8-K 1 c57890e8-k.txt FORM 8-K 1 As filed with the Securities and Exchange Commission on October 16, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): October 2, 2000 EMMIS COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) INDIANA 0-23264 35-1542018 (State or other jurisdiction of (Commission File (IRS Employer incorporation) Number) Identification No.) ONE EMMIS PLAZA, 40 MONUMENT CIRCLE, SUITE 700, INDIANAPOLIS, IN 46204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (317) 266-0100 NOT APPLICABLE (Former name or former address, if changed since last report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On October 2, 2000, Emmis Communications Corporation (the "Company") announced that it had acquired eight network-affiliated and seven satellite television stations from Lee Enterprises, Incorporated ("Lee") effective on October 1, 2000, pursuant to a Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee, New Mexico Broadcasting Co. and the Company (the "Lee Purchase Agreement"). The purchase price was $559.5 million in cash plus working capital. In addition, on October 6, 2000, the Company announced that it had completed the acquisition of six radio stations in St. Louis, Missouri from Sinclair Broadcast Group Inc. ("Sinclair"), pursuant to an Asset Purchase Agreement, dated as of June 21, 2000, by and among Sinclair Radio of St. Louis, Inc., Sinclair Radio of St. Louis Licensee, LLC and the Company (the "Sinclair Purchase Agreement"), for approximately $220.0 million in cash. At the same time, the Company announced that it had exchanged four radio stations in St. Louis, including three of the six stations acquired from Sinclair, for a radio station in Los Angeles, California owned by Bonneville International Corporation ("Bonneville"), pursuant to an Asset Exchange Agreement, dated as of October 6, 2000, between the Company, Emmis 106.5 FM Broadcasting Corporation of St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and Bonneville and Bonneville Holding Company (the "Bonneville Exchange Agreement"). Copies of the Lee Purchase Agreement, the Sinclair Purchase Agreement and the Bonneville Exchange Agreement are attached hereto as Exhibits 2.1, 2.2 and 2.3, respectively, and copies of the press releases announcing the acquisition of the television stations from Lee and the radio stations from Sinclair and Bonneville are attached hereto as Exhibits 99.1 and 99.2, respectively. ITEM 5. OTHER EVENTS On October 2, 2000, the Company entered into a Third Amended and Restated Revolving Credit and Term Loan Agreement (the "Amended and Restated Credit Agreement") with Toronto Dominion (Texas), Inc., as Lead Arranger and Administrative Agent, Fleet National Bank, as Documentation Agent, First Union National Bank, as Syndication Agent and each of the financial institutions from time to time party thereto. The Amended and Restated Credit Agreement increased the commitments thereunder to $1,000,000,000 by adding a $600,000,000 term loan facility to the existing $400,000,000 revolving credit loan for the purpose of enabling the Company to make further acquisitions. A copy of the Amended and Restated Credit Agreement is attached hereto as Exhibit 10.1. On August 24, 2000, the Company announced that it had completed the acquisition of a radio station in Phoenix, Arizona and a radio station in Denver, Colorado from AMFM, Inc. for approximately $108.0 million pursuant to an Asset Purchase Agreement, dated as of June 19, 2000, by and among the Company, AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM Radio Licenses, LLC (the "AMFM 2 3 Purchase Agreement"). A copy of the AMFM Purchase Agreement is attached hereto as Exhibit 10.2. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired SINCLAIR BROADCAST GROUP FINANCIAL INFORMATION Report of Independent Public Accountants.................... 4 Combined Balance Sheet As of December 31, 1999............ 5 Combined Statement of Operations For the Year Ended December 31, 1999...................................... 6 Combined Statement of Stockholders' Equity For the Year Ended December 31, 1999................................ 7 Combined Statement of Cash Flows For the Year Ended December 31, 1999...................................... 8 Notes to Combined Financial Statements As of December 31, 1999................................................... 9 Report of Independent Public Accountants.................... 15 Combined Balance Sheets As of December 31, 1999 and June 30, 2000............................................... 16 Combined Statements of Operations For the Six Months Ended June 30, 1999 and 2000................................. 17 Combined Statements of Cash Flows For the Six Months Ended June 30, 1999 and 2000................................. 18 Notes to Combined Financial Statements As of June 30, 2000................................................... 19 KZLA-FM FINANCIAL INFORMATION Independent Auditor's Report................................ 21 Combined Balance Sheets As of December 31, 1999 and June 30, 2000............................................... 22 Combined Statements of Operations For the Year Ended December 31, 1999 and For the Six Months Ended June 30, 1999 and 2000.......................................... 23 Combined Statements of Cash Flows For the Year Ended December 31, 1999 and For the Six Months Ended June 30, 1999 and 2000.......................................... 24 Notes to Combined Financial Statements For the Year Ended December 31, 1999 and For the Six Months Ended June 30, 1999 and 2000.......................................... 24 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS FINANCIAL INFORMATION Independent Auditor's Report................................ 31 Combined Statements of Net Assets......................... 32 Combined Statements of Income............................. 33 Combined Statements of Changes in Net Assets.............. 34 Combined Statements of Cash Flows......................... 35 Notes to Combined Financial Statements.................... 36 Condensed Combined Statements of Net Assets............... 37 Condensed Combined Statements of Income................... 40 Condensed Combined Statements of Cash Flows............... 41 Notes to Unaudited Condensed Combined Financial Statements............................................. 42 3 4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Emmis Communications Corp.: We have audited the accompanying balance sheet of Sinclair Broadcast Group, Inc. -- St. Louis Radio Group (the Group) as of December 31, 1999, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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 Sinclair Broadcast Group, Inc. -- St. Louis Radio Group as of December 31, 1999, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Baltimore, Maryland August 23, 2000 4 5 COMBINED BALANCE SHEET AS OF DECEMBER 31, 1999 (IN THOUSANDS) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS COMBINED BALANCE SHEET. ASSETS CURRENT ASSETS: Cash...................................................... $ 230 Accounts receivable, net of allowance for doubtful accounts of $245....................................... 4,890 Deferred barter costs..................................... 225 -------- Total current assets........................................ 5,345 FIXED ASSETS, net........................................... 5,228 INTANGIBLES ASSETS, net..................................... 102,498 -------- Total assets................................................ $113,071 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 91 Accrued liabilities....................................... 1,243 Deferred barter revenue................................... 390 -------- Total current liabilities................................... 1,724 LONG-TERM LIABILITIES: Due to parent............................................. 100,759 Deferred tax liabilities.................................. 2,070 Other long-term liabilities............................... 1,025 -------- Total liabilities........................................... 105,578 -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Contributed capital....................................... 7,000 Retained earnings......................................... 493 -------- Total stockholders' equity.................................. 7,493 -------- Total liabilities and stockholders' equity.................. $113,071 ========
The accompanying notes are an integral part of this combined balance sheet. 5 6 COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS) REVENUES: Station broadcast revenues, net of agency commissions of $3,258................................................. $25,193 Revenues realized from station barter arrangements........ 847 ------- Total revenues.............................................. 26,040 ------- OPERATING EXPENSES: Program and production.................................... 6,832 Selling, general and administrative....................... 7,719 Corporate expenses........................................ 755 Depreciation and amortization............................. 4,226 ------- Total operating expenses.................................... 19,532 ------- Broadcast operating income.................................. 6,508 ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (6,173) Other income.............................................. 1 ------- (6,172) ------- INCOME BEFORE PROVISION FOR INCOME TAXES.................... 336 INCOME TAX PROVISION........................................ 186 ------- Net income.................................................. $ 150 =======
The accompanying notes are an integral part of this combined statement. 6 7 COMBINED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
TOTAL CONTRIBUTED RETAINED STOCKHOLDERS' CAPITAL EARNINGS EQUITY ----------- -------- ------------- BALANCE, December 31, 1998................................ $7,000 $343 $7,343 Net income.............................................. -- 150 150 ------ ---- ------ BALANCE, December 31, 1999................................ $7,000 $493 $7,493 ====== ==== ======
The accompanying notes are an integral part of this combined statement. 7 8 COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 150 Adjustments to reconcile net income to net cash flows from operating activities-- Depreciation and amortization............................. 4,226 Changes in assets and liabilities, net of effects of acquisitions and dispositions- Increase in accounts receivable, net................... (639) Decrease in prepaid expenses........................... 49 Increase in accounts payable and accrued liabilities... 60 Deferred tax provision................................. 959 Net effect of changes in deferred barter revenues and deferred barter costs................................. 137 Decrease in other long-term liabilities................ (319) ------- Net cash flows from operating activities.................... 4,623 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment..................... (341) ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in due to parent............................... (4,241) ------- NET INCREASE IN CASH........................................ 41 CASH, beginning of period................................... 189 ------- CASH, end of period......................................... $ 230 ======= SUPPLEMENTAL INFORMATION: Increase in parent company indebtedness related to acquisitions........................................... $14,602 =======
The accompanying notes are an integral part of this combined statement. 8 9 NOTES TO COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 1. BASIS OF PRESENTATION: The St. Louis Radio Group of Sinclair Broadcast Group, Inc. (the "Company") was formed through acquisition. Sinclair Broadcast Group, Inc. ("SBG") entered into the radio business in May 1996 when it acquired radio stations from River City Broadcasting LLP ("River City"). As a result of the subsequent Heritage Media Services, Inc. (Heritage) acquisition and the acquisition of KXOK from WPNT, Inc., the Company now is comprised of radio stations KPNT, KXOK, KIHT, WVRV, WIL, and WRTH, serving the St. Louis market. These acquisitions have been recorded under the purchase method of accounting. These combined financial statements have been prepared from SBG's historical accounting records and present the operations of the St. Louis Radio Group as if the Company had been a separate entity for all periods presented. During these periods, SBG provided various services to the Company (see Note 6). Furthermore, acquisitions consummated by SBG have been presented as if they were made by the Company and the consideration to effect these acquisitions was both loaned and contributed by SBG. All significant intercompany transactions and account balances between the six St. Louis stations have been eliminated in consolidation. The financial information included herein may not necessarily reflect the consolidated results of operations, financial position, changes in stockholder's equity and cash flows of the Company in the future or what they would have been had it been a separate, stand-alone entity during the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates, including those related to intangible assets, allowances for doubtful accounts, income taxes and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates. CONCENTRATION OF CREDIT RISK The Company's revenues and accounts receivable relate primarily to the sale of advertising within the radio stations' broadcast areas. Credit is extended based on an evaluation of the customers' financial condition; and generally, collateral is not required, credit losses are provided for in the financial statements and consistently have been within management's expectations. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments is determined by the Company using the best available market information and appropriate valuation methodologies. However, considerable judgment is necessary in interpreting market data to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange or the value that ultimately will be realized by the Company upon maturity or disposition. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts. Most of the Company's financial instruments, including cash, accounts receivable and payable and accruals are short-term in nature. Accordingly, the carrying amount of the Company's financial instruments approximates fair value. The carrying amount of long-term debt approximates fair value. 9 10 LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company evaluates the recoverability of its long-lived assets which include broadcasting licenses, other intangibles and other assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If indications are that the carrying amount of the asset may not be recoverable, the Company will estimate the future cash flows expected to result from use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, the Company recognizes an impairment loss. The impairment loss recognized is measured as the amount of which the carrying amount of the asset exceeds its fair value. BARTER ARRANGEMENTS The Company broadcasts certain customers' advertising in exchange for equipment, merchandise and services. The estimated fair value of the equipment, merchandise or services received is recorded as deferred barter costs and the corresponding obligation to broadcast advertising is recorded as deferred barter revenue. The deferred barter costs are expensed or capitalized as they are used, consumed or received. Deferred barter revenue is recognized as the related advertising is aired. ACQUIRED INTANGIBLE BROADCASTING ASSETS Acquired intangible broadcasting assets are being amortized on a straight-line basis over periods of 15 to 40 years. These amounts result from the acquisition of radio station broadcasting assets. If indications are that the carrying amount of one of these assets may not be recoverable, the Company will estimate the future cash flows expected to result from use of the asset. Management believes that the carrying amounts of the Company's tangible and intangible assets have not been impaired. Intangible broadcasting assets, at cost, as of December 31, 1999 consist of the following (in thousands):
AMORTIZATION PERIOD ------------ Goodwill............................... 40 years $ 43,721 Decaying advertiser base............... 15 years 4,124 FCC licenses........................... 25 years 61,819 Network affiliations................... 25 years 122 Other.................................. 15 years 196 -------- 109,982 Less: Accumulated amortization......... (7,484) -------- $102,498 ========
ACCRUED LIABILITIES As of December 31, 1999, accrued liabilities are $1.2 million. This balance contains $0.6 million of compensation -- related liabilities, $0.5 million of additional liabilities assumed in acquisitions and $0.1 million of other accrued liabilities. REVENUE RECOGNITION Broadcasting revenues are derived principally from the sale of radio advertising spots to local, regional and national advertisers. Advertising revenue is recognized in the period during which the program time and spot announcements are broadcast. 10 11 3. ACQUISITIONS KXOK-FM ACQUISITION In August, 1999, SBG completed the purchase of KXOK-FM in St. Louis, Missouri from WPNT, Inc. Sinclair's total consideration for KXOK was $15.8 million, including assumed liabilities. The acquisition was accounted for under the purchase method of accounting whereby the purchase price was allocated to property and acquired intangible broadcast assets for $0.6 million and $15.2 million, respectively, based on an appraisal. 4. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed under the straight-line method over the following estimated useful lives. Buildings and improvements......................... 10-35 years Station equipment.................................. 5-10 years Office furniture and equipment..................... 5-10 years Leasehold improvements............................. 10-31 years Automotive equipment............................... 3-5 years
Property and equipment consists of the following as of December 31, 1999 (in thousands): Land and improvements................................. $ 258 Buildings and improvements............................ 574 Station equipment..................................... 5,217 Office furniture and equipment........................ 387 Leasehold improvements................................ 131 Automotive equipment.................................. 186 ------- 6,753 Less: Accumulated depreciation and amortization....... (1,525) ------- $ 5,228 =======
5. PARENT COMPANY INDEBTEDNESS: In connection with the acquisition discussed in Note 3 and the Heritage acquisition, SBG made loans to the Company. The Company has been charged interest on these loans at a rate of interest equal to SBG's annual weighted average borrowing rate on its outstanding indebtedness. The weighted average interest rates on parent company indebtedness for the year ended December 31, 1999 was 6.7%. Substantially all of the Company's assets have been pledged as security for SBG's notes payable and commercial bank financing. Additionally, the operations of the Company have been utilized to service the debt principal and interest payments of SBG. 6. RELATED PARTY TRANSACTIONS: The Company has utilized various services provided by SBG or its subsidiaries. These services included, among others, certain investor relations, executive, human resources, legal, investment, finance, real estate, information management, internal audit, tax preparation and treasury. The costs of such services have been allocated according to established methodologies and are determined on an annual basis by SBG. Such methodologies depend on the specific service provided and include allocating costs that directly relate to the Company or allocating costs that represent a pro rata portion of the total costs for the services provided. Management of the Company believes these allocations to be a fair and reasonable share of such costs. For the year ended December 31, 1999, allocated expenses of approximately $755,000 were included in the consolidated statements of operations of the Company. Substantially all costs relating to direct intercompany services have been reflected in the accompanying combined financial statements. 11 12 The Company's radio stations and SBG's television stations have historically provided broadcast time to each other. The revenues or costs associated with these intercompany transactions were not significant in the periods presented. The Company and SBG have entered into joint advertising arrangements. Revenues are distributed to the parties providing the services based upon the contract terms. The revenues associated with such sales were not significant in the periods presented. 7. INCOME TAXES: Income taxes are provided by using the asset and liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized based on differences between book and tax basis of assets and liabilities using presently enacted tax rates. The provision for income taxes is the sum of the amount of income tax paid or payable for the year as determined by applying the provisions of enacted tax laws to taxable income for that year and the net changes during the year in the Company's deferred tax assets and liabilities other than changes arising from acquisitions and dispositions. SBG files a consolidated federal tax return and separate state tax returns for each of its subsidiaries. It is SBG's policy to reimburse the Company for its federal net operating losses when generated through intercompany charges. The Company is responsible for its current state tax liabilities. The accompanying financial statements have been prepared in accordance with the separate return method of SFAS 109, whereby the allocation of federal tax provision due to the parent is based on what the subsidiary's current and deferred federal tax provision would have been had the subsidiary filed a federal income tax return outside its consolidated group. Given that SBG is required to reimburse the Company for its federal net operating losses when generated, the value of the tax effected federal net operating losses is recorded as an intercompany charge and included as a reduction of the due to parent amount in the accompanying balance sheets. The provision for income taxes consists of the following: Provision for income taxes.............................. $186 Current: Federal............................................... -- State................................................. -- ---- -- ---- Deferred: Federal............................................... 166 State................................................. 20 ---- 186 ---- $186 ====
The following is a reconciliation of federal income taxes at the applicable statutory rate to the recorded provision (in thousands): Statutory federal income taxes.......................... $118 Adjustments-- State income and franchise taxes, net of federal effect............................................. 14 Nondeductible expense items........................... 54 ---- Provision for income taxes.............................. $186 ====
Temporary differences between the financial reporting carrying amounts and the tax basis of assets and liabilities give rise to deferred taxes. The Company has a net deferred tax liability of $2.1 million as of December 31, 1999. The realization of deferred tax assets is contingent upon the Company's ability to generate sufficient future taxable income. Management believes that deferred assets will be realized through future operating results. 12 13 Total deferred tax assets and deferred tax liabilities as of December 31, 1999 including the effects of the source of differences between financial accounting and tax bases of the Company's assets and liabilities which give rise to the deferred tax assets and deferred tax liabilities and the tax effect of each are as follows (in thousands): Deferred tax assets: Accruals and reserves................................ $ 153 State net operating losses........................... 269 Other................................................ 42 ------ $ 464 ====== Deferred tax liabilities: FCC license.......................................... $1,354 Fixed assets and intangibles......................... 1,180 ------ $2,534 ======
8. EMPLOYEE BENEFITS: Employees of the Company participate in the Sinclair Broadcast Group, Inc. 401(k) Profit Sharing Plan and Trust (the "SBG Plan") which covers eligible employees of the Company. Contributions made to the SBG Plan include an employee elected salary reduction amount, company matching contributions and a discretionary amount determined each year by SBG's Board of Directors. During December 1997, SBG registered 800,000 shares of its Class "A" Common Stock with the Securities and Exchange Commission (the "Commission") to be issued as a matching contribution for the 1997 plan year and subsequent plan years. The Company's 401(k) expense for the year ended December 31, 1999 was $68,000. 9. COMMITMENTS AND CONTINGENCIES: LITIGATION The Company is involved in certain litigation matters arising in the normal course of business. In the opinion of management, these matters are not significant and will not have a material adverse effect on the Company's financial position. OPERATING LEASES The Company leases certain property and equipment under noncancellable operating lease agreements. Future minimum lease payments under noncancellable operating leases beginning January 1, 2000, are as follows (in thousands): 2000................................................... $ 853 2001................................................... 782 2002................................................... 782 2003................................................... 774 2004................................................... 367 2005 and thereafter.................................... 274 ------ $3,832 ======
10. SUBSEQUENT EVENT: SALE OF THE ST. LOUIS RADIO GROUP In connection with the acquisition of River City, SBG entered into a five year agreement (the "Baker Agreement") with Barry Baker (the Chief Executive Officer of River City) pursuant to which Mr. Baker served as a consultant to SBG until terminating such services effective March 8, 1999 (the "Termination 13 14 Date"). As of February 8, 1999, the conditions to Mr. Baker becoming an officer of SBG had not been satisfied, and on that date Mr. Baker and SBG entered into a termination agreement, effective on March 8, 1999. Mr. Baker had certain rights as a consequence of the termination of the Baker Agreement. These rights included Mr. Baker's rights to purchase, at fair market value, the radio stations owned by SBG serving the St. Louis, Missouri market. In June, 1999, SBG received a letter from Mr. Baker in which Mr. Baker elected to exercise his option to purchase SBG's radio properties in the St. Louis market for their fair market value. In his letter, Mr. Baker named Emmis Communications Corp. ("Emmis") as his designee to exercise the St. Louis purchase option. Notwithstanding their belief that Emmis was not an appropriate designee of Mr. Baker, SBG negotiated with Emmis regarding the potential sale of the St. Louis properties. Following unsuccessful negotiations, however, on January 18, 2000, SBG filed suit in the Circuit Court of Baltimore County, Maryland against Mr. Baker and Emmis claiming, alternatively, that Mr. Baker's designation of Emmis was invalid, that the St. Louis purchase option was void for vagueness and/or that Emmis breached a duty that it owed to SBG by refusing to negotiate the acquisition agreement in good faith. In the lawsuit, SBG requested that the court grant declaratory relief and/or monetary damages. On March 17, 2000, Emmis and Mr. Baker filed a joint answer and counterclaim generally denying the allegations made by SBG in its lawsuit and claiming that SBG had acted in bad faith in failing to fulfill its contractual obligations, had mismanaged the St. Louis properties and had interfered with the contract between Mr. Baker and Emmis in which Mr. Baker agreed to designate Emmis to buy the properties. The counterclaim sought compensatory and punitive damages, the appointment of a special receiver to manage the St. Louis properties and a declaratory judgment requiring Sinclair to complete the sale of those properties to Emmis. On June 21, 2000, SBG entered into an agreement to sell the assets of the six stations comprising the St. Louis Radio Group to Emmis for $220.0 million in cash (the "St. Louis Sale"). The agreement also included the settlement of the outstanding lawsuit between SBG and Emmis. This acquisition is awaiting approval by the Federal Communications Commission and Department of Justice. In connection with the signing of the purchase agreement, Emmis made an escrow payment of $22.0 million. 14 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Emmis Communications Corp.: We have reviewed the accompanying condensed combined balance sheet of Sinclair Broadcast Group, Inc. -- St. Louis Radio Group (the Group) as of June 30, 2000, and the related condensed combined statements of operations and cash flows for the six-month periods ending June 30, 2000 and 1999. These financial statements are the responsibility of the Group's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the combined balance sheet of Sinclair Broadcast Group, Inc. -- St. Louis Radio Group as of December 31, 1999, and in our report dated August 23, 2000, we expressed our unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed combined balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived. /s/ ARTHUR ANDERSEN LLP Baltimore, Maryland August 23, 2000 15 16 SINCLAIR BROADCAST GROUP, INC. -- ST. LOUIS RADIO GROUP COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND JUNE 30, 2000 (IN THOUSANDS)
DECEMBER 31, 1999 JUNE 30, 2000 ------------ ------------- (NOTE 1) (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 230 $ 287 Accounts receivable, net of allowance for doubtful accounts of $245 and $239, respectively................ 4,890 6,068 Prepaid expenses and other current assets................. -- 47 Deferred barter costs..................................... 225 303 -------- -------- Total current assets........................................ 5,345 6,705 FIXED ASSETS, net........................................... 5,228 4,892 INTANGIBLE ASSETS, net...................................... 102,498 100,649 -------- -------- Total assets................................................ $113,071 $112,246 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 91 $ 197 Accrued liabilities....................................... 1,243 1,258 Deferred barter revenue................................... 390 558 -------- -------- Total current liabilities................................... 1,724 2,013 LONG-TERM LIABILITIES: Due to parent............................................. 100,759 98,708 Deferred tax liabilities.................................. 2,070 2,614 Other long-term liabilities............................... 1,025 876 -------- -------- Total liabilities........................................... 105,578 104,211 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Contributed capital....................................... 7,000 7,000 Retained earnings......................................... 493 1,035 -------- -------- Total stockholders' equity.................................. 7,493 8,035 -------- -------- Total liabilities and stockholders' equity.................. $113,071 $112,246 ======== ========
The accompanying notes are an integral part of these combined balance sheets. 16 17 SINCLAIR BROADCAST GROUP, INC. -- ST. LOUIS RADIO GROUP COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 1999 2000 ------------- --------- (UNAUDITED) REVENUES: Station broadcast revenues, net of agency commissions of $1,414 and $1,528, respectively................................... $11,899 $13,398 Revenues realized from station barter arrangements........ 273 622 ------- ------- Total revenues.............................................. 12,172 14,020 ------- ------- OPERATING EXPENSES: Program and production.................................... 3,517 3,735 Selling, general and administrative....................... 3,689 3,895 Corporate expenses........................................ 365 321 Depreciation and amortization............................. 2,016 2,210 ------- ------- Total operating expenses.................................... 9,587 10,161 ------- ------- Broadcast operating income.................................. 2,585 3,859 ------- ------- OTHER (EXPENSE) INCOME: Interest expense.......................................... (2,653) (3,154) Other (expense) income.................................... (61) 218 ------- ------- (2,714) (2,936) ------- ------- (LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES... (129) 923 INCOME TAX (BENEFIT) PROVISION.............................. (71) 381 ------- ------- Net (loss) income........................................... $ (58) $ 542 ======= =======
The accompanying notes are an integral part of these combined statements. 17 18 SINCLAIR BROADCAST GROUP, INC. -- ST. LOUIS RADIO GROUP COMBINED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------------- 1999 2000 ------------ ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $ (58) $ 542 Adjustments to reconcile net (loss) income to net cash flows from operating activities -- Depreciation and amortization of property and equipment... 2,016 2,210 Changes in assets and liabilities, net of effects of acquisitions and dispositions- Increase in accounts receivables, net.................. (1,549) (1,178) Increase in prepaid expenses and other current assets................................................ (57) (47) Decrease in other long-term assets..................... 1,199 -- Increase in accounts payable and accrued liabilities... 463 122 Deferred tax provision................................. 400 543 Net effect of changes in deferred barter revenues and deferred barter costs......................................... 77 90 Decrease in other long-term liabilities................ (108) (148) ------- ------- Net cash flows from operating activities.................... 2,383 2,134 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment..................... (279) (26) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in due to parent............................... (2,139) (2,051) ------- ------- NET (DECREASE) INCREASE IN CASH............................. (35) 57 CASH, beginning of period................................... 189 230 ------- ------- CASH, end of period......................................... $ 154 $ 287 ======= =======
The accompanying notes are an integral part of these combined statements. 18 19 SINCLAIR BROADCAST GROUP, INC. -- ST. LOUIS RADIO GROUP NOTES TO COMBINED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 1. BASIS OF PRESENTATION: The St. Louis Radio Group of Sinclair Broadcast Group, Inc. (the "Company") was formed through acquisition. Sinclair Broadcast Group, Inc. ("SBG") entered into the radio business in May 1996 when it acquired radio stations from River City Broadcasting LLP ("River City"). As a result of the subsequent Heritage Media Services, Inc. (Heritage) acquisition and the acquisition of KXOK from WPNT, Inc., the Company now is comprised of radio stations KPNT, KXOK, KIHT, WVRV, WIL, and WRTH, serving the St. Louis market. These acquisitions have been recorded under the purchase method of accounting. These condensed combined financial statements have been prepared from SBG's historical accounting records and present the operations of the St. Louis Radio Group as if the Company had been a separate entity for all periods presented. During these periods, SBG provided various services to the Company (see Note 2). Furthermore, acquisitions consummated by SBG have been presented as if they were made by the Company and the consideration to effect these acquisitions was both loaned and contributed by SBG. All significant intercompany transactions and account balances between the six St. Louis stations have been eliminated in consolidation. The financial information included herein may not necessarily reflect the consolidated results of operations, financial position and cash flows of the Company in the future or what they would have been had it been a separate, stand-alone entity during the periods presented. INTERIM FINANCIAL STATEMENTS The condensed combined financial statements for the six months ended June 30, 1999 and 2000, are unaudited, but in the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for these periods. As permitted under the applicable rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed combined financial statements included herein should be read in conjunction with the combined financial statements and the notes thereto included in the Company's annual financial statements for the year ended December 31, 1999. 2. RELATED PARTY TRANSACTIONS The Company has utilized various services provided by SBG or its subsidiaries. These services included, among others, certain investor relations, executive, human resources, legal, investment, finance, real estate, information management, internal audit, tax preparation and treasury. The costs of such services have been allocated according to established methodologies and are determined on an annual basis by SBG. Such methodologies depend on the specific service provided and include allocating costs that directly relate to the Company or allocating costs that represent a pro rata portion of the total costs for the services provided. Management of the Company believes these allocations to be a fair and reasonable share of such costs. For the six months ended June 30, 1999 and 2000, allocated expenses of approximately $365,000 (unaudited) and $321,000 (unaudited), respectively, were included in the combined statements of operations of the Company. Substantially all costs relating to direct intercompany services have been reflected in the accompanying combined financial statements. 19 20 The Company's radio stations and SBG's television stations have historically provided broadcast time to each other. The revenues or costs associated with these intercompany transactions were not significant in the periods presented. The Company and SBG have entered into joint advertising arrangements. Revenues are distributed to the parties providing the services based upon the contract terms. The revenues associated with such sales were not significant in the periods presented. 3. SIGNIFICANT EVENTS SALE OF THE ST. LOUIS RADIO GROUP On June 21, 2000, SBG entered into an agreement with Emmis Communications Corp. ("Emmis") to sell the assets of the radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM and KIHT-FM in St. Louis, Missouri for a cash purchase price of $220.0 million. The agreement also included the settlement of outstanding lawsuits by and between SBG and Emmis. This acquisition is awaiting approval by the Federal Communications Commission and Department of Justice. In connection with the signing of the purchase agreement, Emmis made an escrow payment of $22.0 million which will be held in trust as a deposit until the deal is closed. 20 21 INDEPENDENT AUDITORS' REPORT Emmis Communications Corporation: We have audited the accompanying combined balance sheet of KZLA-FM (the Station) and the related FCC broadcasting license owned by Bonneville Holding Company (collectively, the Company) as of December 31, 1999, and the related combined statements of operations and of cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the combined financial position of the Company as of December 31, 1999, and the combined results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying combined financial statements have been prepared from the separate records maintained by the Company and may not be indicative of the conditions that would have existed or the results of operations had the Company been operated as an unaffiliated company. As discussed in Notes 1 and 6, certain expenses represent allocations made by the Company's parent. /s/ DELOITTE & TOUCHE LLP Salt Lake City, Utah September 5, 2000 21 22 KZLA-FM COMBINED BALANCE SHEETS DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
DECEMBER 31, JUNE 30, 1999 2000 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $144,860 $120,067 Accounts receivable -- net of allowance for doubtful accounts of $93,000 at December 31, 1999 and $38,000 at June 30, 2000.......................................... 3,839,637 3,531,190 Prepaid expenses and other current assets................. 214,480 117,614 Current deferred tax assets............................... 129,731 110,436 ------------ ------------ Total current assets................................. 4,328,708 3,879,307 ------------ ------------ Property, plant, and equipment: Land...................................................... 181,692 181,692 Buildings and leasehold improvements...................... 2,048,374 2,048,709 Furniture, fixtures, and equipment........................ 2,809,543 2,784,876 Construction in progress.................................. 424,136 483,263 ------------ ------------ Total................................................ 5,463,745 5,498,540 Accumulated depreciation and amortization................. (3,543,454) (3,701,906) ------------ ------------ Total property, plant, and equipment -- net.......... 1,920,291 1,796,634 ------------ ------------ Due from affiliates......................................... 2,324,554 3,733,873 Radio broadcast license -- net of accumulated amortization of $6,630,000 at December 31, 1999 and $8,524,000 at June 30, 2000.................................................. 144,917,025 143,022,685 Other intangible assets -- net of accumulated amortization of $248,000 at December 31, 1999 and $319,000 at June 30, 2000...................................................... 402,236 331,357 Deferred tax assets......................................... 231,692 256,739 Other assets................................................ 36,896 34,081 ------------ ------------ Total....................................................... $154,161,402 $153,054,676 ============ ============ LIABILITIES AND NET INVESTMENT CURRENT LIABILITIES: Accounts payable.......................................... $174,774 $87,979 Accrued payroll and benefits.............................. 443,754 294,742 Accrued expenses.......................................... 63,450 110,646 ------------ ------------ Total current liabilities............................ 681,978 493,367 Commitments and contingencies (Notes 4 and 5) Net investment.............................................. 153,479,424 152,561,309 ------------ ------------ Total....................................................... $154,161,402 $153,054,676 ============ ============
See notes to combined financial statements 22 23 KZLA-FM COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ------------------------ 1999 1999 2000 ------------ ---- ---- (UNAUDITED) Net revenues, net of agency and representative commissions and revenue sharing fees of $2,446,000, $1,062,000, and $1,267,000 at December 31, 1999, June 30, 1999, and June 30, 2000, respectively............. $14,779,604 $6,468,160 $7,481,533 ----------- ---------- ---------- Expenses: Operating............................................. 2,774,094 1,375,116 1,731,601 Selling and promotional............................... 4,148,952 2,423,101 3,046,511 General and administrative............................ 1,418,152 745,381 675,504 Allocated corporate expenses.......................... 188,860 97,562 94,688 Depreciation and amortization......................... 4,354,414 2,178,233 2,164,288 ----------- ---------- ---------- Total expenses................................... 12,884,472 6,819,393 7,712,592 ----------- ---------- ---------- Net operating income (loss) before income tax expense... 1,895,132 (351,233) (231,059) Income tax expense...................................... 2,302,575 631,719 687,056 ----------- ---------- ---------- Net loss................................................ $ (407,443) $ (982,952) $ (918,115) =========== ========== ==========
See notes to combined financial statements 23 24 ' KZLA-FM COMBINED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, -------------------------- 1999 1999 2000 ------------ ---- ---- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................ $ (407,443) $ (982,952) $ (918,115) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization.................... 4,354,414 2,178,233 2,164,288 Provision for losses on accounts receivable...... 69,000 21,000 30,000 Loss on disposal of property and equipment....... 425 Deferred income taxes............................ (54,196) (61,558) (5,752) Changes in operating assets and liabilities: Accounts receivable............................ (993,425) (140,858) 278,447 Prepaid expenses and other current assets...... 81,494 355,631 96,866 Other assets................................... (23,222) (2,729) 2,815 Accounts payable............................... 137,033 43,432 (86,795) Accrued payroll and benefits................... (2,196) (157,962) (149,012) Accrued expenses............................... 59,903 18,104 47,196 ----------- ----------- ----------- Net cash provided by operating activities... 3,221,787 1,270,341 1,459,938 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant, and equipment.......... (210,526) (61,418) (75,412) Proceeds from sale of property, plant, and equipment........................................ 445 ----------- ----------- ----------- Net cash used in investing activities....... (210,081) (61,418) (75,412) ----------- ----------- ----------- Cash flows from financing activities -- Increase in due from affiliates..................... (3,172,436) (1,204,115) (1,409,319) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents...... (160,730) 4,808 (24,793) Cash and cash equivalents, beginning of period........ 305,590 305,590 144,860 ----------- ----------- ----------- Cash and cash equivalents, end of period.............. $ 144,860 $ 310,398 $ 120,067 =========== =========== ===========
See notes to combined financial statements 24 25 KZLA-FM NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS -- The radio station, KZLA-FM, is broadcast in the Los Angeles, California area. Through July 31, 2000, KZLA-FM (the Station) was operated by Bonneville International Corporation (BIC) with the related FCC broadcasting license being owned by Bonneville Holding Company (BHC), a not-for-profit tax exempt affiliate of BIC, and the operating assets for the Station being owned by BIC (collectively, the Company). On June 21, 2000, BIC and BHC executed a letter of intent to enter into an asset exchange agreement (the Exchange Agreement) with Emmis Communications Corporation (Emmis) whereby BIC has agreed to transfer title to substantially all of the assets of the Station and BHC has agreed to transfer title to the related Station's FCC license to Emmis in exchange for Emmis transferring title to substantially all of the assets and related FCC licenses of four radio stations located in the St. Louis, Missouri Market to BIC and BHC, respectively. For income tax purposes, the exchange is structured as a "like-kind exchange" under the provisions of Section 1031 of the Internal Revenue Code. Emmis is operating the Station under a time brokerage agreement for the period August 1, 2000 through the closing of the Exchange Agreement, which is expected to be on or about September 30, 2000. BASIS OF ACCOUNTING -- The combined balance sheets and statements of operations and cash flows include the historical accounts and transactions of the Station, as operated by BIC, and the Station's FCC license owned by BHC. In this context, no direct ownership relationship exists and, accordingly, a net investment is shown in lieu of stockholders' equity in the accompanying combined financial statements. Historically, BIC did not charge the Company for certain corporate overhead expenses and income taxes; however, for purposes of the accompanying statements of income, such expenses have been charged as described below and in Note 6. Intercompany transactions have been eliminated in the combination. INTERIM RESULTS (UNAUDITED) -- In the opinion of management, the accompanying unaudited interim combined financial statements as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 have been prepared on the same basis as the audited combined financial statements as of and for the year ended December 31, 1999 and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the combined balance sheets, operating results, and cash flows for such periods. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be reported for any future periods. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. CASH AND CASH EQUIVALENTS -- All highly liquid, short-term investments with original maturities of three months or less are considered to be cash equivalents. ALLOWANCE FOR DOUBTFUL ACCOUNTS -- The allowance for doubtful accounts is based on historical bad debt experience and periodic evaluation of the collectibility of individual accounts receivable. The provision for doubtful accounts charged to operations is made in amounts required to maintain an adequate allowance to cover anticipated losses. 25 26 PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment is stated at cost. Depreciation and amortization are computed using the straight-line method, based on historical costs, over estimated useful lives, as follows:
ESTIMATED LIVES (YEARS) ------------- Buildings............................. 8-40 Furniture and fixtures................ 5-8 Equipment............................. 3-15 Leasehold improvements................ Shorter of life of lease or useful life of asset
DUE FROM AFFILIATES -- The due from affiliates account represents amounts due primarily from BIC and is noninterest bearing and has no specified repayment date. The Company's cash and certain operating activities are largely managed on a centralized basis by BIC. Accordingly, the Company's available cash is deposited in, and cash requirements are transferred from, BIC corporate accounts on a regular basis. Such transactions are recorded through the due from affiliates account. RADIO BROADCAST LICENSE AND OTHER INTANGIBLE ASSETS -- The radio broadcast license is being amortized on a straight-line basis over 40 years. Other intangible assets are being amortized over various periods on a straight-line basis not exceeding 15 years. REVENUE RECOGNITION -- Revenues are recognized when advertisements are broadcast. Advertising costs are recognized as services are rendered. Included in revenues are nonmonetary transactions arising from the trading of advertising time for merchandise and services. These transactions are recorded as the advertising is broadcast at the fair market value of the merchandise and services received. Advertising time exchanged for merchandise and services amounted to approximately $223,000 for the year ended December 31, 1999 and $116,000 and $27,000 for the six months ended June 30, 1999 and 2000, respectively. INCOME TAXES -- The results of the Station's operations are included in consolidated federal and state returns filed by the parent corporation of BIC, Deseret Management Corporation (DMC). Income taxes are calculated for the Station in a manner that approximates a separate return basis. Included in due from affiliates at December 31, 1999 and June 30, 2000 is a current income tax liability payable to BIC of approximately $2,400,000 and $693,000, respectively. The Station utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. BHC is a not-for-profit entity and is not subject to federal and state income taxes; accordingly, the amortization relating to the broadcast license owned by BHC does not have any benefit for income tax purposes in the accompanying combined financial statements. CONCENTRATION OF CREDIT RISK -- The Company extends credit to customers on an unsecured basis in the normal course of business. The customers are generally located in the greater Los Angeles, California area, and no individual industry or industry segment is significant to the Company's customer base. The Company has policies governing the extension of credit and collection of amounts due from customers. IMPAIRMENT OF LONG-LIVED ASSETS -- The Company evaluates the carrying value of long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of these financial instruments. 26 27 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 1999, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued, which establishes accounting and reporting standards for derivative financial instruments and hedging activities. Management believes adoption of this statement will not impact the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 establishes accounting and reporting standards for the recognition of revenue. It states that revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; (4) collectibility is reasonably assured. SAB 101 is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company has determined that the impact of SAB 101 will not have a material impact to the Company's combined financial statements. 2. INCOME TAXES Income tax expense (benefit) for the year ended December 31, 1999 and the six months ended June 30, 1999 and 2000 consisted of the following:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------- 1999 1999 2000 ------------ ---- ---- (UNAUDITED) Current: Federal..................................... $2,003,255 $589,285 $588,887 State....................................... 353,516 103,992 103,921 ---------- -------- -------- 2,356,771 693,277 692,808 ---------- -------- -------- Deferred: Federal..................................... (46,067) (52,324) (4,889) State....................................... (8,129) (9,234) (863) ---------- -------- -------- (54,196) (61,558) (5,752) ---------- -------- -------- Income tax expense............................ $2,302,575 $631,719 $687,056 ========== ======== ========
Income tax expense for the year ended December 31, 1999 and for the six months ended June 30, 1999 and 2000 differs from that computed at the federal statutory corporate tax rate as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------------- 1999 1999 2000 ------------ ---- ---- (UNAUDITED) Computed income taxes at 34%................. $ 644,345 $(119,419) $(78,560) State income tax, net of federal benefit..... 345,387 94,758 103,058 Broadcast license amortization............... 1,288,150 644,075 644,075 Nondeductible expenses....................... 24,693 12,305 18,483 ---------- --------- -------- Provision for income taxes................... $2,302,575 $ 631,719 $687,056 ========== ========= ========
27 28 The components of deferred tax assets at December 31, 1999 and June 30, 2000 are as follows:
DECEMBER 31, 1999 JUNE 30, 2000 --------------------- --------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Deferred tax assets: Accrued vacation and bonuses....... $ 83,730 $ 86,450 Tax and book basis difference in property, plant, and equipment....................... $ 90,620 $111,747 Allowance for doubtful accounts.... 37,201 15,186 Pension accruals................... 77,797 80,840 Other.............................. 8,800 63,275 8,800 64,152 -------- -------- -------- -------- Deferred tax assets.................. $129,731 $231,692 $110,436 $256,739 ======== ======== ======== ========
3. NET INVESTMENT The net investment includes accumulated equity as well as any working capital funding requirement to/from BIC. The net investment is comprised of the following for the year ended December 31, 1999 and the six months ended June 30, 2000: Balance at January 1, 1999.................................. $153,886,867 Net loss.................................................... (407,443) ------------ Balance at December 31, 1999................................ 153,479,424 Net loss (unaudited)........................................ (918,115) ------------ Balance at June 30, 2000 (unaudited)........................ $152,561,309 ============
4. COMMITMENTS AND CONTINGENCIES LEASES -- Rental expense pursuant to the terms of the Company's operating leases was approximately $242,000 for the year ended December 31, 1999 and $122,000 and $128,000 for the six months ended June 30, 1999 and 2000, respectively. At December 31, 1999, future minimum rental payments required under these leases are as follows: Year ending December 31: 2000...................................................... $161,265 2001...................................................... 104,783 2002...................................................... 42,488 2003...................................................... 41,325 2004...................................................... 24,000 Thereafter................................................ 198,000 -------- Total................................................ $571,861 ========
CONTINGENCIES -- The Company is involved in various claims and litigation regarding transactions occurring in the ordinary course of business. In the opinion of management, the effects of these potential liabilities arising from the other claims, if any, will not be material to the combined financial position or the results of operations and cash flows of the Company. EMPLOYMENT AGREEMENTS -- The Company enters into employment agreements with certain key employees of the Company. These agreements specify base salary, along with bonuses. 28 29 Future minimum payments under these employment agreements are as follows at December 31, 1999: Year ending December 31: 2000...................................................... $ 336,923 2001...................................................... 454,569 2002...................................................... 480,998 2003...................................................... 111,358 ---------- Total................................................ $1,383,848 ==========
5. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLAN -- The Station participates in a defined benefit plan of BIC which covers all employees who work at least 1,000 hours in a year, have one year or more of service, and are at least 21 years of age. The plan is sponsored by BIC. Retirement benefits are based on years of service and an average of the employee's highest five years of compensation during the last ten years of employment. BIC's policy is to fund the maximum amounts allowed by the Employee Retirement Income Security Act of 1974. Contributions were intended to provide not only for benefits attributed for service to date but also for those expected to be earned in the future. Pension expense under this plan allocated to the Station by BIC was not material for the year ended December 31, 1999 and for the six months ended June 30, 1999 and 2000. THRIFT PLAN -- The Station participates in a Section 401(k) defined contribution plan (the Thrift Plan) of BIC in which employees age 21 or older could participate. Under provisions of the Thrift Plan, participants could contribute up to 17% of their pre-tax compensation to either a savings option (based on after tax earnings) or a deferred option (based on pre-tax earnings), subject to the "excess contribution" limitations defined in the Internal Revenue Code. For each participating employee, the Station provides a matching contribution of up to 3% of a participant's annual salary. The Station's contributions to the Thrift Plan were approximately $75,000 for the year ended December 31, 1999 and $38,000 and $43,000 for the six months ended June 30, 1999 and 2000, respectively. The plan is sponsored by BIC. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- BIC provides a postretirement monetary benefit other than pensions. It consists of a fixed monthly dollar contribution toward the purchase of medical, dental, and life insurance for substantially all of its retired employees. In 1993, BIC began advance funding for postretirement life benefits for employees retiring on or after January 1, 1994. Advance funding for medical benefits commenced in 1994. Medical benefits for employees who retired before January 1, 1994 continue to be funded on a pay-as-you-go basis. The Station has included in the accompanying combined statements of operations, expense under this plan of approximately $17,000 for the year ended December 31, 1999 and $7,000 and $8,000 for the six months ended June 30, 1999 and 2000, respectively. 6. RELATED PARTY TRANSACTIONS The Station is charged for certain corporate services received from BIC based upon the full-time equivalent employees of the Station to total full-time equivalent employees of all stations operated by BIC. Although BIC management is of the opinion that the allocations used are reasonable and appropriate, other allocations might be used that could produce results substantially different from those reflected herein and these cost allocations might not be indicative of amounts which might be paid to unrelated parties for similar 29 30 services. For purposes of these combined financial statements, the following BIC corporate departmental expenses have been charged to the Station's combined statements of income:
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ------------------ 1999 1999 2000 ------------ ---- ---- (UNAUDITED) Management...................................... $ 63,007 $33,347 $34,950 Finance......................................... 43,116 23,154 22,379 Information systems............................. 17,077 8,923 9,503 Human resources................................. 32,044 15,083 13,477 Engineering..................................... 7,605 4,044 3,316 Legal........................................... 10,742 5,110 5,259 Public relations................................ 3,648 2,022 Building and maintenance........................ 3,434 1,758 2,358 Depreciation.................................... 8,187 4,121 3,446 -------- ------- ------- Total...................................... $188,860 $97,562 $94,688 ======== ======= =======
****** 30 31 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Lee Enterprises, Incorporated Davenport, Iowa We have audited the accompanying combined statements of net assets of Lee Enterprises Certain Broadcasting Operations (Albuquerque, NM; Charleston-Huntington, WV; Honolulu, HI; Omaha, NE; Portland, OR; Topeka, KS; Tucson, AZ; Wichita, KS) (not a legal entity, see Note 1) as of September 30, 1998, and 1999, and the related statements of income, changes in net assets, and cash flows for the years ended September 30, 1997, 1998, and 1999. These financial statements are the responsibility of Lee Enterprises Certain Broadcasting Operations' management. Our responsibility is to express an opinion on these combined 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 combined financial statements referred to above present fairly, in all material respects, the net assets of Lee Enterprises Certain Broadcasting Operations as of September 30, 1998 and 1999, and the results of their operations and their cash flows for the years ended September 30, 1997, 1998, and 1999 in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP Davenport, Iowa August 14, 2000 31 32 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) COMBINED STATEMENTS OF NET ASSETS SEPTEMBER 30, 1998 AND 1999 (DOLLARS IN THOUSANDS)
1998 1999 ---- ---- ASSETS Current Assets: Cash...................................................... $ -- $ 694 Receivables: Trade, less allowance for doubtful accounts 1998 $925; 1999 $1,099............................................... 20,516 22,770 Other.................................................. 1,074 1,504 Program rights............................................ 7,477 8,382 Prepaid expenses.......................................... 910 839 -------- -------- TOTAL CURRENT ASSETS................................. 29,977 34,189 -------- -------- Property and Equipment, net................................. 30,904 30,434 -------- -------- Intangible Assets, net...................................... 127,494 123,476 -------- -------- Other Assets: Program rights, net of current portion.................... 372 678 Investments............................................... 2,555 2,551 -------- -------- 2,927 3,229 -------- -------- $191,302 $191,328 ======== ======== LIABILITIES AND NET ASSETS Current Liabilities: Current maturities of program rights...................... $ 7,684 $ 8,962 Accounts payable.......................................... 2,646 1,578 Accrued compensation...................................... 3,025 2,874 Other accrued expenses.................................... 1,169 1,343 -------- -------- 14,524 14,757 -------- -------- Long-Term Program Rights, net of current maturities......... 539 982 -------- -------- Deferred Revenue and Other.................................. 2,267 2,267 -------- -------- Net Assets.................................................. 173,972 173,322 -------- -------- $191,302 $191,328 ======== ========
See Notes to Combined Financial Statements. 32 33 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) COMBINED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1997, 1998, AND 1999 (DOLLARS IN THOUSANDS)
1997 1998 1999 ---- ---- ---- Gross revenue: Local and regional........................................ $ 66,894 $ 72,585 $ 68,087 National.................................................. 45,696 47,487 49,405 Network................................................... 7,455 7,150 6,152 Political................................................. 6,839 5,589 6,723 Other..................................................... 7,924 8,744 8,249 -------- -------- -------- TOTAL GROSS REVENUE.................................. 134,808 141,555 138,616 Less agency commissions................................... 18,719 19,842 19,585 -------- -------- -------- NET REVENUE.......................................... 116,089 121,713 119,031 -------- -------- -------- Operating expenses: Compensation costs, including expenses from parent 1997 $108; 1998 $199; 1999 $981............................. 48,069 49,591 50,667 Depreciation.............................................. 6,986 6,889 7,814 Amortization of intangibles............................... 4,226 4,225 4,018 Program amortization...................................... 7,004 7,896 9,561 Other, including allocations from parent 1997 $440; 1998 $631; 1999 $670........................................ 25,717 27,414 26,979 -------- -------- -------- 92,002 96,015 99,039 -------- -------- -------- INCOME BEFORE INCOME TAXES........................... 24,087 25,698 19,992 Income tax expense.......................................... 10,053 10,682 8,456 -------- -------- -------- NET INCOME........................................... $ 14,034 $ 15,016 $ 11,536 ======== ======== ========
See Notes to Combined Financial Statements. 33 34 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) COMBINED STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED SEPTEMBER 30, 1997, 1998, AND 1999 (DOLLARS IN THOUSANDS)
1997 1998 1999 ---- ---- ---- Balance, beginning.......................................... $182,033 $179,943 $173,972 Net income................................................ 14,034 15,016 11,536 Transfers to parent, net.................................. (26,177) (31,669) (20,642) Income tax expense transferred to parent.................. 10,053 10,682 8,456 -------- -------- -------- Balance, ending............................................. $179,943 $173,972 $173,322 ======== ======== ========
See Notes to Combined Financial Statements. 34 35 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997, 1998, AND 1999 (DOLLARS IN THOUSANDS)
1997 1998 1999 ---- ---- ---- Cash Flows from Operating Activities: Net income................................................ $ 14,034 $ 15,016 $ 11,536 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 11,212 11,114 11,832 Program amortization................................... 7,004 7,896 9,561 Program contract rights payments....................... (7,404) (8,413) (9,051) Other, primarily (gain) on sale of property and equipment............................................ (2) (43) (55) Income tax expense transferred to parent............... 10,053 10,682 8,456 Changes in assets and liabilities: (Increase) decrease in receivables................... (2,062) 218 (2,684) (Increase) decrease in prepaid expenses.............. (50) 404 71 Increase (decrease) in accounts payable and accrued expenses and deferred revenue..................... (312) 802 (1,045) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 32,473 37,676 28,621 -------- -------- -------- Cash Flows from Investing Activities: Proceeds from sale of property and equipment.............. 155 477 334 Purchase of property and equipment........................ (6,334) (6,705) (7,619) -------- -------- -------- NET CASH (USED IN) INVESTING ACTIVITIES........... (6,179) (6,228) (7,285) -------- -------- -------- Cash Flows (Used In) Financing Activities, transfers to parent, net............................................... (26,177) (31,669) (20,642) -------- -------- -------- NET INCREASE (DECREASE) IN CASH................... 117 (221) 694 Cash: Beginning................................................. 104 221 -- -------- -------- -------- Ending.................................................... $ 221 $ -- $ 694 ======== ======== ======== Supplemental Disclosure of Noncash Operating Activities, program rights acquired................................... $ 7,023 $ 8,486 $ 10,772
See Notes to Combined Financial Statements. 35 36 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND,OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: Lee Enterprises Certain Broadcasting Operations (Business) consists of eight network-affiliated and seven satellite television stations and a mobile television production business owned by Lee Enterprises, Incorporated (Parent). SIGNIFICANT ACCOUNTING POLICIES: Basis of presentation: The accompanying combined financial statements represent the net assets and associated revenues, expenses, and cash flows of the Business, assuming that the Business was organized as a separate legal entity. The Parent provides certain administrative services to the Business including general management, engineering services, insurance, accounting, and payroll. Included within compensation costs are $108, $199, and $981 of costs allocated from the Parent for the years ended September 30, 1997, 1998, and 1999, respectively. Other operating expenses include $440, $631, and $670 of additional costs allocated from the parent for various items including training costs, consulting services, relocation costs, and travel and entertainment for the years ended 1997, 1998, and 1999, respectively. Accounting 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 and 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. Property and equipment: Property and equipment is recorded at cost. Depreciation is calculated under the straight-line method over the estimated useful lives, 5-to-25 years for buildings and improvements, and 15-20 years for towers. Other major equipment is calculated under accelerated methods over 3-to-10 years. Program rights: Cost of program rights is stated at the lower of cost or estimated net realizable value. Estimated net realizable values are based upon management's expectations of future advertising revenue, net of sales commissions, to be generated by the program material. The total cost of the rights is recorded as an asset and a liability when the program becomes available for broadcast. Cost of program rights is charged to operations primarily on accelerated bases related to the usage of the program. The current portion of program rights represents those rights that will be amortized in the succeeding year. Intangible assets: Intangible assets are carried at cost and consist primarily of customer lists, broadcast licenses and agreements, and the excess of acquisition costs over estimated fair value of net assets acquired (goodwill). The excess costs over fair value of net tangible assets acquired include $15,017 incurred prior to October 31, 1970, which is not being amortized. The remaining cost are being amortized using the straight-line method primarily over 40 years. The Business reviews its intangibles and other long-lived assets annually to determine potential impairment. In performing the review, the Business estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. The 36 37 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND,OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amount of impairment is measured based upon projected discounted future cash flows using a discount rate reflecting the Business' average cost of funds. Net assets: The Business participates in the Parent's cash management system. Under the system, all cash generated by the Business is transferred to the Parent and all cash requirements of the Business are funded by the Parent. These transfers of funds are reflected in the net asset balance. Broadcast revenue: Revenue is recognized when advertisements or network programming are broadcast. Income taxes: The Business represents a business unit of Lee Enterprises, Incorporated and as such does not file separate income tax returns. The provision for income taxes of the Business has been calculated as if the Business was a stand-alone corporation filing separate tax returns. The Business accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Cumulative deferred taxes have been settled through net assets. Financial instruments: The Business has reviewed the following financial instruments and has determined that their fair values approximated their carrying values as of September 30, 1997, 1998, and 1999: cash, receivables, accounts payable, accrued expenses, and program rights. NOTE 2. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
SEPTEMBER 30, ------------------- 1998 1999 ---- ---- Land and improvements....................................... $ 3,610 $ 3,655 Buildings and improvements.................................. 16,960 17,814 Equipment................................................... 76,805 82,760 Other, primarily deposits................................... 2,041 1,667 ------- -------- 99,416 105,896 Less accumulated depreciation............................... 68,512 75,462 ------- -------- $30,904 $ 30,434 ======= ========
37 38 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND,OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 3. INTANGIBLE ASSETS A summary of intangible assets is as follows:
SEPTEMBER 30, -------------------- 1998 1999 ---- ---- Customer lists, broadcasting licenses, and agreements....... $ 91,020 $ 91,020 Goodwill.................................................... 79,333 79,333 Other....................................................... 4,200 4,200 -------- -------- 174,553 174,553 Less accumulated amortization............................... 47,059 51,077 -------- -------- $127,494 $123,476 ======== ========
NOTE 4. RETIREMENT PLAN The Parent maintains a qualified defined contribution retirement plan (Plan) that covers all full-time employees of the Business who have satisfied minimum age and service requirements. Total contributions to the plan for the years ended September 30, 1997, 1998, and 1999 were approximately $1,996, $2,181, and $2,191, respectively. NOTE 5. COMMITMENTS AND CONTINGENCIES The Business has entered into agreements to acquire broadcast rights for certain syndicated programs of approximately $19,776 as of September 30, 1999. NOTE 6. SUBSEQUENT EVENT On May 7, 2000, Lee Enterprises, Incorporated entered into an agreement to sell the Business to Emmis Communications Corporation. The purchase price is approximately $562,500. The sale is subject to various conditions, including approval by the Federal Communication Commission, and other customary contingencies for a transaction of this nature. The sale is anticipated to be complete later this year. 38 39 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) CONDENSED COMBINED STATEMENTS OF NET ASSETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30, 1999 2000 ------------- -------- (UNAUDITED) ASSETS Current Assets: Cash...................................................... $ 694 $ 511 Receivables: Trade, less allowance for doubtful accounts 1999 $1,099; 2000 $1,003....................................... 22,770 24,581 Other.................................................. 1,504 1,415 Program rights............................................ 8,382 2,105 Prepaid expenses.......................................... 839 974 -------- -------- TOTAL CURRENT ASSETS................................. 34,189 29,586 -------- -------- Property and Equipment, net................................. 30,434 30,017 -------- -------- Intangible Assets, net...................................... 123,476 120,515 -------- -------- Other Assets: Program rights, net of current portion.................... 678 326 Investments............................................... 2,551 3,322 -------- -------- 3,229 3,648 -------- -------- $191,328 $183,766 ======== ======== LIABILITIES AND NET ASSETS Current Liabilities: Current maturities of program rights...................... $ 8,962 $ 2,144 Accounts payable.......................................... 1,578 1,518 Accrued compensation...................................... 2,874 2,295 Other accrued expenses.................................... 1,343 1,363 -------- -------- 14,757 7,320 -------- -------- Long-Term Program Rights, net of current maturities......... 982 766 -------- -------- Deferred Revenue and Other.................................. 2,267 2,128 -------- -------- Net Assets.................................................. 173,322 173,552 -------- -------- $191,328 $183,766 ======== ========
See Notes to Unaudited Condensed Combined Financial Statements. 39 40 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) CONDENSED COMBINED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 1999 2000 -------- -------- (UNAUDITED) Gross revenue: Local and regional........................................ $ 51,539 $ 53,408 National.................................................. 36,830 40,081 Network................................................... 4,752 2,895 Political................................................. 6,588 3,196 Other..................................................... 5,928 6,176 -------- -------- TOTAL GROSS REVENUE.................................. 105,637 105,756 Less agency commissions................................... 15,035 15,298 -------- -------- NET REVENUE.......................................... 90,602 90,458 -------- -------- Operating expenses: Compensation costs, including expenses from parent 1999 $735; 2000 $444........................................ 37,958 38,160 Depreciation.............................................. 5,472 6,093 Amortization of intangibles............................... 3,005 2,961 Program amortization...................................... 6,451 7,759 Other, including allocations from parent 1999 $300; 2000 $292................................................... 20,446 18,669 -------- -------- 73,332 73,642 -------- -------- INCOME BEFORE INCOME TAXES........................... 17,270 16,816 Income tax expense.......................................... 7,230 7,053 -------- -------- NET INCOME........................................... $ 10,040 $ 9,763 ======== ========
See Notes to Unaudited Condensed Combined Financial Statements. 40 41 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) CONDENSED COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED -------------------- JUNE 30, JUNE 30, 1999 2000 -------- -------- (UNAUDITED) Cash Flows from Operating Activities: Net income................................................ $ 10,040 $ 9,763 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 8,477 9,054 Program amortization................................... 6,451 7,759 Program contract rights payments....................... (6,953) (8,489) Other.................................................. (12) (168) Income tax expense transferred to parent............... 7,230 7,053 Changes in assets and liabilities: (Increase) in receivables............................ (6,338) (1,722) (Increase) in prepaid expenses....................... (167) (135) Increase (decrease) in accounts payable and accrued expenses............................................ 1,224 (758) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 19,952 22,357 -------- -------- Cash Flows from Investing Activities: Purchase of property and equipment........................ (6,471) (5,843) Proceeds from sale of property and equipment.............. 278 172 Purchase of investment.................................... -- (608) -------- -------- NET CASH (USED IN) INVESTING ACTIVITIES........... (6,193) (6,279) -------- -------- Cash Flows (Used In) Financing Activities, transfers to parent, net............................................... (12,897) (16,261) -------- -------- NET INCREASE (DECREASE) IN CASH................... 862 (183) Cash: Beginning................................................. -- 694 -------- -------- Ending.................................................... $ 862 $ 511 ======== ========
See Notes to Unaudited Condensed Combined Financial Statements. 41 42 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1. GENERAL, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING POLICIES GENERAL: Pursuant to the rules and regulations of the Securities and Exchange Commission, the consolidated interim financial statements included herein have been prepared, without audit, by Lee Enterprises Certain Broadcasting Operations (Albuquerque, NM; Charleston-Huntington, WV; Honolulu, HI; Omaha, NE; Portland, OR; Topeka, KS; Tucson, AZ; Wichita, KS). As permitted under the applicable rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, Lee Enterprises Certain Broadcasting Operations believe that the disclosures are adequate to make the information presented not misleading. The condensed combined financial statements included herein should be read in conjunction with the combined financial statements and the notes thereto included elsewhere in this prospectus. The unaudited information furnished reflects all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary to a fair presentation of the financial position as of June 30, 2000 and the results of operations and cash flows for the nine-month periods ended June 30, 2000 and 1999. The results of the nine-month periods are not necessarily indicative of the results of the Lee Enterprises Certain Broadcasting Operations (Business) which may be expected for the entire year. NATURE OF BUSINESS: The Business consists of eight network-affiliated and seven satellite television stations and a mobile television production business owned by Lee Enterprises, Incorporated (Parent). SIGNIFICANT ACCOUNTING POLICIES: Basis of presentation: The accompanying combined financial statements represent the net assets and associated revenues, expenses, and cash flows of the Business, assuming that the Business was organized as a separate legal entity. The Parent provides certain administrative services to the Business including general management, engineering services, insurance, accounting, and payroll. Included within compensation costs are $735 and $444 of costs allocated from the Parent for the nine months ended June 30, 1999 and 2000, respectively. Other operating expenses include $300 and $292 of additional costs allocated from the parent for various items including training costs, consulting services, relocation costs, and travel and entertainment for the nine months ended June 30, 1999 and 2000, respectively. Net assets: The Business participates in the Parent's cash management system. Under the system, all cash generated by the Business is transferred to the Parent and all cash requirements of the Business are funded by the Parent. These transfers of funds are reflected in the net asset balance. 42 43 LEE ENTERPRISES CERTAIN BROADCASTING OPERATIONS (ALBUQUERQUE, NM; CHARLESTON-HUNTINGTON, WV; HONOLULU, HI; OMAHA, NE; PORTLAND, OR; TOPEKA, KS; TUCSON, AZ; WICHITA, KS) NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 2. PROPERTY AND EQUIPMENT A summary of property and equipment as of June 30, 2000 is as follows: Land and improvements....................................... $ 3,573 Buildings and improvements.................................. 17,677 Equipment................................................... 84,536 Other, primarily deposits................................... 5,305 -------- 111,091 Less accumulated depreciation............................... 81,074 -------- $ 30,017 ========
NOTE 3. INTANGIBLE ASSETS A summary of intangible assets as of June 30, 2000 is as follows: Customer lists, broadcasting licenses, and agreements....... $ 91,020 Goodwill.................................................... 79,333 Other....................................................... 4,200 -------- 174,553 Less accumulated amortization............................... 54,038 -------- $120,515 ========
NOTE 4. SUBSEQUENT EVENT On May 7, 2000, Lee Enterprises, Incorporated entered into an agreement to sell the Business to Emmis Communications Corporation. The purchase price is approximately $562,500. The sale is subject to various conditions, including approval by the Federal Communication Commission, and other customary contingencies for a transaction of this nature. The sale is anticipated to be completed later this year. 43 44 (b) Pro forma financial information PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION Introduction.............................................. 45 Pro Forma Combined Condensed Balance Sheet as of May 31, 2000................................................... 46 Pro Forma Combined Condensed Statement of Operations for the three months ended May 31, 2000.................... 47 Pro Forma Combined Condensed Statement of Operations for the Year ended February 29, 2000....................... 48 Notes to Unaudited Pro Forma Condensed Combined Financial Statement.............................................. 49 44 45 EMMIS COMMUNICATIONS CORPORATION PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The accompanying financial statements present our unaudited pro forma combined condensed balance sheet as of May 31, 2000 and our unaudited pro forma combined condensed statement of operations as of May 31, 2000, and for the year ended February 29, 2000. The unaudited pro forma combined condensed balance sheet as of May 31, 2000 is presented as if (i) the acquisition, which we refer to as the "Sinclair Acquisition," of six radio stations in St. Louis from Sinclair Broadcast Group, Inc. for $220 million in cash, (ii) the acquisition, which we refer to as the "Bonneville Acquisition," of a radio station in Los Angeles from Bonneville International Corporation in exchange for one of our radio stations in St. Louis and three of the radio stations we acquired in the Sinclair Acquisition, (iii) the acquisition, which we refer to as the "Lee Acquisition," of eight network-affiliated television stations from Lee Enterprises, Incorporated for $559.5 million in cash and the payment of $21.5 million in cash for working capital, (iv) the disposition, which we refer to as the "Hawaii Disposition," of one of our television stations in Hawaii that was acquired as part of the Lee Acquisition for cash equal to our management's estimate of the fair value of that station, and (v) the debt financing for these transactions, had each occurred on May 31, 2000. The pro forma combined condensed statement of operations for the three month period ended May 31, 2000 and for the year ended February 29, 2000 are presented as if (i) the acquisition, which we refer to as the "Votionis Acquisition," of a 75% interest in Votionis, S.A. which operates two radio stations in Buenos Aires, Argentina for $13.3 million in cash, (ii) the acquisition, which we refer to as the "WKCF Acquisition," of a television station in Orlando from Press Communications LLC for $197.1 million in cash, (iii) the Sinclair Acquisition, (iv) the Bonneville Acquisition, (v) the Lee Acquisition, (vi) the Hawaii Disposition, (vii) the application of $210.4 million of the net proceeds from our public offerings of common stock and convertible preferred stock and from our private placement of common stock to a subsidiary of Liberty Media Corporation, which public offerings and private placement we refer to as our "1999 Equity Transactions," to the Votionis Acquisition and the WKCF Acquisition, (viii) the application of $311.6 million of the net proceeds from our 1999 Equity Transactions to the repayment of our senior debt, and (ix) the debt financing of the Sinclair Acquisition, the Bonneville Acquisition and the Lee Acquisition had each occurred at March 1, 1999 and carried forward. Preparation of the pro forma financial information was based on assumptions deemed appropriate by our management. The pro forma information is unaudited and is not necessarily indicative of the results which actually would have occurred if the transactions had been consummated at the beginning of the period presented, nor does it purport to represent the future financial position and results of operation for future periods. The pro forma information does not reflect any increased revenues, synergies or cost savings that we expect to realize from our recent acquisitions. The pro forma information should be read in conjunction with our audited historical financial statements filed on Form 10-K/A for our year ended February 29, 2000 and our unaudited financial statements filed on Form 10-Q for our fiscal quarter ended May 31, 2000. 45 46 EMMIS COMMUNICATIONS CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MAY 31, 2000 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS --------------------- EMMIS SIGNIFICANT EMMIS HISTORICAL ACQUISITIONS (2C) PRO FORMA ---------- ----------------- --------- CURRENT ASSETS: Cash and cash equivalents............ $19,751 $(4,380) $15,371 Accounts receivable, net............. 81,494 21,500 102,994 Prepaid expenses..................... 14,474 -- 14,474 Other................................ 17,160 5,488 22,648 ---------- -------- ---------- Total current assets................. 132,879 22,608 155,487 Property and equipment, net.......... 127,953 71,148 199,101 Intangible assets, net............... 1,058,167 729,550 1,787,717 Other assets, net.................... 51,117 (620) 50,497 ---------- -------- ---------- Total assets....................... $1,370,116 $822,686(2a) $2,192,802 ========== ======== ========== CURRENT LIABILITIES: Accounts payable................... $25,992 $7,245 $33,237 Current portion of allocated other long-term debt..................... 3,475 -- 3,475 Current portion of TV program rights payable............................ 16,712 4,718 21,430 Accrued salaries and commissions..... 8,500 -- 8,500 Accrued interest..................... 4,969 -- 4,969 Deferred revenue..................... 18,704 -- 18,704 Other................................ 4,561 -- 4,561 ---------- -------- ---------- Total current liabilities............ 82,913 11,963(2b) 94,876 Allocated credit facility and senior subordinated notes................. 332,000 801,000 1,133,000 Acquisition payable.................. -- -- -- TV program rights payable, net of current portion.................... 54,257 770 55,027 Other long-term debt, net of current portion............................ 14,551 -- 14,551 Other noncurrent liabilities......... 4,907 -- 4,907 Deferred income taxes................ 90,341 3,402 93,743 Minority interest.................... 557 -- 557 ---------- -------- ---------- Total liabilities.................... 579,526 817,135 1,396,661 SHAREHOLDERS' EQUITY: Class A Common Stock................. 445 -- 445 Class B Common Stock................. 49 -- 49 Additional paid-in capital........... 815,048 -- 815,048 Accumulated deficit.................. (23,817) 5,551 (18,266) Accumulated other comprehensive loss............................... (1,135) -- (1,135) ---------- -------- ---------- Total shareholders' equity (deficit).......................... 790,590 5,551 796,141 ---------- -------- ---------- Total liabilities and shareholders' equity.......................... $1,370,116 $822,686 $2,192,802 ========== ======== ==========
46 47 EMMIS COMMUNICATIONS CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2000 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS ----------------------------- SIGNIFICANT EMMIS ACQUISITIONS ACQUISITION EMMIS HISTORICAL AND OTHER (3A) ADJUSTMENTS PRO FORMA ---------- -------------- ----------- --------- Net revenues................................. $100,519 $28,898 $-- $129,417 Operating expenses......................... 61,856 21,029 -- 82,885 International business development expenses................................ 404 -- -- 404 Corporate expenses......................... 3,720 227 -- 3,947 Depreciation and amortization.............. 14,272 4,216 2,745(3B) 21,233 Noncash compensation....................... 1,664 -- -- 1,664 Programming Restructuring Cost............. -- -- -- -- Time Brokerage Agreement Fee............... -- -- -- -- -------- ------- -------- -------- Operating Income............................. 18,603 3,426 (2,745) 19,284 Other Income (Expense)....................... -- Interest Expense........................... (8,412) (669) (16,883)(3C) (25,964) Other Income (expense), net................ 310 18 -- 328 -------- ------- -------- -------- Total other income (expense).......... (8,102) (651) (16,883) (25,636) -------- ------- -------- -------- Income before income taxes................... 10,501 2,775 (19,628) (6,352) Tax Provision (Benefit)...................... 4,590 2,162 (8,566)(3D) (1,814) -------- ------- -------- -------- Net Income (loss)............................ 5,911 613 (11,062) (4,538) Less: Preferred Stock Dividends.............. 2,246 -- -- 2,246 -------- ------- -------- -------- Net Income (loss) Available to Common........ $3,665 $613 $(11,062) $ (6,784) ======== ======= ======== ======== EPS (basic).................................. $0.08 $ (0.15) ======== ======== EPS (diluted)................................ $0.08 $ (0.15) ======== ======== Basic (weighted average shares outstanding)............................... 46,269 46,269 ======== ======== Diluted (weighted average shares outstanding)............................... 48,012 46,269 ======== ========
47 48 EMMIS COMMUNICATIONS CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 2000 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS ---------------------------- SIGNIFICANT ACQUISITIONS EMMIS AND OTHER ACQUISITION EMMIS HISTORICAL (3A) ADJUSTMENTS PRO FORMA ---------- ------------ ----------- ------------- Net revenues................................ $325,265 $153,288 $-- $478,553 Operating expenses........................ 199,818 103,896 -- 303,714 International business development expenses............................... 1,558 -- -- 1,558 Corporate expenses........................ 13,872 2,035 -- 15,907 Depreciation and amortization............. 44,161 21,753 11,072(3B) 76,986 Noncash compensation...................... 7,357 -- -- 7,357 Programming restructuring cost............ 896 -- -- 896 Time brokerage agreement fee.............. -- -- -- -- -------- -------- -------- --------- Operating income (loss)..................... 57,603 25,604 (11,072) 72,135 Other income (expense) Interest expense.......................... (51,986) 18,198 (69,328)(3C) (103,116) Other income (expense), net............... 3,247 (2,857) -- 390 -------- -------- -------- --------- Total other income (expense)................ (48,739) 15,341 (69,328) (102,726) -------- -------- -------- --------- Income before income taxes.................. 8,864 40,945 (80,400) (30,591) Tax provision (benefit)..................... 6,875 17,921 (32,914)(3D) (8,118) -------- -------- -------- --------- Income before extraordinary item............ 1,989 23,024 (47,486) (22,473) Less: Preferred stock dividends............. 3,144 -- -- 3,144 -------- -------- -------- --------- Net income to common shareholder before extraordinary item..................... $(1,155) $23,024 $(47,486) $(25,617) ======== ======== ======== ========= EPS before extraordinary item (basic)....... $(0.03) $ (0.57) ======== ========= EPS before extraordinary item (diluted)..... $(0.03) $ (0.57) ======== ========= Basic (weighted average shares outstanding).............................. 36,156 45,337 ======== ========= Diluted (weighted average shares outstanding).............................. 36,156 45,337 ======== =========
48 49 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) 1. BASIS OF PRESENTATION We are a diversified media company with radio broadcasting, television broadcasting, and magazine publishing operations. The accompanying combined condensed pro forma financial statements give effect to our 1999 Equity Transactions and the transactions described below. The following acquisitions have been completed since March 1, 1999. Each acquisition has been accounted for using the purchase method of accounting. - On October 6, 2000, we acquired from Sinclair Broadcast Group, Inc. ("Sinclair") certain assets of radio stations WIL-FM, WRTH-AM, WVRV-FM, KPNT-FM, KXOK-FM, and KIHT-FM in St. Louis, Missouri for a cash purchase price of $220.0 million. This acquisition was financed with borrowings under our credit facility. - On October 6, 2000, we acquired certain assets of radio station KZLA-FM ("Bonneville") in exchange for three radio stations acquired from Sinclair (WIL-FM, WVRV-FM and WRTH-AM) and our existing radio station WKKX-FM. The acquired assets of Bonneville will be recorded based on the fair value of the Sinclair radio stations ($154.5 million) and our station WKKX-FM ($30.5 million) totaling $185 million, exchanged for KZLA. The net book value of WKKX-FM approximates $21.5 million. - On October 2, 2000, we purchased eight network-affiliated and seven satellite television stations from Lee Enterprises, Incorporation for $559.5 million and the payment of $21.5 million for working capital (the "Lee Acquisition"). This transaction was financed through borrowings under our amended credit facility. As a result of the Lee Acquisition, we will own more television stations in the Hawaiian market than is currently permitted by FCC regulations. We may be required to sell one of our Hawaiian television stations to be in compliance with this regulatory requirement. The operating results of the Lee station serving the Hawaiian market have been excluded from the accompanying pro forma statements of operations. - On November 9, 1999, we completed our acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Votionis, which operates two radio stations in Buenos Aires, Argentina, is included in our operating results effective November 9, 1999. A pro forma adjustment is required to reflect its operating results for the period prior to the acquisition. The purchase of Votionis was financed with proceeds from our 1999 Equity Transaction. Therefore, no pro forma adjustment related to debt or interest expense has been recorded for this transaction. - On October 29, 1999, we completed an acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ("WKCF") from Press Communications, L.L.C. for approximately $197.1 million in cash. WKCF is included in our operating results effective October 29, 1999. A pro forma adjustment is required to reflect WKCF's operating results for the period prior to the acquisition. The purchase of WKCF was financed with proceeds from the 1999 Equity Transactions. Therefore, no pro forma adjustment related to debt or interest expense has been recorded for this transaction. 49 50 2. PRO FORMA ADJUSTMENTS TO COMBINED CONDENSED BALANCE SHEET (A) DETERMINATION OF COMBINED PURCHASE PRICE TELEVISION Lee -- cash requirement, including working capital of $21,500................................................... $581,000 Lee -- program rights liability assumed..................... 5,488 Lee -- estimated transaction costs.......................... 560 --------- Total purchase price -- television acquisition.............. 587,048 --------- RADIO Sinclair -- cash requirement................................ 220,000 Sinclair -- assets exchanged................................ (154,527) Bonneville -- assigned value................................ 185,000 Sinclair and Bonneville -- estimated transaction costs...... 11,685 --------- Total purchase price -- significant radio acquisitions...... 262,158 --------- Combined Purchase price -- significant acquisitions......... $849,206 ---------
(B) DETERMINATION OF COMBINED FINANCING REQUIREMENT Combined purchase price -- significant acquisitions......... $849,206 Less: Fair value of assets exchanged (WKKX-FM).............. (30,473) Less: liabilities assumed and transaction costs............. (17,733) --------- Total debt required to finance all acquisitions............. $801,000 =========
--------------- In order to finance the Lee Acquisition and the Sinclair Acquisition, we amended our existing credit facility to increase our borrowing capability to a total of $1.0 billion. We borrowed $801.0 million under the amended credit facility to finance these acquisitions and $128.0 million to fund other acquisitions. 50 51 (C) ALLOCATION OF PURCHASE PRICE FOR SIGNIFICANT ACQUISITIONS:
SIGNIFICANT ACQUISITIONS ------------------------------------------------ ALLOCATION OF PURCHASE PRICE BOOK VALUE PRO FORMA AND FINANCING OF ASSETS ACQUISITIONS COSTS (CA) EXCHANGED (CB) ADJUSTMENT -------------- -------------- ------------ CURRENT ASSETS: Cash and cash equivalents............................. $(4,380) $-- $(4,380)(Cc) Other................................................. 26,988 -- 26,988 -------- -------- -------- Total current assets.................................. 22,608 -- 22,608 Property and equipment, net........................... 72,736 (1,588) 71,148 Intangible assets, net................................ 749,482 (19,932) 729,550 Other assets, net..................................... 4,380 (5,000) (620)(Cc) -------- -------- -------- Total assets.......................................... $849,206 $(26,520) $822,686 ======== ======== ======== CURRENT LIABILITIES: Current portion of TV program rights payable.......... $4,718 $-- $4,718 Accounts payable and other............................ 12,245 (5,000) 7,245 -------- -------- -------- Total current liabilities............................. 16,963 (5,000) 11,963 TV program rights payable, net of current portion..... 770 -- 770 Deferred taxes........................................ 3,402 -- 3,402 Credit facility, bridge loan and senior subordinated notes............................................... 801,000 -- 801,000(Cd) -------- -------- -------- Total liabilities..................................... 822,135 (5,000) 817,135 NET ASSETS:........................................... 27,071 (21,520) 5,551(Ca) -------- -------- -------- Total Liabilities and Net Assets...................... $849,206 $(26,520) $822,686 ======== ======== ========
------------------------- (Ca) Reflects management's preliminary purchase price allocation for the Lee, Sinclair and Bonneville stations to be acquired and retained based on information currently available. Net assets includes the book gain net of taxes resulting from the exchange of our WKKX-FM radio business in connection with the Bonneville Acquisition of $5.551 million net of $3.402 million of deferred income taxes. The gain has been properly excluded from the accompany pro forma statement of operations. (Cb) Pro forma adjustment required to reflect the elimination our radio station WKKX's assets to be exchanged in connection with the Bonneville Acquisition. (Cc) Pro forma adjustment to reflect a reduction in cash related to deferred financing costs incurred in connection with the recent amendment to our credit facility. (Cd) Pro forma adjustment to reflect debt incurred to finance the Lee and Sinclair Acquisitions. 3. PRO FORMA ADJUSTMENTS TO COMBINED STATEMENTS OF OPERATIONS Certain reclassifications have been made to the historical results of the acquired businesses to conform to Emmis' pro forma financial presentation. These reclassifications had no effect on results of operations. (A) Emmis' February 28 fiscal year end differs from the September 30 or December 31 fiscal year ends of Lee, Sinclair and Bonneville. The historical results of the Lee television stations KOIN, KRQE, WSAZ, KSNW, KGMB, KGUN, KMTV and KSNT, the Sinclair radio stations, KPNT, KXOK, KIHT, WIL, WRTH and WVRV, and the Bonneville radio station KZLA for the three months ended March 31, 2000 are included in our pro forma statement of operations for the three months ended May 31, 2000. The historical 51 52 results of the Lee, Sinclair and Bonneville stations for the twelve months ended December 31, 1999, are included in our pro forma statement of operations for the fiscal year ended February 29, 2000.
PRO FORMA ADJUSTMENTS --------------------- ELIMINATE SINCLAIR STATIONS TO BE SIGNIFICANT LEE BONNEVILLE EXCHANGED ACQUISITIONS THREE MONTHS ENDED MAY 31, 2000 (HISTORICAL)(AA) (HISTORICAL) (AB) OTHER (AC) AND OTHER (A) ------------------------------- ---------------- ------------ -------------- ---------- ------------- (IN THOUSANDS) Net revenues....................... $24,891 $9,333 $(5,326) $-- $28,898 Operating expenses................. 18,252 6,183 (3,406) -- 21,029 International business development expenses......................... -- -- -- -- -- Corporate expenses................. 115 194 (82) -- 227 Depreciation and amortization...... 2,843 2,253 (880) -- 4,216 Noncash compensation............... -- -- -- -- -- Programming restructuring cost..... -- -- -- -- -- Time brokerage agreement fee....... -- -- -- -- -- ------- ------- ------- --- ------- Operating income (loss)............ 3,681 703 (958) -- 3,426 Interest expense................... -- (1,603) 934 -- (669) Other income (expense), net...... -- 50 (32) -- 18 ------- ------- ------- -- ------- Total other income (expense)....... -- (1,553) 902 -- (651) Income (loss) before income taxes............................ 3,681 (850) (56) -- 2,775 Tax provision / (benefit).......... 1,590 494 78 -- 2,162 ------- ------- ------- --- ------- Income (loss) before extraordinary item............................. $ 2,091 $(1,344) $(134) -- $613 ======= ======= ======= =======
PRO FORMA ADJUSTMENTS --------------------- SINCLAIR ELIMINATE SIGNIFICANT LEE BONNEVILLE STATIONS TO BE ACQUISITIONS TWELVE MONTHS ENDED FEBRUARY 29, 2000 (HISTORICAL)(AA) (HISTORICAL) EXCHANGED (AB) OTHER (AC) AND OTHER (A) ------------------------------------- ---------------- ------------ -------------- ---------- ------------- Net revenues....................... $105,848 $40,819 $(22,141) $28,762 $153,288 Operating expenses................. 77,007 22,892 (13,801) 17,798 103,896 International business development expenses......................... -- -- -- -- -- Corporate expenses................. 1,557 944 (466) -- 2,035 Depreciation and amortization...... 11,432 8,580 (3,231) 4,972 21,753 Noncash compensation............... -- -- -- -- -- Programming restructuring cost..... -- -- -- -- -- Time brokerage agreement fee....... -- -- -- -- -- -------- ------- -------- ------- -------- Operating income(loss)............. 15,852 8,403 (4,643) 5,992 25,604 Interest expense................... -- (6,173) 3,586 20,785 18,198 Other income (expense), net........ -- 1 6 (2,864) (2,857) -------- ------- -------- ------- -------- Total other income (expense)....... -- (6,172) 3,592 17,921 15,341 Income before income taxes......... 15,852 2,231 (1,051) 23,913 40,945 Tax provision / (benefit).......... 6,799 2,489 (454) 9,087 17,921 -------- ------- -------- ------- -------- Income before extraordinary item... $ 9,053 $ (258) $ (597) $14,826 $ 23,024 ======== ======= ======== ======= ========
------------------------- (Aa) The Lee historical amounts have been adjusted to reflect the elimination of the historical results of Lee television station KGMG in Honolulu, which we may be required to sell to meet FCC ownership limits. 52 53 (Ab) Pro forma adjustment to reflect the elimination of the historical results of the Sinclair radio stations WIL, WRTH, and WVRV and our radio station WKKX, which will be exchanged for Bonneville radio station KZLA. (Ac) Pro forma adjustment to reflect (1) the operating results of Votionis and WKCF for the periods of March 1, 1999 through November 8, 1999 and March 1, 1999 through October 28, 1999, prior to their respective acquisitions by us. Votionis and WKCF were acquired prior to the three months ended May 31, 2000 and are therefore included in our historical operating results for the period. The pro forma adjustment also reflects the reduction in interest expense related to the repayment of $311.6 million of the credit facility with proceeds from the 1999 Equity Transactions and the reduction of investment earnings by us prior to the repayment date. (B) Pro forma adjustment to reflect the increase in depreciation and amortization expense as a result of recording property, plant and equipment and intangible assets at acquisition value.
FOR THE YEAR FOR THE THREE ENDED MONTHS ENDED FEBRUARY 29, MAY 31, 2000 2000 ------------- ------------ Lee.................................................. $2,122 $ 8,428 Bonneville/Sinclair.................................. 623 2,644 ------ ------- $2,745 $11,072 ====== =======
(C) Pro forma adjustment to reflect the following adjustments to interest expense.
FOR THE FOR THE THREE YEAR ENDED MONTHS ENDED FEBRUARY 29, MAY 31, 2000 2000 ------------- ------------ $801,000 borrowed, interest at approximately 8.5% per annum based on the terms of our amended credit facility........................................... $17,027 $68,109 Amortization of deferred financing cost related to our amended credit facility and a permanent financing proposal................................. 525 3,806 ------- ------- Total Additional Pro Forma Interest Expense.......... 17,552 71,915 Historical interest expense.......................... (669) (2,587) ------- ------- Pro Forma Adjustment................................. $16,883 $69,328 ======= =======
If the interest rate on our variable debt were to increase by 0.125%, our pro forma interest expense would have been higher by approximately $1.0 million and $0.3 million for the year ended February 29, 2000 and the three months ended May 31, 2000, respectively. (D) To adjust income taxes based on combined federal and state statutory rate of 38%. 53 54 Exhibit (c) Exhibits Number Description ------ ----------- 2.1 Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee, New Mexico Broadcasting Co. and the Company. 2.2 Asset Purchase Agreement, dated as of June 21, 2000, by and among Sinclair Radio of St. Louis, Inc., Sinclair Radio of St. Louis Licensee, LLC and the Company. 2.3 Asset Exchange Agreement, dated as of October 6, 2000, between the Company, Emmis 106.5 FM Broadcasting Corporation of St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and Bonneville and Bonneville Holding Company. 10.1 Third Amended and Restated Revolving Credit and Term Loan Agreement, dated as of October 2, 2000, among the Company, Toronto Dominion (Texas), Inc., as Lead Arranger and Administrative Agent, Fleet National Bank, as Documentation Agent, First Union National Bank, as Syndication Agent, and each of the Financial Institutions Now or Hereafter Parties Hereto. 10.2 Asset Purchase Agreement, dated as of June 19, 2000, by and among the Company, AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM Radio Licenses, LLC. 23.1 Consent of McGladry & Pullen LLP 23.2 Consent of Arthur Andersen LLP 99.1 Press release, dated October 2, 2000, of the Company and Lee. 99.2 Press release, dated October 6, 2000. of the Company. 54 55 SIGNATURES Pursuant to the requirements 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 COMMUNICATIONS CORPORATION By: /s/ Walter Z. Berger ----------------------------------------- Name: Walter Z. Berger Title: Executive Vice President, (Authorized Corporate Officer) Chief Financial Officer and Treasurer Dated: October 16, 2000 55 56 EXHIBIT INDEX 2.1 Purchase and Sale Agreement, dated as of May 7, 2000, by and among Lee Enterprises, Incorporated, New Mexico Broadcasting Co. and Emmis Communications Corporation. 2.2 Asset Purchase Agreement, dated as of June 21, 2000, by and among Sinclair Radio of St. Louis, Inc., Sinclair Radio of St. Louis Licensee, LLC and Emmis Communications Corporation. 2.3 Asset Exchange Agreement, dated as of October 6, 2000, between Emmis Communications Corporation, Emmis 106.5 FM Broadcasting Corporation of St. Louis and Emmis 106.5 FM License Corporation of St. Louis, and Bonneville International Corporation and Bonneville Holding Company. 10.1 Third Amended and Restated Revolving Credit and Term Loan Agreement, dated as of October 2, 2000, among Emmis Communications Corporation, Toronto Dominion (Texas), Inc., as Lead Arranger and Administrative Agent, Fleet National Bank, as Documentation Agent, First Union National Bank, as Syndication Agent, and each of the Financial Institutions Now or Hereafter Parties Hereto. 10.2 Asset Purchase Agreement, dated as of June 19, 2000, by and among Emmis Communications Corporation, AMFM Houston, Inc., AMFM Ohio, Inc. and AMFM Radio Licenses, LLC. 23.1 Consent of McGladry & Pullen LLP 23.2 Consent of Arthur Andersen LLP 99.1 Press release, dated October 2, 2000, of Emmis Communications Corporation and Lee Enterprises, Incorporated. 99.2 Press release, dated October 6, 2000, of Emmis Communications Corporation.