-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IJ9TWO4eSGQKd5jiHKKPBaznOMoPzZtlXOS2MlK22olLREriHpqX8NeZ3V6eWzru /c7F2DMfLAp2LQNKw5PSyg== /in/edgar/work/20000530/0000950137-00-002610/0000950137-00-002610.txt : 20000919 0000950137-00-002610.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950137-00-002610 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMMIS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000783005 STANDARD INDUSTRIAL CLASSIFICATION: [4832 ] IRS NUMBER: 351542018 STATE OF INCORPORATION: IN FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23264 FILM NUMBER: 646072 BUSINESS ADDRESS: STREET 1: ONE EMMIS PLAZA STREET 2: 40 MONUMENT CIRCLE SUITE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3172660100 MAIL ADDRESS: STREET 1: ONE EMMIS PLZ STREET 2: 40 MONUMENT CIRCLE #700 CITY: INDIAPOLIS STATE: IN ZIP: 46204 FORMER COMPANY: FORMER CONFORMED NAME: EMMIS BROADCASTING CORPORATION DATE OF NAME CHANGE: 19920703 10-K 1 0001.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended February 29, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from to . Commission file number 0-23264 EMMIS COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1542018 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 Monument Circle, Suite 700 Indianapolis, Indiana 46204 (Address of principal executive offices) (Zip Code) (317) 266-0100 Registrant's Telephone Number, Including Area Code SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value; 6.25% Series A Cumulative Convertible Preferred Stock, $.01 par value. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by reference in Part II I of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant, as of April 30, 2000, was approximately $1,965,683,000. The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 2000, was: 41,312,781 Class A Common Shares, $.01 par value 4,938,582 Class B Common Shares, $.01 par value DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K REFERENCE --------- ------------------- Proxy Statement for 2000 Annual Meeting Part III 1 2 EMMIS COMMUNICATIONS CORPORATION FORM 10-K TABLE OF CONTENTS
PAGE PART I .................................................................................. 3 Item 1. Business................................................................ 3 Item 2. Properties.............................................................. 19 Item 3. Legal Proceedings....................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders..................... 21 PART II .................................................................................. 22 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters..................................................... 22 Item 6. Selected Financial Data................................................. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...................................... 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 31 Item 8. Financial Statements and Supplementary Data............................. 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 70 PART III .................................................................................. 71 Item 10. Directors and Executive Officers of the Registrant..................... 71 Item 11. Executive Compensation................................................. 71 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................... 72 Item 13. Certain Relationships and Related Transactions......................... 72 PART IV .................................................................................. 72 Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................................................ 72 Signatures .................................................................................. 75
2 3 PART I ITEM 1. BUSINESS. GENERAL We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We are the eleventh largest radio broadcaster in the United States based on total revenues. The thirteen FM radio stations and two AM radio stations we own in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as St. Louis, Indianapolis and Terre Haute, Indiana. Our seven television stations are located in Orlando, Florida, New Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and Terre Haute, Indiana. Our strategy is to selectively acquire underdeveloped media properties in desirable markets and then to create value by developing those properties to increase their cash flow. We find such underdeveloped properties attractive because they offer greater potential for revenue and cash flow growth than mature properties. We have been successful in acquiring these types of radio stations and improving their ratings, revenues and cash flow with our marketing focus and innovative programming expertise. We have created top-performing radio stations which rank, in terms of primary demographic target audience share, among the top ten stations in the New York City, Los Angeles and Chicago radio markets according to the Winter 1999 Arbitron Survey. We believe that our strong large-market radio presence and diversity of station formats makes us attractive to a diverse base of radio advertisers and reduces our dependence on any one economic sector or specific advertiser. More recently, we began applying our advertising sales and programming expertise to our television stations. We view our entry into television as a logical outgrowth of our radio business and as a platform for diversification. Like the radio stations we previously acquired, our television stations are underdeveloped properties located in desirable markets, which can benefit from innovative, research-based programming and our experienced management team. We believe we can further improve the ratings, revenues and broadcast cash flow of our television stations with a more market-focused, research-based programming approach and other related strategies, which have proven successful with our radio properties. In addition to our domestic broadcasting properties, we operate news and agriculture information radio networks in Indiana, publish Indianapolis Monthly, Atlanta, Cincinnati, Texas Monthly, L.A. Magazine, Country Sampler, Country Marketplace and related magazines, have a 54% interest in a national radio station in Hungary and own 75% of one FM and one AM radio station in Buenos Aires, Argentina. We also engage in various businesses ancillary to our broadcasting business, such as consulting and broadcast tower leasing. BUSINESS STRATEGY We are committed to maintaining our leadership position in broadcasting, enhancing the performance of our broadcast and publishing properties, and distinguishing ourselves through the quality of our operations. Our strategy has the following principal components: DEVELOP INNOVATIVE PROGRAMMING. We believe that knowledge of local markets and innovative programming developed to target specific demographic groups are the most important determinants of individual radio and television station success. We conduct extensive market research to identify underserved segments of the markets we serve or to assure that we are meeting the needs of our target audience. Utilizing the research results, we concentrate on providing a focused programming format carefully tailored to the demographics of our markets and our audiences' preferences. 3 4 EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. We design our local and national sales efforts based on advertiser demand and our programming compared to the competitive formats within each market. We provide our sales force with extensive training and the technology for sophisticated inventory management techniques which provide frequent price adjustments based on regional and market conditions. We seek to maximize sources of non-traditional, non-spot revenue and have led the industry in developing "vendor co-op" advertising revenue. Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize and take advantage of the potential of vendor co-op advertising. PURSUE STRATEGIC ACQUISITIONS AND CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. We have built our portfolio by selectively acquiring underdeveloped media properties in desirable markets at reasonable purchase prices where our experienced management team has been able to enhance value. We intend to pursue acquisitions of radio stations in those of our current markets where we believe we can increase broadcast cash flow. We will also consider acquisitions of individual radio stations or groups of radio stations in new markets where we expect we can achieve a leadership position. We believe that continued consolidation in the radio broadcasting industry will create attractive acquisition opportunities as the number of potential buyers for radio assets declines due to government regulations on the number of stations a company can own in one market. We believe that attractive acquisition opportunities are also increasingly available in the television broadcasting industry. We intend to evaluate acquisitions of international broadcasting stations (typically in conjunction with strong local minority-interest partners) and magazine publishing properties that present opportunities to capitalize on our management expertise to enhance cash flow at attractive purchase price multiples with minimal capital requirements. ENCOURAGE AN ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business and that much of its success is the result of the efforts of regional and local management and staff. We have attracted and retained an experienced team of broadcast professionals who understand the viewing and listening preferences, demographics and competitive opportunities of their particular market. Our decentralized approach to station management gives local management oversight of station spending, long-range planning and resource allocation at their individual stations, and rewards all employees based on those stations' performance. In addition, we encourage our managers and employees to own a stake in the company, and over 95% of all full-time employees have an equity ownership position in Emmis. We believe that our entrepreneurial management approach has created a distinctive corporate culture, making Emmis a highly desirable employer in the broadcasting industry and significantly enhancing our ability to attract and retain experienced and highly motivated employees and management. 4 5 RADIO AND TELEVISION STATIONS The following tables set forth certain information regarding our radio and television stations and their broadcast markets. RADIO STATIONS In the following table, "Market Rank by Revenue" is the ranking of the market revenue size of the principal radio market served by the station among all radio markets in the United States. Market revenue and ranking figures are from Duncan's Radio Market Guide (1999 ed.). We own a 40% equity interest in the publisher of Duncan's Radio Market Guide. "Ranking in Primary Demographic Target" is the ranking of the station among all radio stations in its market based on the Fall 1999 Arbitron Survey. A "t" indicates the station tied with another station for the stated ranking. "Station Audience Share" represents a percentage generally computed by dividing the average number of persons over age 12 listening to a particular station during specified time periods by the average number of such persons for all stations in the market area as determined by Arbitron.
RANKING IN STATION MARKET PRIMARY PRIMARY STATION AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE MARKET REVENUE FORMAT TARGET AGES TARGET SHARE - --------------- -------- ---------------------- ----------- ------------ -------- LOS ANGELES, CA 1 KPWR-FM Dance/Contemporary Hit 12-24 2 3.8 NEW YORK, NY 2 WQHT-FM Dance/Contemporary Hit 12-24 1 5.2 WRKS-FM Classic Soul/Smooth R&B 25-54 3 4.0 WQCD-FM Contemporary Jazz 25-54 8t 3.0 Chicago, IL 3 WKQX-FM New Rock 18-34 4 3.4 St. Louis, MO 18 KSHE-FM Album Oriented Rock 25-54 9 2.9 WKKX-FM Country 25-54 6 4.6 WXTM-FM Extreme Rock 18-34 6 3.0 Indianapolis, IN 30 WENS-FM Adult Contemporary 25-54 7 5.0 WIBC-AM News/Talk 35-64 3 8.4 WNAP-FM* Classic Rock 18-34 8 2.9 WTLC-FM Urban Contemporary 25-54 5 6.0 WTLC-AM Solid Gold Soul, Gospel 25-54 24 0.8 and Talk Terre Haute, IN 171 WTHI-FM Country 25-54 1 17.2 WWVR-FM Classic Rock 25-54 3 7.9
*On March 28, 2000, Emmis changed the call letters of WNAP-FM to WNOU-FM and changed the format to Top 40. 5 6 TELEVISION STATIONS In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 2000. Rankings are based on the relative size of a station's market among the 210 generally recognized Designated Market Areas ("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the number of television stations ("Reportable Stations") designated by Nielsen as "local" to the DMA, excluding public television stations and stations which do not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 6:00 a.m. to 2:00 a.m. time period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by Nielsen from 6:00 a.m. to 2:00 a.m., Sunday through Saturday during November 1999. "Station Audience Share" reflects an estimate of the share of DMA households viewing television received by a local commercial station in comparison to other local commercial stations in the market as measured from 6:00 a.m. to 2:00 a.m., Sunday through Saturday.
NUMBER OF STATION TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE - -------------- ---------------------- ------- --------------- ------------- ---------- --------- WKCF-TV Orlando, FL 22 WB/18 7 4t 7 WVUE-TV New Orleans, LA 41 Fox/8 8 3 9 WALA-TV Mobile, AL-Pensacola, 62 Fox/10 6 3 10 FL WLUK-TV Green Bay, WI 69 Fox/11 6 3 13 KHON-TV Honolulu, HI 71 Fox/2 7 1 16 WFTX-TV Fort Myers, FL 81 Fox/36 5 4 7 WTHI-TV Terre Haute, IN 139 CBS/10 3 1 21
Emmis also owns KAII-TV and KHAW-TV, which operate as satellite stations of KHON-TV and primarily re-broadcast the signal of KHON-TV. The stations are considered one station for FCC multiple ownership purposes. Low power television translators W40AN and K55D2 retransmit stations WLUK-TV and KHON-TV, respectively. RADIO NETWORKS In addition to our other radio broadcasting operations, we own and operate two radio networks. Network Indiana provides news and other programming to nearly 70 affiliated radio stations in Indiana. AgriAmerica Network provides farm news, weather information and market analysis to radio stations across Indiana. PUBLISHING OPERATIONS We publish the following magazines through our publishing division: Indianapolis Monthly. We have published Indianapolis Monthly magazine since September 1988. Indianapolis Monthly covers local personalities, homes and lifestyles and currently has a paid monthly circulation of approximately 45,000. With a large advertising base and a popular editorial focus, Indianapolis Monthly is the market's leading general interest magazine focusing on the Indianapolis area. Atlanta. We acquired and began publishing Atlanta magazine in August 1993. Atlanta covers area personalities, issues and style and currently has a paid monthly circulation of approximately 65,000. The magazine was unprofitable for several years before we acquired it for a nominal investment. Certain initiatives, including downsizing staff, increasing sales efforts and repositioning the editorial focus, have contributed to improving profitability. 6 7 Cincinnati. We acquired Cincinnati magazine in October 1997. Cincinnati magazine was founded by the Greater Cincinnati Chamber of Commerce in 1967 and, under its prior owners, the magazine grew to a paid monthly circulation of approximately 22,000. We repositioned the editorial product to an up-to-date city/regional magazine covering people and entertainment in Cincinnati, doubled the existing sales staff and marketed the newly designed magazine to the Cincinnati area. The magazine currently has a paid monthly circulation of approximately 28,000. Texas Monthly. We acquired Texas Monthly magazine in February 1998. The critically acclaimed magazine, which has received eight National Magazine Awards, has a paid monthly circulation of approximately 300,000, and we believe it is read by more than 2,436,000 people. Since acquiring the magazine, we have worked to increase Texas Monthly's operating efficiencies while leaving the highly regarded editorial product intact. Country Sampler. We acquired Country Sampler magazine in April 1999. Country Sampler focuses on country craft and home decorating ideas and products, and we believe it is read by more than two million people. In connection with the acquisition of Country Sampler, we also acquired other related magazines focusing on particular segments of the country craft and home decorating market. To complement Country Sampler, we acquired Country Marketplace in December 1999. Country Marketplace serves the general craft market, providing projects to crafters of all skill levels. Like Country Sampler magazine, Country Marketplace carries a substantial amount of crafter advertising, allowing for great efficiencies in the sales arena. L.A. Magazine. We acquired L.A. Magazine in March 2000. This high-profile city magazine in the nation's second-largest metropolis maintains a circulation base of approximately 180,000. With the acquisition of L.A. Magazine, Emmis secured a franchise, brand-name product in the country's trend-setting capital. We intend to enhance and upgrade the editorial product, currently a mix of star-coverage, Hollywood insider information and regional service, by including renown columnists, improving lifestyle and service coverage, and exploring hard-hitting stories that make a difference to Angelenos. In addition, we intend to increase the sales force with a renewed emphasis on local retailers. INTERNET We believe that the development and explosive growth of the Internet present not only a challenge, but an opportunity for broadcasters and publishers. The challenge is, primarily, increased competition for the time and attention of our listeners, viewers and readers. The opportunity is to further enhance the relationships we already have with our listeners, viewers and readers by expanding products and services offered by our stations and magazines. For that reason, we have been working with other broadcasters and publishers to put together a local media internet venture (LMIV). The LMIV is premised on the idea that each station's or magazine's website would be the entry way into a backbone of internet content provided by a national, or even international, aggregation of broadcasters and publishers. The LMIV would capitalize on the individual relationships between each station or magazine and its listeners, viewers or readers by allowing each station's or magazine's website to reflect the character of the station or magazine. The LMIV would also capitalize on the potentially tremendous economies of scale provided by the stations' and magazines' aggregated websites. Bringing a group of broadcasters and publishers together is almost always a difficult proposition. However, we remain optimistic that the LMIV will be formalized. 7 8 COMMUNITY INVOLVEMENT We believe that to be successful, we must be integrally involved in the communities we serve. To that end, each of our stations participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable organizations that have been the beneficiaries of our marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, The March of Dimes, American Cancer Society, Riley Children's Hospital and research foundations seeking cures for cystic fibrosis, leukemia and AIDS and helping to fight drug abuse. In addition to our planned activities, our stations and magazines take leadership roles in community responses to natural disasters. INDUSTRY INVOLVEMENT We have an active leadership role in a wide range of industry organizations. Our senior managers have served in various capacities with industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the Arbitron Advisory Council, the Fox and CBS Affiliates Boards, and as founding members of the Radio Operators Caucus. In addition, our managers have been voted Radio President of the Year and General Manager of the Year, and at various times we have been voted Most Respected Broadcaster in polls of radio industry chief executive officers and managers. FEDERAL REGULATION Television and radio broadcasting are subject to the jurisdiction of the Federal Communications Commission (the "FCC") under the Communications Act of 1934, as amended (and, as amended by the Telecommunications Act of 1996 (the "1996 Act"), the "Communications Act"). Television or radio broadcasting is prohibited except in accordance with a license issued by the FCC upon a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate television and radio licenses in such manner as will provide a fair, efficient and equitable distribution of service throughout the United States. The FCC determines the location of stations, regulates the apparatus used by stations, and regulates numerous other areas of television and radio broadcasting pursuant to rules, regulations and policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment of a broadcast license or the transfer of control of a corporation holding a license without the prior approval of the FCC. Under the Communications Act, the FCC also regulates certain aspects of the operation of cable television systems and other electronic media that compete with broadcast stations. The 1996 Act represented the most comprehensive overhaul of the country's telecommunications laws in more than 60 years. The 1996 Act significantly changed both the process for renewal of broadcast station licenses and the broadcast ownership rules. The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Reference should be made to the Communications Act, FCC rules and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of radio and television stations. The 1996 Act established a "two-step" renewal process that limits the FCC's discretion to consider applications filed in competition with an incumbent's renewal application. The 1996 Act also substantially liberalized the national broadcast ownership rules, eliminating the national radio limits and easing the national restrictions on TV ownership; it also relaxed local radio ownership restrictions. 8 9 This new regulatory flexibility has engendered aggressive local, regional, and/or national acquisition campaigns. Removal of previous station ownership limitations on leading incumbents (i.e., existing networks and major station groups) has sharply increased the competition for and the prices of attractive stations. Other legislation has been introduced from time to time which would amend the Communications Act in various respects and the FCC from time to time considers new regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or new or amended FCC regulations adopted or what their effect would be on Emmis. LICENSE RENEWAL. Radio and television stations operate pursuant to broadcasting licenses that are ordinarily granted by the FCC for maximum terms of eight years and are subject to renewal upon application to the FCC. Our licenses currently have the following expiration dates, until renewed: WENS-FM (Indianapolis) August 1, 2004 WKQX-FM (Chicago) December 1, 2004 KSHE-FM (St. Louis) February 1, 2005 KPWR-FM (Los Angeles) December 1, 2005 WQHT-FM (New York) June 1, 2006 WQCD-FM (New York) June 1, 2006 WIBC-AM (Indianapolis) August 1, 2004 WNOU-FM (Indianapolis) August 1, 2004 WRKS-FM (New York) June 1, 2006 WKKX-FM (St. Louis) December 1, 2004 WXTM-FM (St. Louis) December 1, 2004 WTLC-AM (Indianapolis) August 1, 2004 WTLC-FM (Indianapolis) August 1, 2004 WTHI-FM (Terre Haute) August 1, 2004 WWVR-FM (Terre Haute) August 1, 2004 WTHI-TV (Terre Haute) August 1, 2005 WFTX-TV (Fort Myers) February 1, 2005 WALA-TV (Mobile) April 1, 2005 WVUE-TV (New Orleans) June 1, 2005 WLUK-TV (Green Bay) December 1, 2005 KHON-TV (Honolulu) February 1, 2007 KAII-TV (Maui) February 1, 2007 KHAW-TV (Hawaii) February 1, 2007 WKCF-TV (Orlando) February 1, 2005 Under the 1996 Act, at the time an application is filed for renewal for a station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC concludes on its own) that there is a "substantial and material" question whether grant of the renewal application would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine whether renewal should be granted. The 1996 Act modified the license renewal process to provide for the grant of a renewal application upon a finding by the FCC that the licensee: - has served the public interest, convenience and necessity; - has committed no serious violations of the Communications Act or the FCC's rules; and - has committed no other violations of the Communications Act or the FCC's rules which would constitute a pattern of abuse. 9 10 If the FCC cannot make such a finding, it may deny a renewal application, and only then may the FCC accept other applications to operate the station of the former licensee. In a vast majority of cases, the FCC renews broadcast licenses even when petitions to deny applications are filed against broadcast license renewal applications. OWNERSHIP RESTRICTIONS. The 1996 Act eliminated restrictions on the number of radio stations that may be owned by one entity nationwide. Under the 1996 Act, with limited exceptions, the number of radio stations that may be owned by one entity in a given radio market is dependent on the number of commercial stations in that market: - if the market has 45 or more stations, one entity may own not more than eight stations, of which not more than five may be in one service (AM or FM); - if the market has between 30 and 44 stations, one entity may own not more than seven stations, of which not more than four may be in one service; - if the market has between 15 and 29 stations, a single entity may own not more than six stations, of which not more than four may be in one service; and - if the market has fourteen or fewer stations, one entity may own not more than five stations, of which not more than three may be in one service, except that in such a market one entity may not own more than fifty percent of the stations in the market. Each of the six markets in which our radio stations are located has at least 15 commercial radio stations. In August 1999, the FCC substantially revised its ownership rules concerning the common ownership of radio and television stations in the same market. Previously, the FCC had generally prohibited common ownership of a television station and one or more radio stations in the same market, though waivers of the rule were granted frequently; one such waiver was granted to permit our common ownership of WTHI-TV, WTHI-FM and WWVR-FM in Terre Haute, Indiana. The FCC also generally prohibited common ownership of two or more television stations in the same market. Under the new rules, the Commission will permit the common ownership of one television station, along with: - up to six radio stations in any market where at least 20 independent voices remain post-merger; - up to four radio stations in any market where at least 10 independent voices remain post-merger; and - one radio station regardless of the number of independent voices remaining post-merger. Additionally, the new rules provide that an entity may own two television stations in the same Designated Market Area (DMA) if: - the coverage areas of the stations do not overlap, or - there will remain eight, independently-owned and-operated full-power noncommercial and commercial operating stations, and one of the two commonly-owned stations is not a top 4-ranked station in the market (based on audience). Furthermore, the Commission will consider waiving these restrictions, if: - one of the stations is a "failed station," i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding; - one of the stations is a "failing station," i.e., having a low audience share and financially struggling; or - one of the stations is an unbuilt facility, where the permittee has made substantial progress towards constructing the facility. 10 11 The 1996 Act and the FCC's subsequently issued rules restrict the ownership of television stations on a nationwide basis to no more than 35% of the national audience; the FCC is considering raising that limit. Current FCC rules prohibit common ownership of a daily newspaper and a radio or television station in the same market; the FCC is considering possible liberalization or elimination of that prohibition. There is also a prohibition on common ownership of a television station and a cable television system in the same market; however, the FCC is considering possible elimination of that ban. ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC requires the "attribution" of broadcast licenses between a broadcasting company and certain of its stockholders, officers or directors, such that there would be a violation of FCC regulations where such a stockholder, officer or director and the broadcasting company together held more than the permitted number of stations or a prohibited combination of media outlets in the same market. Under FCC rules, with certain exceptions, attribution of broadcast licenses occurs where any five percent voting stockholder or officer or director of a broadcasting company directly or indirectly owns, operates, controls or has a five percent voting interest in or is an officer or director of any other broadcasting company; for passive investments by mutual funds, insurance companies and bank trust departments, voting interests of twenty per cent or more are attributable. Attribution also occurs in the case of all general partnership interests and in the case of limited partnership interests and interests in limited liability companies where a limited partner or member is "materially involved" in the media-related activities of the partnership or LLC. To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable, the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each non-controlling link in a multi-corporation ownership chain. Emmis' Amended and Restated Articles of Incorporation and By-Laws authorize the Board of Directors to prohibit any ownership, voting or transfer of its capital stock which would cause Emmis to violate the Communications Act or FCC regulations. In cases where one person or entity (such as Jeffrey H. Smulyan in the case of Emmis) holds more than 50% of the combined voting power of the common stock of a broadcasting company, a minority shareholder of the company generally would not be deemed to hold an "attributable" interest in the company. However, any attributable interest by any such shareholder in another broadcast station or other media in a market where such company owns, or seeks to acquire, a station would still be subject to review by the FCC under its "equity/debt plus policy" (described below), and could result in the company's being unable to obtain from the FCC one or more authorizations needed to conduct its broadcast business or being unable to obtain FCC consents for future acquisitions. Further, in the event that a majority shareholder of a company (such as Mr. Smulyan in the case of Emmis) were no longer to hold more than 50% of the combined voting power of the common stock of the company, the interests of minority shareholders which had theretofore been considered nonattributable could become attributable, with the result that any other media interests held by such shareholders would be combined with the media interests of such company for purposes of determining compliance with FCC ownership rules. In the case of Emmis, Mr. Smulyan's level of voting control could decrease to or below 50% as a result of transfers of common stock pursuant to agreement or conversion of the Class B Common Stock into Class A Common Stock. In the event of any noncompliance, steps required to achieve compliance could include divestitures by either the shareholder or the affected company. Further, other media interests of shareholders having or acquiring an attributable interest in such a company could result in the company being unable to obtain from the FCC one or more authorizations needed to conduct its broadcast business or being unable to obtain FCC consents for future acquisitions. Conversely, a company's media interests could operate to restrict other media investments by shareholders having or acquiring an interest in Emmis. 11 12 The FCC will also find that a person or entity has an attributable interest in a broadcast (radio or television) station if the person or entity (i) owns a broadcast station, cable television system or newspaper in the same market and (ii) is party to a time brokerage agreement (also known as a local marketing agreement) whereby it programs more than 15% of the programming of another station in the market. In such cases, the brokering person or entity would be considered to "own" such other station for purposes of the FCC's ownership rules. Under a recent change in the FCC's ownership attribution rules, an investor in a television or radio station will also be considered to have an attributable interest in another station where his or her interest in the other station, including both debt and equity holdings, exceeds 33% or the total asset value of the entity owning the other station, and either: - - the investor is a "major program supplier," including all programming entities such as networks and time brokers which supply more than 15% of the station's total weekly broadcast time; or - - the investor is a same-market media owner subject to the FCC's ownership rules, i.e., a broadcaster, cable operator or newspaper owner. TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the "character" of the licensee and those persons holding "attributable" interests therein, and compliance with the Communications Act's limitations on alien ownership as well as compliance with other FCC policies. When passing on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer of the broadcast license to any party other than the assignee or transferee specified in the application. A transfer of control of a corporation controlling a broadcast license may occur in various ways. For example, a transfer of control occurs if an individual stockholder gains or loses "affirmative" or "negative" control of such corporation through issuance, redemption or conversion of stock. "Affirmative" control would consist of control of more than 50% of such corporation's outstanding voting power and "negative" control would consist of control of exactly 50% of such voting power. To obtain the FCC's prior consent to assign or transfer control of a broadcast license, appropriate applications must be filed with the FCC. If the application involves a "substantial change" in ownership or control, the application must be placed on public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. If the application does not involve a "substantial change" in ownership or control, it is a "pro forma" application. The "pro forma" application is nevertheless subject to having informal objections filed against it. If the FCC grants an assignment or transfer application, interested parties have 30 days from public notice of the grant to seek reconsideration of that grant. Generally, parties that do not file initial petitions to deny or informal objections against the application face a high hurdle in seeking reconsideration of the grant. The FCC normally has an additional ten days to set aside such grant on its own motion. (FCC rules for computation of time may cause more variation in the actual time for action and response.) Under the 1996 Act, the FCC is required to review all of its broadcast ownership rules every two years to determine whether the public interest dictates that such rules be repealed or modified. We cannot predict the outcome of any such reviews or the impact they may have on our business. 12 13 ALIEN OWNERSHIP RESTRICTIONS. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country (collectively, "Non-U.S. Persons"). Furthermore, the Communications Act provides that no FCC license may be granted to any corporation directly or indirectly controlled by any other corporation of which more than one-fourth of its capital stock is owned of record or voted by Non-U.S. Persons if the FCC finds the public interest will be served by the refusal of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the grant or holding of a license, and such a finding has been made only in limited circumstances. The foregoing restrictions on alien ownership apply in modified form to other forms of business organizations, including partnerships and limited liability companies. Our Amended and Restated Articles of Incorporation and Code of By-Laws authorize the Board of Directors to prohibit such ownership, voting or transfer of its capital stock as would cause Emmis to violate the Communications Act or FCC regulations. PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the "public interest." Since the late 1970s, the FCC gradually has relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a station's community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness. Broadcast of obscene or indecent material is regulated by the FCC as well as by state and federal law. Complaints from listeners concerning a station's programming often will be considered by the FCC when it evaluates renewal applications of a licensee, although such complaints may be filed and considered by the FCC at any time. Stations also must pay regulatory and application fees and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identifications, the advertisement of contests and lotteries, and technical operations, including limits on radio frequency radiation. In February 2000, the FCC adopted new rules requiring licensees to develop and implement affirmative action programs designed to promote equal employment opportunities. The new rules require all broadcasters to implement broad outreach programs that will lead to the widest possible dissemination of job vacancies. In addition, the rules require additional measures for stations employing five or more full-time employees which extend beyond the recruitment efforts for a particular job vacancy. The new rules also require most broadcasters to file periodic reports with the Commission regarding their recruitment efforts. The FCC has adopted rules to implement the Children's Television Act of 1990, which, among other provisions, limits the permissible amount of commercial matter in children's programs and requires each television station to present "educational and informational" children's programming. The FCC also has adopted renewal processing guidelines effectively requiring television stations to broadcast an average of at least three hours per week of children's educational programming. In addition, the FCC has adopted rules that require television stations to broadcast, over an 8 to 10 year transition period which commenced on January 1, 1998, increasing and set percentages of closed captioned programming for the hearing-impaired. Over the past few years, a number of radio and television stations, including certain Emmis stations, have entered into what commonly are referred to as "local marketing agreements" or "time brokerage agreements" (together, "LMAs"). These agreements take various forms. Separately-owned and licensed stations may agree to function cooperatively in terms of programming, advertising sales and other matters, subject to compliance with the antitrust laws and the FCC's rules and policies, including the requirement that the licensee of each station maintain independent control over the programming and other operations of its own station. As already noted, a station that brokers more than 15% of the broadcast time of another station in the same market will be deemed to have an 13 14 attributable interest in that station. Further, FCC rules prohibit a radio station from "simulcasting" more than 25% of its programming from another station in the same market in the same broadcast service (i.e., AM-AM or FM-FM) where the two stations serve substantially the same geographic area, and where the stations are commonly owned or the owner of one station programs the other through an LMA. Another example of a cooperative agreement between differently owned broadcast stations in the same market is a joint sales agreement ("JSA"), whereby one station sells advertising time in combination, both on itself and on a station under separate ownership. The FCC has determined that JSA's should generally be left to antitrust enforcement, though it has reserved the right to examine JSA's on a case-by-case basis. Generally, JSA's are not deemed by the FCC to be attributable for purposes of its ownership rules. In 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). Certain provisions of this law, such as signal carriage and retransmission consent, have a direct effect on television broadcasting. The signal carriage, or "must carry," provisions require cable operators to carry the signals of local commercial and non-commercial television stations and certain low power television stations. Systems with 12 or fewer usable activated channels and more than 300 subscribers must carry the signals of at least three local commercial television stations. A cable system with more than 12 usable activated channels, regardless of the number of subscribers, must carry the signals of all local commercial television stations, up to one-third of the aggregate number of usable activated channels of such a system. The 1992 Cable Act also includes a retransmission consent provision that prohibits cable operators and other multi-channel video programming distributors ("MVPDs") from carrying broadcast signals without obtaining the station's consent in certain circumstances. The "must carry" and retransmission consent provisions are related in that a local television broadcaster, on a cable system-by-cable system basis, must make a choice once every three years whether to proceed under the "must carry" rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the cable system to carry the station's signal, in most cases in exchange for some form of consideration from the cable operator. Cable systems and other MVPDs must obtain retransmission consent to carry all distant commercial stations other than "super stations" delivered via satellite. In April 1997, the FCC adopted rules that require television broadcasters to provide digital television ("DTV") to consumers. The FCC also adopted a table of allotments for DTV, which provides eligible existing broadcasters with a second channel on which to provide DTV service. The FCC's DTV allotment plan is based on the use of a "core" DTV spectrum between channels 2-51. The Communications Act mandates that unless certain benchmarks are not satisfied, by the end of 2006 the FCC must recover one of the two channels from each television station. Television broadcasters will be allowed to use their channels according to their best business judgment. Such uses can include multiple standard definition program channels, data transfer, subscription video, interactive materials, and audio signals (so-called "ancillary" services), although broadcasters will be required to provide a free digital video programming service that is at least comparable to today's analog service. The FCC has imposed a fee of 5% of the annual gross revenues for television broadcasters' use of the DTV spectrum to offer ancillary services (i.e., services other than free, over-the-air, advertiser-supported television). The form and amount of these fees may have a significant effect on the profitability of such services. Broadcasters will not be required to air "high definition" programming or, initially, to simulcast their analog programming on the digital channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets were required to be on the air with a digital signal by May 1, 1999, and affiliates of those networks in markets 11-30 were required to be on the air with digital signals by November 1, 1999. The remaining commercial stations, including those owned by Emmis, were required to file DTV construction permit applications by November 1, 1999 and to be on the air with digital signals by May 1, 2002. Emmis timely filed DTV construction permit applications for all 14 15 its television stations. The FCC also has released a Notice of Inquiry to determine the extent of broadcasters' future public interest obligations. Whether and to what extent the cable "must-carry" rights discussed earlier will extend to the new DTV signals is still a matter to be determined by a rule making proceeding initiated by the FCC in July 1998. The rule making proceeding also seeks comment on related issues, including how to resolve technical compatibility problems, whether the FCC should modify its signal quality requirement during the transition, how to regulate channel placement of digital television signals and whether such signals must be carried on the basic cable tier. We cannot predict at this time whether the FCC will adopt "must carry" requirements for digital television signals or the effect of an FCC decision on our television stations. The FCC has authorized the provision of video programming directly to home subscribers through high-powered direct broadcast satellites ("DBS"). DBS systems currently are capable of broadcasting as many as 175 channels of digital television service directly to subscribers' equipment with 18-inch receiving dishes and decoders. Currently, several entities provide DBS service to consumers throughout the country. Other DBS operators hold licenses, but have not yet commenced service. DBS operators may not import distant network signals into local television markets unless the individual household that would receive the distant network signal is not capable of receiving a sufficiently strong "over-the-air" signal of the local affiliate of the given network. In November 1999, Congress enacted the Satellite Home Viewer Improvement Act ("SHVIA") which authorizes DBS companies to provide local television signals to their subscribers. During the first six months following enactment of the law, the signal could be provided without the consent of the station. Upon the expiration of that period, the signal may now be provided only pursuant to a retransmission consent agreement with the station. In addition, effective January 1, 2002, a local television station will be entitled to "must-carry" rights on a DBS system if the system is providing any local television stations to its subscribers. The legislation also requires broadcasters to negotiate nonexclusive retransmission consent agreements in good faith until January 1, 2006; however, the law explicitly provides that broadcasters may enter into agreements with competing DBS carriers on different terms. SHVIA also "grandfathered" delivery of the signals of television stations via DBS to certain subscribers who may have been receiving such signals in violation of prior law. SHVIA also created a new category of television stations, Class A stations, which are afforded a measure of protection from new full-service and low-power television stations. Only certain low-power stations qualify for the new Class A status, i.e., those low power television stations certifying that, from September 1, 1999 to November 29, 1999, they (1) operated a minimum of 18 hours per day; (2) produced an average of at least 3 hours per week of programming within the service market; and (3) complied with all applicable low power television (Part 74) rules. Furthermore, the licensee of a Class A station will be required to comply with all applicable full power television station rules as of the date of application for Class A status, including all political advertising restrictions, local public inspection file rules, and the location of the main studio. Finally, SHVIA permitted full-service stations to file applications to "maximize" (expand the coverage of) their DTV facilities by (i) filing a notice of intent to maximize with the FCC on or before December 31, 1999, and (ii) file a bona fide application to maximize on or before May 1, 2000. Stations meeting those requirements will have their "maximized" DTV facilities protected from interference by Class A stations. Emmis timely filed a Notice of Intent and a "maximization application" for each of its television stations. There are FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as network-affiliate relations, the ability of stations to obtain exclusive rights to air syndicated programming, cable systems' carriage of syndicated and network programming on distant stations, political advertising practices, application procedures and other areas affecting the business or operations of broadcast stations. 15 16 Failure to observe FCC rules and policies can result in the imposition of various sanctions, including monetary fines, the grant of "short" (less than the maximum term) license renewal terms or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license. Recent Developments and Proposed Changes. In February 2000, the Commission adopted rules implementing a Low Power ("Microradio") FM service. The new service is comprised of two classes of stations. First, "LP-100" Class stations will be authorized to operate with 50 - 100 watts effective radiated power ("ERP"), at a maximum height above average terrain ("HAAT") of 30 meters. Second, "LP-10" Class stations will be authorized to operate with one to ten watts ERP, at a maximum of 30 meters HAAT. The LP-100 stations are expected to have a service radius of up to 3 1/2 miles, and the LP-10 stations will have a service radius of up to two miles. Both classes of stations will be restricted to non-commercial operation. We cannot predict whether any such stations will interfere with the coverage of any of our radio stations. Currently, Congress is considering legislation with a view to ensuring interference protection for existing radio stations. In April 1997, the FCC adopted rules authorizing delivery of digital audio radio service on a nationwide basis by satellite ("SDARS"). At the same time, the FCC put out for comment a proposal to permit SDARS to be supplemented by terrestrial transmitters designed to fill "gaps" in satellite coverage. The FCC has awarded two nationwide licenses for SDARS. It is anticipated that SDARS, when implemented, will be capable of delivering multiple channels of compact-disc quality sound which will be receivable through the use of special receiving antennas. In November 1999, the Commission released proposed rules regarding the adoption of rules for terrestrial digital audio broadcasting ("DAB"). The proposed rules would permit existing AM and FM stations to operate on their current frequencies in either full analog mode, full digital mode, or (at reduced power) a combination of both. DAB technology is still evolving, and it is not yet certain whether DAB transmission as proposed will be feasible. In August 1998, the FCC adopted rules to govern the use of auctions to resolve competing applications for initial licenses and construction permits and competing applications for major modifications to existing commercial broadcast facilities. The rules apply to full power commercial radio and analog television stations, as well as to all secondary commercial broadcast services (e.g., low power television, FM translator and television translator services). In September 1999, the Commission conducted the first of its auctions for long-frozen applications. Any future applications we may file for major modifications to our facilities may become subject to auction proceedings if they are found to be mutually exclusive with major modification applications filed by other radio or television licensees or applications for new stations. On March 13, 1998, the FCC approved a television programming rating system developed by the television industry which will allow parents to "black-out" programs that contain material they consider inappropriate for children. On March 13, 1998, the FCC also adopted technical requirements for the implementation of so-called "v-chip technology" which will enable parents to program television sets so that certain programming will be inaccessible to children. 16 17 The Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and affect our ability to acquire additional broadcast stations or finance such acquisitions. Such matters include: - - proposals to impose spectrum use or other fees on FCC licensees; - - proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies; - - proposals to change rules relating to political broadcasting, including the reinstatement of the so-called "fairness doctrine"; - - technical and frequency allocation matters; - - AM stereo broadcasting; - - proposals to permit expanded use of FM translator stations; - - proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages on radio; - - proposals permitting FM stations to accept formerly impermissible interference; - - proposals to reimpose holding periods for licenses; - - changes to broadcast technical requirements, including those relative to the implementation of digital audio broadcasting and satellite digital audio radio service; - - proposals to tighten safety guidelines relating to radio frequency radiation exposure; and - - proposals to limit the tax deductibility of advertising expenses by advertisers. We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what impact, if any, the implementation of any of these proposals or changes might have on our business. The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations. Reference is made to the Communications Act, FCC regulations and the public notices and rulings of the FCC for further information concerning the nature and extent of federal regulation of broadcast stations. ADVERTISING SALES Our stations derive their advertising revenue from local and regional advertising in the marketplaces in which they operate, as well as from the sale of national advertising. Local and most regional sales are made by a station's sales staff. National sales are made by firms specializing in such sales which are compensated on a commission-only basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station's audience share position more rapidly than does the volume of local and regional advertising revenue. We have led the industry in developing "vendor co-op" advertising revenue (i.e., revenue from a manufacturer or distributor which is used to promote its particular goods together with local retail outlets for those goods). Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first radio broadcasters to recognize, and take advantage of, the potential of vendor co-op advertising. Our Revenue Development Systems division has established a network of radio stations which share information about sources of vendor co-op revenue. In addition, each of our stations has a salesperson devoted exclusively to the development of cooperative advertising. We also use this approach at our television stations. In March 1999, we acquired substantially all of the assets of the Co-Opportunities division of Jefferson-Pilot Communications. We believe that the business of Co-Opportunities (which focuses more on co-op advertising for television stations and cable systems) provides an excellent complement to Revenue Development Systems. 17 18 COMPETITION Radio and television broadcasting stations compete with the other broadcasting stations in their respective market areas, as well as with other advertising media such as newspapers, magazines, outdoor advertising, transit advertising, the Internet and direct mail marketing. Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market does not generally compete with stations in other market areas. In each of our markets, our stations face competition from other stations with substantial financial resources, including stations targeting the same demographic groups. In addition to management experience, factors which are material to competitive position include the station's rank in its market, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive position with programming and promotional campaigns aimed at the demographic groups targeted by our stations, and through sales efforts designed to attract advertisers that have done little or no broadcast advertising by emphasizing the effectiveness of radio and television advertising in increasing the advertisers' revenues. Changes in the policies and rules of the FCC permit increased joint ownership and joint operation of local stations. Those stations taking advantage of these joint arrangements (including our New York, St. Louis, Indianapolis and Terre Haute clusters) may in certain circumstances have lower operating costs and may be able to offer advertisers more attractive rates and services. Although we believe that each of our stations can compete effectively in its market, there can be no assurance that any of our stations will be able to maintain or increase its current audience ratings or advertising revenue market share. Although the broadcasting industry is highly competitive, some barriers to entry exist. The operation of a broadcasting station in the United States requires a license from the FCC, and the number of stations that can operate in a given market is limited by the availability of the frequencies that the FCC will license in that market, as well as by the FCC's multiple ownership rules regulating the number of stations that may be owned and controlled by a single entity. The FCC's multiple ownership rules have changed significantly as a result of the Telecommunications Act of 1996. The broadcasting industry historically has grown in terms of total revenues despite the introduction of new technology for the delivery of entertainment and information, such as cable television, The Internet, satellite television, audio tapes and compact discs. We believe that radio's portability in particular makes it less vulnerable than other media to competition from new methods of distribution or other technological advances. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio or television broadcasting industry. EMPLOYEES As of February 29, 2000 Emmis had approximately 1,440 full-time employees and approximately 270 part-time employees. We have approximately 214 employees at various radio and television stations represented by unions. We consider relations with our employees to be good. 18 19 GEOGRAPHIC FINANCIAL INFORMATION The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. The following tables summarize relevant financial information by geographic area:
FOR THE YEAR ENDED FEBRUARY 28 (29), ---------------------------------------------------- 1998 1999 2000 ----------- ----------- ------------- (IN THOUSANDS) Net Revenues: Domestic $ 140,583 $ 229,582 $ 316,454 International - 3,254 8,811 ----------- ----------- ------------- Total 140,583 232,836 325,265 =========== =========== =============
AS OF FEBRUARY 28 (29), ---------------------------------------------------- 1998 1999 2000 ----------- ----------- ------------- (IN THOUSANDS) Noncurrent Assets: Domestic $ 261,352 $ 925,161 $ 1,181,640 International 20,884 18,588 32,950 --------- ---------- ------------- Total 282,236 943,749 1,214,590 ========= ========== =============
ITEM 2. PROPERTIES. The following table sets forth information as of February 29, 2000 with respect to Emmis' offices and studios and its broadcast tower locations. Management believes that the properties are in good condition and are suitable for Emmis' operations.
EXPIRATION YEAR PLACED OWNED OR DATE PROPERTY IN SERVICE LEASED OF LEASE -------- ---------- -------- ---------- Corporate and Publishing Headquarters/ 1998 Owned -- WENS-FM/ WIBC-AM/WNOU-FM/ WTLC-AM & FM/ Indianapolis Monthly One Emmis Plaza 40 Monument Circle Indianapolis, Indiana WENS-FM Tower 1985 Owned -- WNOU-FM Tower 1979 Owned -- WIBC-AM Tower 1966 Owned -- WTLC-AM Tower 1968 Leased December 2021 WTLC-FM Tower 1965 Leased December 2000 KSHE-FM 1986 Leased September 2007 700 St. Louis Union Station St. Louis, Missouri KSHE-FM Tower 1985 Leased April 2009 WXTM-FM/WKKX-FM 1998 Leased December 2007 800 St. Louis Union Station St. Louis, Missouri WXTM-FM Tower 1984 Owned -- WKKX-FM Tower 1989 Leased September 2009 KPWR-FM 1988 Leased February 2003(1) 2600 West Olive Burbank, California KPWR-FM Tower 1993 Leased October 2002 WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013 395 Hudson Street, 7th Floor New York, New York WQHT-FM Tower 1988 Leased January 2010 WRKS-FM Tower 1984 Leased November 2005 WQCD-FM Tower 1984 Leased February 2007
19 20 WKQX-FM 1979 Leased August 2015(2) Merchandise Mart Plaza Chicago, Illinois WKQX-FM Tower 1975 Leased September 2009 Atlanta Magazine Office 1997 Leased July 2003 1360 Peachtree Street Atlanta, Georgia Cincinnati Magazine 1996 Leased December 2001 One Centennial Plaza Cincinnati, OH Texas Monthly 1989 Leased August 2009 701 Brazos, Suite 1600 Austin, TX KHON-TV 1999 Owned -- 88 Piikoi Street Honolulu, HI KHON-TV Tower 1978 Leased December 2008 WALA-TV 1952 Leased May 2001 210 Government Street Mobile, AL WALA-TV Tower 1962 Owned -- WFTX-TV 1987 Owned -- 621 Pine Island Road Cape Coral, FL WFTX-TV Tower 1987 Owned -- WLUK-TV 1966 Owned -- 787 Lombardi Avenue Green Bay, WI WLUK-TV Tower 1961 Owned -- WTHI-TV/FM/WWVR-FM 1954 Owned -- 918 Ohio Street Terre Haute, IN WTHI-TV Tower 1965 Owned -- WTHI-FM Tower 1954 Owned -- WWVR-FM Tower 1954 Owned -- WVUE-TV 1972 Owned -- 1025 South Jefferson Davis Highway New Orleans, LA WVUE-TV Tower 1963 Owned -- WKCF-TV Offices 1998 Owned -- 31 Skyine Drive Lake Mary, FL WKCF-TV Tower 1991 Leased September 2006 Los Angeles Magazine Offices 1995 Leased November 2000 11100 Santa Monica Blvd. 7th Floor Los Angeles, CA Country Sampler 1988 Owned -- 707 Kautz Road St. Charles, IL 60174 RDS/Co-Opportunities 1989 Leased December 2000 324 Campus Lane, Suite B Suisun, CA 94585 Emmis West (Corporate) 1999 Leased January 2004 15821 Ventura Blvd., #685 Encino, CA 91436 Slager Radio 1998 Leased December 2004 Szabadsag Ut 117 (Atronyx Bldg. B) H-2040 Budaors, Hungary Slager Tower 1998 Leased December 2000(3)
20 21 Argentina 1996 Owned -- Uriarte 1899 (1414) Capital Federal Buenos Aires, Argentina Argentina Tower 1996 Owned --
- -------------- (1) The lease provides for one renewal option of ten years following the expiration date. Emmis also owns a tower site which it placed in service in 1984 and currently uses as a back-up facility and on which it leases space to other broadcasters. (2) The Company is in the process of building out a studio and office space in the Merchandise Mart. The lease is for this new space, but gives the Company the right to stay in its current space during construction. (3) The lease provides for annual renewal options. ITEM 3. LEGAL PROCEEDINGS. Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. See Note 7 in Item 8, "Financial Statements and Supplementary Data" for discussion of litigation with Sinclair Broadcast Group, Inc. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At a special meeting of shareholders of the Company held on February 21, 2000, the following matters received the following votes:
MATTER DESCRIPTION VOTES FOR VOTES AGAINST ABSTAINING - ------------------ --------- ------------- ---------- Increase authorized shares of Class A and Class B common stock Class A 8,626,729 6,313,588 3,747 Class B 23,692,910 - - Creation of non-voting class of common stock Class A 12,744,500 2,183,060 16,504 Class B 23,692,910 - - Creation of classified board of directors and other matters (Class A and B voted as one group) 29,378,911 8,254,898 1,003,165
21 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Emmis' Class A common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol EMMS. The following table sets forth the high and low sale prices of the Class A common stock for the periods indicated. No dividends were paid during any such periods.
QUARTER ENDED HIGH* LOW* May 1998 28.56 20.75 August 1998 24.56 18.25 November 1998 19.75 11.06 February 1999 25.94 16.94 May 1999 25.13 19.50 August 1999 29.56 22.00 November 1999 42.38 27.25 February 2000 62.34 35.63
*All prices adjusted for the two-for-one stock split on February 24,2000. At April 30, 2000, there were approximately 2,122 record holders of the Class A common stock, and there were two record holders, but only one beneficial owner, of the Class B common stock. Emmis intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its common stock in the foreseeable future. On October 25, 1999 Emmis sold 2,700,000 shares of its Class A Common Stock (5,400,000 shares after the subsequent stock split) to Liberty EMMS, Inc., a wholly owned subsidiary of Liberty Media Corporation, in a transaction not registered under the Securities Act of 1933. The cash purchase price of the stock was $148,500,000. The sale was exempt from registration under Section 4(2) of the Securities Act. Liberty Media Group holds interests in a broad range of video programming, communications, technology and internet businesses in the United States, Europe, South America and Asia. Its common stock is traded on the New York Stock Exchange. 22 23 ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29), ----------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1997 1998 1999 2000 ------------- ------------- ------------- ------------- --------- OPERATING DATA: Net revenues $ 109,244 $ 113,720 $ 140,583 $ 232,836 $ 325,265 Operating expenses 62,466 62,433 81,170 143,348 199,818 International business development Expenses 1,264 1,164 999 1,477 1,558 Corporate expenses 4,419 5,929 6,846 10,427 13,872 Time brokerage fee - - 5,667 2,220 - Depreciation and amortization 5,677 5,481 7,536 28,314 44,161 Non-cash compensation 3,667 3,465 1,482 4,269 7,357 Programming restructuring cost - - - - 896 Operating income 31,751 35,248 36,883 42,781 57,603 Interest expense 13,540 9,633 13,772 35,650 51,986 Loss on donation of radio station - - 4,833 - 956 Other income (expense), net (303) 325 6 1,914 4,203 Income before income taxes and extraordinary item 17,908 25,940 18,284 9,045 8,864 Income before extraordinary item 10,308 15,440 11,084 2,845 1,989 Net income (loss) 10,308 15,440 11,084 1,248 (33) Net income (loss) available to common shareholders 10,308 15,440 11,084 1,248 (3,177) Net income (loss) per share available to common shareholders: Basic $ 0.48 $ 0.71 $ 0.51 $ 0.04 $ (0.09) Diluted $ 0.46 $ 0.68 $ 0.49 $ 0.04 $ (0.09) Weighted average common shares outstanding (1): Basic 21,382 21,886 21,806 28,906 36,156 Diluted 22,168 22,582 22,724 29,696 36,156
FEBRUARY 28 (29), ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- -------- BALANCE SHEET DATA: Cash $ 1,218 $ 1,191 $ 5,785 $ 6,117 $ 17,370 Working capital 14,761 15,463 21,635 1,249 28,274 Net intangible assets 135,830 131,743 234,558 802,307 1,033,970 Total assets 176,566 189,716 333,388 1,014,831 1,327,306 Credit facility and senior subordinated debt 124,000 115,000 215,000 577,000 300,000 Shareholders' equity 13,884 34,422 43,910 235,549 776,367
YEAR ENDED FEBRUARY 28 (29), ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ----------- OTHER DATA: Broadcast/publishing cash flow (2) $ 46,778 $ 51,287 $ 59,413 $ 89,488 $ 125,447 EBITDA before certain charges (2) 41,095 44,194 51,568 77,584 110,017 Cash flows from (used in): Operating activities 23,221 21,362 22,487 35,121 26,360 Investing activities 222 (13,919) (116,693) (541,470) (271,946) Financing activities (25,430) (7,470) 98,800 506,681 256,839 Capital expenditures 1,396 7,559 16,991 37,383 29,316
(1) In February 2000, Emmis effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data shown has been retroactively adjusted to reflect the stock split. (2) Broadcast/publishing cash flow and EBITDA before certain charges are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for Emmis' results of operations presented on the basis of generally accepted accounting principles. 23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Emmis ("the Company") evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses. BCF and PCF are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of generally accepted accounting principles. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing the magazine, and general and administrative costs. The Company's revenues are affected primarily by the advertising rates its entities charge. These rates are in large part based on the entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. Broadcast entities' ratings are measured principally four times a year by Arbitron Radio Market Reports for radio stations and by A.C. Nielsen Company for television stations. Because audience ratings in a station's local market are critical to the station's financial success, the Company's strategy is to use market research and advertising and promotion to attract and retain audiences in each station's chosen demographic target group. In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services which can be used by the station in its business operations. The Company generally confines the use of such trade transactions to promotional items or services for which the Company would otherwise have paid cash. In addition, it is the Company's general policy not to pre-empt advertising spots paid for in cash with advertising spots paid for in trade. ACQUISITIONS, DONATIONS AND INVESTMENTS On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The Lee Acquisition consists of the following stations: KOIN-TV (CBS) in Portland, Oregon, KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico, and KREZ-TV, Durango, Colorado - Farmington, New Mexico), WSAZ-TV (NBC) in Charleston-Huntington, West Virginia, KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas, and KSNK-TV, Oberlin, Kansas - McCook, Nebraska), KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii, and KGMV-TV, Wailuku, Hawaii), KGUN-TV (ABC) in Tucson, Arizona, KMTV-TV (CBS) in Omaha, Nebraska, and 24 25 KSNT-TV (NBC) in Topeka, Kansas. The acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate the Company's television and radio businesses. Management is evaluating structural and financing alternatives to effect this separation of businesses. On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. Los Angeles Magazine Holding Company, Inc. owns and operates Los Angeles Magazine, a city magazine. The acquisition will be accounted for as a purchase and was financed through borrowings under the Company's credit facility (the "Credit Facility"). On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6 million. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. The excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. On November 16, 1999 Emmis purchased one million shares of BuyItNow.com L.L.C. for $5 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. This investment is accounted for using the cost method of accounting and is reflected in other assets in the accompanying consolidated balance sheets. In a separate transaction, BuyItNow.com L.L.C. agreed to a cash purchase of $2.5 million of advertisements from Emmis through February 2001. On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis consists of one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years. On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the Credit Facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheet and are being amortized over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through December 2009. In June 1999, the Company entered into an agreement with a former executive of Sinclair Broadcast Group, Inc. ("Sinclair") to purchase the executive's right to acquire the assets of certain broadcast properties in St. Louis, Missouri under an option agreement (the "St. Louis Acquisition"). The right was exercised and allows the Company to purchase, at fair market value, six radio stations (five FM and one AM) and one ABC-affiliated television station from Sinclair. 25 26 In November 1999, through completion of an appraisal process, the purchase price of the St. Louis Acquisition was determined to be $366.5 million. Sinclair has since filed a lawsuit in which it alleges, among other things, that the option agreement is not enforceable and that Emmis is not a proper designee of the executive's rights. The Company has denied the allegations made by Sinclair and believes that it has meritorious defenses to Sinclair's allegations. In addition, the Company has filed counterclaims against Sinclair, seeking, among other things, that the court order Sinclair to complete the sale of its St. Louis broadcast properties to the Company. The St. Louis Acquisition will be subject to approval by both the Federal Communications Commission and the Department of Justice; it will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors. Under FCC regulations, Emmis can own no more than five FM and three AM stations in the St. Louis market. Since Emmis already owns three FM stations in the St. Louis market, concurrently with the consummation of the St. Louis Acquisition, Emmis must divest three FM stations. Management intends to divest the stations in the St. Louis market with the three weakest transmitting signals. On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the Credit Facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the Credit Facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25 million promissory note and borrowings under the Credit Facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii). On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. Effective July 1, 1997 through the 26 27 date of closing, the Company operated WQCD-FM under a time brokerage agreement. On February 1, 1998, the Company acquired all of the outstanding capital stock of Mediatex Communications Corporation for approximately $37.4 million in cash plus liabilities recorded of $8.0 million (the "Mediatex Acquisition"). Mediatex Communications Corporation owns and operates Texas Monthly, a regional magazine. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. On November 1, 1997, the Company acquired substantially all of the net assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. On November 1, 1997, the Company completed its acquisition of substantially all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting, L.P. for approximately $15.3 million in cash (the "Indianapolis Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.) which was formed in August 1997. In November 1997, Slager Radio acquired a radio broadcasting license from the Hungarian government at a cost of approximately $19.2 million. The broadcast license has an initial term of seven years and may be renewed, subject to governmental approval, for an additional five years. Slager Radio began broadcasting on February 16, 1998. On October 1, 1997, the Company acquired the assets of Network Indiana and AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash (the "Network Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM (formerly WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to broadcast approximately $1 million in trade spots, for Zimco, Inc., over a period of years. The purchase price was financed through borrowings under the Credit Facility and the acquisition was accounted for as a purchase. In February 1998, the Company donated radio station WALC-AM to a church. The $4.8 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. Effective December 1, 1996 through the date of closing, the Company operated the acquired stations under a time brokerage agreement. RESULTS OF OPERATIONS YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999. Net revenues for the year ended February 29, 2000 were $325.3 million compared to $232.8 million for the same period of the prior year, an increase of $92.5 million or 39.7%. The increase in net revenues for the year ended February 29, 2000 is primarily the result of the SF, Wabash and WKCF Acquisitions (the "TV Acquisitions")($36.5 million) and Country Sampler Acquisition ($13.4 million). Excluding these transactions, net revenues for the year ended February 29, 2000 would have increased $42.6 million or 21.8%. Included in this increase is a decrease in political advertising revenue at our television stations as our fiscal year ended February 29, 2000 was not a significant year for political campaigns. The remaining increase in net revenues is due to the ability to realize higher advertising rates resulting from higher ratings at certain broadcasting properties, increases in general radio spending in the markets in which the Company operates, the ability to sell more advertising in our publications and an increase in single copy newsstand sales. 27 28 Operating expenses for the year ended February 29, 2000 were $199.8 million compared to $143.3 million for the same period of the prior year, an increase of $56.5 million or 39.4%. The increase in operating expenses for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($25.0 million) and Country Sampler Acquisition ($11.2 million). Excluding these transactions, operating expenses for the year ended February 29, 2000 would have increased $20.3 million or 17.0%. This increase is principally due to higher advertising and promotional spending at certain of the Company's properties as well as an increase in sales related costs. Broadcast/publishing cash flow for the year ended February 29, 2000 was $125.4 million compared to $89.5 million for the same period of the prior year, an increase of $35.9 million or 40.2%. The increase in broadcast/publishing cash flow for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($11.5 million) and Country Sampler Acquisition ($2.2 million). Excluding these transactions, broadcast/publishing cash flow for the year ended February 29, 2000 would have increased $22.2 million or 29.3%. This increase is principally due to increased net revenues partially offset by increased operating expenses as discussed above. International business development expenses for the year ended February 29, 2000 were $1.6 million compared to $1.5 million for the same period of the prior year. These expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs. Corporate expenses for the year ended February 29, 2000 were $13.9 million compared to $10.4 million for the same period of the prior year, an increase of $3.5 million or 33.0%. These increases are due to costs associated with year 2000 compliance, analysis of potential acquisitions and an increase in the number of corporate employees in all departments as a result of the growth of the Company. EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development expenses. EBITDA before certain charges for the year ended February 29, 2000 was $110.0 million compared to $77.6 million for the same period of the prior year, an increase of $32.4 million or 41.8%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses. Interest expense was $52.0 million for the year ended February 29, 2000 compared to $35.7 million for the same period of the prior year, an increase of $16.3 million or 45.8%. This increase reflected higher outstanding debt due to the TV Acquisitions, WQCD Acquisition, which was previously operated under a time brokerage agreement, and Country Sampler Acquisition and a higher rate of interest paid by the Company on outstanding debt. Depreciation and amortization expense for the year ended February 29, 2000 was $44.2 million compared to $28.3 million for the same period of the prior year, an increase of $15.9 million or 56.0%. The increase in depreciation and amortization expense for the year ended February 29, 2000 is primarily the result of the TV Acquisitions ($8.0 million), WQCD Acquisition ($2.2 million) and Country Sampler Acquisition ($2.3 million). The remaining increase relates to depreciation of capital additions in recent years. Non-cash compensation expense for the year ended February 29, 2000 was $7.4 million compared to $4.3 million for the same period of the prior year, an increase of $3.1 million or 72.3%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. This increase was due to shares granted to certain executives under employment agreements for which the fair market value of the shares at the date of grant was higher than the fair market value of shares granted under previous employment agreements due to the appreciation in the Company's stock price. 28 29 YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998. Net revenues for the year ended February 28, 1999 were $232.8 million compared to $140.6 million for the same period of the prior year, an increase of $92.2 million or 65.6%. This increase was principally due to the Indianapolis, Cincinnati and Mediatex Acquisitions that occurred toward the end of fiscal 1998 and the SF and Wabash Acquisitions that occurred in fiscal 1999 (collectively the "98/99 Acquisitions"). Additionally, Emmis realized higher advertising rates at its broadcasting properties, resulting from higher ratings at certain broadcasting properties, as well as increases in general radio spending in the markets in which the Company operates. Operating expenses for the year ended February 28, 1999 were $143.3 million compared to $81.2 million for the same period of the prior year, an increase of $62.1 million or 76.6%. This increase was principally attributable to the 98/99 Acquisitions and increased promotional spending at the Company's broadcasting properties. Broadcast/publishing cash flow for the year ended February 28, 1999 was $89.5 million compared to $59.4 million for the same period of the prior year, an increase of $30.1 million or 50.6%. This increase was due to increased net revenues partially offset by increased operating expenses as discussed above. International business development expenses for the year ended February 28, 1999 were $1.5 million compared to $1.0 million for the same period of the prior year. These expenses reflect costs associated with Emmis International Corporation. The purpose of this wholly owned subsidiary is to identify, investigate and develop international broadcast investments or other international business opportunities. Expenses consist primarily of salaries, travel and various administrative costs. Corporate expenses for the year ended February 28, 1999 were $10.4 million compared to $6.8 million for the same period of the prior year, an increase of $3.6 million or 52.3%. This increase was primarily due to an increase in the number of corporate employees as a result of the growth of the Company and increased travel and other expenses related to potential acquisitions that were not finalized. EBITDA before certain charges is defined as broadcast/publishing cash flow less corporate and international development expenses. EBITDA before certain charges for the year ended February 28, 1999 was $77.6 million compared to $51.6 million for the same period of the prior year, an increase of $26.0 million or 50.4%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses. Interest expense was $35.7 million for the year ended February 28, 1999 compared to $13.8 million for the same period of the prior year, an increase of $21.9 million or 158.9%. This increase reflected higher outstanding debt due to the 98/99 Acquisitions and the WQCD Acquisition. Depreciation and amortization expense for the year ended February 28, 1999 was $28.3 million compared to $7.5 million for the same period of the prior year, an increase of $20.8 million or 275.7%. This increase was primarily due to the 98/99 Acquisitions and the WQCD Acquisition. Non-cash compensation expense for the year ended February 28, 1999 was $4.3 million compared to $1.5 million for the same period of the prior year, an increase of $2.8 million or 188.1%. Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. The increase in non-cash compensation relates primarily to options awarded the CEO in fiscal 1999 under his employment contract while similar options were not awarded in fiscal 1998. 29 30 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash provided by operations and availability under its Credit Facility. At February 29, 2000, the Company had cash and cash equivalents of $17.4 million, net working capital of $28.3 million and $398.9 million available under the Credit Facility, after considering an outstanding letter of credit of $1.1 million. The Company expects that cash flow from operating activities will be sufficient to fund all debt service requirements for debt existing at February 29, 2000, and working capital and capital expenditure requirements for the next year. In addition, the Company also has access to public equity and debt markets. On January 14, 2000, Emmis repaid the $250 million term note outstanding under its Credit Facility. The repayment resulted in cancellation of the term note portion of the Credit Facility. On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. Also on October 29, 1999, the Company completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. Emmis has exercised its right, acquired in June 1999 from a former executive of Sinclair, to purchase certain broadcast properties in St. Louis, Missouri under an option agreement. The purchase price has been determined to be $366.5 million. The St. Louis Acquisition will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors. For further discussion of this item, see Acquisitions, Donations and Investments. The Company has signed an agreement to purchase the outstanding common stock of one FM radio station and one AM radio station in Buenos Aires, Argentina. This will bring the Company's total radio holdings in Buenos Aires to four radio stations (two FM stations and two AM stations). Emmis expects that this acquisition will have an aggregate purchase price of approximately $10 million and will be financed through borrowings under the Credit Facility. On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. The acquisition was financed through borrowings under the Credit Facility. On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate the Company's television and radio businesses. Management is evaluating structural and financing 30 31 alternatives to effect this separation of businesses. In the fiscal years ended February 1998, 1999 and 2000, the Company had capital expenditures of $17.0 million, $37.4 million and $29.3 million, respectively. These capital expenditures primarily related to the Indianapolis office facility project, the KHON operating facilities project, leasehold improvements to office and studio facilities in connection with the consolidation of the New York broadcast properties to a single location, and broadcast equipment purchases and tower upgrades. As part of its business strategy, the Company continually evaluates potential acquisitions of radio and television stations as well as publishing properties. In connection with future acquisition opportunities, the Company may incur additional debt or issue additional equity or debt securities depending on market conditions and other factors. SEASONALITY The Company's results of operations are usually subject to seasonal fluctuations, which result in higher second and third quarter revenues and broadcast cash flow. This seasonality is due to the younger demographic composition of many of the Company's stations. Advertisers increase spending during the summer months to target these listeners. In addition, advertisers generally increase spending during the months of October and November, which are part of the Company's third quarter, in anticipation of the holiday season. Finally, revenues from political advertising tend to be higher in even numbered calendar years. YEAR 2000 Emmis has not experienced significant problems related to systems properly recognizing date sensitive information as a result of the year 2000. However, if Emmis were to experience such problems in the future, Emmis could implement temporary solutions or processes not involving the malfunctioning equipment. Contingency plans have been documented in the event Emmis must implement such temporary solutions. Emmis completed its assessment of year 2000 compliance for information technology, other equipment, including broadcast equipment, and embedded technology in October 1999. Emmis began tracking costs relating to year 2000 compliance in May 1999. Emmis estimates that the total cost of year 2000 remediation efforts were less than $1.0 million, which was funded from operations. INFLATION The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of Emmis due to adverse changes in financial and commodity market prices and rates. Emmis is exposed to market risk from changes in domestic and international interest rates (i.e. prime and LIBOR) and foreign currency exchange rates. To manage this exposure Emmis periodically enters into interest rate derivative agreements. Emmis does not use financial instruments for trading and is not a party to any leveraged derivatives. 31 32 In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative financial instruments and hedging activities. SFAS No. 133 is amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and is effective for years beginning after June 15, 2000. This pronouncement, which Emmis plans to adopt in its fiscal year ending February 28, 2002, will require, among other things, the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. Management believes adoption of this statement will not materially impact the Company's financial position or results of operations. INTEREST RATES Although no balance existed as of February 29, 2000, future outstanding balances under the Company's Credit Facility will bear interest at variable rates. The Credit Facility requires Emmis to maintain interest rate protection agreements through July 2001. The notional amount required varies based upon Emmis' ratio of adjusted debt to EBITDA, as defined in the Credit Facility. FOREIGN CURRENCY Emmis owns a 54% interest in a Hungarian subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency. Emmis has a natural hedge since some of the subsidiary's long-term obligations are denominated in Hungarian forints. Emmis maintains no other derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. It is estimated that a 10% change in the value of the U.S. dollar to the Hungarian forint would not be material. Emmis owns a 75% interest in an Argentinean subsidiary which is consolidated in the accompanying financial statements. This subsidiary's operations are measured in its local currency (peso), which is tied to the U.S. dollar through the Argentine government's Convertibility Plan. Emmis maintains no derivative instruments to mitigate the exposure to translation and/or transaction risk. However, this does not preclude the adoption of specific hedging strategies in the future. 32 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28 (29), ------------------------------------------------------------ 1998 1999 2000 ------------------------------------------------------------ GROSS REVENUES $ 165,324 $ 274,056 $ 380,995 LESS AGENCY COMMISSIONS 24,741 41,220 55,730 ---------- -------- -------- NET REVENUES 140,583 232,836 325,265 Operating expenses 81,170 143,348 199,818 International business development expenses 999 1,477 1,558 Corporate expenses 6,846 10,427 13,872 Time brokerage fee 5,667 2,220 - Depreciation and amortization 7,536 28,314 44,161 Non-cash compensation 1,482 4,269 7,357 Programming restructuring cost - - 896 ---------- -------- -------- OPERATING INCOME 36,883 42,781 57,603 ---------- -------- -------- OTHER INCOME (EXPENSE): Interest expense (13,772) (35,650) (51,986) Loss on donation of radio station (4,833) - (956) Other income, net 6 1,914 4,203 ---------- -------- -------- Total other income (expense) (18,599) (33,736) (48,739) ---------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 18,284 9,045 8,864 PROVISION FOR INCOME TAXES 7,200 6,200 6,875 ---------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 11,084 2,845 1,989 EXTRAORDINARY ITEM, NET OF TAX - 1,597 2,022 ---------- -------- -------- NET INCOME (LOSS) 11,084 1,248 (33) PREFERRED STOCK DIVIDENDS - - 3,144 ---------- -------- -------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 11,084 $ 1,248 $ (3,177) ========== ======== ======== BASIC EARNINGS PER COMMON SHARE: Before extraordinary item $ 0.51 $ 0.10 $ (0.03) Extraordinary item, net of tax - (0.06) (0.06) ---------- -------- -------- Net income (loss) available to common shareholders $ 0.51 $ 0.04 $ (0.09) ========== ======== ========= DILUTED EARNINGS PER COMMON SHARE: Before extraordinary item $ 0.49 $ 0.10 $ (0.03) Extraordinary item, net of tax - (0.06) (0.06) ---------- -------- -------- Net income (loss) available to common shareholders $ 0.49 $ 0.04 $ (0.09) ========== ======== =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 33 34 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29), --------------------------------- 1999 2000 ------------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,117 $ 17,370 Accounts receivable, net of allowance for doubtful accounts of $1,698 and $1,924, respectively 51,479 66,471 Current portion of TV program rights 3,646 5,452 Income tax refunds receivable - 4,685 Prepaid expenses 6,833 10,053 Other 3,007 8,685 ------------- ------------- Total current assets 71,082 112,716 ------------- ------------- PROPERTY AND EQUIPMENT: Land and buildings 35,411 52,789 Leasehold improvements 8,351 9,006 Broadcasting equipment 63,943 74,975 Office equipment and automobiles 21,199 30,270 Construction in progress 3,418 1,210 ------------- ------------- 132,322 168,250 Less- Accumulated depreciation and amortization 26,262 39,346 ------------- ------------- Total property and equipment, net 106,060 128,904 ------------- ------------- INTANGIBLE ASSETS: Broadcast licenses 711,928 959,454 Excess of cost over fair value of net assets of purchased businesses 123,614 131,013 Other intangibles 6,388 14,558 ------------- ------------- 841,930 1,105,025 Less- Accumulated amortization 39,623 71,055 ------------- ------------- Total intangible assets, net 802,307 1,033,970 ------------- ------------- OTHER ASSETS: Deferred debt issuance costs and cost of interest rate cap agreements, net of accumulated amortization of $839 and $2,535, respectively 18,907 14,082 TV program rights, net of current portion 7,836 15,851 Investments 5,664 10,664 Deposits and other 2,975 11,119 ------------- ------------- Total other assets, net 35,382 51,716 ------------- ------------- Total assets $ 1,014,831 $ 1,327,306 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 34 35 CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29), ------------------------------------- 1999 2000 --------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 15,635 $ 22,957 Current maturities of other long-term debt 835 5,379 Current portion of TV program rights payable 9,471 16,816 Collection of accounts receivable on behalf of SF Broadcasting and Wabash Valley Broadcasting 9,016 - Accrued salaries and commissions 4,545 8,162 Accrued interest 6,223 11,077 Income tax payable 12,057 - Deferred revenue 7,238 15,912 Other 4,813 4,139 ------------- ------------- Total current liabilities 69,833 84,442 CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 577,000 300,000 OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 18,805 14,607 TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION 25,161 58,585 OTHER NONCURRENT LIABILITIES 3,466 5,408 MINORITY INTEREST - 758 DEFERRED INCOME TAXES 85,017 87,139 ------------- ------------- Total liabilities 779,282 550,939 ------------- ------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' EQUITY: Series A cumulative convertible preferred stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 0 shares and 2,875,000 shares, respectively - 29 Class A common stock, $.01 par value; authorized 68,000,000 shares; issued and outstanding 26,380,414 shares and 41,232,811 shares, respectively 264 412 Class B common stock, $.01 par value; authorized 12,000,0000 shares; issued and outstanding 5,164,530 shares and 4,738,582 shares, respectively 52 47 Additional paid-in capital 260,186 804,820 Accumulated deficit (24,305) (27,482) Accumulated other comprehensive income (648) (1,459) ------------- ------------- Total shareholders' equity 235,549 776,367 ------------- ------------- Total liabilities and shareholders' equity $ 1,014,831 $ 1,327,306 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 35 36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 29, 2000
CLASS A CLASS B SERIES A COMMON STOCK COMMON STOCK PREFERRED STOCK ---------------------- ----------------------- ------------------------- SHARES SHARES SHARES OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT ----------- ------ ----------- ------ ----------- ------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, FEBRUARY 28, 1997 16,821,912 $ 168 5,148,940 $ 52 - $ - Issuance of Class A common stock in exchange for Class B common stock 27,152 - (27,152) - - - Exercise of stock options and related income tax benefits 212,610 2 - - - - Compensation related to granting of stock and stock options - - - - - - Issuance of Class A common stock to profit sharing plan 30,304 - - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 158,230 2 - - - - Purchase of Class A common stock (388,888) (4) - - - - Comprehensive Income: Net income - - - - - - ------------- ---- ------------- ---- ------------ ---- BALANCE, FEBRUARY 28, 1998 16,861,320 168 5,121,788 52 - - ------------- ---- ------------- ---- ------------ ---- Issuance of Class A common stock in exchange for Class B common stock 15,258 - (15,258) - - - Exercise of stock options and related income tax benefits 249,356 3 58,000 - - - Compensation related to granting of stock and stock options - - - - - - Issuance of Class A Common Stock to profit sharing plan 43,184 1 - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 11,296 - - - - - Sale of Class A common stock, net of costs incurred of $10,560 9,200,000 92 - - - - Comprehensive Income: Net income - - - - - - Cumulative translation adjustment - - - - - - Total comprehensive income - - - - - - ------------- ----- ------------- ---- ------------ ---- BALANCE, FEBRUARY 28, 1999 26,380,414 264 5,164,530 52 - - -------------- ----- ------------- ---- ------------ ---- Issuance of Class A common stock in exchange for Class B common stock 505,668 5 (505,668) (5) - - Exercise of stock options and related income tax benefits 886,496 9 79,720 - - - Compensation related to granting of stock and stock options - - - - - - Issuance of Class A common stock to profit sharing plan 34,246 - - - - - Issuance of Class A common stock to employees and officers and related income tax benefits 41,987 - - - - - Sale of Class A common stock, net of costs incurred of $14,430 13,384,000 134 - - - - Sale of Series A cumulative convertible preferred stock, net of costs incurred of $5,341 - - - - 2,875,000 29 Preferred stock dividends paid - - - - - - Comprehensive Income: Net income - - - - - - Cumulative translation adjustment - - - - - - Total comprehensive income - - - - - - ------------- ----- ------------- ---- ------------ ---- BALANCE, FEBRUARY 29, 2000 41,232,811 $ 412 4,738,582 $ 47 2,875,000 $ 29 ============== ===== ============= ==== ============ ====
36 37 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (CONTINUED) FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 29, 2000
ACCUMULATED ADDITIONAL OTHER TOTAL PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' CAPITAL DEFICIT INCOME EQUITY ------- ------- ------ ------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) BALANCE, FEBRUARY 28, 1997 70,839 (36,637) - 34,422 Issuance of Class A common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 2,965 - - 2,967 Compensation related to granting of stock and stock options 732 - - 732 Issuance of Class A common stock to profit sharing plan 750 - - 750 Issuance of Class A common stock to employees and officers and related income tax benefits 953 - - 955 Purchase of Class A common stock (6,996) - - (7,000) Comprehensive Income: Net income - 11,084 - 11,084 ------------- ------------ ----------- ------------ BALANCE, FEBRUARY 28, 1998 69,243 (25,553) - 43,910 ------------- ------------ ----------- ------------ Issuance of Class A common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 4,127 - - 4,130 Compensation related to granting of stock and stock options 3,269 - - 3,269 Issuance of Class A common stock to profit sharing plan 999 - - 1,000 Issuance of Class A common stock to employees and officers and related income tax benefits - - - - Sale of Class A common stock, net of costs incurred of $10,560 182,548 - - 182,640 Comprehensive Income: Net income - 1,248 - - Cumulative translation adjustment - - (648) Total comprehensive income - - - 600 ------------- ------------ ----------- ------------ BALANCE, FEBRUARY 28, 1999 260,186 (24,305) (648) 235,549 ------------- ------------- ------------ ------------ Issuance of Class A common stock in exchange for Class B common stock - - - - Exercise of stock options and related income tax benefits 16,761 - - 16,770 Compensation related to granting of stock and stock options 4,807 - - 4,807 Issuance of Class A common stock to profit sharing plan 1,250 - - 1,250 Issuance of Class A common stock to employees and officers and related income tax benefits - - - - Sale of Class A common stock, net of costs incurred of $14,430 383,436 - - 383,570 Sale of Series A cumulative convertible preferred stock, net of costs incurred of $5,341 138,380 - - 138,409 Preferred stock dividends paid - (3,144) - (3,144) Comprehensive Income: Net income (loss) - (33) - Cumulative translation adjustment - - (811) Total comprehensive income - - - (844) ------------- ------------ ----------- ------------ BALANCE, FEBRUARY 29, 2000 $ 804,820 $ (27,482) $ (1,459) $ 776,367 ============= ============ =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 37 38 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28 (29), -------------------------------------------------------- 1998 1999 2000 -------------------- -------------------- ------------ OPERATING ACTIVITIES: Net income (loss) $ 11,084 $ 1,248 $ (33) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Extraordinary item - 1,597 2,022 Depreciation and amortization 9,719 32,158 53,818 Provision for bad debts 802 1,745 2,550 Provision (benefit) for deferred income taxes (524) 4,953 6,670 Non-cash compensation 1,482 4,269 7,357 Loss on donation of radio station 4,833 - 956 Other 357 (1,143) (783) Changes in assets and liabilities - Accounts receivable (8,389) (21,104) (13,319) Prepaid expenses and other current assets (4,760) (727) (14,546) Other assets (1,832) 3,435 (2,507) Accounts payable and accrued liabilities 9,139 7,007 10,165 Deferred revenue 292 (747) 4,332 Other liabilities 284 2,430 (30,322) ---------- ------------ ------------ Net cash provided by operating activities 22,487 35,121 26,360 ---------- ------------ ------------ INVESTING ACTIVITIES: Cash paid for acquisitions (92,377) (504,748) (231,130) Purchases of property and equipment (16,991) (37,383) (29,316) Deposits on acquisitions and other (7,325) 661 (11,500) ----------- ------------ ------------ Net cash used by investing activities (116,693) (541,470) (271,946) ---------- ------------ ------------ FINANCING ACTIVITIES: Proceeds from long-term debt 288,378 1,063,000 149,668 Payments on long-term debt (183,928) (723,500) (426,668) Proceeds (purchase) of the Company's Class A common stock, net of transaction costs (7,000) 182,640 383,570 Proceeds of the Company's Series A cumulative convertible preferred stock, net of transaction costs - - 138,409 Proceeds from exercise of stock options 3,922 4,130 13,881 Purchases of interest rate cap agreements and other debt related costs (4,291) (19,589) - Preferred stock dividends paid - - (2,021) Other 1,719 - - ---------- ------------ ------------- Net cash provided by financing activities 98,800 506,681 256,839 ---------- ------------ ------------- INCREASE IN CASH AND CASH EQUIVALENTS 4,594 332 11,253 CASH AND CASH EQUIVALENTS: Beginning of year 1,191 5,785 6,117 ---------- ------------ ------------- End of year $ 5,785 $ 6,117 $ 17,370 ========== ============ =============
38 39 CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28 (29), ------------------------------------------------------ 1998 1999 2000 --------------- ---------------- ------------ SUPPLEMENTAL DISCLOSURES: Cash paid for- Interest $ 9,655 $ 33,439 $ 41,735 Income taxes 8,419 1,580 9,589 Non-cash investing and financing transactions- Fair value of assets acquired by incurring debt 32 - - Preferred stock dividends accrued - - 1,123 ACQUISITION OF WXTM-FM, WALC-AM AND WKKX-FM: Fair value of assets acquired $ 44,564 - - Cash paid 43,564 - - ---------- Liabilities recorded $ 1,000 - - ACQUISITION OF TEXAS MONTHLY: Fair value of assets acquired $ 45,421 - - Cash paid 37,389 - - ---------- Liabilities recorded $ 8,032 - - ACQUISITION OF WQCD-FM: Fair value of assets acquired - $ 201,347 - Cash paid - 128,550 - ------------ Liabilities recorded - $ 72,797 - ACQUISITION OF SF BROADCASTING: Fair value of assets acquired - $ 346,952 - Cash paid - 287,293 - ------------ Liabilities recorded - $ 59,659 - ACQUISITION OF WABASH VALLEY BROADCASTING: Fair value of assets acquired - $ 101,055 - Cash paid - 88,905 - ------------ Liabilities recorded - $ 12,150 - ACQUISITION OF COUNTRY SAMPLER: Fair value of assets acquired - - $ 25,608 Cash paid - - 18,954 ------------ Liabilities recorded - - $ 6,654 ACQUISITION OF WKCF-TV: Fair value of assets acquired - - $ 246,495 Cash paid - - 197,105 ------------ Liabilities recorded - - $ 49,390 ACQUISITION OF VOTIONIS, S.A.: Fair value of assets acquired - - $ 18,936 Cash paid - - 13,302 ------------ Liabilities recorded - - $ 5,634
The accompanying notes to consolidated financial statements are an integral part of these statements. 39 40 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization Emmis Communications Corporation is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The thirteen FM radio stations and two AM radio stations Emmis Communications Corporation owns in the United States serve the nation's three largest radio markets of New York City, Los Angeles and Chicago, as well as St. Louis, Indianapolis and Terre Haute, Indiana. The seven television stations are located in Orlando, Florida, New Orleans, Louisiana, Mobile, Alabama, Green Bay, Wisconsin, Honolulu, Hawaii, Fort Myers, Florida and Terre Haute, Indiana. Emmis Communications Corporation also publishes Indianapolis Monthly, Texas Monthly, Country Sampler, Cincinnati and Atlanta magazines, has a 54% interest in a national radio station in Hungary (Slager Radio), a 75% interest in one FM and one AM radio station in Buenos Aires, Argentina, and engages in certain businesses ancillary to its business, such as broadcast tower leasing and advertising and program consulting. b. Principles of Consolidation The consolidated financial statements include the accounts of Emmis Communications Corporation and its majority owned Subsidiaries. Unless the content otherwise requires, references to Emmis or the Company in these financial statements mean Emmis Communications Corporation and its Subsidiaries. Emmis' foreign subsidiaries report on a fiscal year ending December 31, which Emmis consolidates into its fiscal year ending February 28 (29). All significant intercompany balances and transactions have been eliminated. c. Revenue Recognition Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery. d. Television Programming Emmis has agreements with distributors for the rights to television programming over contract periods which generally run from one to five years. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first showing. The portion of program contracts which become payable within one year is reflected as a current liability in the accompanying consolidated balance sheet. The rights to program materials are reflected in the accompanying consolidated balance sheet at the lower of unamortized cost or estimated net realizable value. Estimated net realizable values are based upon management's expectation of future advertising revenues, net of sales commissions, to be generated by the program material. Amortization of program contract costs is computed under either the straight-line method over the contract period or based on usage, whichever yields the greater amortization for each program on a monthly basis. Program contract costs that management expects to be amortized in the succeeding year are classified as current assets. Program contract liabilities are typically paid on a scheduled basis and are not affected by adjustments for amortization or estimated net realizable value. Certain program contracts provide for the exchange of advertising air time in lieu of cash payments for the rights to such programming. These contracts are recorded as the programs are aired at the estimated fair value of the advertising air time given in exchange for the program rights. 40 41 e. International Business Development Expenses International business development expenses include the cost of the Company's efforts to identify, investigate and develop international broadcast investments or other international business opportunities. f. Non-cash Compensation Non-cash compensation includes compensation expense associated with stock options granted, restricted common stock issued under employment agreements and common stock contributed to the Company's Profit Sharing Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Pro forma disclosure of net income and earnings per share under SFAS No. 123 is presented in Note 9. g. Cash and Cash Equivalents Emmis considers time deposits, money market fund shares, and all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. h. Property and Equipment Property and equipment are recorded at cost. Depreciation is generally computed by the straight-line method over the estimated useful lives of the related assets which are 31.5 years for buildings, not more than 32 years for leasehold improvements, and 5 to 7 years for broadcasting equipment, office equipment and automobiles. Maintenance, repairs and minor renewals are expensed; improvements are capitalized. Interest was capitalized in connection with the construction of the Indianapolis office facility and the KHON operating facility. The capitalized interest was recorded as part of the buildings. In fiscal 1998, 1999 and 2000 approximately $312,000, $1,591,000 and $420,000 of interest was capitalized, respectively. On a continuing basis, the Company reviews the financial statement carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations. i. Intangible Assets Intangible assets are recorded at cost. Generally, broadcast licenses, trademarks and the excess of cost over fair value of net assets of purchased businesses are being amortized using the straight-line method over 40 years. The cost of the broadcast license for Slager Radio is being amortized over the seven year initial term of the license. The cost of the broadcast license for the two stations in Buenos Aires, Argentina is being amortized over the twenty-three year remaining term of the license. The excess of cost over fair value of net assets resulting from the purchase of publications is being amortized over 15 years. Other intangibles are amortized using the straight-line method over varying periods, not in excess of 10 years. Subsequent to the acquisition of an intangible asset, Emmis evaluates whether later events and circumstances indicate the remaining estimated useful life of that asset may warrant revision or that the remaining carrying value of such an asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, Emmis uses an estimate of the related asset's undiscounted future cash flows over the remaining life of that asset in measuring recoverability. If separately identifiable cash flows are not available for an intangible asset (as would generally be the case for the excess of cost over fair value of purchased businesses), Emmis evaluates recoverability based on the expected undiscounted cash flows of the specific business to which the asset relates. If such an analysis indicates that impairment has in fact occurred, Emmis writes down the remaining net book value of the intangible asset to its fair value. For this purpose, fair value is determined using quoted market prices (if available), appraisals or appropriate valuation techniques. 41 42 j. Investments Emmis has a 50% ownership interest in a partnership in which the sole asset is land on which a transmission tower is located. The other owner has voting control of the partnership. This investment of $5,114,000 is accounted for on the equity method of accounting. Emmis has a $5,000,000 investment, which represents an original 2.49% ownership interest, in BuyItNow.com L.L.C., which is being accounted for on the cost method of accounting. k. Deferred Revenue and Barter Transactions Deferred revenue includes deferred magazine subscription revenue and deferred barter revenue. Barter transactions are recorded at the estimated fair value of the product or service received. Broadcast revenue from barter transactions is recognized when commercials are broadcast. The appropriate expense or asset is recognized when merchandise or services are used or received. l. Foreign Currency Translation The functional currency of Slager Radio is the Hungarian forint. Slager Radio's balance sheet has been translated from forints to the U.S. dollar using the current exchange rate in effect at the balance sheet date. Slager Radio's results of operations have been translated using an average exchange rate for the period. The translation adjustment resulting from the conversion of Slager Radio's financial statements was $648,000 and $811,000 for the years ended February 28 (29), 1999 and 2000, respectively. This adjustment is reflected in shareholders' equity in the accompanying consolidated balance sheet. The functional currency of the two stations in Argentina is the Argentinean peso. The peso is tied to the U.S. dollar through the Argentine government's Convertibility Plan. Thus, translation adjustments resulting from the conversion of these stations' financial statements were immaterial for the year ended February 29, 2000. m. Earnings Per Share Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period (21,806,666, 28,905,640 and 36,155,982 shares for the years ended February 28 (29), 1998, 1999 and 2000, respectively). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at February 28, 1998 and 1999 consisted solely of stock options. Potentially dilutive securities at February 29, 2000 consisted of stock options and the 6.25% Series A cumulative convertible preferred stock. Neither the conversion of the stock options nor the conversion of the preferred stock is included in the calculation of diluted net income per common share for the year ended February 29, 2000 as the effect of these conversions would be antidilutive. Weighted average common equivalent shares outstanding for the period for purposes of computing diluted EPS are 22,723,762, 29,696,342 and 36,155,982 for the years ended February 28 (29), 1998, 1999 and 2000, respectively. Excluded from the calculation of diluted net income per share are 2.7 million weighted average shares that would result from the conversion of the stock options and preferred shares for the year ended February 29, 2000. 42 43 n. Stock Splits In February 2000, the Company effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data shown in the accompanying consolidated financial statements and notes has been retroactively adjusted to reflect the stock split. o. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. p. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the short maturity of these financial instruments. Except for the Senior Subordinated Notes, the carrying amounts of long-term debt approximate fair value due to the variable interest rate on such debt. The fair value of the Senior Subordinated Notes on February 29, 2000 was approximately $281.3 million, based on current market information. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. q. Accounting Pronouncement In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative financial instruments and hedging activities. SFAS No. 133 is amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and is effective for years beginning after June 15, 2000. This pronouncement, which Emmis plans to adopt in its fiscal year ending February 28, 2002, will require, among other things, the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through income or recognized in other comprehensive income. Hedge ineffectiveness, the amount by which the change in the value of a hedge does not exactly offset the change in the value of the hedged item, will be immediately recognized in earnings. Management believes adoption of this statement will not materially impact the Company's financial position or results of operations. r. Reclassifications Certain reclassifications have been made to the February 28, 1998 and 1999 financial statements to be consistent with the February 29, 2000 presentation. 43 44 2. COMMON STOCK Emmis has authorized 170,000,000 shares of Class A common stock, par value $.01 per share, 30,000,000 shares of Class B common stock, par value $.01 per share, and 30,000,000 shares of Class C common stock, par value $.01 per share. The rights of these three classes are essentially identical except that each share of Class A common stock has one vote with respect to substantially all matters, each share of Class B common stock has 10 votes with respect to substantially all matters, and each share of Class C common stock has no voting rights with respect to substantially all matters. Class B common stock is owned by the principal shareholder (Jeffrey H. Smulyan). All shares of Class B common stock convert to Class A common stock upon sale or other transfer to a party unaffiliated with the principal shareholder. At February 28 (29), 1999 and 2000, no shares of Class C common stock were issued or outstanding. The financial statements presented reflect the issuance of Class A and Class B common stock. In June 1997, Emmis acquired 388,888 shares of its Class A common stock from Morgan Stanley, Dean Witter, Discover and Co. at $18.00 per share. The aggregate purchase price of $7.0 million is reflected as a decrease to paid in capital in the accompanying financial statements and was financed through additional borrowings under the Company's Credit Facility. In June 1998, Emmis completed the sale of 9.2 million shares of its Class A common stock at $21.00 per share resulting in total proceeds of $193.2 million. Net proceeds from the offering were used to repay outstanding obligations under the Credit Facility. On October 29, 1999, Emmis completed the sale of 7.984 million shares of its Class A common stock at $31.25 per share resulting in total proceeds of $249.5 million. Net proceeds of $238.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. At the same time as its public sale of 7.984 million shares of Class A common stock, Emmis entered into a stock purchase agreement with Liberty Media Corporation (Liberty) and sold 5.4 million shares of the Company's Class A common stock to Liberty for $148.5 million on November 18, 1999. Net proceeds of $145.3 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. 3. PREFERRED STOCK Emmis has authorized 10,000,000 shares of preferred stock which may be issued with such designations, preferences, limitations and relative rights as Emmis' Board of Directors may authorize. On October 29, 1999, the Company completed the sale of 2.875 million shares of 6.25% Series A cumulative convertible preferred stock at $50 per share resulting in total proceeds of $143.8 million. Net proceeds of $138.4 million were used to fund the acquisition of WKCF-TV in Orlando, Florida, two radio stations in Buenos Aires, Argentina, and to repay certain outstanding obligations under the Credit Facility. The 6.25% Series A cumulative convertible preferred stock has a liquidation preference of $50 per share and a par value of $.01 per share. Each preferred share is convertible at the option of the holder into 1.28 shares of Class A common stock, subject to certain events. Dividends are cumulative and payable quarterly in arrears on January 15, April 15, July 15, and October 15 of each year at an annual rate of $3.125 per preferred share. The Company may not redeem the preferred stock prior to April 15, 2001. From April 15, 2001 to October 15, 2002, the Company may redeem the preferred stock at a redemption premium equal to 104.911% of the stated liquidation preference (plus accumulated and unpaid dividends, if any) if certain conditions are met. Beginning on October 15, 2002, 44 45 and each October 15 thereafter, the Company may redeem the preferred stock for cash at the following redemption premiums (which are expressed as a percentage of the liquidation preference per share), plus in each case accumulated and unpaid dividends, if any, whether or not declared to the redemption date:
YEAR AMOUNT ---- ------ 2002 103.571% 2003 102.679% 2004 101.786% 2005 100.893% 2006 and thereafter 100.000%
4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT The Credit Facility and Senior Subordinated Debt was comprised of the following at February 28 (29), 1999 and 2000:
1999 2000 ------------ ------------ (DOLLARS IN THOUSANDS) Credit Facility: Revolving Credit Facility $ 27,000 $ - Term Note 250,000 - 8 1/8% Senior Subordinated Notes Due 2009 300,000 300,000 ----------- ------------ Total debt $ 577,000 $ 300,000 =========== ============
Credit Facility On July 16, 1998 the Company entered into an amended and restated Credit Facility for $750 million, which could have originally been increased up to $1.0 billion. As a result of the early payoff of the refinanced debt, the Company recorded an extraordinary loss of approximately $1.6 million, net of taxes, related to unamortized deferred debt issuance costs in the year ended February 28, 1999. On July 17, 1999, in accordance with a provision in the Credit Facility, total borrowing capacity under the Credit Facility decreased by $100.0 million. On January 14, 2000, Emmis repaid its $250 million term note outstanding under its Credit Facility. As provided in the Credit Facility, the repayment resulted in the cancellation of the term note and the Company recorded an extraordinary loss of approximately $2.0 million, net of taxes, related to unamortized deferred debt issuance costs, in the year ended February 29, 2000. The amended and restated Credit Facility expires on August 31, 2006 and is now comprised of a $400 million revolving credit facility, which may be increased up to $650 million. The amended and restated Credit Facility provides for letters of credit to be made available to the Company not to exceed $50 million. The aggregate amount of outstanding letters of credit and amounts borrowed under the revolving credit facility cannot exceed the revolving credit facility commitment. At February 29, 2000, a $1.1 million letter of credit was outstanding. All outstanding amounts under the Credit Facility bear interest, at the option of Emmis, at a rate equal to the Eurodollar Rate or an alternative base rate (as defined in the Credit Facility) plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies, depending on Emmis' ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the agreement. The weighted-average interest rate on borrowings outstanding under the Credit Facility at February 28, 1999 was approximately 7.69% and there were no borrowings outstanding as of February 29, 2000. Interest is due on a calendar quarter basis under the alternative base rate and at least every three months under the Eurodollar Rate. The Credit Facility requires the Company to maintain interest rate protection agreements through July 2001. The notional amount required varies based upon Emmis' ratio of adjusted debt to EBITDA, as defined in the Credit Facility. The notional amount of the agreements at February 29, 2000 totaled $274 million. The agreements, which expire at various dates ranging from April 2000 to February 45 46 2001, establish various ceilings on the Credit Facility's underlying base rate approximating a weighted average rate of 7.1% on the three-month LIBOR interest rate. The cost of these agreements is being amortized over the lives of the agreements and the amortization is included as a component of interest expense. The aggregate amount of the revolving credit facility reduces quarterly beginning August 31, 2001. The annual amortization and reduction schedules as of February 29, 2000, assuming the entire $400 million Credit Facility was outstanding prior to the scheduled amortization payments are as follows: SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY AVAILABILITY (In thousands)
REVOLVING YEAR ENDED CREDIT FACILITY FEBRUARY 28 (29), AMORTIZATION ---------------------- ---------------- 2002 $ 40,000 2003 60,000 2004 80,000 2005 90,000 2006 70,000 2007 60,000 ----------- Total $ 400,000 ===========
Commencing with the fiscal year ending February 28, 2002, in addition to the scheduled amortization/reduction of the Credit Facility, within 60 days after the end of each fiscal year, the Credit Facility is permanently reduced by 50% of the Company's excess cash flow if the ratio of adjusted debt (as defined in the Credit Facility) to EBITDA exceeds 4.5 to 1. Excess cash flow is generally defined as EBITDA reduced by cash taxes, capital expenditures, required debt service, increases in working capital (net of cash or cash equivalents), and $5,000,000. The net proceeds from any sale of certain assets must also be used to permanently reduce borrowings under the Credit Facility. If the ratio of adjusted debt to EBITDA is less than 5.5 to 1 and certain other conditions are met, the Company will be permitted in certain circumstances to reborrow the amount of the net proceeds within nine months solely for the purpose of funding an acquisition. The Credit Facility contains various financial and operating covenants and other restrictions with which Emmis must comply, including, among others, restrictions on additional indebtedness, engaging in businesses other than broadcasting and publishing, paying cash dividends, redeeming or repurchasing capital stock of Emmis and use of borrowings, as well as requirements to maintain certain financial ratios. The Company was in compliance with these covenants at February 29, 2000. The Credit Facility also prohibits Emmis, under certain circumstances, from making acquisitions and disposing of certain assets without the prior consent of the lenders, and provides that an event of default will occur if Jeffrey H. Smulyan ceases to maintain (i) a significant equity investment in Emmis (as specified in the Credit Facility), (ii) the ability to elect a majority of Emmis' directors or (iii) control of a majority of shareholder voting power. Substantially all of Emmis' assets, including the stock of Emmis' wholly-owned subsidiaries, are pledged to secure the Credit Facility. SENIOR SUBORDINATED NOTES On February 12, 1999, the Company issued $300 million of 8 1/8% Senior Subordinated Notes. The Senior Subordinated Notes were sold at 100% of the face amount. The proceeds were used to retire a $25 million promissory note and the related $1.1 million accrued interest due to SF Broadcasting in connection with the purchase of four television stations. The remainder of the proceeds was used to reduce outstanding borrowings under the Credit Facility. In March 1999, the Company filed an Exchange Offer Registration Statement with the SEC to exchange the Senior Subordinated Notes for new Series B Notes ("the Notes") registered under the Securities Act. The terms of the new Series B Notes are identical to the terms of the Senior Subordinated Notes. 46 47 Prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined), to redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 108.125% plus accrued and unpaid interest, provided that at least $195.0 million of the aggregate principal amount of the Notes originally issued remains outstanding after such redemption. On or after March 15, 2004 and until March 14, 2007, the Notes will be redeemable at the option of the Company in whole or in part at prices ranging from 104.063% to 101.354% plus accrued and unpaid interest. On or after March 15, 2007, the Notes may be redeemable at 100% plus accrued and unpaid interest. Upon a Change of Control (as defined), the Company is required to make an offer to purchase the Notes then outstanding at a purchase price equal to 101% plus accrued and unpaid interest. Interest on the Notes is payable semi-annually. The Notes have no sinking fund requirements and are due in full on March 15, 2009. The Notes are guaranteed by certain subsidiaries of the Company and expressly subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. The Notes will rank pari passu with any future Senior Subordinated Indebtedness (as defined) and senior to all Subordinated Indebtedness (as defined) of the Company. The indenture relating to the Notes contains covenants with respect to the Company which include limitations of indebtedness, restricted payments, transactions with affiliates, issuance and sale of capital stock of restricted subsidiaries, sale/leaseback transactions and mergers, consolidations or sales of substantially all of the Company's assets. The Company was in compliance with these covenants at February 29, 2000. 5. OTHER LONG-TERM DEBT. Other long-term debt was comprised of the following at February 28 (29), 1999 and 2000:
1999 2000 ------------- ------------- (DOLLARS IN THOUSANDS) Hungary: License Obligation $ 13,428 $ 14,147 Bonds Payable 2,877 2,497 Notes Payable 784 784 Other 2,551 2,558 ----------- ----------- Total Other Long-Term Debt 19,640 19,986 Less: Current Maturities 835 5,379 ----------- ----------- Other Long Term Debt, Net of Current Maturities $ 18,805 $ 14,607 =========== ===========
The License Obligation is payable to the Hungarian government in Hungarian forints, by Emmis' Hungarian subsidiary in four equal annual installments commencing November 2000. The License Obligation of $14.1 million as of February 29, 2000, is reflected net of an unamortized discount of $0.9 million. The obligation is non-interest bearing, however, in accordance with the license purchase agreement, a Hungarian cost of living adjustment is calculated annually and is payable, concurrent with the principal payments, on the outstanding obligation. The cost of living adjustment is estimated each reporting period and is included in interest expense. Prevailing market interest rates in Hungary exceed inflation by approximately 3%. Accordingly, the License Obligation has been discounted at an imputed interest rate of approximately 3% to reflect the obligation at its fair value. The Hungarian Bonds and Notes Payable are payable by Emmis' Hungarian subsidiary to the minority shareholders of the subsidiary. The Bonds, payable in Hungarian forints, are due on maturity at November 2004 and bear interest at the Hungarian State Bill rate plus 3% (approximately 20.2% and 17.5% at February 28 (29), 1999 and 2000, respectively). Interest is payable semi-annually. The Notes Payable and accrued interest, payable in U.S. dollars, are due December 31, 2002 and bear interest at 10.25%. 47 48 6. TV PROGRAM RIGHTS PAYABLE. Future payments required under TV program rights payable as of February 29, 2000, are as follows (in thousands): 2001 $ 16,816 2002 14,680 2003 12,534 2004 9,827 2005 8,180 2006 and thereafter 13,364 ---------- 75,401 Less: Current Portion of TV Program Rights Payable 16,816 ---------- TV Program Rights Payable, Net of Current Portion $ 58,585 ==========
7. ACQUISITIONS, DONATIONS AND INVESTMENTS On December 14, 1999, the Company completed its acquisition of substantially all of the assets of Country Marketplace and related publications from H&S Media, Inc. for approximately $1.8 million in cash plus liabilities recorded of approximately $.6 million. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. The excess of the purchase price over the estimated fair value of identifiable assets was $2.3 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. On November 16, 1999 Emmis purchased one million shares of BuyItNow.com L.L.C. for $5 million in cash, which represented an original investment of 2.49% of the outstanding equity of BuyItNow.com L.L.C. This investment is accounted for using the cost method of accounting and is reflected in other assets in the accompanying consolidated balance sheets. In a separate transaction, BuyItNow.com L.L.C. agreed to a cash purchase of $2.5 million of advertisements from Emmis through February 2001. On November 9, 1999, the Company completed its acquisition of 75% of the outstanding common stock of Votionis, S.A. ("Votionis") for $13.3 million in cash plus liabilities recorded of $5.6 million. Additional consideration of up to $2.2 million will be paid if certain conditions are met. Votionis consists of one FM and one AM radio station located in Buenos Aires, Argentina (the "Votionis Acquisition"). The acquisition was accounted for as a purchase and was financed with proceeds from the Company's October 1999 Common and Preferred Equity Offerings. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheets. This broadcast license is being amortized over 23 years. On October 29, 1999, the Company completed its acquisition of substantially all of the assets of television station WKCF in Orlando, Florida ( the "WKCF Acquisition") from Press Communications, L.L.C. for approximately $197.1 million in cash. The purchase price included the purchase of land and a building for $2.2 million. The Company financed the acquisition through a $12.5 million advance payment borrowed under the Credit Facility and proceeds from the Company's October 1999 Common and Preferred Equity Offerings. In connection with the acquisition, the Company recorded $49.3 million in contract liabilities. The acquisition was accounted for as a purchase. The total purchase price was allocated to property and equipment, television program rights and broadcast licenses based on a preliminary appraisal. Broadcast licenses are included in intangible assets in the accompanying consolidated balance sheet and are being amortized over 40 years. WKCF is an affiliate of the WB Television Network. As part of the WKCF Acquisition, the Company entered into an agreement with the WB Television Network which, among other things, extends the existing network affiliation agreement through December 2009. 48 49 In June 1999, the Company entered into an agreement with a former executive of Sinclair Broadcasting Group, Inc. ("Sinclair") to purchase the executive's right to acquire the assets of certain broadcast properties in St. Louis, Missouri under an option agreement (the "St. Louis Acquisition"). The right was exercised and allows the Company to purchase, at fair market value, six radio stations (five FM and one AM) and one ABC-affiliated television station from Sinclair. In November 1999, through completion of an appraisal process, the purchase price of the St. Louis Acquisition was determined to be $366.5 million. Sinclair has since filed a lawsuit in which it alleges, among other things, that the option agreement is not enforceable and that Emmis is not a proper designee of the executive's rights. The Company has denied the allegations made by Sinclair and believes that it has meritorious defenses to Sinclair's allegations. In addition, the Company has filed counterclaims against Sinclair, seeking, among other things, that the court order Sinclair to complete the sale of its St. Louis broadcast properties to the Company. The St. Louis Acquisition will be subject to approval by both the Federal Communications Commission and the Department of Justice; it will be accounted for as a purchase and will be financed through available cash, additional debt or equity securities, depending on market conditions and other factors. Under FCC regulations, Emmis can own no more than five FM and three AM stations in the St. Louis market. Since Emmis already owns three FM stations in the St. Louis market, concurrently with the consummation of the St. Louis Acquisition, Emmis must divest three FM stations. Management intends to divest the stations in the St. Louis market with the three weakest transmitting signals. On April 1, 1999, the Company completed its acquisition of substantially all of the assets of Country Sampler, Inc. (the "Country Sampler Acquisition") for approximately $20.9 million plus liabilities recorded of approximately $4.7 million. The purchase price was payable with $18.5 million in cash at closing, which was financed through additional borrowings under the Credit Facility, $2.0 million payable under a contract with the principal shareholder through April 2003, and $.5 million paid in October 1999. The acquisition was accounted for as a purchase. The excess of the purchase price over the estimated fair value of identifiable assets was $17.7 million, which is included in intangible assets in the accompanying consolidated balance sheets and is being amortized over 15 years. Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition") for a cash purchase price of $88.9 million (including transaction costs), plus liabilities recorded of approximately $12.2 million. The Company financed the acquisition through borrowings under the Credit Facility. The Wabash Acquisition consists of WFTX-TV, a Fox network affiliated television station in Ft. Myers, Florida, WTHI-TV a CBS network affiliated television station in Terre Haute, Indiana, WTHI-FM and AM and WWVR-FM, radio stations located in the Terre Haute, Indiana area. In December 1999, the Company donated radio station WTHI-AM to a not-for-profit corporation. The $1.0 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. On July 16, 1998, the Company completed its acquisition of substantially all of the assets of SF Broadcasting of Wisconsin, Inc. and SF Multistations, Inc. and Subsidiaries (collectively the "SF Acquisition") for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus liabilities recorded of approximately $34.7 million. The Company financed the acquisition through a $25 million promissory note and borrowings under the Credit Facility. The promissory note was paid in full in February 1999. The SF Acquisition consists of four Fox network affiliated television stations: WLUK-TV in Green Bay, Wisconsin, WVUE-TV in New Orleans, Louisiana, WALA-TV in Mobile, Alabama, and KHON-TV in Honolulu, Hawaii (including satellite stations KAII-TV, Wailuku, Hawaii, and KHAW-TV, Hilo, Hawaii). 49 50 On June 5, 1998, the Company completed its acquisition of radio station WQCD-FM in New York City (the "WQCD Acquisition") from Tribune New York Radio, Inc. for a cash purchase price of $141.6 million (including transaction costs) less approximately $13.0 million for cash purchase price adjustments relating to taxes, plus $20.0 million of net current tax liabilities, $52.5 million of deferred tax liabilities and $0.3 million of liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. Effective July 1, 1997 through the date of closing, the Company operated WQCD-FM under a time brokerage agreement. On February 1, 1998, the Company acquired all of the outstanding capital stock of Mediatex Communications Corporation for approximately $37.4 million in cash plus liabilities recorded of $8.0 million (the "Mediatex Acquisition"). Mediatex Communications Corporation owns and operates Texas Monthly, a regional magazine. The acquisition was accounted for as a purchase and was financed through borrowings under the Credit Facility. On November 1, 1997, the Company acquired substantially all of the net assets of Cincinnati Magazine from CM Media, Inc. for approximately $2.0 million in cash (the "Cincinnati Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. On November 1, 1997, the Company completed its acquisition of substantially all of the assets of WTLC-FM and AM in Indianapolis from Panache Broadcasting, L.P. for approximately $15.3 million in cash (the "Indianapolis Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. Emmis owns a 54% interest in a Hungarian subsidiary (Slager Radio Rt.) which was formed in August 1997. In November 1997, Slager Radio acquired a radio broadcasting license from the Hungarian government at a cost of approximately $19.2 million. The broadcast license has an initial term of seven years and may be renewed, subject to governmental approval, for an additional five years. Slager Radio began broadcasting on February 16, 1998. On October 1, 1997, the Company acquired the assets of Network Indiana and AgriAmerica from Wabash Valley Broadcasting Corporation for $.7 million in cash (the "Network Acquisition"). Emmis financed the acquisition through borrowings under the Credit Facility. The acquisition was accounted for as a purchase. On March 31, 1997, Emmis completed its acquisition of substantially all of the assets of radio stations WXTM-FM (formerly WKBQ-FM and WALC-FM), WALC-AM (formerly WKBQ-AM) and WKKX-FM in St. Louis (the "St. Louis Acquisition") from Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to broadcast approximately $1 million in trade spots, for Zimco, Inc., over a period of years. The purchase price was financed through borrowings under the Credit Facility and the acquisition was accounted for as a purchase. In February 1998, the Company donated radio station WALC-AM to a church. The $4.8 million net book value of the station at the time of donation was recognized as a loss on donation of radio station. Effective December 1, 1996 through the date of closing, the Company operated the acquired stations under a time brokerage agreement. 8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Unaudited pro forma summary information is presented below for the years ended February 28 (29), 1999 and 2000, assuming the June 1998 WQCD Acquisition, the July 1998 SF Acquisition, the October 1998 Wabash Acquisition, the April 1999 Country Sampler Acquisition, the October 1999 WKCF-TV Acquisition, the November 1999 Votionis Acquisition, the December 1999 Country Marketplace Acquisition and the use of proceeds from the June 1998 Equity Offering, the July 1998 Credit Facility, the February 1999 Senior Subordinated Notes Offering, the October 1999 Common and Preferred Equity Offerings and the November 1999 Liberty Investment all had occurred on the first day of the pro forma periods presented below. 50 51 Preparation of the pro forma summary information was based upon assumptions deemed appropriate by the Company. The pro forma summary information presented below is not necessarily indicative of the results that actually would have occurred if the transactions indicated above had been consummated at the beginning of the periods presented, and is not intended to be a projection of future results.
PRO FORMA ----------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 --------------- --------------- Net revenues $ 316,966 $ 359,909 =========== =========== Broadcast/publishing cash flow $ 112,917 $ 139,875 =========== =========== Income before extraordinary item $ 11,123 $ 22,482 =========== =========== Net income $ 11,123 $ 20,460 =========== =========== Net income available to common shareholders $ 2,139 $ 11,476 =========== =========== Basic and diluted net income available to common shareholders $ .05 $ .25 =========== =========== Weighted average shares outstanding: Basic 44,684,160 45,337,162 Diluted 45,474,862 46,817,943
9. EMPLOYEE BENEFIT PLANS a. Non-Employee Director Stock Option Plan At the 1995 annual meeting, the shareholders of Emmis approved a Non-Employee Director Stock Option Plan. Under this Plan, each non-employee director, as of January 24, 1995, was granted an option to acquire 10,000 shares of the Company's Class A common stock. Thereafter, upon election or appointment of any non-employee director or upon a continuing director becoming a non-employee director, such individual will also become eligible to receive a comparable option. In addition, an equivalent option will be automatically granted on an annual basis to each non-employee director. All awards are granted with an exercise price equal to the fair market value of the stock on the date of grant. Under this Plan, awards equivalent to 100,000 shares of Class A common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 1999 and 2000. b. 1997 Equity Incentive Plan At the 1997 annual meeting, the shareholders of Emmis approved the 1997 Equity Incentive Plan. Under this plan, awards equivalent to 2,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 75,000 shares of common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 28 (29), 1999 and 2000. 51 52 c. 1999 Equity Incentive Plan At the 1999 annual meeting, the shareholders of Emmis approved the 1999 Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights or performance units. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 1,000,000 shares of Class B common stock are available for grant and issuance under this Plan. The stock options under this Plan are generally not exercisable for one year after the date of grant and expire not more than 10 years from the date of grant. Under this Plan, awards equivalent to 2,000,000 shares of common stock are available for grant at February 29, 2000. Certain stock options and restricted stock awarded remain outstanding as of February 29, 2000. d. Other Disclosures Related to Stock Option and Equity Incentive Plans The Company has historically accounted for its Stock Option Plans in accordance with APB Opinion No. 25 ("APB 25"), under which compensation expense is recognized only to the extent the exercise price of the option is less than the fair market value of the share of stock at the date of grant. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123), which considers the stock options as compensation expense to the Company, based on their fair value at the date of grant. Under this standard, the Company has the option of accounting for employee stock option plans as it currently does or under the new method. The Company has elected to continue to use the APB 25 method for accounting, but has adopted the disclosure requirements of SFAS 123. Accordingly, compensation expense reflected in non-cash compensation in the consolidated statements of operations related to the plans summarized above was $732,000, $3,269,000 and $6,107,000 for the years ended February 1998, 1999 and 2000, respectively. Had compensation expense related to these plans been determined based on fair value at date of grant, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED FEBRUARY 28 (29), ----------------------------------------------------- 1998 1999 2000 ---------------- --------------- ---------------- Net Income Available to Common: As Reported $ 11,084,000 $ 1,248,000 $ (3,177,000) Pro Forma $ 8,588,000 $ (2,056,000) $ (8,741,000) Basic EPS: As Reported $ .51 $ .04 $ (.09) Pro Forma $ .39 $ (.07) $ (.24) Diluted EPS: As Reported $ .49 $ .04 $ (.09) Pro Forma $ .38 $ (.07) $ (.24)
Because the fair value method of accounting has not been applied to options granted prior to March 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model utilizing the following weighted average assumptions:
YEAR ENDED FEBRUARY 28 (29), --------------------------------------- 1998 1999 2000 ---------- ---------- -------- Risk-Free Interest Rate: 5.78% 5.21% 6.12% Expected Life (Years): 7.5 8.0 5.2 Expected Volatility: 8.65% 42.12% 44.31%
Expected dividend yields were zero for fiscal 1998, 1999 and 2000. 52 53 A summary of the status of options and restricted stock at February 1998, 1999 and 2000 and the related activity for the year, including the adoption of the 1999 Equity Incentive Plan, is as follows:
1998 1999 2000 ----------------------------- --------------------------- ------------------------ NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED OPTIONS/ AVERAGE OPTIONS/ AVERAGE OPTIONS/ AVERAGE RESTRICTED EXERCISE RESTRICTED EXERCISE RESTRICTED EXERCISE STOCK PRICE STOCK PRICE STOCK PRICE ----------- -------- ----------- -------- ----------- -------- Outstanding at Beginning of Year 2,590,520 11.71 2,663,110 13.57 3,485,386 14.63 Granted 450,400 22.03 1,183,000 16.43 2,012,000 23.39 Exercised (212,610) 10.55 (290,724) 10.95 (922,298) 16.20 Lapsing of restricted stock (144,000) - (50,000) - - - Expired and other (21,200) 21.24 (20,000) 8.00 (15,920) 18.57 Outstanding at End of Year 2,663,110 13.57 3,485,386 14.87 4,559,168 18.07 Exercisable at End of Year 2,110,860 11.38 2,570,536 13.32 2,537,168 13.92 Total Available for Grant 2,334,080 1,171,080 2,175,000
During the years ended February 1998, 1999 and 2000 options were granted with an exercise price equal to or less than fair market value of the stock on the date of grant. A summary of the weighted average fair value and exercise price of options granted during 1998, 1999 and 2000 is as follows:
1998 1999 2000 ------------------------------- ------------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE VALUE PRICE VALUE PRICE VALUE PRICE ---------- ----------- ------------ -------------- ------------ --------- OPTIONS GRANTED WITH AN EXERCISE PRICE: Equal to Fair Market Value of the Stock on the Date of Grant $11.43 $ 20.60 $ 10.37 $ 18.39 $ 12.95 $ 26.59 Less Than Fair Market Value of the Stock on the Date of Grant $ - $ - $ 18.62 $ 7.75 $ 11.92 $ 20.00
During fiscal 1999 and 2000, 10,000 and 135,600 shares of nonvested stock were granted at a weighted average grant date fair value of $22.38 and $22.70, respectively, under employment agreements. No nonvested stock was granted during fiscal 1998. The following information relates to options outstanding and exercisable at February 29, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- --------------------------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE NUMBER OF EXERCISE REMAINING NUMBER OF EXERCISE PRICES OPTIONS PRICE CONTRACT LIFE OPTIONS PRICE ---------------- ---------- -------- -------------- --------- -------- $5.65-$8.48 1,126,800 $ 7.69 6.5 years 1,126,800 $ 7.69 8.48-11.30 30,280 8.56 5.0 years 30,280 8.56 11.30-16.95 667,010 16.25 8.3 years 667,010 16.25 16.95-19.78 179,098 18.37 6.4 years 179,098 18.37 19.78-22.60 813,020 21.08 6.8 years 383,020 22.29 22.60-25.43 597,360 23.33 8.0 years 150,960 24.65 25.43-28.25 1,000,000 28.25 9.7 years - -
53 54 In addition to the benefit plans noted above, Emmis has the following employee benefit plans: e. Profit Sharing Plan In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with one year of service. Contributions to the plan are at the discretion of the Emmis Board of Directors and can be made in the form of newly issued Emmis common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions reflected in non-cash compensation in the consolidated statements of operations for the years ended February 1998, 1999 and 2000 were $750,000, $1,000,000 and $1,250,000, respectively. f. 401(k) Retirement Savings Plan Emmis sponsors two Section 401(k) retirement savings plans. One covers substantially all nonunion employees age 18 years and older who have at least six months of service and the other covers substantially all union employees that meet the same qualifications. The union plan became effective August 1, 1998. Employees may make pretax contributions to the plans up to 15% of their compensation, not to exceed the annual limit prescribed by the Internal Revenue Service. Emmis may make discretionary matching contributions to the plans in the form of shares of the Company's Class A common stock. Effective March 1, 1996, Emmis began to match 50% of employee contributions up to $2,000. Emmis' contributions to the plans totaled $315,000, $599,000 and $807,000 for the years ended February 1998, 1999 and 2000, respectively. g. Defined Contribution Health and Retirement Plan Emmis contributes to a multi-employer defined contribution health and retirement plan for employees who are members of a certain labor union. Amounts charged to expense related to the multi-employer plan were approximately $342,000, $344,000 and $345,000 for the years ended February 1998, 1999 and 2000, respectively. h. Employee Stock Purchase Plan Effective March 1, 1995, the Company implemented an employee stock purchase plan which permits employees to purchase, via payroll deduction, shares of the Company's Class A common stock, at fair market value, up to an amount not to exceed 10% of an employee's annual gross pay. Effective March 1, 2000, the Company replaced its previous employee stock purchase plan with a new plan that allows employees to purchase shares of the Company's Class A common stock at the lesser of 90% of the fair value of such shares at the beginning or end of each semi-annual offering period. Purchases are subject to a maximum limitation of $22,500 annually per employee. The Company will not record compensation expense pursuant to this plan as management expects it to meet the requirements of Section 423(b) of the Internal Revenue Code. This plan will be submitted for approval at the annual shareholders' meeting. 10. COMMITMENTS AND CONTINGENCIES a. Operating Leases Emmis leases certain office space, tower space, equipment and automobiles under operating leases expiring at various dates through December 2021. Some of the lease agreements contain renewal options and annual rental escalation clauses (generally tied to the Consumer Price Index or increases in the lessor's operating costs), as well as provisions for payment of utilities and maintenance costs. 54 55 The future minimum rental payments (exclusive of future escalation costs) required by noncancelable operating leases which have remaining terms in excess of one year as of February 29, 2000, are as follows:
PAYABLE IN YEAR ENDING FEBRUARY PAYMENTS --------------- -------- (IN THOUSANDS) 2001 $ 4,721 2002 4,574 2003 4,231 2004 3,241 2005 2,818 Thereafter 15,340 ---------- $ 34,925 ==========
Minimum payments have not been reduced by minimum sublease rentals of approximately $444,000 due in the future under noncancelable subleases. Rent expense totaled $4,512,000, $5,945,000 and $4,404,000 for the years ended February 1998, 1999 and 2000, respectively. Rent expense for the year ended February 1998, 1999 and 2000 is net of sublease income of approximately $86,000, $148,000 and $148,000, respectively. b. Radio Broadcast Agreements Emmis has entered into agreements to broadcast certain syndicated programs and sporting events. Future payments related to these radio broadcast rights are summarized as follows: Year ended February 2001 - $1,899,000, 2002 - $1,650,000, 2003 - $781,000, 2004 - $196,000, 2005 - $48,000 and thereafter - $0. Expense related to these broadcast rights totaled $1,400,000, $1,492,000 and $1,780,000 for the years ended February 1998, 1999 and 2000, respectively. In connection with reformatting one of its radio stations, the Company terminated a syndicated program agreement. The contract required continued payments in the event of termination, and these payments are included in the future payments disclosed above. The discounted present value of these payments of $896,000 is reflected in the accompanying consolidated statements of operations as Programming Restructuring Costs. c. Litigation Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. See Note 7 for discussion of litigation with Sinclair. d. Employment Agreements The Company enters into employment agreements with certain officers and employees. These agreements generally specify base salary, along with bonuses and grants of stock and/or stock options based on certain criteria. The Company finalized negotiations on several new employment contracts with key executives, including the Chief Executive Officer, during the year ended February 29, 2000. At February 29, 2000, 9,383 shares of stock and 1,596,000 options to purchase stock have been granted in connection with current employment agreements. Additionally, up to 168,600 shares and options to purchase up to 272,250 shares of the Company's Class A common stock may be granted (or have been granted subject to forfeiture) under the contracts in the next two years. 55 56 11. INCOME TAXES The provision for income taxes for the years ended February 1998, 1999 and 2000, consisted of the following:
1998 1999 2000 ----------- ----------- ----------- (IN THOUSANDS) Current: Federal $ 6,474 $ 1,247 $ 105 State 1,250 - 100 -------- -------- -------- 7,724 1,247 205 -------- -------- -------- Deferred: Federal (759) 3,953 6,010 State 235 1,000 660 -------- -------- -------- (524) 4,953 6,670 -------- -------- -------- Provision for income taxes 7,200 6,200 6,875 Tax benefit of extraordinary item - 1,750 1,250 -------- -------- -------- Net provision for income taxes $ 7,200 $ 4,450 $ 5,625 ======== ======== ========
The provision for income taxes for the years ended February 1998, 1999 and 2000, differs from that computed at the Federal statutory corporate tax rate as follows:
1998 1999 2000 ----------- ---------- ----------- (IN THOUSANDS) Computed income taxes at 35% $ 6,399 $ 3,166 $ 3,102 State income tax 965 650 494 Valuation allowance on foreign losses - 1,334 893 Nondeductible goodwill - 1,324 1,394 Nondeductible donations - - 363 Other (164) (274) 629 -------- -------- -------- Provision for income taxes $ 7,200 $ 6,200 $ 6,875 ======== ======== ========
The components of deferred tax assets and deferred tax liabilities at February 1999 and 2000 are as follows:
1999 2000 ----------- --------- (IN THOUSANDS) Deferred tax assets: Capital loss carryforwards $ 439 $ 147 Net operating loss carryforwards 2,142 1,394 Compensation relating to stock options 3,336 2,356 Other 2,219 2,847 Valuation allowance (1,056) (858) --------- --------- Total deferred tax assets 7,080 5,886 --------- --------- Deferred tax liabilities: Intangible assets (88,071) (87,756) Other (4,026) (5,269) --------- --------- Total deferred tax liabilities (92,097) (93,025) --------- --------- Net deferred tax liability $ (85,017) $ (87,139) ========= =========
In connection with the acquisition of WQCD-FM, the deferred tax liability was increased (decreased) by $52,505 and ($4,548) in 1999 and 2000, respectively. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. A valuation allowance has been provided for 100% of the capital loss carryforwards available as of February 1999 and 2000 since these loss carryforwards can only be utilized to offset future capital gains. Additionally, a valuation allowance has been provided for the net operating loss carryforwards related to the Company's foreign subsidiaries since these subsidiaries have not yet generated taxable income against which the net operating losses could be utilized. The expiration of net operating loss carryforwards, excluding those at the Company's Hungarian subsidiary, which do not expire, approximate $1,194,000 in 2005, and $758,000 thereafter. 56 57 12. SEGMENT INFORMATION The Company's operations are aligned into three business segments: Radio, Television and Publishing. These business segments are consistent with the Company's management of these businesses and its financial reporting structure. The Radio and Television segments derive revenue from the sale of commercial broadcast inventory. The Publishing segment derives revenue from subscriptions and the sale of print advertising inventory. Corporate and Other represents the results of insignificant operations and income and expense not allocated to reportable segments. The Company's segments operate primarily in the United States with one radio station located in Hungary and two radio stations located in Argentina. Total revenues of the radio station in Hungary for the years ended February 1999 and 2000 were $3.3 million and $7.4 million, respectively. Total revenues for this station were not material for the year ended February 1998. This station's total assets as of February 28 (29), 1999 and 2000 were $20.4 million and $16.2 million, respectively. Total revenues of the radio stations in Argentina acquired on November 1, 1999 were not significant for the year ended February 29, 2000 and total assets as of February 29, 2000 were $35.2 million. The Company evaluates performance of its operating entities based on broadcast cash flow (BCF) and publishing cash flow (PCF). Management believes that BCF and PCF are useful because they provide a meaningful comparison of operating performance between companies in the industry and serve as an indicator of the market value of a group of stations or publishing entities. BCF and PCF are generally recognized by the broadcast and publishing industries as a measure of performance and are used by analysts who report on the performance of broadcasting and publishing groups. BCF and PCF do not take into account Emmis' debt service requirements and other commitments and, accordingly, BCF and PCF are not necessarily indicative of amounts that may be available for dividends, reinvestment in Emmis' business or other discretionary uses. BCF and PCF are not measures of liquidity or of performance in accordance with generally accepted accounting principles, and should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of generally accepted accounting principles. Moreover, BCF and PCF are not standardized measures and may be calculated in a number of ways. Emmis defines BCF and PCF as revenues net of agency commissions and operating expenses. The primary source of broadcast advertising revenues is the sale of advertising time to local and national advertisers. Publishing entities derive revenue from subscriptions and sale of print advertising inventory. The most significant broadcast operating expenses are employee salaries and commissions, costs associated with programming, advertising and promotion, and station general and administrative costs. Significant publishing operating expenses are employee salaries and commissions, costs associated with producing a magazine, and general and administrative costs. 57 58
CORPORATE YEAR ENDED FEBRUARY 29, 2000 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED -------------------------------- --------------- -------------- --------------- ------------- ---------------- Net revenues $ 187,190 $ 82,160 $ 54,105 $ 1,810 $ 325,265 Operating expenses 98,932 53,178 46,456 1,252 199,818 ----------- ----------- ----------- ----------- ------------- Broadcast/publishing cash flow 88,258 28,982 7,649 558 125,447 International business development expenses - - - 1,558 1,558 Corporate expenses - - - 13,872 13,872 Program restructuring cost 896 - - - 896 Depreciation and amortization 16,694 17,138 6,934 3,395 44,161 Non-cash compensation - - - 7,357 7,357 ----------- ----------- ----------- ----------- ------------- Operating income $ 70,668 $ 11,844 $ 715 $ (25,624) $ 57,603 =========== =========== =========== =========== ============= Total assets $ 474,403 $ 701,672 $ 68,927 $ 82,304 $ 1,327,306 =========== =========== =========== =========== ============= CORPORATE YEAR ENDED FEBRUARY 28, 1999 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED -------------------------------- --------------- -------------- --------------- ------------- ---------------- Net revenues $ 155,028 $ 39,623 $ 36,476 $ 1,709 $ 232,836 Operating expenses 84,907 26,130 31,491 820 143,348 ----------- ----------- ----------- ----------- ------------- Broadcast/publishing cash flow 70,121 13,493 4,985 889 89,488 International business development expenses - - - 1,477 1,477 Corporate expenses - - - 10,427 10,427 Time brokerage fee 2,220 - - - 2,220 Depreciation and amortization 13,990 8,352 4,813 1,159 28,314 Non-cash compensation - - - 4,269 4,269 ----------- ----------- ----------- ----------- ------------- Operating income $ 53,911 $ 5,141 $ 172 $ (16,443) $ 42,781 =========== =========== =========== =========== ============= Total assets $ 460,065 $ 439,279 $ 44,171 $ 71,316 $ 1,014,831 =========== =========== =========== =========== ============= CORPORATE YEAR ENDED FEBRUARY 28, 1998 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED -------------------------------- --------------- -------------- --------------- ------------- ---------------- Net revenues $ 125,855 $ - $ 13,586 $ 1,142 $ 140,583 Operating expenses 67,646 - 12,600 924 81,170 ----------- ----------- ----------- ----------- ------------- Broadcast/publishing cash flow 58,209 - 986 218 59,413 International business development expenses - - - 999 999 Corporate expenses - - - 6,846 6,846 Time brokerage fee 5,667 - - - 5,667 Depreciation and amortization 7,034 - 294 208 7,536 Non-cash compensation - - - 1,482 1,482 ----------- ----------- ----------- ----------- ------------- Operating income $ 45,508 $ - $ 692 $ (9,317) $ 36,883 =========== =========== =========== =========== ============= Total assets $ 255,541 $ - $ 50,086 $ 27,761 $ 333,388 =========== =========== =========== =========== =============
13. RELATED PARTY TRANSACTIONS Two officers of Emmis are partners in a law firm which provides legal services to Emmis. Legal fees paid to this law firm were approximately $512,000, $868,000 and $756,000 for the years ended February 1998, 1999 and 2000, respectively. Emmis has periodically made interest-bearing loans to various officers and employees. The approximate amount of such indebtedness outstanding at February 28 (29), 1999 and 2000, was $1,741,000 and $1,834,000, respectively. These loans bear interest at the Company's average borrowing rate of approximately 7.09% and 7.50% for the years ended February 1999 and 2000. During the year ended February 29, 2000, the Company purchased approximately $157,000 in corporate gifts and specialty items from a company owned by the spouse of Norman H. Gurwitz. Also during the last fiscal year, Emmis made payments of approximately $364,000 to a company owned by Mr. Smulyan for use of an airplane to transport employees to various trade shows and meetings. Furthermore, Emmis made payments of $506,000 to a management company for an allocation of operating and maintenance costs of the airplane. 58 59 14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTORS Emmis conducts a significant portion of its business through subsidiaries. The Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries (the "Subsidiary Guarantors"). As of February 29, 2000, subsidiaries holding Emmis' interest in its radio stations in Hungary and Argentina, as well as certain other subsidiaries conducting joint ventures with third parties, did not guarantee the Senior Subordinated Notes (the "Subsidiary Non-Guarantors"). The claims of creditors of Emmis subsidiaries have priority over the rights of Emmis to receive dividends or distributions from such subsidiaries. Presented below is condensed consolidating financial information for the Parent Company Only, the Subsidiary Guarantors and the Subsidiary Non-Guarantors as of February 28 (29), 1999 and 2000 and for each of the three years in the period ended February 29, 2000. Emmis uses the equity method with respect to investments in subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented based on management's determination that they do not provide additional information that is material to investors. 59 60 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 29, 2000 (in thousands of dollars)
ELIMINATIONS PARENT AND COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED ------------ ------------- -------------- ------------- -------------- Current Assets Cash and cash equivalents $ 448 $ 2,564 $ 14,358 $ - $ 17,370 Accounts receivable, net - 63,146 3,325 - 66,471 Current portion of TV program rights - 5,452 - - 5,452 Income tax refunds receivable 4,685 - - - 4,685 Prepaid expenses 1,197 8,434 422 - 10,053 Other 1,096 7,292 297 - 8,685 ----------- ----------- --------- ----------- ------------- Total current assets 7,426 86,888 18,402 - 112,716 Property and equipment, net 38,611 85,587 4,706 - 128,904 Intangible assets, net 196 1,007,860 25,914 - 1,033,970 Investment in affiliates 1,098,183 - - (1,098,183) - Other assets, net 37,573 16,194 2,330 (4,381) 51,716 ----------- ----------- --------- ----------- ------------- Total assets $ 1,181,989 $ 1,196,529 $ 51,352 $(1,102,564) $ 1,327,306 =========== =========== ========= =========== ============= Current Liabilities Accounts payable 2,973 15,202 4,782 - 22,957 Current maturities of other long- term debt $ 34 $ 17 $ 5,328 $ - $ 5,379 Current portion of TV program rights payable - 16,816 - - 16,816 Collection of accounts receivable on behalf of SF Broadcasting and Wabash Valley Broadcasting - - - - - Accrued salaries and commissions 1,952 5,801 409 - 8,162 Accrued interest 10,995 - 82 - 11,077 Income taxes payable - - - - - Deferred revenue - 15,912 - - 15,912 Other 1,034 3,105 - - 4,139 ----------- ----------- --------- ----------- ------------- Total current liabilities 16,988 56,853 10,601 - 84,442 Credit Facility and Senior Subordinated Debt 300,000 - - - 300,000 Other long-term debt, net of current portion 36 671 18,281 (4,381) 14,607 TV program rights payable, net of current portion - 58,585 - - 58,585 Other noncurrent liabilities - 5,408 - - 5,408 Minority interest - - 758 - 758 Deferred income taxes 87,139 - - - 87,139 ----------- ----------- --------- ----------- ------------- Total liabilities 404,163 121,517 29,640 (4,381) 550,939 Shareholders' Equity Series A preferred stock 29 - - - 29 Class A common stock 412 - - - 412 Class B common stock 47 - - - 47 Additional paid-in capital 804,820 - 4,393 (4,393) 804,820 Subsidiary investment - 803,373 29,885 (833,258) - Retained earnings (accumulated deficit) (27,482) 271,639 (11,107) (260,532) (27,482) Accumulated other comprehensive income - - (1,459) - (1,459) ----------- ----------- --------- ----------- ------------- Total shareholders' equity 777,826 1,075,012 21,712 (1,098,183) 776,367 ----------- ----------- --------- ----------- ------------- Total liabilities and shareholders' equity $ 1,181,989 $ 1,196,529 $ 51,352 $(1,102,564) $ 1,327,306 =========== =========== ========= =========== =============
60 61 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 29, 2000 (in thousands of dollars)
ELIMINATIONS PARENT AND COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED --------- ------------- --------------- -------------- ------------ Net revenues $ 1,810 $ 314,644 $ 8,811 $ - $ 325,265 Operating expenses 1,252 191,666 6,900 - 199,818 International business development expenses - 1,558 - - 1,558 Corporate expenses 13,872 - - - 13,872 Depreciation and amortization 3,395 37,733 3,033 - 44,161 Non-cash compensation 5,518 1,839 - - 7,357 Programming restructuring cost - 896 - - 896 --------- ----------- ----------- ----------- ----------- Operating income (22,227) 80,952 (1,122) - 57,603 --------- ----------- ----------- ----------- ----------- Other income (Expense) Interest expense (49,257) (107) (3,363) 741 (51,986) Loss on donation of station - (956) - - (956) Other income (expense), net 3,428 13 (502) 1,264 4,203 --------- ----------- ----------- ----------- ----------- Total other income (expense) (45,829) (1,050) (3,865) 2,005 (48,739) --------- ----------- ----------- ----------- ----------- Income (loss) before income taxes (68,056) 79,902 (4,987) 2,005 8,864 Provision (benefit) for income taxes (22,689) 29,564 - - 6,875 --------- ----------- ----------- ----------- ----------- (45,367) 50,338 (4,987) 2,005 1,989 Extraordinary item, net of tax (2,022) - - - (2,022) Equity in earnings (loss) of subsidiaries 47,356 - - (47,356) - --------- ----------- ----------- ----------- ----------- Net income (loss) (33) 50,338 (4,987) (45,351) (33) Less: Preferred stock dividends 3,144 - - - 3,144 --------- ----------- ----------- ----------- ----------- Net income (loss) available to common shareholders $ (3,177) $ 50,338 $ (4,987) $ (45,351) $ (3,177) ========= =========== =========== =========== ===========
61 62 Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 29, 2000 (in thousands of dollars)
PARENT COMPANY SUBSIDIARY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ----------- ---------------- ------------ --------------- Operating Activities: Net income $ (33) $ 50,338 $ (4,987) $ (45,351) $ (33) Adjustments to reconcile net income to net cash provided (used) by operating activities - Extraordinary item 2,022 - - - 2,022 Depreciation and amortization 5,805 44,980 3,033 - 53,818 Provision for bad debts - 2,550 - - 2,550 Provision (benefit) for deferred income taxes 6,670 - - - 6,670 Noncash compensation 5,518 1,839 - - 7,357 Equity in earnings of subsidiaries (47,356) - - 47,356 - Loss on donation of radio station - 956 - - 956 Other 2,033 - (811) (2,005) (783) Changes in assets and liabilities - Accounts receivable - (13,029) (290) - (13,319) Prepaid expenses and other current assets (1,258) (13,101) (187) - (14,546) Other assets (8,393) 7,382 (1,496) - (2,507) Accounts payable and accrued liabilities (391) 9,255 1,301 - 10,165 Deferred revenue - 4,332 - - 4,332 Other liabilities (10,389) (19,933) - - (30,322) --------- ----------- ---------- ----------- -------------- Net cash provided (used) by operating activities (45,772) 75,569 (3,437) - 26,360 --------- ----------- ---------- ----------- -------------- Investing Activities: Cash paid for acquisitions - (217,828) (13,302) - (231,130) Purchases of property and equipment (8,124) (21,170) (22) - (29,316) Deposits on acquisitions and other (5,000) (6,500) - - (11,500) --------- ----------- ---------- ----------- -------------- Net cash used in investing activities (13,124) (245,498) (13,324) - (271,946) --------- ----------- ---------- ----------- -------------- Financing Activities: Proceeds from long term debt 149,668 - - - 149,668 Payments on long term debt (426,668) - - - (426,668) Proceeds of the Company's Class A common stock, net of transaction costs 383,570 - - - 383,570 Proceeds of the Company's Series A cumulative convertible preferred stock, net of transaction costs 138,409 - - - 138,409 Proceeds from exercise of stock options 13,881 - - - 13,881 Purchase of interest rate cap agreements and other debt related costs - - - - - Intercompany (199,781) 169,347 30,434 - - Preferred stock dividends paid (2,021) - - - (2,021) Other - - - - - --------- ----------- ---------- ----------- -------------- Net cash provided by financing Activities 57,058 169,347 30,434 - 256,839 --------- ----------- ---------- ----------- -------------- Increase (decrease) in cash and cash Equivalents (1,838) (582) 13,673 - 11,253 Cash and cash equivalents: Beginning of year 2,286 3,146 685 - 6,117 --------- ----------- ---------- ----------- -------------- End of year $ 448 $ 2,564 $ 14,358 $ $ 17,370 ========= =========== ========== =========== ==============
62 63 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 28, 1999 (in thousands of dollars)
ELIMINATIONS PARENT AND COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED ----------- -------------- -------------- ------------- ------------ Current Assets Cash and cash equivalents $ 2,286 $ 3,146 $ 685 $ - $ 6,117 Accounts receivable, net - 50,436 1,043 - 51,479 Current portion of TV program rights - 3,646 - - 3,646 Income tax refunds receivable - - - - - Prepaid expenses 2,745 4,016 72 - 6,833 Other 2,975 32 - - 3,007 ----------- ----------- --------- ---------- ------------- Total current assets 8,006 61,276 1,800 - 71,082 Property and equipment, net 33,769 71,342 949 - 106,060 Intangible assets, net 151 785,219 16,937 - 802,307 Investment in affiliates 856,701 - - (856,701) - Other assets, net 31,866 7,648 702 (4,834) 35,382 ----------- ----------- --------- ---------- ------------- Total assets $ 930,493 $ 925,485 $ 20,388 $ (861,535) $ 1,014,831 =========== =========== ========= ========== ============= Current Liabilities Accounts payable 7,527 7,739 369 - 15,635 Current maturities of other long- term debt $ 34 $ 16 $ 2,239 $ (1,454) $ 835 Current portion of TV program rights payable - 9,471 - - 9,471 Collection of accounts receivable on behalf of SF Broadcasting and Wabash Valley Broadcasting - 9,016 - - 9,016 Accrued salaries and commissions 1,262 2,719 564 - 4,545 Accrued interest 6,222 1 - - 6,223 Income taxes payable 11,790 267 - - 12,057 Deferred revenue - 7,238 - - 7,238 Other 146 4,667 - - 4,813 ----------- ----------- --------- ---------- ------------- Total current liabilities 26,981 41,134 3,172 (1,454) 69,833 Credit Facility and Senior Subordinated Debt 577,000 - - - 577,000 Other long-term debt, net of current portion 2,543 (45) 19,687 (3,380) 18,805 TV program rights payable, net of current portion - 25,161 - - 25,161 Other noncurrent liabilities (4) 3,470 - - 3,466 Minority interest - - - - - Deferred income taxes 87,776 (2,759) - - 85,017 ----------- ----------- --------- ---------- ------------- Total liabilities 694,296 66,961 22,859 (4,834) 779,282 Shareholders' Equity Series A preferred stock - - - - - Class A common stock 264 - - - 264 Class B common stock 52 - - - 52 Additional paid-in capital 260,186 - 4,297 (4,297) 260,186 Subsidiary investment - 637,223 - (637,223) - Retained earnings (accumulated deficit) (24,305) 221,301 (6,120) (215,181) (24,305) Accumulated other comprehensive income - - (648) - (648) ----------- ----------- --------- ----------- ------------- Total shareholders' equity 236,197 858,524 (2,471) (856,701) 235,549 ----------- ----------- --------- ----------- ------------- Total liabilities and shareholders' equity $ 930,493 $ 925,485 $ 20,388 $ (861,535) $ 1,014,831 =========== =========== ========= =========== =============
63 64 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1999 (in thousands of dollars)
ELIMINATIONS PARENT AND COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED --------- ----------- -------------- ------------- --------------- Net revenues $ 1,709 $ 227,873 $ 3,254 $ - $ 232,836 Operating expenses 820 138,581 3,947 - 143,348 International business development expenses - 1,477 - - 1,477 Corporate expenses 10,427 - - - 10,427 Time brokerage agreement fee - 2,220 - - 2,220 Depreciation and amortization 1,159 24,336 2,819 - 28,314 Non-cash compensation 3,600 669 - - 4,269 --------- ----------- ----------- ----------- ------------- Operating income (14,297) 60,590 (3,512) - 42,781 --------- ----------- ----------- ----------- ------------- Other income (Expense) Interest expense (33,667) (102) (3,171) 1,290 (35,650) Other income (expense), net 74,865 (73,957) 421 585 1,914 --------- ----------- ----------- ----------- ------------- Total other income (expense) 41,198 (74,059) (2,750) 1,875 (33,736) --------- ----------- ----------- ----------- ------------- Income (loss) before income taxes 26,901 (13,469) (6,262) 1,875 9,045 Provision (benefit) for income taxes 9,719 (3,377) (142) - 6,200 --------- ----------- ----------- ----------- ------------- 17,182 (10,092) (6,120) 1,875 2,845 Extraordinary item, net of tax (1,597) - - - (1,597) Equity in earnings (loss) of subsidiaries (14,337) - - 14,337 - --------- ----------- ----------- ----------- ------------- Net income (loss) $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248 ========= =========== =========== =========== =============
64 65 Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1999 (in thousands of dollars)
PARENT COMPANY SUBSIDIARY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ------- ------------- --------------- ------------ ------------ Operating Activities: Net income $ 1,248 $ (10,092) $ (6,120) $ 16,212 $ 1,248 Adjustments to reconcile net income to net cash provided (used) by operating activities - Extraordinary item 1,597 - - - 1,597 Depreciation and amortization 1,998 27,341 2,819 - 32,158 Provision for bad debts - 1,745 - - 1,745 Provision (benefit) for deferred income taxes 4,953 - - - 4,953 Noncash compensation 3,600 669 - - 4,269 Equity in earnings of subsidiaries 14,337 - - (14,337) - Other 103 629 - (1,875) (1,143) Changes in assets and liabilities - Accounts receivable 345 (21,835) 386 - (21,104) Prepaid expenses and other current assets (4,725) 4,070 (72) - (727) Other assets 9,516 (6,408) 327 - 3,435 Accounts payable and accrued liabilities 8,183 (1,519) (1,111) 1,454 7,007 Deferred revenue - (747) - - (747) Other liabilities (2,029) 5,099 (640) - 2,430 --------- ----------- ---------- ----------- -------------- Net cash provided (used) by operating activities 39,126 (1,048) (4,411) 1,454 35,121 --------- ----------- ---------- ----------- -------------- Investing Activities: Cash paid for acquisitions - (504,748) - - (504,748) Purchases of property and equipment (21,363) (13,654) (2,366) - (37,383) Deposits on acquisitions and other 7 654 - - 661 --------- ----------- ---------- ----------- -------------- Net cash used in investing activities (21,356) (517,748) (2,366) - (541,470) --------- ----------- ---------- ----------- -------------- Financing Activities: Proceeds from long term debt 1,063,000 - - - 1,063,000 Payments on long term debt (723,500) - - - (723,500) Proceeds of the Company's Class A common stock, net of transaction costs 182,640 - - - 182,640 Proceeds from exercise of stock options 4,130 - - - 4,130 Purchase of interest rate cap agreements and other debt related costs (19,589) - - - (19,589) Intercompany (522,788) 521,699 2,543 (1,454) - Other - - - - - --------- ----------- ---------- ----------- -------------- Net cash provided (used) by financing activities (16,107) 521,699 2,543 (1,454) 506,681 --------- ----------- ---------- ----------- -------------- Increase (decrease) in cash and cash equivalents 1,663 2,903 (4,234) - 332 Cash and cash equivalents: Beginning of year 623 243 4,919 - 5,785 --------- ----------- ---------- ----------- -------------- End of year $ 2,286 $ 3,146 $ 685 $ $ 6,117 ========= =========== ========== =========== ==============
65 66 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1998 (in thousands of dollars)
ELIMINATIONS PARENT AND COMPANY SUBSIDIARY SUBSIDIARY CONSOLIDATING ONLY GUARANTORS NON-GUARANTORS ENTRIES CONSOLIDATED ----------- ----------- -------------- ----------- -------------- Net revenues $ 1,142 $ 139,441 $ - $ - $ 140,583 Operating expenses 924 80,246 - - 81,170 International business development expenses - 999 - - 999 Corporate expenses 6,846 - - - 6,846 Time brokerage agreement fee - 5,667 - - 5,667 Depreciation and amortization 171 7,365 - - 7,536 Non-cash compensation 818 664 - - 1,482 ----------- ----------- ----------- ----------- ------------- Operating income (7,617) 44,500 - - 36,883 ----------- ----------- ----------- ----------- ------------- Other income (Expense) Interest expense (13,766) (6) - - (13,772) Loss on donation of radio station (4,833) - - - (4,833) Other income (expense), net 15 (9) - - 6 ----------- ----------- ----------- ----------- ------------- Total other income (expense) (18,584) (15) - - (18,599) ----------- ----------- ----------- ----------- ------------- Income (loss) before income taxes (26,201) 44,485 - - 18,284 Provision (benefit) for income taxes (10,480) 17,680 - - 7,200 ----------- ----------- ----------- ----------- ------------- (15,721) 26,805 - - 11,084 Equity in earnings (loss) of subsidiaries 26,805 - - (26,805) - ----------- ----------- ----------- ----------- ------------- Net income (loss) $ 11,084 $ 26,805 $ - $ (26,805) $ 11,084 =========== =========== =========== =========== =============
66 67 Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1998 (in thousands of dollars)
PARENT COMPANY SUBSIDIARY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED --------- ----------- -------------- ------------ ------------ Operating Activities: Net income $ 11,084 $ 26,805 $ - $ (26,805) $ 11,084 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities - Extraordinary item - - - - - Depreciation and amortization Depreciation and amortization 2,354 7,365 - - 9,719 Provision for bad debts 20 782 - - 802 Provision (benefit) for deferred income taxes (121) (403) - - (524) Noncash compensation 818 664 - - 1,482 Equity in earnings of subsidiaries (26,805) - - (26,805) - Loss on donation of radio station 4,833 - - - 4,833 Other 357 - - - 357 Changes in assets and liabilities - Accounts receivable 797 (7,757) (1,429) - (8,389) Prepaid expenses and other current assets (5,234) 474 - - (4,760) Other assets (951) (6,136) (1,027) 6,282 (1,832) Accounts payable and accrued liabilities 4,047 4,611 481 - 9,139 Deferred revenue - 292 - - 292 Other liabilities 1,056 (772) - - 284 --------- ----------- ---------- ----------- -------------- Net cash provided (used) by operating activities (7,745) 25,925 (1,975) 6,282 22,487 --------- ----------- ---------- ----------- -------------- Investing Activities: Cash paid for acquisitions - (92,377) - - (92,377) Purchases of property and equipment (13,349) (3,019) (623) - (16,991) Deposits on acquisitions and other - - (7,325) - (7,325) --------- ----------- ---------- ----------- -------------- Net cash used in investing activities (13,349) (95,396) (7,948) - (116,693) --------- ----------- ---------- ----------- -------------- Financing Activities: Proceeds from long-term debt 288,378 - 6,282 (6,282) 288,378 Payments on long-term debt (183,928) - - - (183,928) Purchase of Company's Class A common stock (7,000) - - - (7,000) Proceeds from exercise of stock options 3,922 - - - 3,922 Purchase of interest rate cap agreements and other debt related costs (4,291) - - - (4,291) Intercompany (75,327) 68,642 8,560 (1,875) - Other (156) - - 1,875 1,719 --------- ----------- ---------- ----------- -------------- Net cash provided (used) by financing activities 21,598 68,642 14,842 (6,282) 98,800 --------- ----------- ---------- ----------- -------------- Increase (decrease) in cash and cash equivalents 504 (829) 4,919 - 4,594 Cash and cash equivalents: Beginning of year 119 1,072 - - 1,191 --------- ----------- ---------- ----------- -------------- End of year $ 623 $ 243 $ 4,919 $ - $ 5,785 ========= =========== ========== =========== ==============
67 68 15. SUBSEQUENT EVENTS - ACQUISITIONS On March 3, 2000, the Company acquired all of the outstanding capital stock of Los Angeles Magazine Holding Company, Inc. for approximately $36.0 million in cash plus liabilities recorded of $1.4 million. Los Angeles Magazine Holding Company, Inc. owns and operates Los Angeles Magazine, a city magazine. The acquisition will be accounted for as a purchase and was financed through borrowings under the Credit Facility. On May 7, 2000, the Company entered into an agreement to purchase eight network-affiliated and seven satellite television stations from Lee Enterprises, Inc. for $562.5 million (the "Lee Acquisition"). The Lee Acquisition consists of the following stations: KOIN-TV (CBS) in Portland, Oregon, KRQE-TV (CBS) in Albuquerque, New Mexico (including satellite stations KBIM-TV, Roswell, New Mexico, and KREZ-TV, Durango, Colorado - Farmington, New Mexico), WSAZ-TV (NBC) in Charleston-Huntington, West Virginia, KSNW-TV (NBC) in Wichita, Kansas (including satellite stations KSNG-TV, Garden City, Kansas, KSNC-TV, Great Bend, Kansas, and KSNK-TV, Oberlin, Kansas - McCook, Nebraska), KGMB-TV (CBS) in Honolulu, Hawaii (including satellite stations KGMD-TV, Hilo, Hawaii, and KGMV-TV, Wailuku, Hawaii), KGUN-TV (ABC) in Tucson, Arizona, KMTV-TV (CBS) in Omaha, Nebraska, and KSNT-TV (NBC) in Topeka, Kansas. The acquisition will be accounted for as a purchase and is subject to obtaining various regulatory, network and other approvals prior to closing. In connection with the Lee Acquisition, management intends to separate all or part of the Company's television and radio businesses. Management is evaluating structural and financing alternatives to effect this separation of businesses. 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ------------------------------------------------------- FULL MAY 31 AUG. 31 NOV. 30 FEB. 28 (29) YEAR ----------- ----------- ----------- --------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended February 28, 1999: Net revenues $ 44,619 $ 57,874 $ 71,639 $ 58,704 $ 232,836 Operating income 8,173 14,807 18,085 1,716 42,781 Income (loss) before extraordinary item 1,788 4,161 3,012 (6,116) 2,845 Net income (loss) available to common shareholders 1,788 2,564 3,012 (6,116) 1,248 Basic earnings per common share: Before extraordinary item $ 0.08 $ 0.13 $ 0.10 $ (0.19) $ 0.10 Net income (loss) available to common shareholders $ 0.08 $ 0.08 $ 0.10 $ (0.19) $ 0.10 Diluted earnings per common share: Before extraordinary item $ 0.08 $ 0.13 $ 0.09 $ (0.19) $ 0.10 Net income (loss) available to common shareholders $ 0.08 $ 0.08 $ 0.09 $ (0.19) $ 0.04 Year ended February 29, 2000: Net revenues $ 72,352 $ 81,529 $ 91,257 $ 80,127 $ 325,265 Operating income 12,949 18,041 20,929 5,684 57,603 Income (loss) before extraordinary item 241 1,216 2,456 (1,924) 1,989 Net income (loss) available to common shareholders 241 1,216 1,657 (6,291) (3,177) Basic earnings per common share: Before extraordinary item $ 0.01 $ 0.04 $ 0.05 $ (0.09) $ (0.03) Net income (loss) available to common shareholders $ 0.01 $ 0.04 $ 0.05 $ (0.14) $ (0.09) Diluted earnings per common share: Before extraordinary item $ 0.01 $ 0.04 $ 0.04 $ (0.09) $ (0.03) Net income (loss) available to common shareholders $ 0.01 $ 0.04 $ 0.04 $ (0.14) $ (0.09)
68 69 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of EMMIS COMMUNICATIONS CORPORATION (an Indiana corporation) and Subsidiaries as of February 28 (29), 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended February 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Emmis Communications Corporation and Subsidiaries as of February 28 (29), 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 2000 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ------------------------------------------ ARTHUR ANDERSEN LLP Indianapolis, Indiana, May 7, 2000. 69 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 70 71 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors of Emmis is incorporated by reference from the section entitled "Proposal No. 1: Election of Directors" in the Emmis 2000 Proxy Statement and the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Emmis 2000 Proxy Statement. Listed below is certain information about the executive officers of Emmis or its affiliates who are not directors.
AGE AT YEAR FIRST FEBRUARY 28, ELECTED NAME POSITION 1999 OFFICER - -------------------- ------------------------------ --------------- ----------- Richard F. Cummings Executive Vice 47 1984 President-Programming Norman H. Gurwitz Executive Vice President-Human 51 1987 Resources and Secretary Walter Z. Berger Executive Vice President, 43 1999 Treasurer and Chief Financial Officer
Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates who is not also a director. Richard F. Cummings was the Program Director of WENS from 1981 to March 1984, when he became the National Program Director and a Vice President of Emmis. He became Executive Vice President--Programming in 1988. Norman H. Gurwitz currently serves as Executive Vice President -- Human Resources, a position he assumed in 1998. Previously he served as Corporate Counsel for Emmis from 1987 to 1998 and as a Vice President from 1988 to 1995. He became Secretary of Emmis in 1989 and became an Executive Vice President in 1995. Prior to 1987, he was a partner in the Indianapolis law firm of Scott & Gurwitz. Mr. Gurwitz is the brother-in-law of Richard A. Leventhal, a director of the Company. Walter Z. Berger became Executive Vice President, Treasurer and Chief Financial Officer of Emmis on March 1, 1999. Most recently, Mr. Berger served as Group President of the Energy Marketing Division of LG&E Energy Corporation. Prior to that appointment, he served as Executive Vice President and Chief Financial Officer of LG&E Energy Corporation. From 1992 to 1996, he held several senior financial and operating management positions at Enron Corporation and its affiliates. Mr. Berger also spent seven years in various financial management roles at Baker Hughes Incorporated after working for eight years at Arthur Andersen & Co. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the section entitled "Executive Compensation" in the Emmis 2000 Proxy Statement. 71 72 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the section entitled "Voting Securities and Beneficial Owners" in the Emmis 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the section entitled "Certain Transactions" in the Emmis 2000 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Financial Statements The financial statements filed as a part of this report are set forth under Item 8. Financial Statement Schedules The following financial statement schedule is filed as a part of this report: Report of Independent Public Accountants on Financial Statement Schedule Schedule II Valuation and Qualifying Accounts and Reserves for the fiscal years in the three year period ended February 29, 2000. Reports on Form 8-K The Company filed no reports on Form 8-K during its last fiscal quarter. Exhibits The following exhibits are filed or incorporated by reference as a part of this report: 3.1 Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation. * 3.2 Amended and Restated Bylaws of Emmis Communications Corporation, incorporated by reference from Exhibit 3.2 to the Company's Form 10-Q for the period ended August 31, 1999. 3.3 Form of stock certificate for Class A common stock, incorporated by reference from Exhibit 3.5 to the 1994 Emmis Registration Statement on Form S-1, File No. 33-73218, the "1994 Registration Statement". 4.1 Indenture dated February 12, 1999 among Emmis Communications Corporation, certain subsidiary guarantors and IBJ Whitehall Bank and Trust Company, as trustee, including as an exhibit thereto the form of note, incorporated by reference to Exhibit 4.1 to Emmis' Registration Statement on Form S-4, File No. 333-74377, as amended (the "1999 Registration Statement"). 10.1 Emmis Communications Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the 1994 Registration Statement.++ 72 73 10.2 Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the 1994 Registration Statement.++ 10.3 The Emmis Communications Corporation 1995 Non-Employee Director Stock Option Plan, incorporated by reference from Exhibit 10.15 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (the "1995 10-K").++ 10.4 The Emmis Communications Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 to the 1995 10-K.++ 10.5 Emmis Communications Corporation 1997 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1998 (the "1998 10-K").++ 10.6 Emmis Communications Corporation 1999 Equity Incentive Plan, incorporated by reference from the Company's proxy statement dated May 26, 1999.++ 10.7 Employment Agreement dated as of March 1, 1994, by and between Emmis Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.13 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1994 and amendment to Employment Agreement, effective March 1, 1999, between the Company and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999.++ 10.8 Employment Agreement dated as of March 1, 1999, by and between Emmis Communications Corporation and Walter Z. Berger, incorporated by reference from Exhibit 10.9 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999.++ 10.9 Employment Agreement, effective March 1, 1999, between the Company and Doyle L. Rose, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999.++ 10.10 Employment Agreement, effective March 1, 1999, between the Company and Richard F. Cummings, incorporated by reference from Exhibit 10.3 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999.++ 10.11 Second Amended and Restated Revolving Credit and Term Loan Agreement, and First Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference to Exhibits 10.1 and 10.2, respectively, to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1998. 10.12 Second Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference from Exhibit 10.11 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999. 10.13 Stock Purchase Agreement dated October 25, 1999 by and between Liberty Media Corporation and Emmis Communications Corporation with Registration Rights Agreement as Exhibit A thereto, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended November 30, 1999. 10.14 Asset Purchase Agreement dated June 3, 1999 between Emmis Communications Corporation and Press Communications Corporation, incorporated by reference from Exhibit 10.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1999. 10.15 Asset Purchase Agreement by and between Emmis Broadcasting Corporation and Wabash Valley Broadcasting Corporation, dated March 20, 1998, incorporated by reference from Exhibit 10.15 to the 1998 10-K. 73 74 10.16 Asset Purchase Agreement by and among SF Broadcasting of Honolulu, Inc., SF Honolulu License Subsidiary, Inc., SF Broadcasting of New Orleans, Inc., SF New Orleans License Subsidiary, Inc., SF Broadcasting of Mobile, Inc., SF Mobile License Subsidiary, Inc., SF Broadcasting of Green Bay, Inc., SF Green Bay License Subsidiary, Inc. and Emmis Broadcasting Corporation, dated March 30, 1998, incorporated by reference from Exhibit 10.16 to the 1998 10-K. 10.17 Asset Purchase Agreement by and among Emmis Communications Corporation, Country Sampler, Inc. and Mark A. Nickel, dated as of February 23, 1999, together with associated Consulting Agreement and Letter Agreement, incorporated by reference from Exhibit 10.16 to Emmis' Annual Report on Form 10-K for the fiscal year ended February 28, 1999. 21 Subsidiaries of Emmis.* 23 Consent of Accountants.* 24 Powers of Attorney.* 27 Financial Data Schedule (EDGAR-filed version only) - ------------------------ * Filed with this report. ++ Management contract or compensatory plan or arrangement. 74 75 Signatures. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMMIS COMMUNICATIONS CORPORATION Date: May 30, 2000 By: /s/ Jeffrey H. Smulyan ----------------------------------- Jeffrey H. Smulyan Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and on the dates indicated.
SIGNATURE TITLE Date: May 30, 2000 /s/ Jeffrey H. Smulyan President, Chairman of the Board an d ---------------------- Director (Principal Executive Officer) Jeffrey H. Smulyan Date: May 30, 2000 /s/ Walter Z. Berger Executive Vice President, Treasurer -------------------- and Chief Financial Officer Walter Z. Berger (Principal Accounting Officer) Date: May 30, 2000 Susan B. Bayh* Director -------------- Susan B. Bayh Date: May 30, 2000 Gary L. Kaseff* Executive Vice President, General --------------- Counsel and Director Gary L. Kaseff Date: May 30, 2000 Richard A. Leventhal* Director --------------------- Richard A. Leventhal Date: May 30, 2000 Greg A. Nathanson* Television Division President and ------------------ Director Greg A. Nathanson Date: May 30, 2000 Doyle L. Rose* Radio Division President and -------------- Director Doyle L. Rose Date: May 30, 2000 Director -------------- Frank V. Sica Date: May 30, 2000 Lawrence B. Sorrel* Director ------------------- Lawrence B. Sorrel
*By: /s/ J. Scott Enright ---------------------------- J. Scott Enright Attorney-in-Fact 75 76 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Emmis Communications Corporation and Subsidiaries: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES included in Item 8, in this Form 10-K, and have issued our report thereon dated March 29, 2000. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ----------------------------------- ARTHUR ANDERSEN LLP Indianapolis, Indiana, May 7, 2000. 76 77 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 29, 2000 (DOLLARS IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END CLASSIFICATION OF YEAR PROVISION WRITE-OFFS OTHER OF YEAR ------------------------------------------ ------------- ----------- ---------- --------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS, Year ended February 28, 1998 $ 820 $ 802 $ (981) $ 705(1) $ 1,346 Year ended February 28, 1999 1,346 1,745 (1,393) - 1,698 Year ended February 29, 2000 1,698 2,550 (2,324) - 1,924
(1) Represents additions to the allowance for doubtful accounts associated with certain acquisitions. 77 EX-3.1 2 0002.txt SECOND AMENDED AND RESTATED ARTICLES OF INCORP. 1 EXHIBIT 3.1 ARTICLES OF AMENDMENT AND RESTATEMENT OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF EMMIS COMMUNICATIONS CORPORATION The undersigned officer of EMMIS COMMUNICATIONS CORPORATION (the "Corporation"), existing pursuant to the provisions of the INDIANA BUSINESS CORPORATION LAW (IND. CODE SS. 23-1 et SEQ.), AS AMENDED (the "Act") and desiring to give notice of corporate action effectuating amendment and restatement of certain provisions of its Amended and Restated Articles of Incorporation, certifies the following facts: ARTICLE I - AMENDMENT SECTION 1: The date of incorporation of the Corporation is: JULY 17, 1986 SECTION 2: The name of the Corporation following this amendment and restatement of its Amended and Restated Articles of Incorporation is: EMMIS COMMUNICATIONS CORPORATION SECTION 3: The text of the Amended and Restated Articles of Incorporation is amended and restated to read as follows: SEE ATTACHED EXHIBIT 1 This Amendment and Restatement is to be effective upon filing. ARTICLE II-MANNER OF ADOPTION AND VOTE SECTION 1: Action by Directors: The Board of Directors of the Corporation duly adopted resolutions amending and restating the Amended and Restated Articles of Incorporation. These resolutions were adopted at a meeting duly held on February 8, 2000, at which a quorum was present. SECTION 2: Action by Shareholders: The Shareholders of the Corporation entitled to vote in respect of the amendments contained in the restatement adopted the proposed amendments by vote of such Shareholders during a meeting called by the Board of Directors and held on February 21, 2000. The result of such vote was as follows:
Proposal 2: Proposal 3: Proposal 1: Amendment to Amendment to Amendment to Create Non-Voting Classify Board and Increase Shares Common Make Other Changes --------------- ---------- ------------------ NUMBER OF OUTSTANDING SHARES: CLASS A: 20,487,853 20,487,853 20,487,853 CLASS B: 2,369,291 2,369,291 2,369,291 SHARES ENTITLED TO VOTE: CLASS A: 20,487,853 20,487,853 20,487,853 CLASS B: 2,369,291 2,369,291 2,369,291 TOTAL VOTES (1): - - 44,180,763 SHARES/VOTES REPRESENTED AT MEETING: CLASS A: 14,944,594 14,944,594 14,944,594 CLASS B: 2,369,291 2,369,291 2,369,291 TOTAL VOTES (1): - - 38,637,504 SHARES VOTED IN FAVOR: CLASS A: 8,635,0591 2,752,830 5,694,331
2 CLASS B: 2,369,291 2,369,291 2,369,291 TOTAL VOTES (1): - - 29,387,241 SHARES VOTED AGAINST: CLASS A: 6,313,588 2,183,060 8,254,898 CLASS B: 0 0 0 TOTAL VOTES (1): - - 8,254,898 ABSTENTIONS: CLASS A: 3,747 16,503 20,543 CLASS B: 0 0 0
- --------------- (1) For proposals one and two, voting was by class. For proposal three, all shares voted as a single class and pursuant to the amended and restated articles of incorporation, each Class A share was entitled to one vote and each Class B share was entitled to ten votes. SECTION 3: Compliance with legal requirements: The manner of the adoption of the Articles of Amendment and Restatement and the votes by which they were adopted constitute full legal compliance with the provisions of the Act, the Amended and Restated Articles of Incorporation, and the Code of By-Laws of the Corporation. I hereby verify, subject to penalties for perjury, that the facts contained herein are true this 22nd day of February, 2000. ------------------------------------------ Norman H. Gurwitz Executive Vice President and Secretary 2 3 EXHIBIT 1 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF EMMIS COMMUNICATIONS CORPORATION The Second Amended and Restated Articles of Incorporation (the "Restated Articles") of Emmis Communications Corporation, a corporation organized and existing under the laws of the State of Indiana (the "Corporation"), are as follows: ARTICLE I Corporate Name The name of the Corporation is Emmis Communications Corporation. ARTICLE II Purposes The purpose of the Corporation is to transact any or all lawful business for which corporations may be incorporated under the Indiana Business Corporation Law, as now or hereafter amended (the "Act"). The Corporation shall have the same capacity to act as possessed by natural persons and shall have and exercise all powers granted to business corporations formed under the Act and permitted by the laws of the State of Indiana in force from time to time hereafter, including, but not limited to, the general rights, privileges and powers set out in the Act, the power to enter into and engage in partnerships and joint ventures, and to act as agent. The Corporation shall have the power and capacity to engage in all business activities, either directly or through any person, firm, entity, trust, partnership or association. ARTICLE III Definitions As used herein, the following terms shall have the meanings indicated: "Act" has the meaning defined in Article II. "Affiliate of Smulyan" means (i) any person or entity that, directly or indirectly, controls, is controlled by or is under common control with Smulyan, (ii) any corporation or organization (other than the Corporation or a majority-owned subsidiary of the Corporation) of which Smulyan is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent 1 4 (10%) or more of any class of voting securities, or in which Smulyan has a substantial beneficial interest, (iii) a Qualified Voting Trust, (iv) any other trust or estate in which Smulyan has a substantial beneficial interest or as to which Smulyan serves as trustee or in a similar fiduciary capacity, or (v) any relative or spouse of Smulyan, or any relative of such spouse, who has the same residence as Smulyan. "Alien" has the meaning defined in Article XI. "Alien Ownership Restrictions" has the meaning defined in Article XI. "Board of Directors" has the meaning defined in Section 7.2(a). "Class A Directors" has the meaning defined in Section 7.4(b). "Class A Shares" has the meaning defined in Section 6.1(a). "Class B Shares" has the meaning defined in Section 6.1(b). "Class C Shares" has the meaning defined in Section 6.1(c). "Common Shares" has the meaning defined in Section 6.1(c). "Communications Act" has the meaning defined in Article XI. "Corporation" has the meaning defined in the introduction to these Restated Articles. "Effective Date" means March 1, 1994, the date and time at which the Corporation's Amended and Restated Articles become effective. "Event of Automatic Conversion" means each of the automatic conversion events described in Section 7.6(a) or Section 7.6(c). "Existing Common Shares" has the meaning defined in Section 7.6(a). "Going Private Transaction" shall mean any transaction that is a "Rule 13e-3 Transaction," as such term is defined in Rule 13e-3(a)(3), 17 C.F.R. ss. 240.13e-3, as amended from time to time, promulgated under the Securities Exchange Act of 1934, as amended; provided, however, that the term "affiliate" as used in Rule 13e-3(a)(3)(i) shall be deemed to include an Affiliate of Smulyan. "Independent Director" shall have the meaning defined in Part III, Section 5(c) of Schedule D to the By-Laws of the National Association of Security Dealers, Inc., as the same may be amended from time to time. "Preferred Stock" has the meaning defined in Section 6.1(c). "Qualified Voting Trust" means any voting trust, voting agreement or similar arrangement pursuant to which Smulyan generally controls the vote of the Common Shares held by or subject to such trust, agreement or similar arrangement, regardless of whether the 2 5 beneficial owner reserves or is granted a limited right to vote such Common Shares in certain circumstances. A good faith determination by the Board of Directors as to whether a voting trust, voting agreement or similar arrangement constitutes a Qualified Voting Trust shall be conclusive and binding on all shareholders. "Restated Articles" has the meaning defined in the introduction to these Second Amended and Restated Articles of Incorporation of Emmis Communications Corporation. "Smulyan" means and refers to Jeffrey H. Smulyan. ARTICLE IV Term of Existence The period during which the Corporation shall continue is perpetual. ARTICLE V Registered Office and Registered Agent The street address of the registered office of the Corporation is 950 North Meridian Street, Suite 1200, Indianapolis, Indiana 46204, and the name of the registered agent at such office is Steven C. Crane. ARTICLE VI Capital Structure 6.1. Authorized Shares. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Two Hundred Forty million (240,000,000), consisting of the following: (a) One hundred seventy million (170,000,000) shares of Class A Common Stock, par value $.01 per share (the "Class A Shares"); (b) Thirty million (30,000,000) shares of Class B Common Stock, par value $.01 per share (the "Class B Shares"); (c) Thirty million (30,000,000) shares of Class C Common Stock, par value $.01 per share (the "Class C Shares" and together with the Class A Shares and the Class B Shares, the "Common Shares"); and 3 6 (d) Ten million (10,000,000) shares of serial Preferred Stock, par value $.01 per share (the "Preferred Stock"). 6.2. Terms of Stock. The designations, preferences, powers, qualifications and special or relative rights or privileges of the capital stock of the Corporation shall be as set forth in Articles VII and VIII. ARTICLE VII Common Shares 7.1. Identical Rights. Except as otherwise provided in these Restated Articles, all Common Shares shall be identical and shall entitle the holders thereof to the same rights and privileges, including, but not limited to, the right to share ratably in liquidation distributions after payment in full of creditors and payment in full to any holders of Preferred Stock then outstanding of any amount required to be paid under the terms of such Preferred Stock. 7.2. Dividends. (a) General. When, as and if dividends are declared by the Corporation's board of directors (the "Board of Directors"), whether payable in cash, securities of the Corporation or other property, the holders of Common Shares shall be entitled, in accordance with the number of Common Shares held by each, to share equally in and to receive all such dividends, except that if dividends are declared that are payable in Common Shares, such stock dividends shall be payable at the same rate on each class of Common Shares and shall be payable only in Class A Shares to holders of Class A Shares, in Class B Shares to holders of Class B Shares and in Class C Shares to holders of Class C Shares. (b) Record Date. Dividends declared by the Board of Directors shall be paid to the holders of record of the outstanding Common Shares as their names shall appear on the stock register of the Corporation on the record date fixed by the Board of Directors in advance of declaration and payment of each dividend. (c) Stock Dividends. Any Common Shares issued as a dividend shall, when so issued, be duly authorized, validly issued, fully paid and non-assessable. The Corporation shall not issue fractions of Common Shares on payment of any such stock dividend but shall issue a whole number of shares to such holder of Common Shares rounded up or down in the Corporation's sole discretion to the nearest whole number, without compensation to the stockholder whose fractional share has been rounded down or from any stockholder whose fractional share has been rounded up. 7.3. Stock Splits. The Corporation shall not in any manner subdivide (by stock split, reverse stock split, reclassification, stock dividend, recapitalization or otherwise) or combine the outstanding shares of one class of Common Shares unless the outstanding shares of all classes of Common Shares shall be proportionately subdivided or combined, provided that this Section shall not apply to the reclassification taking effect upon the filing of these Restated Articles with the Secretary of State of Indiana. 4 7 7.4. Voting Rights. (a) General. The holders of the Class A Shares and the Class B Shares shall vote as a single class in all matters submitted to a vote of the stockholders, with each Class A Share being entitled to one vote and each Class B Share being entitled to ten votes, except (i) for the election of directors, which shall be governed by Subsections (b) and (c) below, (ii) with respect to any Going Private Transaction described in Subsection (e) below, which shall be governed by such Subsection, and (iii) as otherwise provided by law. The holders of the Class C Shares have no right to vote on any matter except as otherwise provided by law. (b) Class A Directors. In the election of directors, the holders of Class A Shares shall be entitled by class vote, exclusive of all other stockholders, to elect two of the Corporation's directors (the "Class A Directors"), with each Class A Share entitled to one vote; provided, however, that each Class A Director must be qualified at the time of his or her election to be an Independent Director. Any vote by stockholders on the removal of a Class A Director shall only be by the class vote of the holders of Class A Shares. (c) Other Directors. Except as provided in Subsection (b) above, the holders of Class A Shares and Class B Shares, voting as a single class, shall have the right to vote on the election or removal of all directors of the Corporation (other than directors, if any, who may be elected by the holders of Preferred Stock), with each Class A Share entitled to one vote and each Class B Share entitled to ten votes. (d) Class A Director Vacancies. In the event of the death, removal or resignation of a Class A Director prior to expiration of the director's term, the vacancy on the Board of Directors created thereby may be filled by a majority of the directors then in office, although less than a quorum; provided, however, that any person appointed to fill a vacancy created by the death, removal or resignation of a Class A Director shall be an Independent Director. A director elected in such manner to fill such a vacancy shall hold office until the director's successor has been duly elected and qualified at a meeting of holders of Class A Shares duly called for such purpose. (e) Going Private Transactions. With respect to any Going Private Transaction between the Corporation and (i) Smulyan, (ii) any Affiliate of Smulyan or (iii) any group of which Smulyan or any Affiliate of Smulyan is a member, the holders of Class A Shares and Class B Shares shall vote as a single class, with each Class A Share and Class B Share entitled to one vote. 7.5. Issuance of Common Shares. Each new issuance of Common Shares after the Effective Date shall be an issuance of Class A Shares or Class C Shares unless (i) the Common Shares are issued to Smulyan or (ii) the Common Shares are issued or subject to a Qualified Voting Trust. In each event described in clauses (i) or (ii) above, each Common Share issued shall be a Class B Share. 7.6. Conversion. (a) Automatic Conversion on Effective Date. Each share of the Corporation's common stock issued and outstanding immediately prior to the Effective Date (the "Existing 5 8 Common Shares") that is owned of record as of the Effective Date by Smulyan shall convert automatically and without the requirement of any further action into one fully paid and non-assessable Class B Share as of the Effective Date. Each of the Existing Common Shares not converted in accordance with the previous sentence shall convert automatically and without the requirement of any further action into one fully paid and non-assessable Class A Share as of the Effective Date. (b) Voluntary Conversion. Each Class B Share shall be convertible, at the option of its holder, into one fully paid and non-assessable Class A Share at any time. (c) Automatic Conversion. (i) Each Class B Share shall convert automatically into one fully paid and non-assessable Class A Share upon the sale, gift or other transfer of such share, voluntarily or involuntarily, to a person or entity other than Smulyan or an Affiliate of Smulyan; provided, however, that the pledge of a Class B Share pursuant to a bona fide pledge as security for indebtedness owed to the pledgee shall not constitute a transfer for purposes of this Subsection (c) until such time as either (A) such share is registered in the name of the pledgee, (B) the pledgee acquires the right to vote such share and exercises such right, in which case the automatic conversion into a Class A Share shall be deemed to occur immediately prior to such vote, or (C) ownership of the pledged share is transferred pursuant to enforcement of such pledge to a person or entity other than Smulyan or an Affiliate of Smulyan. (ii) All Class B Shares shall convert automatically into fully paid and non-assessable Class A Shares (on the basis of one Class A Share for each Class B Share) upon the earlier of (A) the death of Smulyan or (B) Smulyan's ceasing to own at least 1,520,000 Common Shares, as adjusted from time to time to account for any stock dividend in respect of the Common Shares or any stock split or reverse stock split of Common Shares. (d) Voluntary Conversion Procedure. At the time of a voluntary conversion, the holder of Class B Shares shall deliver to the office of the Corporation or any transfer agent for the Common Shares (i) the certificate or certificates representing the Class B Shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer, and (ii) written notice to the Corporation stating that such holder elects to convert such share or shares and stating the names and addresses in which each certificate for Class A Shares issued upon such conversion is to be issued. Voluntary conversion shall be deemed to have been effected at the close of business on the date when such delivery is made to the Corporation of the shares to be converted, and the person or entity exercising such voluntary conversion shall be deemed to be the holder of record of the number of Class A Shares issuable upon such conversion at such time. The Corporation shall promptly deliver certificates evidencing the appropriate number of Class A Shares to such holder. (e) Automatic Conversion Procedure. Upon the occurrence of the Event of Automatic Conversion pursuant to Section 7.6(a), each certificate previously representing Existing Common Shares that pursuant to Section 7.6(a) are converted into Class A Shares shall automatically and without the requirement of any further action represent the same number of Class A Shares. Promptly upon the occurrence of (i) the Event of Automatic Conversion pursuant to Section 7.6(a) with respect to those Existing Common Shares that are converted automatically into Class B Shares, or (ii) an Event of Automatic Conversion pursuant to Section 6 9 7.6(c), such that Class B Shares are converted automatically into Class A Shares, the holder of such converted shares shall surrender the certificate or certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the office of the Corporation or of any transfer agent for the Common Shares and shall give written notice to the Corporation, at such office (A) stating that the shares are being converted pursuant to an Event of Automatic Conversion into Class B Shares or Class A Shares as provided in Section 7.6(a) or (c), respectively, (B) specifying the Event of Automatic Conversion (and, if the occurrence of such event is within the control of the transferor, stating the transferor's intent to effect an Event of Automatic Conversion), (C) identifying the number of Existing Common Shares or Class B Shares being converted, and (D) setting out the name or names (with addresses) and denominations in which the certificate or certificates shall be issued, and instructions for the delivery thereof. Delivery of such notice together with the certificates representing the converted shares shall obligate the Corporation to issue and deliver, and thereupon the Corporation or its transfer agent shall promptly issue and deliver, at such stated address to such holder or to the transferee of the converted shares a certificate or certificates for the number and class of Common Shares to which such holder or transferee is entitled, registered in the name of such holder, the designee of such holder or transferee as specified in such notice. Nothing contained in this Subsection (e) or elsewhere in these Restated Articles shall be construed to permit or provide for (i) the transfer of any Class B Shares to any person or entity other than Smulyan or an Affiliate of Smulyan without the conversion of such Class B Shares into Class A Shares upon such transfer or (ii) the issuance of Class B Shares to any person or entity other than Smulyan or an Affiliate of Smulyan. To the extent permitted by law, conversion pursuant to an Event of Automatic Conversion shall be deemed to have been effected as of the date and time at which the Event of Automatic Conversion occurs (such time being the "Conversion Time"). The person or entity entitled to receive the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder of such Common Shares at and as of the Conversion Time. The rights as a holder of the converted shares shall cease and terminate at and as of the Conversion Time, in each case without regard to any failure by the holder to deliver the certificates or the notice required by this Subsection (e). (f) Unconverted Shares; Notice Required. In the event of the conversion of less than all of the Class B Shares evidenced by a certificate surrendered to the Corporation in accordance with the procedures of Section 7.6(d) or (e), the Corporation shall execute and deliver to or upon the written order of the holder of such certificate, without charge to such holder, a new certificate evidencing the number of Class B Shares not converted. Class B Shares shall not be transferred as Class B Shares on the books of the Corporation unless the Corporation shall have received from the holder thereof the written notice described herein. (g) Reservation. The Corporation hereby reserves and shall at all times reserve and keep available, out of its authorized and unissued Class A Shares, for the purposes of effecting conversions, such number of duly authorized Class A Shares as shall from time to time be sufficient to effect the conversion of all outstanding Class B Shares. The Corporation covenants that all the Class A Shares so issuable shall, when so issued, be duly and validly issued, fully paid and non-assessable. Subject to Article XI, the Corporation will take all such action as may be necessary to assure that all such Class A Shares may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Class A Shares may be listed. 7 10 7.7. Consideration on Merger, Consolidation, etc. In any merger, consolidation or business combination, the consideration to be received per share by the holders of Class A Shares, Class B Shares and Class C Shares must be identical for each class of stock, except that in any such transaction in which shares of common stock are to be distributed, such shares may differ as to voting rights to the extent that the voting rights provided in these Restated Articles differ between the Class A Shares, the Class B Shares and the Class C Shares. ARTICLE VIII Preferred Stock 8.1. Terms of Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation shall have authority to fix by resolution or resolutions the designations and powers, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, the voting rights, dividend rate, purchase or sinking funds, provisions for redemption, conversion rights, redemption price and liquidation preference, of any series of shares of Preferred Stock, to fix the number of shares constituting any such series and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution or resolutions originally fixing the number of shares of such series. ARTICLE IX Board of Directors 9.1 Number of Directors. The number of directors constituting the Board of Directors shall be fixed by the By-Laws of the Corporation and shall be not less than six (6) and not more than fifteen (15). No amendment to the By-Laws decreasing the number of directors shall have the effect of shortening the term of any incumbent director. 9.2 Classes and Term of Office. Effective as of the annual meeting of shareholders in 2000, the Board of Directors shall be divided into three (3) classes, designated Class I, Class II and Class III, as nearly equal in number as possible. The number of Class A Directors in each class shall also be as nearly equal in number as possible. The initial term of office of directors in Class I will expire at the annual meeting of shareholders in 2001. The initial term of office of directors in Class II will expire at the annual meeting of shareholders in 2002. The initial term of office of directors in Class III will expire at the annual meeting of shareholders in 2003. At each annual election beginning at the annual meeting of shareholders in 2001, the successors to the class of directors whose term then expires shall be elected to hold office for a term of three (3) years and until his or her successor is elected and qualifies or until his or her earlier resignation, removal from office or death. This section does not apply to any directors elected pursuant to special voting rights of one or more series of Preferred Stock. 8 11 9.3 Removal of Directors. (a) A director other than a Class A Director may be removed by the shareholders only for cause and only if the removal has been approved by an 80% majority of the combined voting power of the shares entitled to vote for the election of such director, cast at a special meeting of the shareholders called for that purpose. A Class A Director may be removed by the holders of Class A Shares as provided in Section 7.4(b) only for cause and only if the removal has been approved by the holders of an 80% majority of the Class A Shares, cast at a special meeting of the shareholders called for that purpose. Cause for removal exists only if: (1) the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and the conviction is no longer subject to direct appeal; or (2) the director whose removal is proposed has been adjudicated by a court of competent jurisdiction to be liable for negligence or misconduct in the performance of his duty to the Corporation in a matter of substantial importance to the Corporation, and the adjudication is not longer subject to direct appeal. (b) This section does not apply to any directors elected pursuant to special voting rights of one or more series of Preferred Stock. 9.4 Amendment or Repeal of this Article. Notwithstanding any other provision of these Articles or the By-Laws of the Corporation, and in addition to any other procedure specified under Indiana law, any amendment or repeal of or adoption of a provision inconsistent with any provision in this Article IX is not effective unless it is approved by at least an 80% majority of the combined voting power of the outstanding Common Shares. ARTICLE X Control Share Acquisitions Chapter 42 of the Act (I.C. 23-1-42) shall not apply to control share acquisitions of shares of capital stock of the Corporation. ARTICLE XI Alien Ownership The following provisions are included in these Restated Articles for the purpose of ensuring that control and management of the Corporation complies with the Communications Act of 1934 and the rules, regulations and policies of the Federal Communications Commission as amended from time to time (collectively, the "Communications Act"): (a) The Corporation (i) shall not issue to or for the account of (A) a person who is a citizen of a country other than the United States; (B) an entity organized under the laws 9 12 of a government other than the government of the United States or any state, territory, or possession of the United States; (C) a government other than the government of the United States or of any state, territory, or possession of the United States; or (D) a representative of, or an individual or entity controlled by, any of the foregoing (each person or entity described in any of the foregoing clauses (A) through (D), an "Alien") any share of capital stock of the Corporation if such issuance would cause the total capital stock of the Corporation held or voted by Aliens to exceed, in violation of the Communications Act, 25% of (1) the total capital stock of the Corporation outstanding at any time or (2) the total voting power of all shares of such capital stock outstanding and entitled to vote at any time, and (ii) shall not permit the transfer on the books of the Corporation of any capital stock to any Alien that would result in the total capital stock of the Corporation held or voted by Aliens to exceed such 25% limits in violation of the Communications Act. (b) No Alien or Aliens, individually or collectively, shall be entitled to vote or direct or control the vote of more than 25% of (i) the total capital stock of the Corporation outstanding at any time or (ii) the total voting power of all shares of capital stock of the Corporation outstanding and entitled to vote at any time, if to do so would violate the Communications Act. (c) No Alien shall be qualified to act as an officer of the Corporation and no more than one-fourth of the total number of directors of the Corporation at any time may be Aliens, in either case if such would violate the Communications Act. (d) The Board of Directors shall have all powers necessary to implement the provisions of this Article and to ensure compliance with the alien ownership restrictions (the "Alien Ownership Restrictions") of the Communications Act, including, without limitation, the power to prohibit the transfer of any shares of capital stock of the Corporation to any Alien and to take or cause to be taken such action as it deems appropriate to implement such prohibition. Without limiting the generality of the foregoing and notwithstanding any other provision of these Restated Articles to the contrary, any shares of capital stock of the Corporation (other than the Series A Preferred Stock and the Series B Preferred Stock) determined by the Board of Directors to be owned beneficially by an Alien or Aliens shall always be subject to redemption by the Corporation by action of the Board of Directors to the extent necessary in the judgment of the Board of Directors to comply with the Alien Ownership Restrictions. The terms and conditions of such redemption shall be as follows: (i) The redemption price of the shares to be redeemed pursuant to this Article shall be equal to the lower of (A) the fair market value of the shares to be redeemed, as determined in good faith by the Board of Directors in good faith, and (B) such Alien's purchase price of such shares; (ii) The redemption price of such shares may be paid in cash, securities or any combination thereof; (iii) If less than all the shares held by Aliens are to be redeemed, the shares to be redeemed shall be selected in any manner determined by the Board of Directors to be fair and equitable; 10 13 (iv) At least ten (10) days' written notice of the redemption date shall be given to the record holders of the shares selected to be redeemed (unless waived in writing by any such holder), provided that the redemption date may be the date on which written notice shall be given to record holders if the cash or securities necessary to effect the redemption shall have been deposited in trust for the benefit of such record holders and subject to immediate withdrawal by them upon surrender of the stock certificates for their shares to be redeemed; (v) From and after the redemption date, the shares to be redeemed shall cease to be regarded as outstanding and any and all rights of the holders in respect of the shares to be redeemed or attaching to such shares of whatever nature (including, without limitation, any rights to vote or participate in dividends declared on stock of the same class or series as such shares) shall cease and terminate, and the holders thereof shall thereafter be entitled only to receive the cash or securities payable upon redemption; and (vi) Such other terms and conditions as the Board of Directors shall determine. For purposes of this Article, the determination of the beneficial ownership of shares of capital stock of the Corporation shall be made pursuant to Rule 13d-3, 17 C.F.R. ss. 240.13d-3, as amended from time to time, promulgated under the Securities Exchange Act of 1934, as amended, or in such other manner as determined in good faith by the Board of Directors to be fair and equitable. ARTICLE XII Indemnification 12.1. General. The Corporation shall, to the fullest extent to which it is empowered to do so by the Act, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that such person is or was a director or officer of the Corporation, or who, while serving as such a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether for profit or not, against expenses (including counsel fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) actually or reasonably incurred by such person in accordance with such action, suit or proceeding, if such person acted in good faith and in a manner he or she reasonably believed, in the case of conduct in his or her official capacity, was in the best interests of the Corporation, and in all other cases, was not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, such person either had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standard of conduct. 12.2. Authorization of Indemnification. To the extent that a director or officer of the Corporation has been wholly successful, on the merits or otherwise, in the defense of any action, 11 14 suit or proceeding referred to in Section 12.1, or in the defense of any claim, issue or matter therein, the Corporation shall indemnify such person against expenses (including counsel fees) actually and reasonably incurred by such person in connection therewith. Any other indemnification under Section 12.1 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case, upon a determination that indemnification of the director or officer is permissible in the circumstances because he or she has met the applicable standard of conduct. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not at the time parties to such action, suit or proceeding; or (ii) if a quorum cannot be obtained under clause (i), by a majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to such action, suit or proceeding; or (iii) by special legal counsel (A) selected by the Board of Directors or its committee in the manner prescribed in clauses (i) or (ii), or (B) if a quorum of the Board of Directors cannot be obtained under clause (i) and a committee cannot be designated under clause (ii), selected by a majority vote of the full Board of Directors (in which selection directors who are parties may participate); or (iv) by the stockholders, but shares owned by or voted under the control of directors or officers who are at the time parties to such action, suit or proceeding may not be voted on the determination. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under foregoing clause (iii) to select counsel. 12.3. Good Faith. For purposes of any determination under Section 12.1, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 12.1 if his or her action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (i) one or more officers or employees of the Corporation or other enterprise whom he or she reasonably believes to be reliable and competent in the matters presented; (ii) legal counsel, public accountants, appraisers or other persons as to matters he or she reasonably believes are within the person's professional or expert competence; or (iii) a committee of the Board of Directors of the Corporation or other enterprise of which the person is not a member if he or she reasonably believes the committee merits confidence. The term "other enterprise" as used in this Section 12.3 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, partner, trustee, employee or agent. The provisions of this Section 12.3 shall not be exclusive or limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 12.1. 12.4. Payment of Expenses in Advance. Expenses incurred in connection with any civil or criminal action, suit or proceeding may be paid for or reimbursed by the Corporation in advance of the final disposition of such action, suit or proceeding, as authorized in the specific case in the same manner described in Section 12.2, upon receipt of the director or officer's written affirmation of his or her good faith belief that he or she has met the standard of conduct described in Section 12.1 and upon receipt of a written undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she did not meet the standard of conduct set forth in this Article XII, and a determination is made that the 12 15 facts then known to those making the determination would not preclude indemnification under this Article XII. 12.5. Other Indemnitees. The Corporation may, by action of its Board of Directors, indemnify employees and agents of the Corporation with the same scope and effect and pursuant to the same procedures as provided in this Article XII for directors and officers. 12.6. Provisions Not Exclusive. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under these Restated Articles of Incorporation, the Corporation's By-Laws, any resolution of the Board of Directors or stockholders, any other authorization, whenever adopted, after notice, by a majority vote of all voting shares of the Corporation then outstanding, or any contract, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to serve in his or her official capacity, and shall inure to the benefit of the heirs, executors and administrators of such a person. 12.7. Vested Right to Indemnification. The right of any person to indemnification under this Article shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section 12.1 and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article. To the extent such prior acts or omissions cannot be deemed to be covered by this Article XII, the right of any person to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. 12.8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee or agent, whether or not the Corporation would have power to indemnify the individual against the same liability under this Article. 12.9. Additional Definitions. For purposes of this Article: (i) References to the "Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (ii) Serving an employee benefit plan at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of 13 16 an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" referred to in this Article. (iii) The term "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding. (iv) The term "official capacity," when used with respect to a director, shall mean the office of director of the Corporation; and when used with respect to an individual other than a director, shall mean the office in the Corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not. ARTICLE XIII Severability In the event that any Article or Section (or portion thereof) of these Restated Articles shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions, or portion thereof, of these Restated Articles shall be deemed to remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its stockholders that each such remaining provision (or portion thereof) of these Restated Articles remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders notwithstanding any such findings. 14 17 EXHIBIT A EXHIBIT A TO THE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF EMMIS COMMUNICATIONS CORPORATION Pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of Article VIII, Section 8.01 of the Corporation's Amended and Restated Articles of Incorporation, as amended from time to time (the "Articles of Incorporation"), and pursuant to I.C. 23-1-25-2, the Board of Directors hereby creates a series of preferred stock of the Corporation with the following voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof (in addition to the provisions set forth in the Articles of Incorporation which are applicable to the preferred stock of all classes and series): 1. Designation, Amount and Ranking. 1.1 There shall be created from the 10,000,000 shares of preferred stock, par value $0.01 per share, of the Corporation authorized to be issued pursuant to the Articles of Incorporation, a series of preferred stock, designated as the "6.25% Series A Cumulative Convertible Preferred Stock," par value $0.01 per share (the "Preferred Stock"), and the number of shares of such series shall be 2,875,000. Such number of shares may be decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Preferred Stock to a number less than that of the shares of Preferred Stock then outstanding plus the number of shares issuable upon exercise of options or rights then outstanding and, if any portion of the over-allotment option granted by the Corporation pursuant to the Purchase Agreement (as defined in this Exhibit A) expires unexercised, the Board of Directors shall by resolution decrease the number of authorized shares of Preferred Stock by the number of shares subject to the expired portion of such over-allotment option. Any shares of Preferred Stock issued after the Issue Date (as defined in this Exhibit A) pursuant to the over-allotment option granted by the Corporation pursuant to the Purchase Agreement shall, for all purposes, including, without limitation, voting and dividend rights, be deemed issued as of the Issue Date. 1.2 The Preferred Stock, with respect to dividend distributions upon the liquidation, winding-up and dissolution of the Corporation, ranks: (a) senior to all classes of the Corporation's common stock and to each other class of capital stock or series of preferred stock established after the Issue Date by the Board of Directors, the terms of which do not expressly provide that it ranks senior to or on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation; (b) ratably with any class of capital stock or series of preferred stock issued by the Corporation established after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation; and A-1 18 (c) subject to certain conditions which include the affirmative vote or consent of the holders of at least 66 2/3% of the outstanding Preferred Stock, junior to each class of capital stock or series of preferred stock issued by the Corporation established after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank senior the Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Corporation. 2. Definitions. As used in this Exhibit A, the following terms shall have the following meanings: 2.1 "Accrued Dividends" shall mean, with respect to any share of Preferred Stock, as of any date, the accrued and unpaid dividends on such share from and including the most recent Dividend Payment Date (or the Issue Date, if such date is prior to the first Dividend Payment Date) to but not including such date. "Accumulated Dividends" shall mean, with respect to any share of Preferred Stock, as of any date, the aggregate accumulated and unpaid dividends on such share from the Issue Date until the most recent Dividend Payment Date prior to such date. There shall be no Accumulated Dividends with respect to any share of Preferred Stock prior to the first Dividend Payment Date. 2.2 "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law or executive order to close. 2.3 "Change of Control" shall mean any of the following events: (i) the sale, lease or transfer, in one or a series of related transactions, of all or substantially all of the Corporation's assets to any "person or group," as such terms are used in Section 13(d)(3) of the Exchange Act other than to Permitted Holders; (ii) the adoption of a plan relating to the liquidation or dissolution of the Corporation; (iii) the acquisition, directly or indirectly, by any person or group, as such terms are used in Section 13(d)(3) of the Exchange Act as in effect on the original date of issuance of the Preferred Stock, other than Permitted Holders, of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act as in effect on the original date of issuance of the convertible preferred stock, except that a person will be deemed to have beneficial ownership of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after passage of time) of more than 50% of the Corporation's total outstanding voting stock; provided, however, that the Permitted Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the issue date), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Corporation's voting stock than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Corporation's Board of Directors; or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Corporation's Board of Directors, together with any new directors whose election by such Board of Directors or whose nomination for election by the Corporation's shareholders was approved by a vote of 66 2/3% of the Corporation's Board of Directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Corporation's Board of Directors then in office. 2.4 "Change of Control Date" shall mean the date on which the Change of Control event occurs. A-2 19 2.5 "Conversion Price" shall mean $78.125, subject to adjustment as set forth in Section 9(c). 2.6 "Class A Common Stock" shall mean the Class A Common Stock, par value $0.01 per share, of the Corporation, or any other class of stock resulting from successive changes or reclassifications of such common stock consisting solely of changes in par value, or from par value to no par value, or as a result of a subdivision, combination, or merger, consolidation or similar transaction in which the Corporation is a constituent corporation. 2.7 "Class B Common Stock" shall mean the Class B Common Stock par value $0.01 per share, of the Corporation. 2.8 "Common Stock" shall mean both the Class A Common Stock and the Class B Common Stock of the Corporation. 2.9 "Dividend Payment Date" shall mean January 15, April 15, July 15 and October 15 of each year, commencing January 15, 2000. 2.10 "Dividend Record Date" shall mean, with respect to each Dividend Payment Date, a date not more than 60 days nor less than 10 days preceding a Dividend Payment Date, as may be fixed by the Board of Directors. 2.11 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. 2.12 "Issue Date" shall mean October 26, 1999, the original date of issuance of the Preferred Stock. 2.13 "Liquidation Preference" shall mean, with respect to each share of Preferred Stock, $50. 2.14 "Market Capitalization" shall mean as of a given date the product of the Market Value so of such date times the total number of shares of Common Stock outstanding as of such date. 2.15 "Market Value" shall mean as of a given date the average closing price of the Class A Common Stock for a ten consecutive trading day period, ending on the last trading day immediately preceding such date, on the Nasdaq Stock Market or any national securities exchange or authorized quotation system on which the Corporation's Class A Common Stock is listed or authorized for quotation, or if the Class A Common Stock is not so listed or authorized for quotation, an amount determined in good faith by the Board of Directors to be the fair value of the Class A Common Stock. 2.16 "Permitted Holders" means Jeffrey H. Smulyan, his spouse, lineal descendants and ascendants, heirs, executors or other legal representatives and any trusts or other entities established by or for the benefit of any of the foregoing or established by any of the foregoing for charitable purposes, or any other person or entity in which the foregoing persons or entities exercise control. A-3 20 2.17 "Person" shall mean any individual, corporation, general partnership, limited partnership, limited liability partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. 2.18 "Purchase Agreement" shall mean that certain Purchase Agreement with respect to the Preferred Stock, dated as of October 26, 1999 among the Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. 3. Dividends. 3.1 The holders of shares of the outstanding Preferred Stock shall be entitled, when, as and if declared by the Board of Directors out of funds legally available therefor, to receive cumulative annual cash dividends at a rate per annum equal to 6.25% (the "Dividend Rate") of the Liquidation Preference, payable quarterly in arrears. Dividends payable for each full dividend period will be computed by dividing the Dividend Rate by four and shall be payable in arrears on each Dividend Payment Date for the quarterly period ending immediately prior to such Dividend Payment Date, to the holders of record of Preferred Stock at the close of business on the Dividend Record Date applicable to such Dividend Payment Date. Such dividends shall be cumulative from the Issue Date and shall accrue on a day-to-day basis, whether or not earned or declared, from and after the Issue Date. Dividends on the Preferred Stock which are not declared and paid when due will compound quarterly on each Dividend Payment Date at the Dividend Rate. Dividends payable for any partial dividend period shall be computed on the basis of actual days elapsed over a 360-day year consisting of twelve 30-day months. Notwithstanding anything in this Exhibit A to the contrary, the initial Dividend Payment Date, which shall be for dividends accrued during the period commencing on the Issue Date and ending on January 15, 2000, will be January 15, 2000. 3.2 Dividends paid on the Preferred Stock shall be payable in cash. 3.3 No dividends or other distributions (other than a dividend or distribution payable solely in stock of the Corporation ranking junior to or ratably with the Preferred Stock as to dividends and upon liquidation, dissolution or winding up and cash in lieu of fractional shares) may be declared, made or paid or set apart for payment on the Common Stock or upon any other stock of the Corporation ranking junior to or ratably with the Preferred Stock as to dividends, and no Common Stock or any other stock of the Corporation ranking junior to or ratably with the Preferred Stock as to dividends or upon liquidation, dissolution or winding up, may be redeemed, purchased or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to or ratably with the Preferred Stock as to dividends and upon liquidation dissolution or winding up), unless full Accumulated Dividends shall have been or contemporaneously are paid or declared and a sum sufficient for the payment thereof is set apart for such payment on the Preferred Stock for all Dividend Payment Periods terminating on or prior to the date of such declaration, payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if full dividends have not been paid to the holders of the Preferred Stock and on any other preferred stock ranking ratably with the Preferred Stock as to dividends, dividends may be declared and paid on the Preferred Stock and such other ratable preferred stock, only so long as the dividends are declared and paid A-4 21 pro rata so that the amounts of dividends declared per share on the Preferred Stock and such other ratable preferred stock will in all cases bear to each other the same ratio that, immediately prior to payment of the dividend on such other ratable stock, Accumulated and Accrued Dividends per share of the Preferred Stock and accrued and unpaid dividends per share of such other ratable preferred stock bear to each other. 3.4 Holders of shares of Preferred Stock shall not be entitled to any dividends on the Preferred Stock, whether payable in cash, property or stock in excess of full cumulative dividends at the Dividend Rate provided in this Exhibit A. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Preferred Stock which may be in arrears. 3.5 The holders of shares of Preferred Stock at the close of business on a Dividend Record Date will be entitled to receive the dividend payment on those shares (except that holders of shares called for redemption on a redemption date between the Dividend Record Date and the Dividend Payment Date will be entitled to receive such dividend on such redemption date on the corresponding Dividend Payment Date notwithstanding the subsequent conversion thereof or the Corporation's default in payment of the dividend due on that Dividend Payment Date. 4. Optional Redemption. 4.1 The Preferred Stock is not subject to any sinking fund or other similar provisions. From April 15, 2001 to October 15, 2002, the Corporation may redeem Preferred Stock (the "Provisional Redemption") at a redemption premium equal to 104.911% of the Liquidation Preference plus Accumulated Dividends, if any, whether or not declared to the redemption date (the "Provisional Redemption Date"), if the closing price of the Corporation's Class A Common Stock on the Nasdaq Stock Market, or any national securities exchange or authorized quotation system on which the Corporation's Class A Common Stock is then listed or authorized for quotation, if not so listed, is greater than 150% of the Conversion Price ($117.1875), as hereafter defined in this Exhibit A, per share for 20 trading days within any 30 consecutive trading day period. If the Corporation undertakes a Provisional Redemption, holders of Preferred Stock that the Corporation calls for redemption will also receive a payment (the "Additional Payment") in an amount equal to the present value of the aggregate value of the dividends (whether or not declared) that would thereafter have been payable on the Preferred Stock called for redemption from the Provisional Redemption Date to October 15, 2002 (the "Additional Period"). The present value will be calculated using as the discount rate the bond equivalent yield on U.S. Treasury notes or bills having the term nearest in length to that of the Additional Period, calculated as of the day immediately preceding the date on which a notice of Provisional Redemption is mailed. The Corporation will be obligated to make the Additional Payment on all shares of Preferred Stock that the Corporation has called for the Provisional Redemption whether or not those shares of Preferred Stock that the Corporation has called are converted prior to the Provisional Redemption Date. 4.2 Beginning on October 15, 2002, the Corporation may redeem in cash the Preferred Stock, during the twelve-month periods commencing on October 15 of the years indicated below, at the following redemption premiums (which are expressed as a percentage of the stated liquidation preference of $50 per share), plus in each case Accrued Dividends and Accumulated Dividends, if any, whether or not declared to the redemption date: A-5 22
Year Amount ---- ------ 2002................. 103.571% 2003................. 102.679% 2004................. 101.786% 2005................. 100.893% 2006................. 100.000%
5. Procedure for Redemption. 5.1 Not less than 30 nor more than 60 days previous to the date fixed for redemption by the Board of Directors, a notice specifying the time and place thereof shall be given to the holders of record of the Preferred Stock to be redeemed by first class mail at their respective addresses as the same shall appear on the books of the Corporation; provided, however, that no failure to mail such notice, nor any defect therein, nor in the mailing thereof, shall affect the validity of the proceedings for the redemption of any of the Preferred Stock to be redeemed. Upon the redemption date, the Corporation shall pay over the redemption price to the holders of the shares upon the endorsement and surrender of the certificates for such shares by the holders of the Preferred Stock. 5.2 On or before any redemption date, each holder of shares of Preferred Stock to be redeemed shall surrender the certificate or certificates representing such shares of Preferred Stock to the Corporation, in the manner and at the place designated in the notice of redemption and on the redemption date, the full redemption price, payable in cash, for such shares of Preferred Stock shall be paid or delivered to the person whose name appears on such certificate or certificates as the owner thereof, and the shares represented by each surrendered certificate shall be returned to authorized but unissued shares of preferred stock of any or no series. Upon surrender (in accordance with the notice of redemption) of the certificate or certificates representing any shares to be so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice of redemption shall so state), such shares shall be redeemed by the Corporation at the redemption price. If fewer than all the shares represented by any such certificate are to be redeemed, a new certificate shall be issued representing the unredeemed shares, without costs to the holder thereof, together with the amount of cash, if any, in lieu of fractional shares. 5.3 If a notice of redemption shall have been given as provided in Section 5.1, dividends on the shares of Preferred Stock so called for redemption shall cease to accrue, such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation with respect to shares so called for redemption (except for the right to receive from the Corporation the redemption price) shall cease (including any right to receive dividends otherwise payable on any Dividend Payment Date that would have occurred after the time and date of redemption) either (i) from and after the time and date fixed in the notice of redemption as the time and date of redemption (unless the Corporation shall default in the payment of the redemption price, in which case such rights shall not terminate at such time and date) or (ii) if the Corporation shall so elect and state in the notice of redemption, from and after the time and date (which date shall be the date fixed for redemption or an earlier date not less than 30 days after the date of mailing of the redemption notice) on which the Corporation shall irrevocably deposit in trust for the holders of the shares of Preferred Stock to be redeemed A-6 23 with a designated bank or trust company doing business in the State of New York, as paying agent, money sufficient to pay at the office of such paying agent, on the redemption date, the redemption price. Any money so deposited with any such paying agent which shall not be required for such redemption shall be returned to the Corporation forthwith. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of one year from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the redemption price without interest. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 5.4 In the event that fewer than all the outstanding shares of the Preferred Stock are to be redeemed, the shares to be redeemed will be determined pro rata or by lot. From and after the applicable redemption date, unless the Corporation defaults in the payment of the redemption price, dividends on the shares of Preferred Stock to be redeemed on such redemption date will cease to accrue, said shares will no longer be deemed to be outstanding, and all rights of the holders thereof as the Corporation's shareholders (except the right to receive the redemption price) will cease. 5.5 The Corporation shall not redeem any shares of Preferred Stock if any dividends on the Preferred Stock are in arrears unless all dividends on the Preferred Stock in arrears are paid in full. 6. Change of Control. 6.1 Upon the occurrence of a Change of Control of the Corporation, holders of Preferred Stock will, if the Market Value as of the Change of Control Date is less than the Conversion Price, have a one-time option (the "Change of Control Option") to convert all of their outstanding shares of Preferred Stock into shares of the Corporation's Class A Common Stock at a conversion price equal to the greater of (i) the Market Value as of the Change of Control Date; or (ii) 66.67% of the market price per share of the Corporation's Class A Common Stock at the close of trading on the date of issuance of the Preferred Stock. The Change of Control Option will be exercisable during a period of not less than 30 days nor more than 60 days commencing on the third business day after notice of the Change of Control is given by the Corporation. In lieu of issuing the shares of the Corporation's Class A Common Stock issuable upon conversion in the event of a Change of Control, the Corporation may, at its option, make a cash payment equal to the Market Value as of the Change of Control Date of such Class A Common Stock otherwise issuable. 6.2 In the event of a Change of Control, notice of such Change of Control shall be given, within five Business Days of the Change of Control Date, by the Corporation by first class mail to each record holder of shares of Preferred Stock, at such holder's address as the same appears on the books of the Corporation. Each such notice shall state (i) that a Change of Control has occurred; (ii) the last day on which the Change of Control Option may be exercised (the "Expiration Date"); (iii) the name and address of the paying agent; and (iv) the procedures that holders must follow to exercise the Change of Control Option. 6.3 On or before the Expiration Date, each holder of shares of Preferred Stock wishing to exercise the Change of Control Option shall surrender the certificate or certificates representing the shares of Preferred Stock to be converted, in the manner and at the place A-7 24 designated in the notice described in Section 6.2, and on such date the cash or shares of Class A Common Stock due to such holder shall be delivered to the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be returned to authorized but unissued shares. Upon surrender (in accordance with the notice described in Section 6.2) of the certificate or certificates representing any shares to be so converted (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares shall be converted by the Corporation at the Conversion Price. 6.4 The rights of holders of Preferred Stock pursuant to this Section 6 are in addition to, and not in lieu of, the rights of holders of Preferred Stock provided for in Section 9 in this Exhibit A. 7. Voting. 7.1 The shares of Preferred Stock shall have no voting rights except as required by law or as set forth in this Section 7. increase or decrease the aggregate number of authorized shares of the class of preferred stock; 7.2 If the dividends payable on the Preferred Stock are in arrears for six consecutive quarterly periods, the holders of Preferred Stock voting separately as a class with the shares of any other preferred stock or preference securities having similar voting rights will be entitled at the next regular or special meeting of the Corporation's shareholders to elect two directors to the Corporation's Board of Directors. Such voting rights and terms of the directors so elected continue until such time as the dividend arrearage on the Preferred Stock has been paid in full. 7.3 The affirmative vote or consent of the holders of at least 66 2/3% of the outstanding Preferred Stock will be required for the issuance of any class or series of stock, or security convertible into the Corporation's stock, ranking senior to the Preferred Stock as to dividends, liquidation rights or voting rights and for amendments to the Corporation's Articles of Incorporation that would adversely affect the rights of holders of the Preferred Stock; provided, however, that any issuance of shares of preferred stock which rank ratably with the Preferred Stock (including the issuance of additional shares of the Preferred Stock) will not, by itself, be deemed to adversely affect the rights of the holders of the Preferred Stock. In all such cases, each share of Preferred Stock will be entitled to one vote. 8. Liquidation Rights. 8.1 In the event of any dissolution, voluntary or involuntary liquidation or winding-up of the Corporation, the holders of the shares of Preferred Stock shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution is made to holders of the Corporation's Common Stock or any other class or series of stock of the Corporation ranking junior to the Preferred Stock upon liquidation, the Liquidation Preference plus Accumulated Dividends, if any, with respect to each share. 8.2 Neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property and assets of the Corporation nor the merger or consolidation of the Corporation into or with any other A-8 25 corporation, or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, voluntary or involuntary liquidation or winding up, for the purposes of this Section 8. 8.3 After the payment to the holders of the shares of Preferred Stock of full preferential amounts provided for in this Section 8, the holders of Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. 8.4 If upon any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the amounts payable with respect to the Liquidation Preference and Accumulated Dividends on the Preferred Stock and any other shares of the Corporation's stock ranking as to any distribution ratably with the Preferred Stock are not paid in full, the holders of the Preferred Stock and of such other shares will share pro rata in proportion to the Liquidation Preference plus Accumulated Dividends thereon. 9. Conversion. (a) Subject to compliance with the provisions of this Section 9, each outstanding share of the Preferred Stock shall be convertible at any time at the option of the holder into that number of whole shares of the Corporation's Class A Common Stock as is equal to the Liquidation Preference, divided by an initial conversion price of $78.125, equivalent to 0.6400 shares of Class A Common Stock per share of Preferred Stock, subject to adjustment as described in Section 9(c). The initial conversion price and the conversion price as adjusted are referred to in this Exhibit A as the Conversion Price. A share of Preferred Stock called for redemption will be convertible into shares of Class A Common Stock up to and including, but not after, the close of business on the date fixed for redemption unless the Corporation defaults in the payment of the amount payable upon redemption. To exercise the conversion right, the holder of each share of Preferred Stock to be converted shall surrender the Certificate representing such share, if certificated, duly endorsed or assigned to the Corporation or in blank, at the office of the transfer agent, together with written notice of the election to convert executed by the holder (the "Conversion Notice") specifying the number of shares of Preferred Stock to be converted, the name in which the shares of Class A Common Stock deliverable upon conversion shall be registered, and the address of the named person. If the shares of Preferred Shares are not certificated, the holder must deliver evidence of ownership satisfactory to the Corporation and the transfer agent. Unless the shares of Class A Common Stock deliverable upon conversion are to be issued in the same name as the name in which the shares of Preferred Stock to be converted are registered, the holder must also deliver to the transfer agent an instrument of transfer, in form satisfactory to the Corporation, duly executed by the holder or the holder's duly authorized attorney, together with an amount sufficient to pay any transfer or similar tax in connection with the issuance and delivery of such shares of Class A Common Stock in such name (or evidence reasonably satisfactory to the Corporation demonstrating that such taxes have been paid). As promptly as practicable after compliance with the provisions of the foregoing paragraph, the Corporation shall deliver or cause to be delivered at the office where such certificates are surrendered to or upon the written order of the holder thereof a certificate or certificates representing the number of shares of Class A Common Stock into which such Preferred Stock may be converted in accordance with the provisions of this Section 9, registered A-9 26 in such name or names as are duly specified in the Conversion Notice. Such conversion shall be deemed to have been effected at the close of business on the date the holder has complied with the provisions of the foregoing paragraph, and the rights with respect to the shares of Preferred Stock so converted, including the rights, if any, to receive notices, will terminate at that time, except only (i) the rights of holders of such shares of Preferred Stock to receive certificates for the number of shares of Class A Common Stock into which such shares of Preferred Stock have been converted; and (ii) the right of holders of such shares of the Preferred Stock at the close of business on a Dividend Record Date to receive, on the corresponding Dividend Payment Date, the dividend declared on such shares for payment on such Dividend Payment Date. If the last day for the exercise of the conversion right shall not be a Business Day, then such conversion right may be exercised on the next preceding Business Day. (b) Upon and after conversion of shares of the Preferred Stock, the Corporation shall have no obligation to pay any undeclared Accumulated Dividends or Accrued Dividends. (c) The Conversion Price shall be subject to adjustment as follows: (i) In case the Corporation shall at any time or from time to time make a redemption payment or pay a dividend or make another distribution payable in shares of the Corporation's Common Stock to all holders of any class of the Corporation's capital stock, other than the issuance of shares of Class A Common Stock in connection with the conversion of Preferred Stock, then, the Conversion Price in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Corporation) so that the holder of any share of Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Class A Common Stock that such holder would have owned or would have been entitled to receive upon or by reason of any of the events described above, had such share of Preferred Stock been converted into shares of Class A Common Stock immediately prior to the occurrence of such event. An adjustment made pursuant to this Section 9(c)(i) shall become effective retroactively in the case of any such dividend or distribution, to the day immediately following the close of business on the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution. (ii) In case the Corporation shall at any time or from time to time issue to all holders of its Common Stock rights, options or warrants entitling the holders thereof to subscribe for or purchase shares of Common Stock (or securities convertible into or exchangeable for shares of Common Stock) at a price per share less than the Market Value as of the record date of such issuance (treating the price per share of any security convertible or exchangeable or exercisable into Common Stock as equal to (A) the sum of the price paid to acquire such security convertible, exchangeable or exercisable into Common Stock plus any additional consideration payable (without regard to any anti-dilution adjustments) upon the conversion, exchange or exercise of such security into Common Stock divided by (B) the number of shares of Common Stock into which such convertible, exchangeable or exercisable security is initially convertible, exchangeable or exercisable), other than (I) issuances of such rights, options or warrants if the holder of Preferred Stock would be entitled to receive such rights, options or warrants upon conversion at any time of shares of Preferred Stock, or if such rights, options, and warrants have expired or been redeemed by the Corporation prior to conversion and (II) issuances that are subject to certain triggering events (until such time as such A-10 27 triggering events occur), then, the Conversion Price then in effect shall be adjusted by dividing the Conversion Price in effect on the day immediately prior to the record date of such issuance by a fraction (y) the numerator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock issued or to be issued upon or as a result of the issuance of such rights, options or warrants (or the maximum number into or for which such convertible or exchangeable securities initially may convert or exchange or for which such options, warrants or other rights initially may be exercised) and (z) the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date plus the number of shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock so issued (or into or for which such convertible or exchangeable securities may convert or exchange or for which such options, warrants or other rights may be exercised plus the aggregate amount of any additional consideration initially payable upon the conversion, exchange or exercise of such security) would purchase at the Market Value as of such record date; provided, that if the Corporation distributes rights or warrants (other than those referred to above in this subparagraph (c)(ii)) pro rata to the holders of Common Stock, so long as such rights or warrants have not expired or been redeemed by the Corporation, (y) the holder of any Preferred Stock surrendered for conversion shall be entitled to receive upon such conversion, in addition to the shares of Class A Common Stock then issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of Class A Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions applicable to the rights or warrants and (ii) if such conversion occurs after the Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Class A Common Stock into which such Preferred Stock was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date had such Preferred Stock been converted immediately prior to such Distribution Date in accordance with the terms and Provisions applicable to the rights and warrants, and (z) the Conversion Price shall not be subject to adjustment on account of any declaration, distribution or exercise of such rights or warrants. (iii) In case the Corporation shall at any time or from time to time subdivide the outstanding shares of Common Stock into a larger number of shares, combine the outstanding shares of Common Stock into a smaller number of shares, or issue any shares of its capital stock in a reclassification of the Common Stock, then, the Conversion Price in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Corporation) so that the holder of any share of Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock that such holder would have owned or would have been entitled to receive upon or by reason of any of the events described above, had such share of Preferred Stock been converted into shares of Class A Common Stock immediately prior to the occurrence of such event. An adjustment made pursuant to this Section 9(c)(iii) shall become effective retroactively in the case of any such subdivision, combination, or reclassification, to the close of business on the date upon which such corporate action becomes effective. (iv) In case the Corporation shall at any time or from time to time pay a dividend or distribute to all holders of shares of the Corporation's Common Stock A-11 28 (other than a dividend or distribution subject to 9(c)(ii)) pursuant to any shareholder rights plan, "poison pill" or similar arrangement and excluding regular dividends and distributions paid exclusively in cash and dividends payable upon the Preferred Stock, then, the Conversion Price in effect immediately prior to such event shall be adjusted (and any other appropriate actions shall be taken by the Corporation) so that the holder of any share of Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Class A Common Stock that such holder would have owned or would have been entitled to receive upon or by reason of any of the events described above, had such share of Preferred Stock been converted into shares of Class A Common Stock immediately prior to the occurrence of such event. An adjustment made pursuant to this Section 9(c)(iv) shall become effective retroactively in the case of any such dividend or distribution, to the day immediately following the close of business on the record date for the determination of holders of Common Stock entitled to receive such dividend or distribution. (v) In case the Corporation shall at any time or from time to time (A) make a distribution to all holders of shares of its Common Stock consisting exclusively of cash (excluding any cash portion of distributions referred to in paragraph (iv) above, or cash distributed upon a merger or consolidation to which (B) of this paragraph below applies), that, when combined together with (x) all other such all-cash distributions made within the then-preceding 12 months in respect of which no adjustment has been made and (y) any cash and the fair market value of any other consideration paid or payable in respect of any tender offer by the Corporation or any of its subsidiaries for shares of Common Stock concluded within the then-preceding 12 months in respect of which no adjustment pursuant to this Section 9(c) has been made, in the aggregate exceeds 15% of the Corporation's Market Capitalization as of the record date of such distribution; (B) complete a tender or exchange offer which the Corporation or any of its subsidiaries makes for shares of the Corporation's Common Stock that involves an aggregate consideration that, together with (x) any cash and other consideration payable in a tender or exchange offer by the Corporation or any of its subsidiaries for shares of the Corporation's Common Stock expiring within the then preceding 12 months in respect of which no adjustment has been made and (y) the aggregate amount of any such all-cash distributions referred to in (A) of this paragraph to all holders of shares of Common Stock within the then preceding 12 months in respect of which not adjustments have been made, exceeds 15% of the Corporation's Market Capitalization just prior to the expiration of such tender offer; or (C) make a distribution to all holders of its Common Stock consisting of evidences of indebtedness, shares of its capital stock other than Common Stock or assets (including securities, but excluding those dividends, rights, options, warrants and distributions referred to in this Section 9(c)), then, the Conversion Price then in effect shall be adjusted by dividing the Conversion Price in effect immediately prior to the date of such distribution or completion of such tender or exchange offer, as the case may be, by a fraction (x) the numerator of which shall be the Market Value as of the record date referred to below, or, if such adjustment is made upon the completion of a tender or exchange offer, as of the payment date for such offer, and (y) the denominator of which shall be such Market Value less the then fair market value (as determined by the Board of Directors of the Corporation) of the portion of the cash, evidences of indebtedness, securities or other assets so distributed or paid in such tender or exchange offer, applicable to one share of Common Stock (but such denominator not to be less than one); provided, however, that no adjustment shall be made with respect to any distribution of rights to purchase securities of the Corporation if the holder of shares of Preferred Stock would otherwise be entitled to receive such rights upon Conversion at any time of shares of Preferred Stock into shares of Class A Common Stock unless such rights are subsequently redeemed by the Corporation, in which case such redemption shall A-12 29 be treated for purposes of this Section 9(c)(v) as a dividend on the Common Stock. Such adjustment shall be made whenever any such distribution is made or tender or exchange offer is completed, as the case may be, and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. (vi) In the case the Corporation at any time or from time to time shall take any action affecting its Common Stock (it being understood that the issuance or sale of shares of Class A Common Stock (or securities convertible into or exchangeable for shares of Class A Common Stock, or any options, warrants or other rights to acquire shares of Class A Common Stock) to any Person at a price per share less than the Conversion Price then in effect shall not be deemed such an action), other than an action described in any of Section 9(c)(i) through Section 9(c)(v), inclusive, or Section 9(g), then the Conversion Price shall be adjusted in such manner and at such time as the Board of Directors of the Corporation in good faith determines to be equitable in the circumstances (such determination to be evidenced in a resolution, a certified copy of which shall be mailed to the holders of the Preferred Stock). (vii) Notwithstanding anything in this Exhibit A to the contrary, no adjustment under this Section 9(c) need be made to the Conversion Price unless such adjustment would require an increase or decrease of at least 1% of the Conversion Price then if effect. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, if any, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 1% of such Conversion Price. Notwithstanding anything to the contrary, no Conversion Price adjustment will be made as a result of the issuance of the Corporation's Class A Common Stock on conversion of the Preferred Stock. Each event requiring adjustment to the Conversion Price will require only a single adjustment even though more than one of the foregoing adjustment clauses may be applicable to such event. (viii) The Corporation reserves the right to make such reductions in the Conversion Price in addition to those required in the foregoing provisions as it considers advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients. In the event the Corporation elects to make such a reduction in the Conversion Price, the Corporation will comply with the requirements of Rule 14e-1 under the Exchange Act, and any other securities laws and regulations thereunder if and to the extent that such laws and regulations are applicable in connection with the reduction of the Conversion Price. (d) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter (and before the dividend or distribution has been paid or delivered to stockholders) legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the Conversion Price then in effect shall be required by reason of the taking of such record. (e) Upon any increase or decrease in the Conversion Price, then, and in each such case, the Corporation promptly shall deliver to each registered holder of Preferred Stock a certificate signed by an authorized officer of the Corporation, setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was A-13 30 calculated and specifying the increased or decreased Conversion Price then in effect following such adjustment. (f) No fractional shares or scrip representing fractional shares of Class A Common Stock shall be issued upon the conversion of any shares of Preferred Stock. If more than one share of Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Class A Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate Liquidation Preference of the shares of Preferred Stock so surrendered. If the conversion of any share or shares of Preferred Stock results in a fraction, an amount equal to such fraction multiplied by the last reported sale price of the Class A Common Stock on the Nasdaq Stock Market (or on such other national securities exchange or authorized quotation system on which the Class A Common Stock is then listed for trading or authorized for quotation or, if the Class A Common Stock is not then so listed or authorized for quotation, an amount determined in good faith by the Board of Directors to be the fair value of the Class A Common Stock) at the close of business on the trading day next preceding the day of conversion shall be paid to such holder in cash by the Corporation. (g) In the event of any capital reorganization or reclassification or other change of outstanding shares of Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value), or in the event of any consolidation or merger of the Corporation with or into another Person (other than a consolidation or merger in which the Corporation is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Class A Common Stock), or in the event of any sale or other disposition to another Person of all or substantially all of the assets of the Corporation (other than any assets not owned directly or indirectly by the Corporation and its subsidiaries) (computed on a consolidated basis) (any of the foregoing, a "Transaction"), each share of Preferred Stock then outstanding shall, without the consent of any holder of Preferred Stock, become convertible only into the kind and amount of shares of stock or other securities (of the Corporation or another issuer) or property or cash receivable upon such Transaction by a holder of the number of shares of Class A Common Stock into which such share of Preferred Stock could have been converted immediately prior to such Transaction after giving effect to any adjustment event. The provisions of this Section 9(g) and any equivalent thereof in any such certificate similarly shall apply to successive Transactions. The provisions of this Section 9(g) shall be the sole right of holders of Preferred Stock in connection with any Transaction and such holders shall have no separate vote thereon. (h) In the event of any distribution by the Corporation to its stockholders of all or substantially all of its assets (other than any assets not owned directly or indirectly by the Corporation and its subsidiaries) (computed on a consolidated basis), each holder of Preferred Stock will participate pro rata in such distribution based on the number of shares of Class A Common Stock into which such holders' shares of Preferred Stock would have been convertible immediately prior to such distribution. (i) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock such number of its authorized but unissued shares of Class A Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock, and shall take all action required to increase the authorized number of shares of Class A Common Stock if at any time there shall be insufficient A-14 31 unissued shares of Class A Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock. (j) The issuance or delivery of certificates for Class A Common Stock upon the conversion of shares of Preferred Stock shall be made without charge to the converting holder of shares of Preferred Stock for such certificates or for any documentary stamp or similar issue or transfer tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, the holders of the shares of Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. 10. Other Provisions. 10.1 With respect to any notice to a holder of shares of Preferred Stock required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular holder shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice with respect to the other holders or affect the legality or validity of any distribution, rights, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding-up, or the vote upon any such action. Any notice which was mailed in the manner provided in this Exhibit A shall be conclusively presumed to have been duly given whether or not the holder receives the notice. 10.2 Shares of Preferred Stock issued and reacquired will be retired and canceled promptly after reacquisition thereof and, upon compliance with the applicable requirements of Indiana law, have the status of authorized but unissued shares of preferred stock of the Corporation undesignated as to series and may with any and all other authorized but unissued shares of preferred stock of the Corporation be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Corporation, except that any issuance or reissuance of shares of Preferred Stock must be in compliance with this Certificate of Designation. 10.3 The shares of Preferred Stock shall be issuable only in whole shares. 10.4 All notices periods referred to in this Exhibit A shall commence on the date of the mailing of the applicable notice. A-15 EX-21 3 0003.txt SUBSIDIARIES OF EMMIS 1 EXHIBIT 21 EMMIS COMMUNICATIONS CORPORATION SUBSIDIARIES
Corporations ------------ State of Legal Name Organization Business Name ---------- ------------ ------------- Emmis DAR, Inc. IN DAR Emmis International Corporation IN EIC Emmis License Corporation CA ELC Emmis International Broadcasting Corporation CA Intl. Emmis Television License Corporation of Honolulu CA KHON TV License KPWR, Inc. IN KPWR KPWR License, Inc. CA KPWR License Emmis FM Broadcasting Corporation of St. Louis IN KSHE Emmis FM License Corporation of St. Louis CA KSHE License Los Angeles Magazine, Inc. CA LA Mag Los Angeles Magazine Holding Company, Inc. CA LA Mag Holding Co. Emmis Meadowlands Corporation IN Meadowlands Mediatex Communications Corporation TX Mediatex Comm. Mediatex Development Corporation TX Mediatex Development Emmis Pledge Corporation DE Pledge Emmis Publishing Corporation IN Publish Slager Radio Rt. (54%) Hungary Slager Radio Emmis 1380 AM Radio Corporation of St. Louis IN St. Louis AM Texas Monthly, Inc. TX Texas Monthly Emmis Television License Corporation of Mobile CA WALA TV License Emmis 104.1 FM Radio Corporation of St. Louis IN WXTM Emmis 104.1 FM Radio License Corporation of St. Louis CA WXTM License Emmis FM Broadcasting Corporation of Indianapolis IN WENS Emmis FM License Corporation of Indianapolis CA WENS License Emmis Television License Corporation of Cape Coral CA WFTX TV License Emmis AM Radio Corporation of Indianapolis IN WIBC Emmis AM Radio License Corporation of Indianapolis CA WIBC License Emmis Television License Corporation of Orlando CA WKCF License Emmis 106.5 FM Broadcasting Corporation of St. Louis IN WKKX Emmis 106.5 FM License Corporation of St. Louis CA WKKX License Emmis FM Broadcasting Corporation of Chicago IN WKQX Emmis FM License Corporation of Chicago CA WKQX License Emmis Television License Corporation of Green Bay CA WLUK License Emmis FM Radio Corporation of Indianapolis IN WNAP Emmis FM Radio License Corporation of Indianapolis CA WNAP License Emmis FM Holding Corporation of New York DE WQCD Holding Emmis 101.9 FM Radio Corporation of New York MI WQCD Emmis Broadcasting Corporation of New York IN WQHT Emmis License Corporation of New York CA WQHT License Emmis Radio Corporation of New York DE WRKS Emmis Radio License Corporation of New York CA WRKS License Emmis Television License Corporation of Terre Haute CA WTHI TV License Emmis 99.9 FM Radio License Corporation of Terre Haute CA WTHI - FM License Emmis 1310 AM Radio Corporation of Indianapolis IN WTLC - AM Emmis 1310 AM Radio License Corporation of Indianapolis CA WTLC -AM License Emmis 105.7 FM Radio Corporation of Indianapolis IN WTLC - FM Emmis 105.7 FM Radio License Corporation of Indianapolis CA WTLC -FM License Emmis Television License Corporation of New Orleans CA WVUE TV License Emmis 105.5 FM Radio License Corporation of Terre Haute CA WWVR License Emmis Television License Corporation of Orlando CA WKCF-TV License Big Hit Marketing, Inc. IL BHM Emmis Latin America Broadcasting Corporation CA ELAB Emmis South America Broadcasting Corporation CA ESAB Emmis Argentina Broadcasting, S.A. EAB Emmis Buenos Aires Broadcasting, S.A. EBAB
PARTNERSHIPS, LLC'S ------------------- State of Legal Name Organization Business Name ---------- ------------ ------------- Emmis Indiana Broadcasting, L.P. IN N/A Emmis Publishing, L.P. IN N/A Emmis Television Broadcasting, L.P. IN N/A 1050, L.P. (Emmis Meadowlands is a limited partner) 1050, LP Duncan American Radio, LLC (40%) DAR, LLC Country Sampler Stores, LLC (51%) Country Stores Game Warden Wildlife Journal, LLC (51%) IN Game Warden
EX-23 4 0004.txt CONSENT OF ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File Numbers 33-83890 and 333-14657. /s/ Arthur Andersen LLP ------------------------- ARTHUR ANDERSEN LLP Indianapolis, Indiana, May 25, 2000. EX-24 5 0005.txt POWERS OF ATTORNEY 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, his attorneys-in-fact and agents, with full power of substitution and resubstitution for him in any and all capacities, to sign the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 20, 2000 /s/ Lawrence B. Sorrel ---------------------- Lawrence B. Sorrel 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, his attorneys-in-fact and agents, with full power of substitution and resubstitution for him in any and all capacities, to sign the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 22, 2000 /s/ Richard A. Leventhal ------------------------ Richard A. Leventhal 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, his attorneys-in-fact and agents, with full power of substitution and resubstitution for him in any and all capacities, to sign the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 23, 2000 /s/ Doyle L. Rose ----------------- Doyle L. Rose 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, her attorneys-in-fact and agents, with full power of substitution and resubstitution for her in any and all capacities, to the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 22, 2000 /s/ Susan B. Bayh ----------------- Susan B. Bayh 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, his attorneys-in-fact and agents, with full power of substitution and resubstitution for him in any and all capacities, to sign the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 25, 2000 /s/ Gary L. Kaseff ------------------ Gary L. Kaseff 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, Walter Z. Berger, J. Scott Enright and Norman H. Gurwitz, or any of them, his attorneys-in-fact and agents, with full power of substitution and resubstitution for him in any and all capacities, to sign the annual report of Emmis Communications Corporation on Form 10-K under the Securities Exchange Act of 1934 for the fiscal year ended February 29, 2000, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 25, 2000 /s/ Greg A. Nathanson --------------------- Greg A. Nathanson EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
5 0000783005 EMMIS COMMUNICATIONS CORPORATION 3-MOS 12-MOS FEB-29-2000 FEB-29-2000 DEC-01-1999 MAR-01-1999 FEB-29-2000 FEB-29-2000 17,370 0 0 0 68,395 0 1,924 0 0 0 112,716 0 168,250 0 39,346 0 1,327,306 0 84,442 0 314,607 0 0 0 29 0 459 0 775,879 0 1,327,306 0 94,339 380,995 94,339 380,995 14,212 55,730 14,212 55,730 72,507 261,865 958 2,550 10,781 51,986 (4,119) 8,864 (2,195) 6,875 (1,924) 1,989 0 0 (2,022) (2,022) 0 0 (6,291) (3,177) (.19) (.09) (.19) (.09)
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