class B Common Stock.
The Company intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its common stock in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
GENERAL
The performance of a radio group, such as Emmis, is customarily measured by the ability of its stations to generate Broadcast Cash Flow. Although Broadcast Cash Flow is not a measure of performance calculated in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not as a substitute for the Company's results of operations presented on the basis of generally accepted accounting principles, the Company believes that Broadcast Cash Flow is useful because it is generally recognized by the radio broadcasting industry as a measure of performance and is used by analysts who report on the performance of broadcasting companies. The main components of Broadcast Cash Flow are advertising revenues net of agency commissions and operating expenses. The primary source of advertising revenues is the sale of advertising time to local and national advertisers. The most significant operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs.
The Company's revenues are affected primarily by the advertising rates its radio stations charge. These rates are in large part based on the stations' ability to attract audiences in demographic groups targeted by their advertisers, as measured principally on a quarterly basis by Arbitron Radio Market Reports. Because audience ratings in a station's local market are critical to the station's financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain listeners in each station's chosen demographic target group. In addition to the sale of advertising time for cash, radio stations typically exchange advertising time for goods
or services which can be used by the station in its business operations. The Company generally confines the use of such trade transactions to promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade.
SIGNIFICANT EVENTS
On June 9, 1994, the Company completed its acquisition of substantially all of the assets of radio stations WIBC-AM and WNAP-FM (formerly WKLR-FM) for approximately $26.6 million. The acquisition was financed through additional borrowings under the Company's existing Credit Facility.
On July 7, 1994, the Company invested approximately $2.5 million for a 24.5% interest in TalkRadio UK Limited (TRUK). Subsequently, the Company invested an additional $1.0 million to support the operations of TRUK. In conjunction with this investment, the Company organized Emmis International Corporation as a wholly owned subsidiary for the purpose of identifying, investigating and developing international broadcast investment or other international business opportunities. Emmis reported losses from the operations of TRUK since inception of approximately $3.5 million ($3.1 million for the year ended February 29, 1996). On November 7, 1995, the Company sold its 24.5% interest in TRUK for approximately $3.0 million and recorded a gain on sale of approximately $2.7 million.
On December 1, 1994, the Company acquired all of the outstanding capital stock and working capital of Summit Broadcasting Holding Company (including $4.5 million of net working capital) for approximately $72.5 million in cash. Summit Broadcasting Holding Company owns all the outstanding capital stock of Summit-New York Broadcasting Corporation which, in turn, owns and operates WRKS-FM in New York City (WRKS-FM together with WIBC-AM and WNAP-FM, are hereafter referred to as the Acquired Stations). The Company amended its Credit Facility to add an $80 million revolver/term loan facility which was utilized to finance this purchase.
In June 1996, the Company sold 60% of its ownership interest in Duncan's American Radio, Inc. for $0.5 million and recorded a gain of $0.2 million. The Company also paid $0.3 million to buy out a management contract.
On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations of WALC-FM (formerly WKBQ-FM), WKBQ-AM and WKKX-FM in St. Louis from Zimco, Inc. for approximately $43.1 million in cash, plus an agreement to broadcast approximately $1.0 million in trade spots, for Zimco, Inc., over a period of several years. In accordance with the asset purchase agreement, Emmis made an escrow payment of $6.0 million and paid $600,000 in non-refundable prepayments. The purchase price was financed through additional borrowings under the Company's existing Credit Facility.
RESULTS OF OPERATION
YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 29, 1996. Net broadcasting revenues for the year ended February 28, 1997 were $103.3 million compared to $99.8 million for the same period of the prior year, an increase of $3.5 million or 3.5%. This increase is due principally to the ability to realize higher advertising rates at the Company's broadcasting properties, resulting from higher ratings at certain broadcasting properties, as well as increases in general radio spending in the markets in which the Company operates.
Total broadcasting operating expenses for the year ended February 28, 1997, were $52.8 million compared to $53.9 million for the same period of the prior year, a decrease of $1.1 million or 2.1%. This decrease is attributable to a decrease in rent expense as a result of the recognition of a loss associated with property no longer used for operating purposes in the prior year, and a decrease in compensation as a result of a reallocation of management personnel to corporate operations, which was partially offset by operating expenses incurred under the time brokerage agreement related to the St. Louis acquisition.
Publication and other revenues net of operating expenses for the year ended February 28, 1997, were $0.8 million compared to $0.9 million for same period of the prior year, a decrease of $0.1 million or 6.9%. This decrease is principally a result of an increase in operating expenses at Atlanta magazine, which was not fully offset by the total increase in publishing revenue of $0.8 million.
Corporate expenses for the year ended February 28, 1997, were $5.9 million compared to $4.4 million for the same period of the prior year, an increase of $1.5 million or 34.2%. This increase is primarily due to an increase in the number of management personnel allocated to the corporate division as well as an overall increase in compensation.
International business development expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs. Such expenses were $1.2 million for the fiscal year ended February 28, 1997, compared to $1.3 million for the same period of the prior year, a decrease of $0.1 million or 7.9%. This decrease is due to decreased need for outside consulting services.
Depreciation and amortization expense for the year ended February 28, 1997, was $5.5 million compared to $5.7 million for the same period of the prior year, a decrease of $0.2 million or 3.5%. This decrease is due to fully depreciated assets at the Company's broadcasting properties.
Noncash compensation expense for year ended February 28, 1997, was $3.5 million compared to $3.7 million for the same period of the prior year, a decrease of $0.2 million or 5.5%. Noncash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. This decrease is due primarily to the decrease in stock price from February 29, 1996 to February 28, 1997.
Interest expense for the fiscal year ended February 28, 1997, was $9.6 million compared to $13.5 million for the same period of the prior year, a decrease of $3.9 million or 28.9%. This decrease reflects lower outstanding debt due to voluntary repayments made under the Company's Credit Facility and lower effective interest rates.
Accounts receivable at February 28, 1997, were $20.8 million compared to $19.2 million at February 29, 1996, an increase of $1.6 million or 8.7%. This increase in accounts receivable is due primarily to increases in net broadcasting revenues at the Company's broadcasting properties during the fourth quarter as compared to the same period a year ago.
YEAR ENDED FEBRUARY 29, 1996 COMPARED TO YEAR ENDED FEBRUARY 28, 1995. Net broadcasting revenues for the year ended February 29, 1996, were $99.8 million compared to $66.8 million for the same period of the prior year, an increase of $33.0 million or 49.4%. This increase is due to increases in net broadcasting revenues at the Company's broadcasting properties as well as the Indianapolis and New York acquisitions.
Total broadcasting operating expenses for the year ended February 29, 1996, were $53.9 million compared to $38.8 million for the same period of the prior year, an increase of $15.1 million or 39.1%. This increase is principally due to the addition of the WNAP-FM, WIBC-AM and WRKS-FM.
Publication and other revenues net of operating expenses for the year ended February 29, 1996, were $0.9 million compared to $0.6 million for same period of the prior year, an increase of $0.3 million or 51.1%. This increase is principally a result of an increase in revenue net of operating expenses from Atlanta magazine and Indianapolis Monthly magazine.
Corporate expenses for the year ended February 29, 1996, were $4.4 million compared to $3.7 million for the same period of the prior year, an increase of $0.7 million or 19.4%. This increase is primarily due to increased compensation, increased professional fees and additional costs associated with the legal requirements of and transacting business as a public company.
International business development expenses reflect costs associated with Emmis International Corporation. Such expenses were $1.3 million for the fiscal year ended February 29, 1996, compared to $0.3 million for the same period of the prior year, an increase of $1.0 million or 303.8%. This increase is due to the formation of Emmis International Corporation during the quarter ended February 28, 1995.
Depreciation and amortization expense for the year ended February 29, 1996, was $5.7 million compared to $3.8 million for the same period of the prior year, an increase of $1.9 million or 48.3%. This increase is due to the addition of the WNAP-FM, WIBC-AM, and WRKS-FM.
Noncash compensation expense for year ended February 29, 1996, was $3.7 million compared to $0.6 million for the same period of the prior year, an increase of $3.1 million or 511.2%. Noncash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. This increase is due primarily to an increase in compensation expense related to options granted and restricted common stock issued to employees of the Company and a larger contribution to the Profit Sharing Plan.
Interest expense for the fiscal year ended February 29, 1996, was $13.5 million compared to $7.8 million for the same period of the prior year, an increase of $5.7 million or 72.5%. This increase is principally due to the Indianapolis and New York acquisitions and higher interest rates than experienced in the prior year under the Company's Credit Facility.
Accounts receivable at February 29, 1996, were $19.2 million compared to $16.8 million at February 28, 1995, an increase of $2.4 million or 13.9%. This increase in accounts receivable is due primarily to increases in net broadcasting revenues at stations owned and operated for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
On December 20, 1993, the Company entered into a $100 million Credit Facility comprised of a $40 million revolver/term loan and a $60 million reducing revolving Credit Facility. During the fiscal year ended February 28, 1995 this Credit Facility was amended to add an $80 million revolver/term loan facility, a portion of the proceeds of which were used to acquire the stock of the corporation which owns and operates WRKS-FM in New York City. In connection with this amendment, the $40 million revolver/term loan was converted to a term loan and the quarterly commitment reduction schedule of the $60 million reducing revolving Credit Facility was revised. In the fiscal year ended February 28, 1997, the Company made voluntary payments of $9.0 million under its Credit Facility. As of February 28, 1997, the Company had $47.8 million available for borrowing under the Credit Facility. A full discussion of the Company's long-term debt is contained in Note 5 to the Company's audited consolidated financial statements. On March 2, 1994, Emmis received approximately $40.4 million of proceeds from its initial public offering of 2.8 million shares of Class A Common Stock. The Company used approximately $9.2 million of the proceeds to redeem its Series B Preferred Stock and associated detachable warrants. The remaining proceeds were used principally to reduce amounts outstanding under the Credit Facility. A complete discussion of the Company's initial public offering and related transactions is contained in Note 2 to the audited consolidated financial statements contained herein.
In the fiscal years ended February 28, 1997, February 29, 1996 and February 28, 1995, the Company had capital expenditures of $7.6 million, $1.4 million and $1.1 million, respectively. The Company's capital expenditures consist primarily of broadcasting equipment purchases and tower upgrades; however, for the fiscal year ending February 28, 1997, capital expenditures consisted primarily of leasehold improvements to office and studio facilities in connection with the move of its New York broadcast properties to a new location.
The Company expects that cash flow from operating activities will be sufficient to fund all debt service, working capital and capital expenditure requirements. As part of its business strategy, the Company frequently evaluates potential acquisitions of radio stations. In
connection with future acquisition opportunities, the Company may incur additional debt or issue additional equity or debt securities depending on market conditions and other factors.
In August 1996, Emmis announced its plan to build an office building in downtown Indianapolis for its corporate office and its Indianapolis operations. The project is expected to be completed in 1999 for an estimated cost of $20 million, net of reimbursable construction costs of $2 million. Certain factors such as additional studio costs related to digital technology and historical landmark requirements may cause the cost of this project to increase. The Company plans to fund this project through additional borrowings under the Credit Facility.
INFLATION
The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of EMMIS BROADCASTING CORPORATION (an Indiana corporation) and Subsidiaries as of February 28, 1997 and February 29, 1996, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the three years in the period ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Emmis Broadcasting Corporation and Subsidiaries as of February 28, 1997 and February 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
Indianapolis, Indiana, April 2, 1997.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, 1997
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Emmis Broadcasting Corporation owns and operates FM radio stations in Los Angeles, New York City (2 stations), Chicago, St. Louis and Indianapolis (2 stations) and an AM radio station in Indianapolis, and on March 31, 1997 acquired three additional radio stations in St. Louis (Note 6). Emmis Broadcasting Corporation also publishes Indianapolis Monthly magazine and Atlanta magazine, and engages in certain businesses ancillary to its radio businesses, such as advertising, program consulting and broadcast tower leasing.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Emmis Broadcasting Corporation and its wholly owned Subsidiaries. Unless the content otherwise requires, references to Emmis or the Company in these financial statements mean Emmis Broadcasting Corporation and its Subsidiaries. All significant intercompany balances and transactions have been eliminated.
C. REVENUE RECOGNITION
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of issue.
D. PUBLICATION AND OTHER REVENUE, NET OF OPERATING EXPENSES
Publication revenue of $8,037,000, $9,924,000 and $10,428,000 for the years ended February 1995, 1996 and 1997, respectively, is reflected net of operating expenses in the consolidated statements of operations. Other revenues of $828,000, $703,000 and $935,000 for the years ended February 1995, 1996 and 1997, respectively, are also reflected net of operating expenses in the consolidated statements of operations.
E. INTERNATIONAL BUSINESS DEVELOPMENT EXPENSES
International business development expenses includes the cost of the Company's efforts to identify, investigate and develop international broadcast investments or other international business opportunities.
F. NONCASH COMPENSATION
Noncash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Pro forma disclosure of net income and earnings per share under SFAS No. 123 is presented in Note 8.
G. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are generally computed by the straight-line method over the estimated useful lives of the related assets which are 31.5 years for buildings, not more than 32 years for leasehold improvements, 5 to 7 years for broadcasting equipment and 7 years for furniture and fixtures. Maintenance, repairs and minor renewals are expensed; improvements are capitalized. On a continuing basis, the Company reviews the financial statement carrying value of property and equipment for impairment. Whenever events or changes or circumstances indicate that the carrying value may not be recoverable, a write down of the asset would be recorded through a charge to operations.
H. INTANGIBLE ASSETS
Intangible assets are recorded at cost. FCC licenses, trademarks and the excess of cost over fair value of net assets of purchased businesses are being amortized using the straight-line method over 40 years. Other intangibles are amortized using the straight-line method over varying periods, not in excess of 10 years.
On a continuing basis, the Company reviews the financial statement carrying value of these assets for impairment. Specifically, this process includes a comparison of the carrying amounts of the operating units to their estimated fair values, an analysis of estimated future operating cash flows and an evaluation as to whether an operating unit might be sold in the near future. If this process were to result in the conclusion that the carrying value of an intangible asset would not be recovered, a writedown of the operating unit's assets would be recorded through a charge to operations.
I. INVESTMENTS
Emmis has a 50% ownership interest in a partnership in which the sole asset is land on which a transmission tower is located. The other owner has voting control of the partnership. This investment is reflected at cost of $5,113,000, which approximates the equity method of accounting.
In June 1996, the Company sold 60% of its ownership interest in Duncan's American Radio, Inc. for $0.5 million and recorded a gain of $0.2 million. The Company also paid $0.3 million to buy out a management contract. The Company's remaining 40% interest is accounted for under the equity method of accounting and is reflected in other assets in the consolidated balance sheet as of February 28, 1997. Equity in earnings of this unconsolidated affiliate from June 1996 through February 28, 1997, was not signifianct.
On July 7, 1994, the Company invested approximately $2.5 million for a 24.5% interest in TalkRadio UK Limited (TRUK). Subsequently, the Company invested an additional $1.0 million to support the operations of TRUK. This investment was accounted for utilizing the equity method of accounting. Emmis reported losses from the operations of TRUK since inception of approximately $3.5 million ($3.1 million for the year ended February 29, 1996) which is included in equity in loss of unconsolidated affiliate in the consolidated statements of operations. On November 7, 1995, Emmis sold its 24.5% interest in TRUK for approximately $3.0 million and recorded a gain on sale of approximately $2.7 million.
J. DEPOSITS AND OTHER ASSETS
Deposits and other assets includes amounts due from officers of $1,235,000 for February 28, 1997 and $1,205,000 at February 29, 1996. Officer loans bear interest at the Company's borrowing rate (6.625% at February 28, 1997).
K. DEFERRED REVENUE AND BARTER TRANSACTIONS
Deferred revenue includes deferred magazine subscription revenue and deferred barter revenue. Barter transactions are recorded at the estimated fair value of the product or service received. Broadcast revenue from barter transactions is recognized when commercials are broadcast. The appropriate expense or asset is recognized when merchandise or services are used or received.
L. INCOME TAXES
Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The liability method measures the expected tax impact of future taxable income or deductions resulting from differences in the tax and financial reporting bases of assets and liabilities reflected in the consolidated balance sheets and the expected tax impact of carryforwards for tax purposes.
M. FOREIGN CURRENCY TRANSLATION
The functional currency of TRUK is the pound sterling. The Company's investment in and advances to TRUK has been translated from the pound sterling to the U.S. dollar using current exchange rates in effect at the balance sheet date and for the Company's equity in the loss of TRUK using an average exchange rate for the period. The applicable gains or losses, net of deferred income taxes, resulting from the translation of the Company's investment in and advances to TRUK are shown as cumulative translation adjustments in shareholders' equity (deficit).
N. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed by dividing net income by the weighted average number of common shares outstanding during the year (11,208,862 shares for the year ended February 29, 1996 and 11,451,590 shares for the year ended February 28, 1997). Weighted average common shares outstanding assumes the exercise of stock options when the effect is dilutive.
Fully diluted earnings per common share assumes additional dilution related to stock options due to the use of the market price of common stock at the end of the year, when higher than the average price for the year. The weighted average common shares assuming full dilution are 11,305,553 shares for the year ended February 29, 1996 and 11,451,590 shares for the year ended February 28, 1997.
O. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, Emmis considers time deposits, money market fund shares, and all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
P. ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Q. ACCOUNTING PRONOUNCEMENTS
In February 1997 Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", was issued. This new statement supersedes APB Opinion No.15, "Earnings Per Share", and supersedes or amends other related accounting pronouncements. SFAS No. 128 must be adopted by the Company in the fourth quarter of fiscal 1998. All prior period earnings per share (EPS) data will be restated when the new statement is adopted. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures such as the Company's. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Pro forma EPS, assuming the Company had adopted SFAS No. 128 as of March 1, 1994 is as follows:
2. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
Concurrent with the closing on March 1, 1994 of the initial public offering of its Class A Common Stock discussed below, Emmis amended its Articles of Incorporation to create two new separate classes of common stock, Class A Common Stock and Class B Common Stock, and authorized 34,000,000 shares of Class A Common Stock, par value $.01 per share, and 6,000,000 shares of Class B Common Stock, par value $.01 per share. The rights of these two classes are essentially identical except that each share of Class B Common Stock has 10 votes in respect to substantially all matters. All current shares of common stock were converted into shares of Class A Common Stock with the exception of those shares owned by the principal shareholder (Jeffrey H. Smulyan), which were converted into shares of Class B Common Stock. All shares of Class B Common Stock convert to Class A Common Stock upon sale or other transfer to a party unaffiliated with the principal shareholder. The financial statements presented reflect the establishment of the two classes of stock.
Also, on March 1, 1994, Emmis converted all outstanding shares of its Series A Preferred Stock plus accrued dividends into 765,963 shares of Class A Common Stock.
On March 2, 1994, Emmis received approximately $40.4 million of proceeds (net of $3.0 million of underwriters' fees) from its initial public offering of 2,800,000 shares of Class A Common Stock. Emmis utilized approximately $9.2 million of the proceeds to redeem the Series B Preferred Stock, which had a carrying value of $4.7 million, and the associated detachable warrants, which had a carrying value of $5.8 million, and recognized the $1.3 million difference as an increase to additional paid-in capital. Also on March 2, 1994, the Company utilized approximately $30.0 million of the proceeds to repay amounts outstanding under the Credit Facility discussed in Note 5.
3. PREFERRED STOCK
Emmis has authorized 10,000,000 shares of preferred stock which may be issued with such designations, preferences, limitations and relative rights as Emmis' Board of Directors may authorize. As of February 29, 1996 and February 28, 1997, no shares of preferred stock are issued and outstanding.
Emmis had authorized 100 shares of nonvoting Series A Convertible Exchangeable Redeemable Preferred Stock (the "Series A Preferred Stock"). On October 7, 1991, Emmis issued 44.63 shares of Series A Preferred Stock, which were stated at the mandatory redemption value of $100,000 per share. Dividends, which were paid in shares of Series A Preferred Stock, were cumulative and accrued at an annual rate of 14.625% per share. As discussed in Note 2, on March 1, 1994 all shares outstanding of Series A Preferred Stock plus accrued dividends were converted into 765,963 shares of Class A Common Stock. Emmis had authorized 200 shares of nonvoting Series B Preferred Stock (the "Series B Preferred Stock"). On May 28, 1993, Emmis issued 100 shares of the Series B Preferred Stock. The Series B Preferred Stock was recorded at fair value which was $42,460 per share. The difference between the fair value of $42,460 per share at issuance and the mandatory redemption value of $100,000 per share was being accreted by periodic charges to accumulated deficit over the eight-year life of the Series B Preferred Stock issue. Dividends, which were paid in shares of Series B Preferred Stock, were cumulative and accrued at an annual rate of 4% per share. As discussed in Note 2, on March 2, 1994, Emmis exercised an option to repurchase the Series B Preferred Stock and associated detachable warrants (Note 4) for approximately $9.2 million.
4. WARRANTS
In connection with the issuance of the Series B Preferred Stock, Emmis issued detachable warrants to acquire 1,172,875 shares of common stock of Emmis. The warrants were exercisable at no additional cost to the holder. The expiration date of the warrants was May 28, 2001. As discussed in Notes 2 and 3, on March 2, 1994 Emmis repurchased these warrants.
5. LONG-TERM DEBT
On December 20, 1993, Emmis entered into a $100 million credit facility comprised of a $40 million revolver/term loan and a $60 million reducing revolving credit facility. During the year ended February 28, 1995, the Credit Facility was amended to add an $80 million revolver/term loan facility, the proceeds of which were used to acquire the stock of Summit Broadcasting Holding Company (Note 6). In connection with this amendment the $40 million revolver/term loan was converted to a term loan and the quarterly commitment reduction schedule of the $60 million reducing revolving credit facility was revised. Under the Credit Facility, long-term debt was comprised of the following at February 29, 1996 and February 28, 1997:
All outstanding amounts under the Credit Facility bear interest, at the option of Emmis, at a rate equal to LIBOR (5.375% at February 28, 1997) or an alternate base rate (as defined in the Credit Facility) plus a margin. The margin over LIBOR or the alternate base rate varies from time to time, depending upon Emmis' ratio of debt to cash flow as defined in the agreement. The interest rate on borrowings outstanding under the Credit Facility at February 28, 1997 was 6.625%. As required by the Credit Facility, Emmis has entered into interest rate cap agreements. The notional amounts of these agreements total $76 million. The agreements, which expire at various dates ranging from April 1997 to December 1997, establish various ceilings, ranging from 7% to 10%, on the one-month LIBOR interest rate. Effective April 1997, interest rate cap agreements with notional amounts of $33 million expired and were replaced with an agreement for a notional amount of $34 million. The interest rate cap agreement establishes a ceiling of 8% on the three-month LIBOR interest rate and expires April 2000. The cost of these agreements is being amortized over the lives of the agreements.
Amortization of the outstanding principal amount under the $40 million term loan is payable in quarterly installments beginning May 31, 1997 and ending November 30, 2001. The aggregate amount of the $60 million reducing revolving Credit Facility reduces in quarterly installments which began May 31, 1995 and ends May 31, 2001. Amortization of the outstanding principal amount under the $80 million revolver/term loan is payable in quarterly installments beginning May 31, 1998 and ending November 30, 2001. The respective annual amortization and reduction schedules as of February 28, 1997, assuming the entire $180 million Credit Facility was outstanding prior to the scheduled amortization payments are as follows:
Scheduled Amortization/Reduction of Credit Facility Availability (In Thousands)
In addition to scheduled amortization/reduction of Credit Facility availability, within 60 days after the end of each fiscal year, the term loan and revolver/term loan are permanently reduced on a pro rata basis by 50% of the Company's excess cash flow. Excess cash flow is generally defined as operating cash flow reduced by cash taxes, capital expenditures, required debt service, increases in working capital (net of cash or cash equivalents). Any such prepayment/ reduction is applied in inverse order of maturity to the scheduled amortization payments/reduction described above. The Credit Facility was amended to eliminate the excess cash flow payment/reduction for fiscal 1996 and 1997. The net proceeds of any sale of certain assets must also be used to permanently reduce borrowings under the Credit Facility. If the ratio of debt to cash flow (as defined in the Credit Facility) is less than 5.5 to 1, the Company will be permitted to reborrow the amount of the net proceeds within nine months solely for the purpose of funding an acquisition.
The Credit Facility contains various financial and operational covenants and other restrictions with which Emmis must comply, including, among others, limitations on capital expenditures, additional indebtedness, engaging in businesses other than radio broadcasting and publishing, paying cash dividends and redeeming or repurchasing capital stock of Emmis, as well as restrictions on the use of borrowings and requirements to maintain certain financial ratios. The Company was in compliance with these covenants as of February 29, 1996 and February 28, 1997. The Credit Facility also prohibits Emmis, under certain circumstances, from making acquisitions without the prior consent of the lenders and will provide that an event of default will occur if Jeffrey H. Smulyan ceases to maintain (i) a significant equity investment in Emmis (as specified in the Credit Facility), (ii) the ability to elect a majority of Emmis' directors or (iii) control of a majority of shareholder voting power. Substantially all of Emmis' assets, including the stock of Emmis' subsidiaries, are pledged to secure the Credit Facility.
6. ACQUISITIONS
On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations of WALC-FM (formerly WKBQ-FM), WKBQ-AM and WKKX-FM in St. Louis from Zimco, Inc. for approximately $43.1 million in cash, plus an agreement to broadcast approximately $1.0 million in trade spots, for Zimco, Inc., over a period of several years. In accordance with the asset purchase agreement, Emmis made an escrow payment of $6.0 million and paid $600,000 in non-refundable prepayments. These payments are reflected in deposits and other assets in the consolidated balance sheet as of February 28, 1997. The purchase price was financed through additional borrowings under the Company's existing Credit Facility. The acquisition will be accounted for as a purchase.
Concurrent with the signing of the asset purchase agreement, Emmis entered into a time brokerage agreement which permitted Emmis to operate the acquired stations effective December 1, 1997 through the date of closing. Operating results of these stations are reflected in the consolidated statements of operations for the period December 1, 1996 through February 28, 1997. During this period, net revenues related to the acquired stations were approximately $1 million and income before income taxes were not significant.
On December 1, 1994, Emmis acquired all of the outstanding capital stock of Summit Broadcasting Holding Company (which included working capital of $4.5 million) for approximately $72.5 million in cash. Summit Broadcasting Holding Company owns all the outstanding capital stock of Summit-New York Broadcasting Corporation. Summit-New York Broadcasting Corporation owns and operates radio station WRKS-FM in New York City. The Company's $80 million revolver/term loan facility was utilized to finance the acquisition. The acquisition was accounted for as a purchase and, accordingly, the results of WRKS-FM have been included in the consolidated statements of operations since the acquisition date. The operations of WRKS-FM are reflected in the pro forma condensed consolidated statements of operations presented in Note 7.
On June 13, 1994, the Company acquired the remaining 20% of Emmis Publishing Corporation previously not owned by the Company, by exchanging 45,624 shares of Emmis Class A common stock, valued at $12.75 per share, for 20 shares of Emmis Publishing Corporation common stock. This acquisition was accounted for as a purchase. The total purchase price of $581,700 was allocated to intangible assets.
On June 9, 1994, Emmis completed its acquisition of substantially all of the assets of radio stations WIBC-AM and WNAP-FM (formerly WKLR-FM) in Indianapolis from Horizon Broadcasting Corporation for approximately $26.6 million in cash. Emmis financed the acquisition through additional borrowings under its existing Credit Facility. The acquisition was accounted for as a purchase and, accordingly, the results of WIBC-AM and WNAP-FM have been included in the consolidated statements of operations since the acquisition date. The operations of WIBC-AM and WNAP-FM are reflected in the pro forma condensed consolidated statements of operations presented in Note 7.
7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Pro forma condensed consolidated statements of operations are presented below for the year ended February 28, 1995 assuming the acquisitions of WNAP-FM, WIBC-AM and WRKS-FM all had occurred on the first day of the year.
Pro forma depreciation of property and equipment and amortization expense related to the intangibles resulting from the allocation of the purchase price for the acquisitions referred to above and interest expense related to additional borrowings associated with the acquisitions have been included in the pro forma statement presented below.
The pro forma condensed consolidated statement of operations presented above does not purport to be indicative of the results that actually would have been obtained if the indicated transactions had been effective at the beginning of the year presented, and is not intended to be a projection of future results or trends.
8. EMPLOYEE BENEFIT PLANS
a. 1986 STOCK INCENTIVE PLAN AND 1992 NONQUALIFIED STOCK OPTION PLAN
These stock plans provide for incentive stock options, nonqualified stock options and stock appreciation rights equivalent to 1,112,500 shares of common stock. The options and stock appreciation rights are generally exercisable six months after the date of grant and expire not more than 10 years from the date the options or rights are granted. Stock appreciation rights provide for the issuance of stock or the payment of cash equal to the appreciation in market value of the allocated shares from the date of grant to the date of exercise. When rights are issued with options, exercise of either the option or the right results in the surrender of the other. As of February 29, 1996 and February 28, 1997, there were no stock appreciation rights outstanding nor were there any stock appreciation rights issued with options outstanding. Certain stock options awarded remain outstanding as of February 29, 1996 and February 28, 1997.
b. 1994 EQUITY INCENTIVE PLAN
Effective March 1, 1994, the shareholders of Emmis approved the 1994 Equity Incentive Plan (the Plan). Under the Plan, awards equivalent to 1,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights, performance units or limited stock appreciation rights. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 500,000 shares of Class B Common Stock are available for grant and issuance under the Plan. As of February 29, 1996 and February 28, 1997, the only awards granted under this Plan were for stock options and restricted shares of stock. Certain stock options awarded remain outstanding as of February 29, 1996 and February 28, 1997. The stock options under this Plan are generally exercisable one year after the date of grant and expire not more than 10 years from the date of grant. The exercise price of these options are at the fair market value of the stock on the grant date.
c. 1995 EQUITY INCENTIVE PLAN
Effective March 1, 1995, the shareholders of Emmis approved the 1995 Equity Incentive Plan (the Plan). Under the Plan, awards equivalent to 650,000 shares of common stock may be granted pursuant to employment agreements discussed in Note 9.
d. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Effective June 29, 1995, Emmis implemented a Non-Employee Director Stock Option Plan. Under this Plan, each non-employee director, as of January 24, 1995, was granted an option to acquire 5,000 shares of the Company's Class A Common Stock. Thereafter, upon election or appointment of any non-employee director or upon a continuing director becoming a non-employee director, such individual will also become eligible to receive a comparable option. In addition, an equivalent option will be automatically granted on an annual basis to each non-employee director. Under this Plan, awards equivalent to 125,000 shares of Class A Common Stock are available for grant and issuance.
e. PROFORMA IMPACT OF AND DISCLOSURES RELATED TO SFAS NO.123
Compensation expense reflected in noncash compensation in the consolidated statements of operations related to the plans summarized above was $50,000, $2,917,000 and $2,715,000 for the years ended February 1995, 1996, 1997. Had compensation expense related to these plans been determined consistent with SFAS No. 123 "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to March 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model utilizing the following weighted average assumptions:
During the years ended February 1995, 1996 and 1997 options were granted with an exercise price equal to or less than fair market value of the stock on the date of grant. A summary of the weighted average grant date fair value and exercise price of options granted during 1996 and 1997 is as follows:
During fiscal 1996 and 1997, 90,000 and 14,800 shares of nonvested stock were granted at a weighted average grant date fair value of $17.36 and $37.20, respectively, under employment agreements discussed in Note 9. No nonvested stock was granted during fiscal 1995.
The following information relates to options outstanding and exercisable at February 28, 1997:
In addition to the benefit plans noted above, Emmis has the following employee benefit plans:
f. PROFIT SHARING PLAN
In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with one year of service. Contributions to the plan are at the discretion of the Emmis Board of Directors. Contributions to the plan can be made in the form of newly issued Emmis common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions reflected in noncash compensation in the consolidated statements of operations were $550,000, $750,000 and $750,000 for the years ended February 1995, 1996 and 1997.
g. 401(k) RETIREMENT SAVINGS PLAN
Emmis sponsors a Section 401(k) retirement savings plan which covers substantially all nonunion employees age 18 years and older who have at least one year of service. Employees may make pre-tax contributions to the plan up to 10% of their compensation, not to exceed the annual limit prescribed by the Internal Revenue Service. Emmis may make discretionary matching contributions to the plan. Effective March 1, 1995, Emmis began to match 100% of employee contributions up to $1,000, 50% of the match to be in cash and 50% in the form of shares of the Company's Class A common stock. Beginning March 1, 1996, the Company's match limit increased to $2,000. Emmis' contributions to the plan totaled $58,000, $129,000 and $273,000 for the years ended February 1995, 1996 and 1997, respectively.
h. DEFINED CONTRIBUTION HEALTH AND RETIREMENT PLAN
Emmis contributes to a multi-employer defined contribution health and retirement plan for employees who are members of a labor union. Amounts charged to expense related to the multi-employer plan were approximately $169,000, $276,000 and $297,000 for the years ended February 1995, 1996 and 1997, respectively.
i. EMPLOYEE STOCK PURCHASE PLAN
Effective March 1, 1995, the Company implemented an employee stock purchase plan which permits employees to purchase, via payroll deduction, shares of the Company's Class A Common Stock, at fair market value, up to an amount not to exceed 10% of an employee's annual gross pay.
9. COMMITMENTS AND CONTINGENCIES
a. OPERATING LEASES
Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through March 2013. Some of the lease agreements contain renewal options and annual rental escalation clauses (generally tied to the Consumer Price Index or increases in the lessor's operating costs), as well as provisions for payment of utilities and maintenance costs.
Rent expense for the year ended February 1996 includes a loss recognized in connection with a remaining lease obligation related to leased property no longer used for operating purposes. During the year ended February 1997, the Company settled the aforementioned lease obligation and recorded a reduction to rent expense. The future minimum rental payments (exclusive of future escalation costs) required by noncancellable operating leases which have remaining terms in excess of one year as of February 28, 1997, are as follows:
Rent expense totaled $2,840,000, $4,437,000 and $3,025,000 for the years ended February 1995, 1996 and 1997, respectively.
b. BROADCAST AGREEMENTS
Emmis has entered into agreements to broadcast certain syndicated programs and sporting events. Future payments related to these broadcast rights are summarized as follows: Year ended February 1998 - $1,300,000; 1999 - $200,000. Expense related to these broadcast rights totaled $135,000, $1,260,000 and $1,383,000 for the years ended February 1995, 1996 and 1997.
c. LITIGATION
Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis.
d. EMPLOYMENT AGREEMENTS
Effective March 1, 1994, Emmis entered into an employment agreement with its Chief Executive Officer that continues through February 28, 1999 and provides for an annual base salary as specified in the agreement and an annual bonus. In addition, for each year Emmis meets specified financial targets, the Chief Executive Officer will be granted an option to acquire 100,000 shares of Class B Common Stock. The options will have a five-year term and an exercise price of $15.50 per share. The Chief Executive Officer was granted an option to acquire 100,000 shares of Class B Common Stock in accordance with the terms of this agreement for each of the years ended February 1995, 1996 and 1997. Upon the termination or disability of the Chief Executive Officer, specified levels of compensation may continue for five years from the date of termination or disability. Upon the death of the Chief Executive Officer, lump sum payments are payable to his estate.
Effective March 1, 1995, Emmis entered into employment agreements with two other executive officers of the Company that continue through February 28, 1998 and provide for an annual base salary and certain bonuses as specified in the agreements. Subject to certain conditions, each executive officer will receive 12,000 shares of the Company's Class A Common Stock for each year of the employment agreements. The shares vest upon completion of the agreements. In addition, subject to certain conditions, each executive officer will be granted an option to acquire 25,000 shares of Class A Common Stock during each year of the employment agreements. The options become exercisable at the end of the term of the employment agreements and have an exercise price of $15.50 per share.
Effective March 1, 1995 and 1996, Emmis entered into employment agreements with two additional executives of the Company that continue through February 28, 1999 and provide for an annual base salary and certain other bonuses as specified in the agreements. Subject to certain conditions, the executives will receive, in total, 27,000 shares of the Company's Class A Common Stock. Of the total shares to be received, 2,000 were awarded as of February 28, 1997 with the remaining 25,000 to be awarded upon completion of the term of the agreements. In addition, subject to certain conditions, during the term of the agreements, the executives will be granted options to acquire shares of Class A Common Stock, with an exercise price equal to the fair market value at the date of grant. Each option becomes exercisable one year from the date of grant. Up to 89,806 options may be granted over the term of the agreements. Through February 1997, 41,806 options have been granted under the agreements.
Effective March 1, 1995, Emmis entered into employment agreements with certain station managers that continue through February 28, 1997 and provide for an annual base salary and certain bonuses as specified in the agreements. Subject to certain conditions, each station manager will receive a prescribed number of shares, not to exceed 1,000 shares, of the Company's Class A Common Stock during each year of the employment agreements. Through February 28, 1997, 5,800 shares have been granted under these agreements.
e. CONSTRUCTION OF OFFICE BUILDING
In August 1996, Emmis announced its plan to build an office building in downtown Indianapolis for its corporate office and its Indianapolis operations. The project is expected to be completed in 1999 for an estimated cost of $20 million, net of reimbursable construction costs of $2 million.
10. INCOME TAXES
The provision for income taxes for the years ended February 1995, 1996 and 1997, consisted of the following:
The provision for income taxes for the years ended February 1995, 1996 and 1997, differs from that computed at the Federal statutory corporate tax rate as follows:
The components of deferred tax assets and deferred tax liabilities at February 29, 1996 and February 28, 1997, are as follows:
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. A valuation allowance has been provided for 100% of the capital loss carryforwards available as of February 29, 1996 and February 28, 1997, since these loss carryforwards can only be utilized to offset future capital gains with expiration of approximately $162,000 in 1998, $2,475,000 in 1999, $292,000 in 2001, and $279,000 in 2002.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments of Emmis are estimated below based on the methods and assumptions discussed therein.
a. Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable
The carrying amounts approximate fair value because of the short maturity of these instruments.
b. Long-Term Debt
Based upon borrowing rates currently available to the Company for debt with similar terms and the same remaining maturities, the fair value of long-term debt approximated the carrying value at February 28, 1997.
c. Interest Rate Cap Agreements
The unamortized cost of interest rate cap agreements included in the February 28, 1997 consolidated balance sheet totals $111,000. The fair value of interest rate cap agreements is nominal based on quotes obtained from brokers.
12. RELATED PARTY TRANSACTIONS
Two officers of Emmis are partners in a law firm which provides legal services to Emmis. Legal fees billed by this law firm were approximately $706,000, $188,000 and $296,000 for the years ended February 1995, 1996 and 1997, respectively.
Affiliates of Morgan Stanley Group, Inc. are shareholders of Emmis. No fees were paid to Morgan Stanley Group, Inc. and affiliates for the years ended February 1995, 1996 and 1997; however, an affiliate of Morgan Stanley Group, Inc. served as an underwriter in connection with the initial public offering addressed in Note 2.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
14. SUBSEQUENT EVENT (UNAUDITED) - ACQUISITION
On May 15, 1997, the Company entered into an agreement involving radio station WQCD-FM in New York City whereby the current owner of the station has the option to require the Company to purchase the station at any time through May 2000. The current owner may extend the option for an additional one-year period. The Company has an option to acquire the radio station during the two month period subsequent to the expiration of the current owner's option. In connection therewith, the Company has issued an irrevocable letter of credit totaling $50 million as security to the current owner of the Company's obligations under this agreement. The purchase price agreed to ranges from approximately $145 million to $160 million based on certain events and conditions as specified in the agreement.
In connection with the above agreement, the Company has entered into a time brokerage agreement to operate the station effective upon the clearance of certain Federal antitrust regulations. This agreement expires upon the purchase of the station by the Company or by agreement by the parties to terminate. In consideration for the time brokerage agreement, the Company will pay a monthly fee of approximately $700,000. If the current owner elects to extend the option beyond May 2000, the monthly fee to operate the station will be waived during the extension period.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors of the Company is incorporated by reference from the section entitled "Proposal No. 1: Election of Directors" on pages 3-4 of the Company's 1997 Proxy Statement and the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 8 of the Company's 1997 Proxy Statement.
Listed below is certain information about the executive officers of the Company or its affiliates and who are not directors.
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Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates who is not also a director.
RICHARD F. CUMMINGS was the Program Director of WENS from 1981 to March 1984, when he became the National Program Director and a Vice President of the Company. His title was changed to Executive Vice President--Programming in 1988.
HOWARD L. SCHROTT became Vice President, Chief Financial Officer and Treasurer of the Company in 1991. He became an Executive Vice President in 1995. Prior to joining the Company, Mr. Schrott was a Vice President in the Communications Lending Group at First Union National Bank, Charlotte, North Carolina. From 1984 to 1989 Mr. Schrott served as Chief Operating and Executive Officer for a group of radio stations. Mr. Schrott also spent two years practicing law in Washington, D.C. and Indianapolis, Indiana, where he concentrated on matters before the FCC and general business matters relating to broadcasting and media.
NORMAN H. GURWITZ was elected Corporate Counsel for the Company in 1987 and a Vice President in 1988. He was elected Secretary of the Company in 1989 and became an Executive Vice President in 1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott & Gurwitz.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the section entitled "Executive Compensation" on pages 4-8 of the Company's 1997 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the section entitled "Voting Securities and Beneficial Owners" on pages 1-2 of the Company's 1997 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the section entitled "Certain Transactions" on page 4 of the Company's 1997 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The financial statements filed as a part of this report are set forth under Item 8.
FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this report:
Report of Independent Public Accountants on Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts and Reserves for the fiscal years in the three year period ende February 28, 1997.
All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes.
Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
3.1 Amended and Restated Articles of Incorporation of Emmis Broadcasting Corporation, incorporated by reference from Exhibit 3.3 to the Registration Statement, as amende (the "Registration Statement") of the Company on Form S-1, file no. 33-73218.* 3.2 Amended and Restated Bylaws of Emmis Broadcasting Corporation, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (the "1995 10-K").*
3.3 Form of stock certificate for Class A Common Stock, incorporated by reference from Exhibit 3.5 to the Registration Statement.* 10.1 Emmis Broadcasting Corporation 1986 Stock Incentive Plan, as amended, incorporated by reference from Exhibit 10.1 to the Registration Statement.* 10.2 The 1989 Emmis Broadcasting Corporation Stock Appreciation Rights Plan, incorporated by reference from Exhibit 10.2 to the Registration Statement.* 10.3 Emmis Broadcasting Corporation 1992 Stock Option Plan, incorporated by reference from Exhibit 10.3 to the Registration Statement.* 10.4 Emmis Broadcasting Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the Registration Statement.* 10.5 Emmis Broadcasting Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the Registration Statement.* 10.6 Stock Purchase Agreement dated December 23, 1992, by and between Emmis Broadcasting Corporation and Greater Media, Inc., incorporated by reference from Exhibit 10.12 to the Registration Statement.* 10.7 Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibit 10.15 to the Registration Statement.* 10.8 Form of Employment Agreement with Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (the "1994 10-K").* 10.9 Form of Registration Rights Agreement between Emmis Broadcasting Corporation and Morgan Stanley Group Inc., incorporated by reference from Exhibit 10.17 to the Registration Statement.* 10.10 The Emmis Broadcasting Corporation 1995 Non-Employee Director Stock Option Plan incorporated by reference from Exhibit 10.15 of the 1995 10-K.* 10.11 The Emmis Broadcasting Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 of the 1995 10-K.* 10.12 Employment Agreement with Doyle L. Rose, incorporated by reference from Exhibit 10.2 to the Company's Report on Form 10-Q for the quarter ended May 31, 1995 (the "May 1995 10-Q").* 10.13 Employment Agreement with Richard F. Cummings, incorporated by reference from Exhibit 10.3 to the May 1995 10-Q."* 10.14 First, Second and Third Amendments to Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibit 10.12 to the Company's Report on Form 10-Q for the quarter ended November 30, 1994.* 10.15 Fourth Amendment to Revolving Credit and Term Loan Agreement, dated as of April 4, 1995, incorporated by reference from Exhibit 10.1 to the May 1995 10-Q.* 10.16 Employment Agreement with Howard L. Schrott, incorporated by reference from Exhibit 10 to the Company's report on Form 10-Q for the quarter ended May 31, 1996.* 10.17 Asset Purchase Agreement dated October 31, 1997 between the Company and Zimco, Inc. (with exhibits omitted in which the Company agrees to file supplementally upon request), incorporated by reference . from Exhibit 2 to the Company's report on Form 8-K filed April 15, 1997.* 11 Schedules re: Calculation of per share and pro forma per share net income (loss). 21 Subsidiaries of the Company. 23 Consent of Accountants. 24 Powers of Attorney. 27 Financial Data Schedule (EDGAR-filed version only) 99 Proxy Statement.*
___________________ * Previously Submitted
Signatures.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EMMIS BROADCASTING CORPORATION
Date: May 22, 1997 By: /s/ Jeffrey H. Smulyan -------------------------- Jeffrey H. Smulyan Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and on the dates indicated.
SIGNATURE TITLE Date: May 22, 1997 /s/Jeffrey H. Smulyan President, Chairman of the --------------------- Board and Director (Principal Jeffrey H. Smulyan Executive Officer)
Date: May 28, 1997 /s/Howard L. Schrott Executive Vice President, --------------------- Treasurer and Chief Financial Howard L. Schrott Officer (Principal Accounting Officer)
Date: May 28, 1997 /s/Susan B. Bayh* Director --------------------- Susan B. Bayh
Date: May 27, 1997 /s/Gary L. Kaseff* Director --------------------- Gary L. Kaseff
Date: May 23, 1997 /s/Richard A. Leventhal* Director --------------------- Richard A. Leventhal
Date: May 22, 1997 /s/Doyle L. Rose* Radio Division President and --------------------- Director Doyle L. Rose
Date: May 28, 1997 /s/Lawrence B. Sorrel* Director --------------------- Lawrence B. Sorrel
*By: /s/Norman H. Gurwitz -------------------- Norman H. Gurwitz Attorney-in-Fact
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Emmis Broadcasting Corporation and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES included in Item 8, in this Form 10-K, and have issued our report thereon dated April 2, 1997. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana, April 2, 1997.
EMMIS BROADCASTING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 28, 1997
(DOLLARS IN THOUSANDS)
(1) Represents additions to the allowance for doubtful accounts associated with the acquisition of certain radio stations.