<PAGE> 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)
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 5
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS COMBINED BALANCE SHEET.
<TABLE>
<S> <C>
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
========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
5
<PAGE> 6
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
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
=======
</TABLE>
The accompanying notes are an integral part of this combined statement.
6
<PAGE> 7
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
----------- -------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1998................................ $7,000 $343 $7,343
Net income.............................................. -- 150 150
------ ---- ------
BALANCE, December 31, 1999................................ $7,000 $493 $7,493
====== ==== ======
</TABLE>
The accompanying notes are an integral part of this combined statement.
7
<PAGE> 8
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
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
=======
</TABLE>
The accompanying notes are an integral part of this combined statement.
8
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
------------
<S> <C> <C>
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
========
</TABLE>
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
<PAGE> 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.
<TABLE>
<S> <C>
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
</TABLE>
Property and equipment consists of the following as of December 31, 1999
(in thousands):
<TABLE>
<S> <C>
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
=======
</TABLE>
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
<PAGE> 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:
<TABLE>
<S> <C>
Provision for income taxes.............................. $186
Current:
Federal............................................... --
State................................................. --
----
--
----
Deferred:
Federal............................................... 166
State................................................. 20
----
186
----
$186
====
</TABLE>
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision (in thousands):
<TABLE>
<S> <C>
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
====
</TABLE>
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
<PAGE> 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):
<TABLE>
<S> <C>
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
======
</TABLE>
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):
<TABLE>
<S> <C>
2000................................................... $ 853
2001................................................... 782
2002................................................... 782
2003................................................... 774
2004................................................... 367
2005 and thereafter.................................... 274
------
$3,832
======
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 16
SINCLAIR BROADCAST GROUP, INC. --
ST. LOUIS RADIO GROUP
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 JUNE 30, 2000
------------ -------------
(NOTE 1) (UNAUDITED)
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
16
<PAGE> 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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 2000
------------- ---------
(UNAUDITED)
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
17
<PAGE> 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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
18
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 22
KZLA-FM
COMBINED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
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
============ ============
</TABLE>
See notes to combined financial statements
22
<PAGE> 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)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------------
1999 1999 2000
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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)
=========== ========== ==========
</TABLE>
See notes to combined financial statements
23
<PAGE> 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)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, --------------------------
1999 1999 2000
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See notes to combined financial statements
24
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
ESTIMATED
LIVES (YEARS)
-------------
<S> <C>
Buildings............................. 8-40
Furniture and fixtures................ 5-8
Equipment............................. 3-15
Leasehold improvements................ Shorter of life of lease
or useful life of asset
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1999 1999 2000
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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
========== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1999 1999 2000
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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
========== ========= ========
</TABLE>
27
<PAGE> 28
The components of deferred tax assets at December 31, 1999 and June 30,
2000 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
--------------------- ---------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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:
<TABLE>
<S> <C>
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
============
</TABLE>
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:
<TABLE>
<S> <C>
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
========
</TABLE>
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
<PAGE> 29
Future minimum payments under these employment agreements are as follows at
December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31:
2000...................................................... $ 336,923
2001...................................................... 454,569
2002...................................................... 480,998
2003...................................................... 111,358
----------
Total................................................ $1,383,848
==========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------
1999 1999 2000
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
******
30
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
See Notes to Combined Financial Statements.
32
<PAGE> 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See Notes to Combined Financial Statements.
33
<PAGE> 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See Notes to Combined Financial Statements.
34
<PAGE> 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)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
See Notes to Combined Financial Statements.
35
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
---- ----
<S> <C> <C>
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
======= ========
</TABLE>
37
<PAGE> 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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1999
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 2000
------------- --------
(UNAUDITED)
<S> <C> <C>
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
======== ========
</TABLE>
See Notes to Unaudited Condensed Combined Financial Statements.
39
<PAGE> 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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
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
======== ========
</TABLE>
See Notes to Unaudited Condensed Combined Financial Statements.
40
<PAGE> 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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
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
======== ========
</TABLE>
See Notes to Unaudited Condensed Combined Financial Statements.
41
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C>
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
========
</TABLE>
NOTE 3. INTANGIBLE ASSETS
A summary of intangible assets as of June 30, 2000 is as follows:
<TABLE>
<S> <C>
Customer lists, broadcasting licenses, and agreements....... $ 91,020
Goodwill.................................................... 79,333
Other....................................................... 4,200
--------
174,553
Less accumulated amortization............................... 54,038
--------
$120,515
========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 46
EMMIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MAY 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------
EMMIS SIGNIFICANT EMMIS
HISTORICAL ACQUISITIONS (2C) PRO FORMA
---------- ----------------- ---------
<S> <C> <C> <C>
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
========== ======== ==========
</TABLE>
46
<PAGE> 47
EMMIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
SIGNIFICANT
EMMIS ACQUISITIONS ACQUISITION EMMIS
HISTORICAL AND OTHER (3A) ADJUSTMENTS PRO FORMA
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
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
======== ========
</TABLE>
47
<PAGE> 48
EMMIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 29, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
SIGNIFICANT
ACQUISITIONS
EMMIS AND OTHER ACQUISITION EMMIS
HISTORICAL (3A) ADJUSTMENTS PRO FORMA
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
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
======== =========
</TABLE>
48
<PAGE> 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
<PAGE> 50
2. PRO FORMA ADJUSTMENTS TO COMBINED CONDENSED BALANCE SHEET
(A) DETERMINATION OF COMBINED PURCHASE PRICE
<TABLE>
<S> <C>
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
---------
</TABLE>
(B) DETERMINATION OF COMBINED FINANCING REQUIREMENT
<TABLE>
<S> <C>
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
=========
</TABLE>
---------------
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
<PAGE> 51
(C) ALLOCATION OF PURCHASE PRICE FOR SIGNIFICANT ACQUISITIONS:
<TABLE>
<CAPTION>
SIGNIFICANT ACQUISITIONS
------------------------------------------------
ALLOCATION OF
PURCHASE PRICE BOOK VALUE PRO FORMA
AND FINANCING OF ASSETS ACQUISITIONS
COSTS (CA) EXCHANGED (CB) ADJUSTMENT
-------------- -------------- ------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
-------------------------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
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)
------------------------------------- ---------------- ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
======== ======= ======== ======= ========
</TABLE>
-------------------------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE THREE ENDED
MONTHS ENDED FEBRUARY 29,
MAY 31, 2000 2000
------------- ------------
<S> <C> <C>
Lee.................................................. $2,122 $ 8,428
Bonneville/Sinclair.................................. 623 2,644
------ -------
$2,745 $11,072
====== =======
</TABLE>
(C) Pro forma adjustment to reflect the following adjustments to interest
expense.
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE YEAR ENDED
MONTHS ENDED FEBRUARY 29,
MAY 31, 2000 2000
------------- ------------
<S> <C> <C>
$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
======= =======
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
