-----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, BH4wn/JMWzglsPzeLMl9rbUsAjkQ+kcJ89wM8IVLyjxZJvuOpwpCtF14MvDv5T8P 5qn2SbUPzLl6b4R/IWUDvg== 0000950137-99-001868.txt : 19990624 0000950137-99-001868.hdr.sgml : 19990624 ACCESSION NUMBER: 0000950137-99-001868 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMMIS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000783005 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [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: 99636457 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 ANNUAL REPORT DATED 2/28/99 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 28, 1999 [ ] 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
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 Title of Class Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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, 1999, was approximately $566,224,920. The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 1999, was: 13,240,619 Class A Common Shares, $.01 par value 2,582,265 Class B Common Shares, $.01 par value Documents Incorporated by Reference: See Page 2 2 DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference --------- ------------------- Proxy Statement Dated May 26, 1999 Part III
2 3 EMMIS COMMUNICATIONS CORPORATION FORM 10-K TABLE OF CONTENTS
Page PART I ......................................................................................................4 Item 1. Business....................................................................................4 Item 2. Properties.................................................................................21 Item 3. Legal Proceedings..........................................................................23 Item 4. Submission of Matters to a Vote of Security Holders........................................23 PART II .....................................................................................................23 Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................23 Item 6. Selected Financial Data....................................................................24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.......25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................30 Item 8. Financial Statements and Supplementary Data................................................32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......68 PART III .....................................................................................................69 Item 10. Directors and Executive Officers of the Registrant........................................69 Item 11. Executive Compensation....................................................................70 Item 12. Security Ownership of Certain Beneficial Owners and Management............................70 Item 13. Certain Relationships and Related Transactions............................................70 PART IV .....................................................................................................70 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................70 Signatures....................................................................................................73
3 4 PART I ITEM 1. BUSINESS. GENERAL We are a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. We are the eighth largest radio broadcaster in the United States based on total revenues. The thirteen FM radio stations and three 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 six television stations, which we acquired in 1998, are located in 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 1998 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 have begun to apply 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 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 networks in Indiana, publish Indianapolis Monthly, Atlanta, Cincinnati, Texas Monthly and Country Sampler and related magazines, and have a 54% interest in a national radio station in Hungary. 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 positions in broadcasting, enhancing the performance of our broadcast properties, and distinguishing ourselves through the quality of our operations. Our strategy has the following principal components: CREATE CASH FLOW GROWTH BY ENHANCING STATION PERFORMANCE. 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 believe that our station portfolio provides significant potential for revenue and cash flow growth through enhanced operating performance. We believe that our growth is less dependent on overall advertising market growth than it would be if we owned only mature properties. We expect to continue to create value, particularly in our recently-acquired television stations, through maximizing operating efficiencies, development of innovative programming and focused sales and marketing efforts. 4 5 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 our markets or to insure that we are meeting the needs and tastes of our target audiences. Utilizing the research results, we concentrate on providing focused programming formats carefully tailored to the demographics of our markets and our advertisers' preferences. Such programming strategies might include, for example, the development or acquisition of on-air talent or development of a sports coverage or news franchise. Local market knowledge is particularly important in developing programming for our Fox television stations, as the higher degree of programming flexibility afforded by our Fox affiliation provides us greater opportunity to tailor our programming to meet the specific demands of our local markets. Greg Nathanson, who heads our television division and directs programming, has over 30 years of television broadcasting experience and has had extensive independent programming experience as President of Programming and Development for Twentieth Television and President of Fox Television Stations. EMPHASIZE FOCUSED SALES AND MARKETING STRATEGY. Emmis designs its local and national sales efforts based on advertiser demand and the competition within each market. We provide our sales force with extensive training and technology for sophisticated inventory management techniques, which allows us to make frequent price adjustments based on regional and local market conditions. We seek to maximize sources of non-traditional, non-spot revenue and have led the industry in developing "vendor co-op" (as explained under Advertising Sales) advertising revenue. Although this source of advertising revenue is common in the newspaper and magazine industry, we were among the first broadcasters to recognize and take advantage of the potential of vendor co-op advertising. ENCOURAGE ENTREPRENEURIAL MANAGEMENT APPROACH. We believe that broadcasting is primarily a local business and that much of our 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 musical tastes, demographics and competitive opportunities of their particular market. Our decentralized approach to station management gives local management oversight of station spending, long-range planning, company policies and resource allocation at their individual stations and rewards local management based on those stations' performance. In addition, we encourage our managers and employees to own a stake in Emmis, and over 90% of all full-time employees have an equity ownership position in the company. We believe that this entrepreneurial management approach has given us 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. SELECTIVELY PURSUE STRATEGIC ACQUISITIONS. Our acquisition strategy is to selectively acquire underdeveloped media properties at reasonable purchase prices where our experienced management team can enhance value. We believe that continued consolidation in the radio broadcasting industry will result in attractive acquisition opportunities as the number of potential buyers for radio assets declines as a result of in-market ownership limitations, and we will continue to evaluate acquisitions of individual radio stations or groups of radio stations in both our current and new markets. We believe that attractive acquisition opportunities are becoming increasingly available in the television broadcasting industry. In many cases, television stations have suffered ratings and revenue declines due to management inattention, improper programming strategies or inadequate sales and marketing efforts. We also expect to evaluate acquisitions of international broadcasting stations and magazine publishing properties which present attractive purchase prices and significant opportunities to capitalize on our management expertise to enhance cash flow. We intend to seek strong local minority-interest partners in evaluating and completing international broadcasting acquisition opportunities. 5 6 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 (1998 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 Winter 1998 Arbitron Survey, except that rankings for the Terre Haute stations are based on the Fall 1998 Arbitron Survey because Arbitron compiles surveys only in the Fall and Spring in that market. 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. 6 7
RANKING IN STATION MARKET PRIMARY PRIMARY STATION AND RANK BY DEMOGRAPHIC DEMOGRAPHIC AUDIENCE MARKET REVENUE FORMAT TARGET AGES TARGET SHARE ------ ------- ------ ----------- ----------- -------- LOS ANGELES 1 KPWR-FM Dance/Contemporary Hit 12-24 1 4.3 NEW YORK 2 WQHT-FM Dance/Contemporary Hit 12-24 1 5.7 WRKS-FM Classic Soul/Smooth R&B 25-54 5 3.6 WQCD-FM Contemporary Jazz 25-54 8 2.7 Chicago 3 WKQX-FM New Rock 18-34 3 3.4 St. Louis 18 KSHE-FM Album Oriented Rock 18-34 11 3.2 WKKX-FM Country 18-34 5 4.1 WXTM-FM Extreme Rock 18-34 10 2.1 Indianapolis 30 WENS-FM Adult Contemporary 25-54 4 5.8 WIBC-AM News/Talk 35-64 3 9.3 WNAP-FM Classic Rock 18-34 8 3.7 WTLC-FM Urban Contemporary 25-54 9 4.6 WTLC-AM Solid Gold Soul, Gospel 25-54 24 0.8 and Talk Terre Haute 172 WTHI-FM Country 25-54 1t 19.2 WTHI-AM News/Talk 35-54 9t 1.7 WWVR-FM Classic Rock 25-49 1 12.1
7 8 TELEVISION STATIONS In the following table, "DMA Rank" is estimated by the A.C. Nielsen Company ("Nielsen") as of January 1997. Rankings are based on the relative size of a station's market among the 210 generally recognized Designated Market Areas ("DMAs"), as defined by Nielsen. "Number of Stations in Market" represents the number of television stations ("Reportable Stations") designated by Nielsen as "local" to the DMA, excluding public television stations and stations which do not meet minimum Nielsen reporting standards (i.e., a weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 9:00 a.m. to midnight time period. "Station Rank" reflects the station's rank relative to other Reportable Stations based upon the DMA rating as reported by Nielsen from 9:00 a.m. to midnight, Sunday through Saturday during February 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 9:00 a.m. to midnight, Sunday through Saturday.
NUMBER OF STATION TELEVISION METROPOLITAN DMA AFFILIATION/ STATIONS STATION AUDIENCE STATION AREA SERVED RANK CHANNEL IN MARKET RANK SHARE ----------- --------------- ----- ----------- --------- ----- ----- WVUE-TV New Orleans, LA 41 Fox/8 7 3t 8 WALA-TV Mobile, AL-Pensacola, FL 62 Fox/10 6 3 10 WLUK-TV Green Bay, WI 70 Fox/11 6 4 10 KHON-TV Honolulu, HI 71 Fox/2 6 1 16 WFTX-TV Fort Myers, FL 83 Fox/36 5 4 7 WTHI-TV Terre Haute, IN 139 CBS/10 3 1 24
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. 8 9 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 31,000. 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. It marked its 25th anniversary with the publication of the February 1998 issue, which set a single issue advertising record. Since acquiring the magazine, we have worked to increase Texas Monthly's operating efficiencies while leaving the highly regarded editorial product intact. During the year ended February 28, 1999 we also entered into an agreement to acquire Country Sampler magazine. This acquisition closed 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. 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 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 and the Arbitron Advisory Council 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 9 10 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. First, 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. The 1996 Act also relaxed local radio ownership restrictions, but left local TV restrictions in place pending further FCC review. The FCC has already implemented some of these changes through Commission Orders. 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 increased sharply 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 WNAP-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-AM (Terre Haute)................................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
10 11 KAII-TV (Maui).......................................February 1, 2007 KHAW-TV (Hawaii).....................................February 1, 2007
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: (1) has served the public interest, convenience and necessity; (2) has committed no serious violations of the Communications Act or the FCC's rules; and (3) has committed no other violations of the Communications Act or the FCC's rules which would constitute a pattern of abuse. If the FCC cannot make such a finding, it may deny a renewal application, and only then may the FCC accept other applications to operate the station of the former licensee. In a vast majority of cases, the FCC renews broadcast licenses even when petitions to deny applications are filed against broadcast license renewal applications. In February 1999, pursuant to various third-party proposals, the FCC sought comment on whether it should establish a "microradio" service. The service, as proposed, would consist of three classes of low-power stations licensed by the FCC: a class of 1,000 watt stations; a class of 100 watt stations; and a class of 1-10 watt stations. The licenses would be available only to entities and individuals with no interests in any other FCC-regulated license and stations would be permitted to operate on a for-profit basis. In order to accommodate these "microradio" stations, the FCC is considering whether to weaken the interference protection provided to full-power radio stations, including those owned by Emmis. Emmis cannot predict at this time the outcome of this rulemaking proceeding or what effect establishing a "microradio" service would have on Emmis' radio stations Ownership Matters. 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 determining whether we are in compliance with the local ownership limits on AM and FM stations, the FCC will 11 12 consider our AM and FM holdings as well as the attributable broadcast interests of our officers, directors and attributable stockholders. Accordingly, any attributable broadcast interests of our officers and directors may limit the number of radio stations we may acquire or own in any market in which such officers or directors hold or acquire attributable broadcast interests. In addition, our officers and directors may from time to time hold various nonattributable interests in media properties. One entity may not own a radio station together with a television station (the "one-to-a-market" rule) or together with a daily newspaper in the same market, although common ownership of a radio station and a television station in the same market is permitted upon a finding by the FCC that such ownership is in the public interest. The FCC has established a liberal waiver policy to permit common ownership of a radio station and a television station in any of the nation's 25 largest markets; the 1996 Act directed the FCC to extend that policy to the 50 largest markets. Emmis has been granted a waiver of the one-to-a-market rule to permit its common ownership of WTHI-AM, WTHI-FM, WWVR-FM and WTHI-TV. With respect to television, the 1996 Act and the FCC's subsequently issued orders eliminated the previously existing 12-station limit for station ownership and increased the national audience reach limitation from 25% to 35%. On a local basis, however, the 1996 Act did not alter current FCC rules that limit an individual entity to maintaining an attributable interest in only one television station in a market. The 1996 Act did require the FCC to conduct a rule making proceeding, however, to determine whether to narrow the geographic scope of the local television cross-ownership rule (the so-called "TV duopoly rule") to permit some two-station combinations in certain (large) markets. At the time of the passage of the 1996 Act, the FCC had already initiated a rule making proceeding to consider whether the television duopoly rule should be retained, modified or eliminated. That proceeding remains pending. The same prohibition concerning daily newspapers and radio stations also applies to common ownership of a daily newspaper and a television broadcast station. Under current policy, the FCC will grant a permanent waiver of the newspaper cross-ownership rule (whether involving radio or television) only in those circumstances where the effects of applying the rule would be "unduly harsh," i.e., the newspaper is unable to sell the commonly-owned station or the sale would be at an artificially depressed price, or the local community could not support a separately-owned newspaper and broadcast station. The FCC has previously granted only two permanent waivers of this cross-ownership rule. The FCC has pending a Notice of Inquiry requesting comment on possible changes to its policy for waiving the rule including, among other possible changes: - whether waivers should only be available in markets of a particular size; - whether any weight should be given to a newspaper's or broadcast station's economic presence or market penetration; and - whether there should be limits on the number of broadcast stations or other media outlets that could be co-owned with a newspaper in the same market. At present, the FCC's one-to-a-market and cross-ownership rules do not apply to Local Marketing Agreements ("LMAs") as defined below. As part of its attribution rule making, however, the FCC has proposed to apply these rules to LMAs. If such a rule were adopted, Emmis could not provide programming to a radio or television station pursuant to an LMA if Emmis or an individual or an entity holding an attributable ownership interest in Emmis already owns a television station or a daily newspaper in the same market. The FCC rules generally prohibit the direct or indirect common ownership, operation, control or interest in a cable television system, on the one hand, and a local television broadcast station whose television signal (predicted grade B contour as defined under FCC regulations) reaches any portion of the community served by the cable television system, on the other hand (the "cable-television ownership rule"). The 1996 Act eliminates the statutory prohibition underlying the cable-television ownership rule and directed the FCC to review the cable-television ownership rule to determine if it is necessary in the public interest. In March 1998, the FCC initiated a rule making proceeding to determine whether the cable-television ownership rule is necessary and in the public interest or should 12 13 be eliminated. Pursuant to the mandate of the 1996 Act, the FCC eliminated its regulatory restriction on cross-ownership of cable systems and national broadcasting networks. 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 some more variation in the actual time for action and response.) In the case of all of these ownership rules, the FCC requires the attribution of broadcast licenses between a broadcasting company and certain of its stockholders, officers or directors 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. Attribution also occurs in the case of general partnership interests and in the case of limited partnership interests where a limited partner is "materially involved" in the media-related activities of the partnership. Passive investments of less than ten percent of the voting interest in a broadcasting company held by certain categories of financial institutions are generally not cognizable for purposes of the foregoing rules of attribution. 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. In cases involving competing media in the same market, however, FCC policy in certain instances prohibits common ownership interests under its "cross-interest" policy even where they are non-voting interests or fall below the five percent and ten percent "benchmarks" discussed above, although the FCC has initiated proceedings to inquire whether this policy should be liberalized or eliminated. 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. For purposes of the local radio ownership rules described above, a station is also considered to have an attributable interest in another station in the same market if the first station provides the programming for more than 15% of the broadcast time, on a weekly basis, of a second station. As a result, such programming arrangements may not be entered into by station combinations that could not be commonly owned under FCC rules. 13 14 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 "cross-interest" policy, and could result in the company's being unable to obtain from the FCC one or more authorizations needed to conduct its 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 the company. 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. The FCC recently initiated a biennial review and is considering a number of changes to its rules, including changes to the newspaper cross-ownership rule, the local radio ownership rules, and certain aspects of its cable-television ownership rule. We cannot predict the outcome of these proceedings. The adoption of more restrictive ownership limits could have a material adverse effect on our business. Alien Ownership Rules. Under the Communications Act, no FCC license may be held by a corporation of which more than one-fifth of its capital stock is owned of record or voted by aliens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country (collectively, "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 organization, including partnerships. 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. Cross-Interest Policy. Under its "cross-interest" policy, referred to above, the FCC considers certain "meaningful" relationships among competing media outlets in the same market, even if the ownership rules do not specifically prohibit the relationship. Under the cross-interest policy, the FCC in certain instances may prohibit one party from acquiring an attributable interest in one media outlet and a substantial non-attributable economic interest in another media outlet in the same market. Under this policy, the FCC may consider significant equity interests combined with an attributable interest in a media outlet in the same market, joint ventures, and common key employees among competitors. The cross-interest policy does not necessarily prohibit all of these interests, but requires that the FCC consider whether, in a particular market, the "meaningful" relationships between competitors could have a significant adverse effect upon economic competition and program diversity. Heretofore, the FCC has not applied its cross-interest policy to LMAs (as defined below) and JSAs (as defined below) between broadcast stations. In its ongoing rule making proceeding concerning the attribution rules described below, the FCC has sought comment on, among other things: 14 15 - whether the cross-interest policy should be applied only in smaller markets and - whether non-equity financial relationships such as debt, when combined with multiple business interrelationships such as LMAs and JSAs and other programming relationships raise concerns under the cross-interest policy. 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. Until recently, the FCC required licensees to develop and implement affirmative action programs designed to promote equal employment opportunities, and to submit reports to the FCC with respect to these matters on an annual basis and in connection with a renewal application. In 1998, the United States Court of Appeals for the District of Columbia Circuit held that the FCC's equal employment opportunity policies violate the Fifth Amendment. As a result, licensees are no longer required to develop or file materials relating to equal employment opportunity matters. The FCC has proposed new equal employment opportunity rules that would impose on licensees many of the same outreach and recordkeeping obligations as the former rules. During the pendancy of this rulemaking, Emmis and other major licensees have informally volunteered to comply with the principles espoused in the FCC's old equal employment opportunity rules and policies. 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. 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 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. Failure to observe these or other 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. Local Marketing Agreements. 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. A radio station that brokers substantial time on another station in its market or engages in an LMA with a radio station in the same market will be considered to have an attributable ownership interest in the brokered station for 15 16 purposes of the FCC's ownership rules, discussed above. As a result, a broadcast station may not enter into an LMA that allows it to program more than 15% of the broadcast time, on a weekly basis, on another local radio station that it could not own under the FCC's local multiple ownership rules. FCC rules also prohibit the radio broadcast licensee from simulcasting more than 25% of its programming on another station in the same broadcast service (i.e., AM-AM or FM-FM) where the two stations service substantially the same geographical area, where the licensee owns those stations or owns one and programs the other through an LMA arrangement. The FCC has specifically revised its "cross-interest" policy to make that policy inapplicable to time brokerage arrangements. Under its current policies, the FCC does not attribute LMAs between television stations to the station or entity providing programming. In connection with its review of its attribution rules, as discussed below, the FCC has proposed to attribute television LMAs in the same fashion as LMAs between radio stations. Concurrently, the FCC is considering whether and for how long to "grandfather" existing television LMAs if the LMA would result in an attributable interest for the brokering station or entity. Joint Sales Agreements. Another example of a cooperative agreement between differently owned radio 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. In the past the FCC has determined that issuance of joint advertising sales should be left to antitrust enforcement. Currently JSAs are not deemed by the FCC to be attributable. However, the FCC has outstanding a notice of proposed rule making, which, if adopted, would require Emmis to terminate any JSA it might have with a radio station with which Emmis could not have an LMA. Recent Developments and Proposed Changes. The FCC in March 1992 initiated an inquiry and rule making proceeding in which it solicited comment on whether it should alter its ownership attribution rules, and initiated a further rule making proceeding in December 1994 to solicit additional public comment on amending those rules. Among the issues being explored in the proceeding are: - whether the FCC should raise the benchmarks for determining voting stock interests to be "attributable" from 5% to 10% for those stockholders other than passive institutional investors, and from 10% to 20% for passive institutional investors; - whether to consider non-voting stock interests to be attributable under the multiple ownership rules (at present such interests are not attributable); - whether to consider generally attributable voting stock interests which account for a minority of the issued and outstanding shares of voting stock of a corporate licensee, where the majority of the corporation's voting stock is held by a single stockholder; and - whether to adopt a new attribution policy under which the FCC would scrutinize multiple "cross interests" or other significant business relationships which are held in combination among ostensibly arm's-length competing broadcasters in the same market to determine whether combined interests which individually would not raise concerns as to potential diminution of competition and diversity of viewpoints would nonetheless raise such concerns in light of the totality of the relationships among the parties (including, e.g., LMAs, JSAs, debt relationships, holdings of non-attributable interests, or other relationships among competing broadcasters in the same market). In November 1996, the FCC issued a second further notice of proposed rule making in which, in addition to the attribution proposals outlined above, it sought comment on whether the FCC should modify its attribution rules by, among other changes: - attributing ownership in situations where an entity: (1) holds a non-attributable equity or debt interest in a broadcast licensee that exceeds a minimum threshold and 16 17 (2) either supplies programming to the licensee or owns a daily newspaper, cable system or broadcast station in the same market as the licensee ("Equity/Debt Plus Rule"); - attributing interests in LMAs between television stations in the same market; and - attributing interests in JSAs, under which a third party purchases the right to sell a licensee's commercial time inventory, but the owner of the license continues to program its station. With respect to application of the Equity/Debt Plus Rule, if adopted, the Commission may grandfather equity/debt plus relationships that were in existence as of December 15, 1994, or require parties to terminate such relationships within a short period of time following the rule's adoption. We cannot predict when or whether any of these attribution proposals will ultimately be adopted by the FCC. 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 and a third company has applied for a license. 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 October 1998, in response to a petition filed by USA Digital Radio, the FCC sought comment on whether to initiate a proceeding to adopt rules for the delivery of digital audio broadcasting on a local basis by terrestrial stations utilizing existing broadcasting frequencies. As proposed, digital audio broadcasting would permit existing AM and FM stations to operate in either full analog, hybrid or full digital modes on their current frequencies. Also 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 the channels currently used for analog broadcasting. 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. Affiliates of those networks in markets 11-30 are required to be on the air with digital signals by November 1, 1999, and the remaining commercial stations, including those owned by Emmis, are required to file DTV construction permit applications by November 1, 1999 and to be on the air with digital signals by May 1, 2002. The FCC stated that broadcasters will remain public trustees and that it will issue a notice to determine the extent of broadcasters' future public interest obligations. 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). Currently, pending applications for major modifications are "frozen" and will not be acted upon by the FCC. Our pending and future applications for major modifications may become subject to auction proceedings if 17 18 they are found to be mutually exclusive with major modification applications filed by other radio 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. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). The FCC began implementing the requirements of the 1992 Cable Act in 1993, and final implementation proceedings remain pending regarding certain of the rules and regulations previously adopted. Certain statutory provisions, such as signal carriage and retransmission consent, have a direct effect on television broadcasting. Other provisions are focused exclusively on the regulation of cable television but can still be expected to have an indirect effect on Emmis because of the competition between over-the-air television stations and cable systems. The signal carriage, or "must carry," provisions of the 1992 Cable Act require cable operators to carry the signals of local commercial and non-commercial television stations and certain low power television stations. The U.S. Supreme Court upheld the constitutionality of the must-carry provisions of the 1992 Cable Act in 1997. 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. Whether and to what extent such must-carry rights will extend to the new digital television signals discussed above to be broadcast by licensed television stations (including those to be owned by Emmis) over the next several years 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. Generally, the signals of local television broadcast stations are not carried on DBS systems although Congress is considering legislation which would permit carriage of local stations. 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 signal of the local affiliate of the given network. In 1998, several federal judges found that certain DBS operators had unlawfully provided distant network signals to households that were not eligible to receive them and ordered the 18 19 operators to cease providing the illegal signals. In response to these decisions, Congress is contemplating whether to enact legislation that would give DBS operators more flexibility in providing distant network signals to particular households. We cannot predict whether this legislation will pass, but if it does it could adversely affect our television stations by reducing the number of households that receive the television signals of our stations. As part of the ongoing examination of its broadcast ownership rules, the FCC is considering whether to permit a single entity to own television stations covering more than 35% of the national television homes. The FCC is also considering whether to eliminate the 50% discount credited to UHF television stations in calculating compliance with the national ownership cap. 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; - the FCC's equal employment opportunity rules and other matters relating to minority and female involvement in the broadcasting industry; - proposals to repeal or modify some or all of the FCC's multiple ownership rules and/or policies; - proposals to increase the benchmarks or thresholds for attributing ownership interests in broadcast media; - 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; - changes in the FCC's alien ownership, cross-interest, multiple ownership and cross-ownership policies; - 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. 19 20 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. At the end of the last fiscal year 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. 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. Recent 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 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, audio tapes and compact 20 21 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 28, 1999 Emmis had approximately 1,268 full-time employees and approximately 283 part-time employees. We have approximately 208 employees at various radio and television stations represented by unions. We consider relations with our employees to be excellent. ITEM 2. PROPERTIES. The following table sets forth information as of February 28, 1999 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/WNAP-FM/ WTLC-AM & FM/ Indianapolis Monthly One Emmis Plaza 40 Monument Circle Indianapolis, Indiana WENS-FM Tower 1985 Owned -- WNAP-FM Tower 1979 Owned -- WIBC-AM Tower 1966 Owned -- WTLC-AM Tower 1965 Leased May 2021 WTLC-FM Tower 1968 Leased December 2000 KSHE-FM 1986 Leased September 2007 700 St. Louis Union Station St. Louis, Missouri KSHE-FM Tower 1986 Leased September 2009 WXTM-FM/WKKX-FM 1988 Leased September 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 2600 West Olive Burbank, California KPWR-FM Tower 1993 Leased March 2003(1)
21 22 WQHT-FM/WRKS-FM/WQCD-FM 1996 Leased January 2013 395 Hudson Street, 7th Floor New York, New York WQHT-FM Tower 1988 Leased Month-to-Month WRKS-FM Tower 1992 Leased November 2005 WQCD-FM Tower 1992 Leased March 2007 WKQX-FM 1979 Leased July 1999(2) Merchandise Mart Plaza Chicago, Illinois WKQX-FM Tower 1975 Leased September 1999(2) Atlanta Magazine Office 1993 Leased February 2003 1360 Peachtree Street Atlanta, Georgia Cincinnati Magazine 1996 Leased September 2001 One Centennial Plaza Cincinnati, OH Texas Monthly 1989 Leased August 2008 701 Brazos, Suite 1600 Austin, TX KHON-TV 1987 Leased September 1999(3) 1170 Auahi Street Honolulu, HI KHON-TV Tower 1978 Leased December 2018 WALA-TV 1996 Leased May 2001 210 government Street Mobile, AL WALA-TV Tower 1987 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/AM/FM/WWVR-FM 1954 Owned -- 918 Ohio Street Terre Haute, IN WTHI-TV Tower 1965 Owned -- WTHI-AM/FM Tower 1954 Owned -- WWVR-FM Tower 1954 Owned --
22 23 WVUE-TV 1972 Owned -- 1025 South Jefferson Davis Highway New Orleans, LA WVUE-TV Tower 1963 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) Emmis is in the process of negotiating a new lease with the lessor. (3) Emmis expects to move into a new studio facility prior to the expiration of the lease. 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 a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to shareholders during Emmis' fourth quarter. 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 1997...............................39.25 33.75 August 1997............................49.75 36.50 November 1997..........................47.88 43.25 February 1998..........................49.50 44.00 May 1998...............................55.06 43.13 August 1998............................48.75 37.50 November 1998..........................38.75 25.25 February 1999..........................51.25 34.69
At April 30, 1999, there were approximately 1,439 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. 23 24 ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29), ---------------------------- (in thousands, except per share data) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- OPERATING DATA: Net revenues $74,604 $109,244 $113,720 $140,583 $232,836 Operating expenses 45,990 62,466 62,433 81,170 143,348 International business development expenses 313 1,264 1,164 999 1,477 Corporate expenses 3,700 4,419 5,929 6,846 10,427 Time brokerage fee - - - 5,667 2,220 Depreciation and amortization 3,827 5,677 5,481 7,536 28,314 Noncash compensation 600 3,667 3,465 1,482 4,269 Operating income 20,174 31,751 35,248 36,883 42,781 Interest expense 7,849 13,540 9,633 13,772 35,650 Loss on donation of radio station - - - 4,833 - Other income (expense), net (170) (303) 325 6 1,914 Income before income taxes and extraordinary item 12,155 17,908 25,940 18,284 9,045 Income before extraordinary item 7,627 10,308 15,440 11,084 2,845 Net income 7,627 10,308 15,440 11,084 1,248 Basic net income per share $0.72 $0.96 $1.41 $1.02 $0.09 Diluted net income per share $0.70 $0.93 $1.37 $0.98 $0.08 Weighted average common shares outstanding: Basic 10,557 10,691 10,943 10,903 14,453 Diluted 10,832 11,084 11,291 11,362 14,848
FEBRUARY 28 (29), ------------------------------------------------------------- (Dollars in thousands) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash $ 3,205 $ 1,218 $ 1,191 $ 5,785 $ 6,117 Working capital 10,088 14,761 15,463 21,635 1,249 Net intangible assets 139,729 135,830 131,743 234,558 802,307 Total assets 183,441 176,566 189,716 333,388 1,014,831 Credit facility and senior subordinated debt 152,000 124,000 115,000 215,000 577,000 Shareholders' equity (deficit) (2,661) 13,884 34,422 43,910 235,549
24 25
YEAR ENDED FEBRUARY 28 (29), ---------------------------- (Dollars in thousands) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- OTHER DATA: Broadcast/publishing cash flow (1) $ 28,614 $ 46,778 $ 51,287 $ 59,413 $ 89,488 Adjusted EBITDA (1) 24,601 41,095 44,194 51,568 77,584 Cash flows from (used in): Operating activities 15,480 23,221 21,362 22,487 35,121 Investing activities (102,682) 222 (13,919) (116,693) (541,470) Financing activities 88,800 (25,430) (7,470) 98,800 506,681 Capital expenditures 1,081 1,396 7,559 16,991 37,383
- --------------- (1) Broadcast/publishing cash flow and adjusted EBITDA 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. GENERAL 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 25 26 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 On April 1, 1999, Emmis acquired substantially all the assets of Country Sampler, Inc. for approximately $19.0 million in cash, $2.0 million payable under contract with the principal shareholder through April 2003, and assumed liabilities of approximately $3.4 million (the "Country Sampler Acquisition"). The acquisition was accounted for as a purchase and was financed through additional borrowings under the Company's amended and restated credit facility (Credit Facility). Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation (the "Wabash Acquisition"), the seller, for a cash purchase price of $88.9 million (including transaction costs), plus assumed program rights payable and other liabilities 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. 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"), the seller, for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus assumed program rights payable and other liabilities 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 McHale Videofilm and 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 additional bank borrowings. 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 assumed liabilities 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 additional bank borrowings. 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 additional bank borrowings. 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 additional bank borrowings. The acquisition was accounted for as a purchase. 26 27 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 is subject to renewal 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 additional bank borrowings. 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 additional bank borrowings 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 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. On a pro forma basis, net revenues would have increased $22.2 million or 9.2% for the year. For purposes herein, pro forma information assumes the 98/99 Acquisitions and the WQCD Acquisition were effective on the first day of the year ended February 28, 1998. 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. On a pro forma basis, operating expenses would have increased $7.9 million or 5.0% for the year. 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. On a pro forma basis, broadcast/publishing cash flow would have increased $14.3 million or 17.1% for the year. 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. Adjusted EBITDA is defined as broadcast/publishing cash flow less corporate and international development expenses. Adjusted EBITDA 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. On a pro forma basis, adjusted EBITDA would have increased $10.9 million or 14.5% for the year. 27 28 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. On a pro forma basis, interest expense would have increased $1.9 million or 3.9% for the year. 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. On a pro forma basis, depreciation and amortization expense would have increased $5.0 million or 16.3%. 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 which similar options were not awarded in fiscal 1998. In April 1999, the Fox Network made a proposal to decrease the number of commercials available for sale by local TV affiliates. If this proposal is implemented, the Company expects its broadcast cash flow would decrease by approximately $1.0 million. YEAR ENDED FEBRUARY 28, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997. Net revenues for the year ended February 28, 1998 were $140.6 million compared to $113.7 million for the same period of the prior year, an increase of $26.9 million or 23.6%. This increase was principally due to the St. Louis Acquisition, the Operation of WQCD-FM, and the ability to realize higher advertising rates at the Company's broadcasting properties, resulting from higher ratings at certain broadcasting properties, as well as increases in general radio spending in the markets in which the Company operates. Operating expenses for the year ended February 28, 1998 were $81.2 million compared to $62.4 million for the same period of the prior year, an increase of $18.8 million or 30.0%. This increase was principally attributable to the St. Louis Acquisition, the Operation of WQCD-FM and increased promotional spending at the Company's broadcasting properties. Broadcast/publishing cash flow for the year ended February 28, 1998 was $59.4 million compared to $51.3 million for the same period of the prior year, an increase of $8.1 million or 15.8%. This increase was due to increased net revenues partially offset by increased operating expenses as discussed above. Corporate expenses for the year ended February 28, 1998 were $6.8 million compared to $5.9 million for the same period of the prior year, an increase of $.9 million or 15.5%. This increase was primarily due to increased travel expenses and other expenses related to potential acquisitions that were not finalized and increased professional fees. Adjusted EBITDA is defined as broadcast/publishing cash flow less corporate and international development expenses. Adjusted EBITDA for the year ended February 28, 1998 was $51.6 million compared to $44.2 million for the same period of the prior year, an increase of $7.4 million or 16.7%. This increase was principally due to the increase in broadcast/publishing cash flow partially offset by an increase in corporate expenses. Interest expense was $13.8 million for the year ended February 28, 1998 compared to $9.6 million for the same period of the prior year, an increase of $4.2 million or 43.0%. This increase reflected higher outstanding debt due to the St. Louis Acquisition and the write-off of deferred financing costs associated with refinancing of the 28 29 Company's bank debt, offset by voluntary repayments made thereunder and a rate decrease associated with the refinancing. Depreciation and amortization expense for the year ended February 28, 1998 was $7.5 million compared to $5.5 million for the same period of the prior year, an increase of $2.0 million or 37.5%. This increase was primarily due to the Mediatex, Indianapolis, and St. Louis Acquisitions. Non-cash compensation expense for year the ended February 28, 1998 was $1.5 million compared to $3.5 million for the same period of the prior year, a decrease of $2.0 million or 57.2%. 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 decrease was due primarily to options under an employment contract awarded to the CEO in fiscal 1997 which similar options were not awarded in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES In June 1998, Emmis completed the sale of 4.6 million shares of its Class A Common Stock at $42.00 per share resulting in total proceeds of $193.0 million. Net proceeds from the offering were used to repay outstanding obligations under the Credit Facility. On July 16, 1998, the Company entered into the Credit Facility for $750.0 million, which may be increased up to $1.0 billion. The Credit Facility matures on August 31, 2006, except for the Term Note which matures on February 28, 2007, and is comprised of (1) a $400.0 million revolving credit facility which is subject to certain adjustments as defined in the Credit Facility, (2) a $250.0 million term note and (3) a $100.0 million revolving acquisition credit facility/term note. This Credit Facility is available for general corporate purposes and acquisitions. Amounts borrowed under the Credit Facility bear interest at a variable rate based on an index chosen by the Company. The commitments under the 8-year revolving credit facility, 8-year revolving acquisition Credit Facility/term loan are subject to scheduled annual reductions beginning in 2001 and to additional reductions from the net proceeds of asset sales if the Company's ratio of total indebtedness to operating cash flow exceeds a specified level. As of February 28, 1999, Emmis had $473.0 million available for borrowing under its Credit Facility. In February 1999, Emmis completed the sale of $300.0 million of senior subordinated notes that mature in February 2009 (the "Notes"). The Notes bear interest at 8 1/8% with interest payments due semi-annually on September and March 15. Net proceeds of the Notes were used to repay 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 and outstanding obligations under the Credit Facility. Up to 35% of the Notes can be redeemed prior to March 15, 2002 with the net proceeds of a public offering and the Notes can be 100% redeemed on or after March 15, 2004. In connection with the acquisition of KHON-TV in Honolulu, Hawaii, in July 1998, Emmis acquired a commitment to complete the construction of new operating facilities, including broadcast equipment, for the station. The project is expected to be completed in the fall of 1999 for an estimated cost of approximately $19.0 million of which $2.7 million has been incurred through February 28, 1999. In the fiscal years ended February 1997, 1998 and 1999, the Company had capital expenditures of $7.6 million, $17.0 million, and $37.4 million, respectively. These capital expenditures primarily consisted of progress payments in connection with the Indianapolis office facility project, leasehold improvements to office and studio facilities in connection with the consolidation of its New York broadcast properties to a single location, and broadcast equipment purchases and tower upgrades, respectively. 29 30 On April 1, 1999, the Company acquired substantially all the assets of Country Sampler, Inc. for approximately $19.0 million in cash, $2.0 million payable under contract with the principal shareholder through April 2003 and assumed liabilities of approximately $3.4 million (the "Country Sampler Acquisition"). The acquisition was accounted for as a purchase and was financed through additional borrowings under the Credit Facility. The Company expects cash flow from operating activities and borrowings available under its Credit Facility will be sufficient to fund all debt service for debt existing at February 28, 1999, working capital requirements, and capital expenditure requirements for the next year. IMPACT OF THE YEAR 2000 Emmis has completed its assessment phase of year 2000 compliance for information technology for all of its radio broadcasting properties except those included in the Wabash Valley Acquisition. The Company has also completed its assessment of other equipment, including broadcast equipment and embedded technology, at certain radio properties. Assessment of year 2000 compliance at newly acquired television stations, corporate and publishing entities is partially complete. Certain information technology and other equipment is represented by its vendors to be year 2000 compliant. Technology and equipment that is currently not represented as year 2000 compliant will be upgraded or replaced, and tested prior to August 31, 1999. In connection with the move of our corporate and Indianapolis operations to an office building in downtown Indianapolis, substantially all information technology and other equipment in the building has been replaced and is believed to be year 2000 compliant. Emmis estimates that the cost of the remaining year 2000 remediation effort will be approximately $2.0 million, which will be funded from current operations. Emmis has not separately tracked costs incurred to date relating to year 2000 compliance; however, management believes that these costs have been insignificant. Emmis has trained its employees regarding year 2000 issues and compliance. Certain employees at each entity are responsible for year 2000 compliance. Emmis' information systems department is currently auditing the year 2000 compliance of each entity. This audit includes (1) verifying that critical applications have been identified, (2) testing of critical applications, (3) ensuring that year 2000 compliance documentation exists, (4) verifying that remediation is occurring as planned and (5) developing written contingency plans. The audit should be complete by August 31, 1999. If certain broadcast equipment and information technology is not year 2000 compliant prior to January 1, 2000, an entity using that equipment and information technology might not be able to broadcast and process transactions. If this were to occur, temporary solutions or processes not involving the malfunctioning equipment could be implemented. The contingency plans documented during the audit process would be used to implement such temporary solutions. 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. 30 31 INTEREST RATES At February 28 1999, Emmis' entire outstanding balance under the Credit Facility, or approximately 48% of Emmis' Credit Facility and Senior Subordinated Debt outstanding bears interest at variable rates. Emmis currently hedges a portion of its outstanding debt with interest rate caps that effectively cap the Credit Facility's underlying base rate at a weighted average rate of 7.1% on the three-month LIBOR for agreements in place as of February 28, 1999. Assuming the current level of borrowings protected under interest rate cap agreements and that LIBOR increased from the rates at February 28, 1999 to the cap rates, interest expense would have increased by $5.7 million and net income would have decreased by $3.5 million. 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. The notional amount of the agreements at February 28, 1999 totaled $274 million and expire at various dates ranging from April 2000 to February 2001. The fair value of the interest rate cap agreements was $166,000 at February 28, 1999. 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 their local currency. Emmis has a natural hedge through some of the subsidiary's long-term obligations being 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. 31 32 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, -------------------------------------------- 1997 1998 1999 -------- ------- ------- GROSS REVENUES $134,102 $165,324 $274,056 LESS AGENCY COMMISSIONS 20,382 24,741 41,220 -------- -------- -------- NET REVENUES 113,720 140,583 232,836 Operating expenses 62,433 81,170 143,348 International business development expenses 1,164 999 1,477 Corporate expenses 5,929 6,846 10,427 Time brokerage fee - 5,667 2,220 Depreciation and amortization 5,481 7,536 28,314 Non-cash compensation 3,465 1,482 4,269 -------- -------- --------- OPERATING INCOME 35,248 36,883 42,781 ------ -------- -------- OTHER INCOME (EXPENSE): Interest expense (9,633) (13,772) (35,650) Loss on donation of radio station - (4,833) - Other income, net 325 6 1,914 -------- -------- --------- Total other income (expense) (9,308) (18,599) (33,736) -------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 25,940 18,284 9,045 PROVISION FOR INCOME TAXES 10,500 7,200 6,200 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 15,440 11,084 2,845 EXTRAORDINARY ITEM, NET OF TAX - - 1,597 --------- --------- -------- NET INCOME $ 15,440 $ 11,084 $ 1,248 ========= ========== ========= BASIC EARNINGS PER SHARE: Income before Extraordinary Item $1.41 $1.02 $ 0.20 Extraordinary Item, Net of Tax - - (0.11) ------ ------ ------- Net Income $1.41 $1.02 $ 0.09 ===== ===== ====== DILUTED EARNINGS PER SHARE: Income before extraordinary item $1.37 $0.98 $0.19 Extraordinary item, net of tax - - (0.11) ------ ------ ------- Net income $1.37 $0.98 $ 0.08 ===== ===== ======
The accompanying notes to consolidated financial statements are an integral part of these statements. 32 33 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28, ---------------------- 1998 1999 ------ ------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,785 $ 6,117 Accounts receivable, net of allowance for doubtful accounts of $1,346 and $1,698 at February 28, 1998 and 1999, respectively 32,120 51,479 Current portion of TV program rights - 3,646 Income tax refunds receivable 4,968 - Prepaid expenses and other 8,279 9,840 --------- --------- Total current assets 51,152 71,082 -------- -------- PROPERTY AND EQUIPMENT: Land and buildings 2,192 35,411 Leasehold improvements 8,188 8,351 Broadcasting equipment 18,800 63,943 Office equipment and automobiles 12,144 21,199 Construction in progress 13,091 3,418 -------- --------- 54,415 132,322 Less- Accumulated depreciation and amortization 20,969 26,262 -------- -------- Total property and equipment, net 33,446 106,060 -------- ------- INTANGIBLE ASSETS: Broadcast licenses 195,400 711,928 Trademarks 1,022 756 Excess of cost over fair value of net assets of purchased businesses 53,297 123,614 Other intangibles 5,567 5,632 --------- --------- 255,286 841,930 Less- Accumulated amortization 20,728 39,623 -------- -------- Total intangible assets, net 234,558 802,307 ------- ------- OTHER ASSETS: Deferred debt issuance costs and cost of interest rate cap agreements, net of accumulated amortization of $692 and and $839 at February 28, 1998 and 1999, respectively 3,806 18,907 TV program rights, net of current portion - 7,836 Investments 5,114 5,664 Deposits and other 5,312 2,975 ------- ------ Total other assets, net 14,232 35,382 -------- -------- Total assets $333,388 $1,014,831 ======== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 33 34 CONSOLIDATED BALANCE SHEETS - (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY
FEBRUARY 28, -------------------- 1998 1999 ------ ------ CURRENT LIABILITIES: Current maturities of other long-term debt $ 1,499 $ 835 Current portion of TV program rights payable - 9,471 Accounts payable 13,140 15,635 Collection of account receivable on behalf of SF Broadcasting and Wabash Valley Broadcasting - 9,016 Accrued salaries and commission 2,893 4,545 Accrued interest 2,421 6,223 Income tax payable - 12,057 Deferred revenue 7,985 7,238 Other 1,579 4,813 -------- ---------- Total current liabilities 29,517 69,833 CREDIT FACILITY AND SENIOR SUBORDINATED DEBT 215,000 577,000 TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION - 25,161 OTHER LONG-TERM DEBT, NET OF CURRENT PORTION 14,923 18,805 OTHER NONCURRENT LIABILITIES 604 3,466 MINORITY INTEREST 1,875 - DEFERRED INCOME TAXES 27,559 85,017 -------- ---------- Total liabilities 289,478 779,282 -------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' EQUITY: Class A common stock, $.01 par value; authorized 34,000,000 shares; issued and outstanding 8,430,660 shares and 13,190,207 shares at February 28, 1998 and 1999, respectively 84 132 Class B common stock, $.01 par value; authorized 6,000,000 shares; issued and outstanding 2,560,894 shares and 2,582,265 shares at February 28, 1998 and 1999, respectively 26 26 Additional paid-in capital 69,353 260,344 Accumulated deficit (25,553) (24,305) Accumulated other comprehensive income - (648) -------- ----------- Total shareholders' equity 43,910 235,549 -------- ---------- Total liabilities and shareholders' equity $333,388 $1,014,831 ======== ==========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 34 35 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, 1999
Class A Class B Common Stock Common Stock ----------------------------------- Addi- Shares Shares tional Out- Out- Paid-in standing Amount standing Amount Capital -------- ------ -------- ------ ------- (Dollars in thousands, except share data) BALANCE, FEBRUARY 29, 1996 8,264,940 $ 83 2,606,332 $26 $ 65,852 Issuance of Class A Common Stock in exchange for Class B Common Stock 31,862 - (31,862) - - Exercise of stock options and related income tax benefits 92,415 1 - - 1,632 Compensation related to granting of stock and stock options - - - - 2,715 Issuance of Class A Common Stock to profit sharing plan 21,739 - - - 750 Comprehensive Income: Net income - - - - - ---------- ---- --------- --- -------- BALANCE, FEBRUARY 28, 1997 8,410,956 84 2,574,470 26 70,949 ---------- ---- --------- --- -------- Issuance of Class A Common Stock in exchange for Class B Common Stock 13,576 - (13,576) - - Exercise of stock options and related income tax benefits 106,305 1 - - 2,966 Compensation related to granting of stock and stock options - - - - 732 Issuance of Class A Common Stock to profit sharing plan 15,152 - - - 750 Issuance of Class A Common Stock to employees and officers and related income tax benefits 79,115 1 - - 954 Purchase of Class A Common Stock (194,444) (2) - - (6,998) Comprehensive Income: Net income - - - - - ---------- ---- --------- --- -------- BALANCE, FEBRUARY 28, 1998 8,430,660 84 2,560,894 26 69,353 ---------- ---- --------- --- -------- Issuance of Class A Common Stock in exchange for Class B Common Stock 7,629 - (7,629) - - Exercise of stock options and related income tax benefits 124,678 2 29,000 - 4,128 Compensation related to granting of stock and stock options - - - - 3,269 Issuance of Class A Common Stock to profit sharing plan 21,592 - - - 1,000 Issuance of Class A Common Stock to employees and officers and related income tax benefits 5,648 - - - - Equity offering, net of costs incurred of $10,606 4,600,000 46 - - 182,594 Comprehensive Income: Net income - - - - - Cumulative translation adjustment - - - - - Total comprehensive income - - - - - ---------- ---- --------- --- -------- BALANCE, FEBRUARY 28, 1999 13,190,207 $132 2,582,265 $26 $260,344 ========== ==== ========= === ========
Accumu- Accum- lated Other Total ulated Comprehen- Shareholders' Deficit sive Income Equity -------- ------------ ------------- (Dollars in thousands, except share data) BALANCE, FEBRUARY 29, 1996 $(52,077) $ - $ 13,884 Issuance of Class A Common Stock in exchange for Class B Common Stock - - - Exercise of stock options and related income tax benefits - - 1,633 Compensation related to granting of stock and stock options - - 2,715 Issuance of Class A Common Stock to profit sharing plan - - 750 Comprehensive Income: Net income 15,440 - 15,440 -------- ----- -------- BALANCE, FEBRUARY 28, 1997 (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 - - 2,967 Compensation related to granting of stock and stock options - - 732 Issuance of Class A Common Stock to profit sharing plan - - 750 Issuance of Class A Common Stock to employees and officers and related income tax benefits - - 955 Purchase of Class A Common Stock - - (7,000) Comprehensive Income: Net income 11,084 - 11,084 -------- ----- -------- BALANCE, FEBRUARY 28, 1998 (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 - - 4,130 Compensation related to granting of stock and stock options - - 3,269 Issuance of Class A Common Stock to profit sharing plan - - 1,000 Issuance of Class A Common Stock to employees and officers and related income tax benefits - - - Equity offering, net of costs incurred of $10,606 - - 182,640 Comprehensive Income: Net income 1,248 - Cumulative translation adjustment - (648) Total comprehensive income - - 600 -------- ----- -------- BALANCE, FEBRUARY 28, 1999 $(24,305) $(648) $235,549 ======== ===== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 35 36 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, --------------------------------------------- 1997 1998 1999 ----- ------- ------ OPERATING ACTIVITIES: Net income $ 15,440 $ 11,084 $ 1,248 Adjustments to reconcile net income to net cash provided by operating activities- Extraordinary item - - 1,597 Depreciation and amortization of property and equipment 1,639 2,580 9,705 Amortization of debt issuance costs and cost of interest rate cap agreements 1,071 2,183 839 Amortization of intangible assets 3,842 4,956 18,609 Amortization of TV program rights - - 3,005 Provision for bad debts 726 802 1,745 Provision (benefit) for deferred income taxes 1,590 (524) 4,953 Compensation related to stock and stock options granted 2,715 732 3,269 Contribution to profit sharing plan paid with common stock 750 750 1,000 Loss on donation of radio station - 4,833 - Cash paid for TV program rights - - (1,469) Other (195) 357 (1,143) (Increase) decrease in certain current assets . (net of dispositions and acquisitions)- Accounts receivable (2,385) (8,389) (21,104) Prepaid expenses and other current assets (3,041) (4,760) (727) Increase (decrease) in certain current liabilities (net of dispositions and acquisitions)- Accounts payable 2,757 5,560 1,868 Accrued salaries and commissions (1,999) 1,332 1,337 Accrued interest (146) 2,247 3,802 Deferred revenue 395 292 (747) Other current liabilities 26 116 4,486 (Increase) decrease in deposits and other assets (898) (1,832) 3,435 Increase (decrease) in other noncurrent liabilities (925) 168 (587) -------- --------- --------- Net cash provided by operating activities 21,362 22,487 35,121 -------- --------- --------- INVESTING ACTIVITIES: Acquisition of WXTM-FM, WALC-AM and WKKX-FM (6,600) (36,964) - Acquisition of WTLC-FM and WTLC-AM - (15,336) - Acquisition of Texas Monthly - (37,389) - Acquisition of Cincinnati Magazine - (1,979) - Acquisition of Network Indiana and AgriAmerica - (709) - Acquisition of WQCD-FM - - (128,550) Acquisition of SF Broadcasting - - (287,293) Acquisition of Wabash Valley Broadcasting - - (88,905) Purchases of property and equipment (7,559) (16,991) (37,383) Initial payment for purchase of Hungarian broadcast license - (7,325) - Other 240 - 661 -------- --------- --------- Net cash used by investing activities (13,919) (116,693) (541,470) -------- --------- ---------
36 37 CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (DOLLARS IN THOUSANDS)
FOR THE THREE-YEAR PERIOD ENDED FEBRUARY 28, -------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1998 1999 -------- --------- ---------- FINANCING ACTIVITIES: Proceeds of credit facility and senior subordinated notes 19,000 288,378 1,063,000 Payments on credit facility (28,102) (183,928) (723,500) Purchases of interest rate cap agreements and payment of loan fees - (4,291) (19,589) Proceeds (purchase) of the Company's Class A Common Stock, net of transaction costs - (7,000) 182,640 Proceeds from exercise of stock options and income tax benefits of certain equity transactions 1,632 3,922 4,130 Other - 1,719 - -------- --------- ---------- Net cash provided (used) by financing activities (7,470) 98,800 506,681 -------- --------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27) 4,594 332 CASH AND CASH EQUIVALENTS: Beginning of year 1,218 1,191 5,785 -------- --------- ---------- End of year $ 1,191 $ 5,785 $ 6,117 ======== ========= ==========
37 38 SUPPLEMENTAL DISCLOSURES: Cash paid for- Interest $ 8,708 $ 9,655 $ 33,439 Income taxes 9,180 8,419 1,580 Non-cash investing and financing transactions- Fair value of assets acquired by incurring debt 17 32 - ACQUISITION OF WXTM-FM, WALC-AM AND WKKX-FM: Fair value of assets acquired - $ 44,564 - Cash paid - 43,564 - --------- Liabilities assumed - $ 1,000 - ACQUISITION OF TEXAS MONTHLY: Fair value of assets acquired - $ 45,421 - Cash paid - 37,389 - --------- Liabilities assumed - $ 8,032 - ACQUISITION OF WQCD-FM: Fair value of assets acquired - - $201,347 Cash paid - - 128,550 ------- Liabilities assumed - - $ 72,797 ACQUISITION OF SF BROADCASTING: Fair value of assets acquired - - $346,952 Cash paid - - 287,293 ------- Liabilities assumed - - $ 59,659 ACQUISITION OF WABASH VALLEY BROADCASTING: Fair value of assets acquired - - $101,055 Cash paid - - 88,905 -------- Liabilities assumed - - $ 12,150
The accompanying notes to consolidated financial statements are an integral part of these statements. 38 39 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 three 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 six television stations, which Emmis Communications Corporation acquired in 1998, are located in 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, Cincinnati and Atlanta magazines, has a 54% interest in a national radio station in Hungary (Slager Radio) and engages in certain businesses ancillary to its business, such as broadcast tower leasing and advertising and program consulting. b. Principles of Consolidation In fiscal 1999, Emmis Broadcasting Corporation changed its name to Emmis Communications Corporation. 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. All significant intercompany balances and transactions have been eliminated. Effective in the fourth quarter of fiscal 1999, Emmis began recording 100% of Slager Radio's losses as the minority shareholders' investment had been reduced to zero. When Slager Radio generates net income, Emmis will recognize 100% of their net income to the extent that losses greater than Emmis' 54% interest have been previously recorded. 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, estimated by management 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 39 40 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. 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 and amortization are generally computed by the straight-line method over the estimated useful lives of the related assets which are 31.5 years for buildings, not more than 32 years for leasehold improvements, 5 to 7 years for broadcasting equipment, 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. The capitalized interest was recorded as part of the building cost. In fiscal 1999 and 1998 approximately $1,591,000 and $312,000 of interest was capitalized, respectively. No interest was capitalized in fiscal 1997. 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 (totaling approximately $20.8 million) is being amortized over the seven year initial term of the license. The excess of cost over fair value of net assets resulting from the purchase of Texas Monthly (approximately $32.4 million) 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 40 41 this purpose, fair value is determined using quoted market prices (if available), appraisals or appropriate valuation techniques. 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. k. Deposits and Other Assets Deposits and other assets include amounts due from officers, including accrued interest, of $1,654,000 and $1,741,000 at February 28, 1998 and 1999, respectively. Officer loans bear interest at the Company's average borrowing rate of approximately 6.60% and 7.09% for the years ended February 28, 1998 and 1999, respectively. l. 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. m. Income Taxes Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The liability method measures the expected tax impact of future taxable income or deductions resulting from differences in the tax and financial reporting bases of assets and liabilities reflected in the consolidated balance sheets and the expected tax impact of carryforwards for tax purposes. n. 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 not significant for the year ended February 28, 1998 and was $648,000 for the year ended February 28,1999. This adjustment is reflected in shareholders' equity in the accompanying balance sheet. o. 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 like the Company's. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period (10,942,996, 10,903,333 and 14,452,820 shares for the years ended February 28, 1997, 1998 and 1999, respectively). Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Weighted average common equivalent shares outstanding for the period, considering the effect of employee stock options, are 11,291,225, 11,361,881 and 14,848,171 for the years ended February 28, 1997, 1998 and 1999, respectively. For the years ended February 28, 1997, 1998 and 1999, the difference between the weighted-average shares outstanding used to compute basic and diluted EPS is attributable to dilution caused by stock options. 41 42 p. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. q. Accounting Pronouncements As of March 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement establishes new rules for the reporting and display of comprehensive income and its components. The Company has reported, in addition to net income, the components of other comprehensive income including foreign currency translation adjustments, in its consolidated statements of shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The adoption of this disclosure standard had no impact on the Company's net income or financial position. Effective February 28, 1999, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" (See Note 12). This pronouncement superseded SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", and establishes new standards for reporting information about operating segments and related disclosures about products, geographic areas, and major customers in annual and interim financial statements. The adoption of SFAS No. 131 does not affect results of operations or financial operation. 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. This pronouncement, which is required to be adopted in fiscal years beginning after June 15, 1999, 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 has not yet determined what the effect of SFAS No. 133 will be on the Company. r. Reclassifications Certain reclassifications have been made to the February 28, 1997 and 1998 financial statements to be consistent with the February 28, 1999 presentation. 2. COMMON STOCK Emmis has authorized 34,000,000 shares of Class A Common Stock, par value $.01 per share, and 6,000,000 shares of Class B Common Stock, par value $.01 per share. The rights of these two classes are essentially identical except that each share of Class B Common Stock has 10 votes 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. The financial statements presented reflect the establishment of the two classes of stock. In June 1997, Emmis acquired 194,444 shares of its common stock from Morgan Stanley, Dean Witter, Discover and Co. at $36 per share. The aggregate purchase price of $7.0 million is reflected as a decrease to 42 43 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 4.6 million shares of its Class A Common Stock at $42.00 per share resulting in total proceeds of $193.0 million. Net proceeds from the offering were used to repay 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. As of February 28, 1998 and 1999, no shares of preferred stock are issued and outstanding. 4. CREDIT FACILITY AND SENIOR SUBORDINATED DEBT The Credit Facility and Senior Subordinated Debt was comprised of the following at February 28, 1998 and 1999:
1998 1999 -------- --------- (dollars in thousands) Credit Facility: Revolving Credit Facility $ 115,000 $ 27,000 Term Note 100,000 250,000 8 1/8% Senior Subordinated Notes Due 2009 - 300,000 --------- --------- Total debt $ 215,000 $ 577,000 ========= =========
Credit Facility On July 16, 1998 the Company entered into an amended and restated Credit Facility for $750 million, which may be 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. The amended and restated Credit Facility expires on August 31, 2006, except for the Term Note which matures on February 28, 2007, and is comprised of (1) a $400 million revolving credit facility which is subject to certain adjustments as defined in the Credit Facility, (2) a $250 million term note and (3) a $100 million revolving acquisition credit facility/term note. 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. No letters of credit were outstanding at February 28, 1999. 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, 1998 and 1999 was approximately 6.72% and 7.69%, respectively. 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 28, 1999 totaled $274 million. The agreements, which expire at various dates ranging from April 2000 to February 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 43 44 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. Amortization of the outstanding principal amount under the term note and revolving acquisition Credit Facility/term note is payable in quarterly installments beginning August 31, 2001. The annual amortization and reduction schedules as of February 28, 1999, assuming the entire $750 million Credit Facility was outstanding prior to the scheduled amortization payments are as follows: SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY AVAILABILITY (In thousands)
Revolving Acquisition Revolving Credit Facility/ Year Ended Credit Facility Term Note Term Note February (29) 28 Amortization Amortization Amortization Total ---------------- ------------- ------------ ------------ ----- 2002 $ 40,000 $ 1,875 $ 10,000 $ 51,875 2003 60,000 2,500 15,000 77,500 2004 80,000 2,500 20,000 102,500 2005 90,000 2,500 22,500 115,000 2006 70,000 2,500 17,500 90,000 2007 60,000 238,125 15,000 313,125 -------- -------- -------- -------- Total $400,000 $250,000 $100,000 $750,000 ======== ======== ======== ========
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 28, 1999. 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' 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") 44 45 registered under the Securities Act. The terms of the new Series B Notes are identical to the terms of the Senior Subordinated Notes. 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 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 general unsecured obligations 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 28, 1999. 5. OTHER LONG-TERM DEBT. Other long term debt was comprised of the following at February 28, 1998 and 1999:
1998 1999 --------- --------- (dollars in thousands) Hungary: License Obligation $ 11,800 $ 13,428 Bonds Payable 2,996 2,877 Notes Payable 1,448 784 Other 178 2,551 --------- --------- Total Other Long-Term Debt 16,422 19,640 Less: Current Maturities 1,499 835 --------- --------- Other Long Term Debt, Net of Current Maturities $14,923 $ 18,805 ========= =========
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 $13.4 million as of February 28, 1999, is reflected net of an unamortized discount of $1.3 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 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 23.0% and 20.2% at February 28, 1998 and 1999, respectively). Interest is payable semi-annually. The Notes Payable and accrued interest, 45 46 payable in U.S. dollars, are due on demand and bear interest at prime plus 2% (approximately 10.5% and 9.75% at February 28, 1998 and 1999, respectively). 6. TV PROGRAM RIGHTS PAYABLE. Future payments required under TV program rights payable as of February 28, 1999, are as follows (in thousands): 2000 $ 9,471 2001 7,260 2002 4,944 2003 3,450 2004 2,719 2005 and thereafter 6,788 -------- 34,632 Less: Current Portion of TV Program Rights Payable 9,471 -------- TV Program Rights Payable, Net of Current Portion $25,161 ========
7. ACQUISITIONS 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 from Zimco, Inc. for approximately $43.6 million in cash, plus an agreement to broadcast approximately $1.0 million in trade spots for Zimco, Inc., over a period of years. Concurrent with the signing of the asset purchase agreement, Emmis entered into a time brokerage agreement which permitted Emmis to operate the acquired stations effective December 1, 1996 through the date of closing. Operating results of these stations are reflected in the consolidated statements of operations commencing December 1, 1996. The purchase price was financed through additional bank borrowings. The acquisition was accounted for as a purchase. In February 1998, the Company donated WALC-AM to a church. The $4.8 million net book value of the station at the time of donation was reflected as a loss on donation of radio station in the accompanying consolidated statement of operations. On October 1, 1997, the Company acquired the assets of Network Indiana and AgriAmerica from Wabash Valley Broadcast Corporation for $.7 million in cash. Emmis financed the acquisition through additional bank borrowings. 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. Emmis financed the acquisition through additional bank borrowings. The acquisition was accounted for as a purchase. 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. Emmis financed the acquisition through additional bank borrowings. 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 is subject to renewal for an additional five years. Slager Radio began broadcasting on February 16, 1998. 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 assumed liabilities of $8.0 million. Mediatex Communications Corporation owns and operates Texas Monthly, a regional magazine. The acquisition was accounted for as a purchase and was financed through additional bank borrowings. 46 47 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 assumed liabilities associated with the acquisition. The acquisition was accounted for as a purchase and was financed through additional bank borrowings under its Credit Facility. Effective July 1, 1997 through the date of closing, the Company operated WQCD-FM under a time brokerage agreement. 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), the seller, for a cash purchase price of $287.3 million (including transaction costs), a $25 million promissory note due to the former owner, plus assumed program rights payable and other liabilities of approximately $34.7 million. The Company financed the acquisition through a $25 million promissory note (due July15, 1999, bearing interest at 8%) 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 McHale Videofilm and satellite stations KAII-TV, Wailuka, Hawaii, and KHAW-TV, Hilo, Hawaii). Effective October 1, 1998, the Company completed its acquisition of substantially all of the assets of Wabash Valley Broadcasting Corporation ("the Wabash Acquisition"), the seller, for a cash purchase price of $88.9 million (including transaction costs), plus assumed program rights payable and other liabilities 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. The appraisals used to allocate costs for the WQCD-FM Acquisition, the SF Acquisition and the Wabash Acquisition have not been finalized. 8. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) A pro forma condensed consolidated statement of operations is presented below for the years ended February 28, 1998 and 1999, assuming the acquisitions of WXTM-FM, WKKX-FM, WTLC-FM and AM, Texas Monthly, and the WQCD Acquisition, SF Acquisition and Wabash Acquisition all had occurred on the first day of the year ended February 28, 1998. Pro forma results for the year ended February 28, 1998, include pro forma adjustments for March and actual results for April through February for the acquisition of WXTM-FM and WKKX-FM, pro forma results for March through June and actual results for July through February for the operation of WQCD-FM under the time brokerage agreement, pro forma results for March through October and actual results for November through February for the acquisition of WTLC-FM and AM, pro forma results for March through January and actual results for February for the acquisition of Texas Monthly, pro forma results for March through February for the SF Acquisition and Wabash Acquisition. Pro forma results for Cincinnati Magazine, Network Indiana and AgriAmerica have been excluded as they are not significant to the consolidated operating results of the Company. Pro forma results for the year ended February 28, 1999, include actual results for March through June 4, 1998 for the operation of WQCD-FM under the time brokerage agreement and actual results from June 5, 1998 through February 28, 1999 for the acquisition of WQCD-FM, pro forma results from March through July 15, 1998 and actual results from July 16, 1998 through February 28, 1999 for the SF Acquisition, and pro forma results from March through September and actual results from October through February for the Wabash Acquisition. Pro forma interest expense, depreciation of property and equipment and amortization expense related to the intangibles resulting from the allocation of the purchase price for the above acquisitions and pro forma amortization of television broadcast rights have been included in the pro forma statements presented below (in thousands, except per 47 48 share data). The appraisals used to allocate costs for the WQCD-FM Acquisition, the SF Acquisition and the Wabash Acquisition have not been finalized.
Pro Forma ------------------------- 1998 1999 -------- -------- NET REVENUES $241,472 $263,696 Operating expenses 157,952 165,862 International business development expenses 999 1,477 Corporate expenses 7,846 10,828 Depreciation and amortization 30,699 35,695 Non-cash compensation 1,482 4,269 Time brokerage agreement fees - - -------- -------- OPERATING INCOME 42,494 45,565 -------- -------- OTHER INCOME (EXPENSE): Interest expense (48,147) (50,015) Other income (expense), net (173) 1,680 -------- -------- Total other income (expense) (48,320) (48,335) -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (5,826) (2,770) PROVISION (BENEFIT) FOR INCOME TAXES (1,200) 2,100 -------- -------- NET INCOME (LOSS) $ (4,626) $ (4,870) ======== ======== Basic net income per share $ (0.30) $ (0.31) ======== ======== Diluted net income per share $ (0.30) $ (0.31) ======== ========
The pro forma condensed consolidated statement of operations presented above does not purport to be indicative of the results that actually would have been obtained if the indicated transactions had been effective at the beginning of the year presented, and is not intended to be a projection of future results or trends. 9. EMPLOYEE BENEFIT PLANS a. 1986 Stock Incentive Plan and 1992 Nonqualified Stock Option Plan These stock plans provide for incentive stock options, nonqualified stock options and stock appreciation rights equivalent to 1,112,500 shares of common stock. The options and stock appreciation rights are generally exercisable six months after the date of grant and expire not more than 10 years from the date the options or rights are granted. Stock appreciation rights provide for the issuance of stock or the payment of cash equal to the appreciation in market value of the allocated shares from the date of grant to the date of exercise. When rights are issued with options, exercise of either the option or the right results in the surrender of the other. As of February 28, 1998 and 1999, there were no stock appreciation rights outstanding nor were there any stock appreciation rights issued with options outstanding. Certain stock options awarded remain outstanding as of February 28, 1998 and 1999. b. 1994 Equity Incentive Plan Effective March 1, 1994, the shareholders of Emmis approved the 1994 Equity Incentive Plan. Under this Plan, awards equivalent to 1,000,000 shares of common stock may be granted. The awards, which have 48 49 certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights, performance units or limited stock appreciation rights. Under this Plan, all awards are granted with an exercise price equal to the fair market value of the stock except for shares of restricted stock which may be granted with an exercise price at amounts greater than or equal to the par value of the underlying stock. No more than 500,000 shares of Class B Common Stock are available for grant and issuance under this Plan. As of February 28, 1998 and 1999, the only awards granted under this Plan were for stock options and restricted shares of stock. Certain stock options awarded remain outstanding as of February 28, 1998 and 1999. The stock options under this Plan are generally exercisable one year after the date of grant and expire not more than 10 years from the date of grant. The exercise price of these options are at the fair market value of the stock on the grant date. c. 1995 Equity Incentive Plan Effective March 1, 1995, the shareholders of Emmis approved the 1995 Equity Incentive Plan. Under this Plan, awards equivalent to 650,000 shares of common stock may be granted pursuant to employment agreements discussed in Note 10. d. Non-Employee Director Stock Option Plan Effective June 29, 1995, Emmis implemented a Non-Employee Director Stock Option Plan. Under this Plan, each non-employee director, as of January 24, 1995, was granted an option to acquire 5,000 shares of the Company's Class A Common Stock. Thereafter, upon election or appointment of any non-employee director or upon a continuing director becoming a non-employee director, such individual will also become eligible to receive a comparable option. In addition, an equivalent option will be automatically granted on an annual basis to each non-employee director. 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 75,000 shares of Class A Common Stock are available for grant at February 28, 1999. e. 1997 Equity Incentive Plan Effective March 1, 1997, the shareholders of Emmis approved the 1997 Equity Incentive Plan. Under this plan, awards equivalent to 1,000,000 shares of common stock may be granted. The awards, which have certain restrictions, may be for incentive stock options, nonqualified stock options, shares of restricted stock, stock appreciation rights 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 500,000 shares of Class B Common Stock are available for grant and issuance under this Plan. As of February 28, 1998, there were no awards granted under this Plan. During fiscal 1999, Emmis granted incentive and nonqualified stock options and restricted stock under this Plan. The stock options under this Plan are generally exercisable one year after the date of grant and expire not more than 10 years from the date of grant. f. 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 $2,715,000, $732,000 and $3,269,000 for the years ended February 1997, 1998 and 1999, respectively. Had compensation expense 49 50 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, ------------------------------------------------ 1997 1998 1999 ------------- --------------- ------------ Net Income: As Reported $15,440,000 $11,084,000 $1,248,000 Pro Forma $11,545,000 $8,588,000 ($2,056,000) Basic EPS: As Reported $1.41 $ 1.02 $.09 Pro Forma $1.06 $ .79 ($.14) Diluted EPS: As Reported $1.37 $ .98 $.08 Pro Forma $1.02 $ .76 ($.14)
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, ------------------------------------------------ 1997 1998 1999 ------------- --------------- ------------ Risk-Free Interest Rate: 6.39% 5.78% 5.21% Expected Life (Years): 7.1 7.5 8.0 Expected Volatility: 41.56% 38.65% 42.12%
Expected dividend yields were zero for fiscal 1997, 1998 and 1999. A summary of the status of options at February 1997, 1998 and 1999 and the related activity for the year is as follows:
1997 1998 1999 ---------------------- ---------------------- ---------------------------- Weighted Weighted Weighted Number Average Number Average Number Average Of Exercise Of Exercise Of Exercise Options Price Options Price Options Price ------- ----- ------- ------- ------- ------ Outstanding at Beginning of Year 893,888 15.88 1,232,335 23.42 1,340,630 26.95 Granted 439,862 35.54 225,200 44.06 586,500 33.14 Exercised (92,415) 10.01 (106,305) 21.09 (145,362) 21.90 Expired and other (9,000) 33.96 (10,600) 42.47 (10,000) 16.00 Outstanding at End of Year 1,232,335 23.42 1,340,630 26.95 1,771,768 29.25 Exercisable at End of Year 737,223 16.71 1,055,430 22.76 1,285,268 26.63 Available for Grant 1,385,150 2,671,350 2,074,850
50 51 During the years ended February 1997, 1998 and 1999 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 1997, 1998 and 1999 is as follows:
1997 1998 1999 ---------------------- ---------------------- ------------------- 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 $ 24.46 $ 42.66 $ 22.85 $ 41.20 $ 20.74 $ 36.77 Less Than Fair Market Value of the Stock on the Date of Grant $ 24.30 $ 15.50 $ - $ - $ 37.23 $ 15.50
During fiscal 1997 and 1999, 14,800 and 5,000 shares of nonvested stock were granted at a weighted average grant date fair value of $37.20 and $44.75, respectively, under employment agreements. No nonvested stock was granted during fiscal 1998. The following information relates to options outstanding and exercisable at February 28, 1999:
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 ----------- --------- --------- ------------- --------- -------- 3.75 31,250 3.75 3.2 years 31,250 3.75 9.90-14.85 52,900 12.30 4.6 years 52,900 12.30 14.85-19.80 602,915 15.55 7.4 years 602,915 15.55 24.75-29.70 88,925 28.88 6.6 years 88,925 28.88 29.70-34.65 442,500 33.24 9.4 years 71,000 34.50 34.65-39.60 87,678 38.50 7.0 years 87,678 38.50 39.60-44.55 148,800 44.00 7.3 years 148,800 44.00 44.55-49.50 316,800 46.64 8.4 years 201,800 45.30
In addition to the benefit plans noted above, Emmis has the following employee benefit plans: g. Profit Sharing Plan In December 1986, Emmis adopted a profit sharing plan that covers all nonunion employees with one year of service. Contributions to the plan are at the discretion of the Emmis Board of Directors. Contributions to the plan can be made in the form of newly issued Emmis common stock or cash. Historically, all contributions to the plan have been in the form of Emmis common stock. Contributions reflected in non-cash compensation in the consolidated statements of operations were $750,000 for the years ended February 1997 and 1998, and $1,000,000 for the year ended February 1999. h. 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 one year of service and the other covers substantially all 51 52 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 $273,000, $315,000 and $599,000 for the years ended February 1997, 1998 and 1999, respectively. i. 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 $297,000, $342,000 and $344,000 for the years ended February 1997, 1998 and 1999, respectively. j. 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. 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 August 2009. 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. 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 28, 1999, are as follows:
Payable in Year Ending February Payments ---------------- -------------- (In Thousands) 2000 $ 4,939 2001 4,324 2002 4,090 2003 3,826 2004 3,080 Thereafter 13,852 ------- $34,111 =======
Minimum payments have not been reduced by minimum sublease rentals of approximately $592,000 due in the future under noncancelable subleases. Rent expense totaled $3,025,000, $4,512,000 and $5,945,000 for the years ended February 1997, 1998 and 1999, respectively. Rent expense for the year ended February 1998 and 1999 is net of sublease income of approximately $86,000 and $148,000, respectively. 52 53 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 2000 - $1,564,000, 2001 - $1,345,000, 2002 - $1,276,000, 2003 - $761,000, 2004 - $142,000, and thereafter - - $48,000. Expense related to these broadcast rights totaled $1,383,000, $1,400,000 and $1,492,000 for the years ended February 1997, 1998 and 1999, respectively. c. Litigation Emmis currently and from time to time is involved in litigation incidental to the conduct of its business, but Emmis is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of Emmis. d. Employment Agreements 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. Options to purchase up to approximately 100,000 shares of the Company's Class A Common Stock may be granted over the next three years under agreements in place as of February 28, 1999. Additionally, the Company was negotiating several new employment contracts at February 28, 1999 which were expected to be finalized during fiscal 2000. e. Construction of Office Building In connection with the acquisition of KHON-TV in Honolulu, Hawaii, in July 1998, Emmis acquired a commitment to complete the construction of new operating facilities, including broadcast equipment, for the station. The project is expected to be completed in the fall of 1999 for an estimated cost of approximately $19.0 million of which $2.7 million has been incurred through February 28, 1999. 11. INCOME TAXES The provision for income taxes for the years ended February 1997, 1998 and 1999, consisted of the following:
1997 1998 1999 ------- ------ ----- (In Thousands) Current: Federal $ 7,535 $6,474 $1,247 State 1,375 1,250 - ------- ------ ------ 8,910 7,724 1,247 ------- ------ ------ Deferred: Federal 1,328 (759) 3,953 State 262 235 1,000 ------- ------ ------ 1,590 (524) 4,953 ------- ------ ------ Provision for income taxes $10,500 $7,200 $6,200 ======= ====== ======
The provision for income taxes for the years ended February 1997, 1998 and 1999, differs from that computed at the Federal statutory corporate tax rate as follows: 53 54
1997 1998 1999 -------- ------ ------ (In Thousands) Computed income taxes at 35% $ 9,079 $6,399 $3,166 State income tax 1,064 965 650 Foreign losses - - 1,334 Nondeductible goodwill - - 1,324 Other 357 (164) (274) ------- ------ ------ Net provision for income taxes $10,500 $7,200 $6,200 ======= ====== ======
The components of deferred tax assets and deferred tax liabilities at February 28, 1998 and 1999, are as follows:
1998 1999 -------- -------- (In Thousands) Deferred tax assets: Capital loss carryforwards $ 2,914 $ 439 Net operating loss carryforwards 2,587 2,142 Compensation relating to stock options 2,243 3,336 Other 2,739 2,219 Valuation allowance (2,914) (1,056) -------- -------- Total deferred tax assets 7,569 7,080 -------- -------- Deferred tax liabilities: Intangible assets (33,166) (88,071) Other (1,962) (4,026) -------- -------- Total deferred tax liabilities (35,128) (92,097) -------- -------- Net deferred tax liability $(27,559) $(85,017) ======== ========
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 28, 1998 and 1999, since these loss carryforwards can only be utilized to offset future capital gains with expiration of approximately $730,000 in 2000, and $368,000 in 2002. The expiration of net operating loss carryforwards approximate $692,000 in 2000, $1,486,000 in 2003, $2,623,000 in 2004, and $2,133,000 thereafter. 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 segment includes all 17 of the company's radio stations. The Radio segment derives its revenue from the sale of commercial broadcast inventory. The Television segment consists of six television stations that derive revenue from the sale of commercial broadcast inventory. The Company's Publishing segment consists of four publishing entities which derive revenue from subscriptions and the sale of print advertising inventory. The category "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. Total revenues for the year-ended February 28, 1999 were $3.3 million and total assets as of february 28, 1998 and 1999 were $27.2 million and $20.4 million, respectively, related to the Hungarian radio station. Total revenues for this station were not material for the year ended February 28, 1998. The 54 55 accounting policies as described in the summary of significant accounting policies are applied consistently across segments. 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 a measure 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.
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
55 56
CORPORATE YEAR ENDED FEBRUARY 28, 1997 RADIO TELEVISION PUBLISHING AND OTHER CONSOLIDATED Net revenues $103,292 - $9,493 $ 935 $113,720 Operating expenses 52,839 - 8,957 637 62,433 --------- -- ------- ------- -------- Broadcast/publishing cash flow 50,453 - 536 298 51,287 International business development expenses - - - 1,164 1,164 Corporate expenses - - - 5,929 5,929 Time brokerage fee - - - - - Depreciation and amortization 5,098 - 158 225 5,481 Non-cash compensation - - - 3,465 3,465 --------- -- ------- ------- -------- Operating income 45,355 - 378 (10,485) 35,248 Total assets 168,730 - 3,652 17,334 189,716
13. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments of Emmis is estimated below based on the methods and assumptions discussed therein. a. Cash and Cash Equivalents The carrying amounts approximate fair value because of the short maturity of these instruments. b. Long-Term Debt Based upon borrowing rates currently available to the Company for debt with similar terms and the same remaining maturities, the fair value of long-term debt approximated the carrying value at February 28, 1999. c. Interest Rate Cap Agreements The unamortized cost of interest rate cap agreements included in the February 28, 1999 consolidated balance sheet totals $231,000. The fair value of interest rate caps is estimated by obtaining quotations from brokers and approximates $166,000 at February 28, 1999. d. Letter of Credit Fees paid for the Company's $50 million letter of credit approximate fair value based on fees currently charged for similar arrangements. 14. 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 $296,000, $512,000 and $868,000 for the years ended February 1997, 1998 and 1999, respectively. 56 57 15. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTOR 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"). One of Emmis' subsidiaries does not guarantee the Senior Subordinated Notes (the "Non-Guarantor Subsidiary"). The claims of creditors of the Non-Guarantor Subsidiary have priority over the rights of Emmis to receive dividends or distributions from such subsidiary. Presented below is condensed consolidating financial information for Emmis, the Subsidiary Guarantors and the Non-Guarantor Subsidiary as of February 28, 1999 and 1998 and for each of the three years in the period ended February 28, 1999. The equity method has been used by Emmis 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. 57 58 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-Guarantor 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 and other 5,720 4,048 72 - 9,840 -------- -------- ------- --------- ---------- 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 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 Accounts payable 7,527 7,739 369 - 15,635 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 TV program rights payable, net of current portion - 25,161 - - 25,161 Other long-term debt, net of current portion 2,543 (45) 19,687 (3,380) 18,805 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 Class A common stock 132 - - - 132 Class B common stock 26 - - - 26 Additional paid-in capital 260,344 - 4,297 (4,297) 260,344 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 ======== ======== ======= ========= ==========
58 59 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-Guarantor 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 ======== ======== ======= ======= ========
59 60 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-Guarantor 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 of property and equipment 779 6,886 2,040 - 9,705 Amortization of debt issuance costs and cost of interest rate cap agreements 839 - - - 839 Amortization of intangible assets 380 17,450 779 - 18,609 Amortization of TV program rights - 3,005 - - 3,005 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 Cash paid for TV program rights - (1,469) - - (1,469) Equity in earnings of subsidiaries 14,337 - - (14,337) - Intercompany (522,788) 521,699 2,543 (1,454) - Other 103 629 - (1,875) (1,143) (Increase) decrease in certain assets (net of dispositions and acquisitions) - Accounts receivable 345 (21,835) 386 - (21,104) Prepaid expenses and other current assets (4,725) 4,070 (72) - (727) Increase (decrease) in certain current liabilities (net of dispositions and acquisitions) - Accounts payable 4,146 (2,057) (1,675) 1,454 1,868 Accrued salaries and commissions 236 537 564 - 1,337 Accrued interest 3,801 1 - - 3,802 Deferred revenue - (747) - - (747) Other current liabilities (2,625) 6,320 791 - 4,486 (Increase) decrease in deposits and other assets 9,516 (6,408) 327 - 3,435 Increase (decrease) in other noncurrent liabilities 596 248 (1,431) - (587) ---------- --------- ------- -------- ---------- Net cash provided (used) by operating activities (483,662) 520,651 (1,868) - 35,121 ---------- --------- ------- -------- ---------- Investing Activities: Acquisition of WQCD-FM - (128,550) - - (128,550) Acquisition of SF Broadcasting - (287,293) - - (287,293) Acquisition of Wabash Valley Broadcasting - (88,905) - - (88,905) Purchases of property and equipment (21,363) (13,654) (2,366) - (37,383) Other 7 654 - - 661 ---------- --------- ------- -------- ---------- Net cash used in investing activities (21,356) (517,748) (2,366) - (541,470) ---------- --------- ------- -------- ---------- Financing Activities: Proceeds of credit facility and senior subordinated notes 1,063,000 - - - 1,063,000 Payments on credit facility (723,500) - - - (723,500) Purchase of interest rate cap agreements and payment of loan fees (19,589) - - - (19,589) Proceeds of the Company's Class A common stock, net of transaction costs 182,640 - - - 182,640 Proceeds from exercise of stock options and income tax benefits of certain equity transactions 4,130 - - - 4,130 Other - - - - - ---------- --------- ------- -------- ---------- Net cash provided by financing activities 506,681 - - - 506,681 ---------- --------- ------- -------- ---------- Effect of exchange rates on cash - - - - - 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 ========== ========= ======= ======== ==========
60 61 Emmis Communications Corporation Condensed Consolidating Balance Sheet As of February 28, 1998 (in thousands of dollars)
Eliminations Parent and Company Subsidiary Subsidiary Consolidating Only Guarantors Non-Guarantor Entries Consolidated --------- ---------- ------------- ------------- ------------ Current Assets Cash and cash equivalents $ 623 $ 243 $ 4,919 $ - $ 5,785 Accounts receivable, net 345 30,346 1,429 - 32,120 Income tax refunds receivable 4,968 - - - 4,968 Prepaid expenses and other 995 7,284 - - 8,279 -------- -------- ------- --------- -------- Total current assets 6,931 37,873 6,348 - 51,152 Property and equipment, net 13,295 19,528 623 - 33,446 Intangible assets, net 529 214,797 19,232 - 234,558 Investment in affiliates 257,816 - - (257,816) - Other assets, net 17,892 1,593 1,029 (6,282) 14,232 -------- -------- ------- --------- -------- Total assets $296,463 $273,791 $27,232 $(264,098) $333,388 ======== ======== ======= ========= ======== Current Liabilities Current maturities of other long- term debt $ 34 $ 17 $ 1,448 $ - $ 1 ,499 Accounts payable 3,381 9,169 590 - 13,140 Accrued salaries and commissions 1,026 1,867 - - 2,893 Accrued interest 2,421 - - - 2,421 Deferred revenue - 7,985 - - 7,985 Other current liabilities 1,189 390 - - 1,579 -------- -------- ------- --------- -------- Total current liabilities 8,051 19,428 2,038 - 29,517 Credit facility and senior subordinated debt 215,000 - - - 215,000 Other long-term debt, net of current portion 59 28 21,118 (6,282) 14,923 Other noncurrent liabilities 1,884 595 - (1,875) 604 Minority interest - - - 1,875 1,875 Deferred income taxes 27,559 - - - 27,559 -------- -------- ------- --------- -------- Total liabilities 252,553 20,051 23,156 (6,282) 289,478 Shareholders' Equity Class A common stock 84 - - - 84 Class B common stock 26 - - - 26 Additional paid-in capital 69,353 - 4,076 (4,076) 69,353 Subsidiary investment - 22,347 - (22,347) - Retained earnings/accumulated deficit (25,553) 231,393 - (231,393) (25,553) -------- -------- ------- --------- -------- Total shareholders' equity 43,910 253,740 4,076 (257,816) 43,910 -------- -------- ------- --------- -------- Total liabilities and shareholders' equity $296,463 $273,791 $27,232 $(264,098) $333,388 ======== ======== ======= ========= ========
61 62 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1998 (in thousands of dollars)
Eliminations Parent and Company Subsidiary Consolidating Only 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 Noncash 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 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 ======== ======== ======== ========
62 63 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-Guarantor Eliminations Consolidated -------------- ---------- ------------- ------------ ------------ Operating Activities: Net income (loss) $ 11,084 $ 26,805 $ - $(26,805) $ 11,084 Adjustments to reconcile net income to net cash provided (used) by operating activities - Depreciation and amortization of property and equipment 155 2,425 - - 2,580 Amortization of debt issuance costs and cost of interest rate cap agreements 2,183 - - - 2,183 Amortization of intangible assets 16 4,940 - - 4,956 Provision for bad debts 20 782 - - 802 Equity in earnings of subsidiaries (26,805) - - 26,805 - Provision (benefit) for deferred income taxes (121) (403) - - (524) Noncash compensation 818 664 - - 1,482 Loss on donation of radio station 4,833 - - - 4,833 Other 357 - - - 357 Intercompany (75,327) 68,642 8,560 (1,875) - (Increase) decrease in certain assets (net of dispositions and acquisitions) - Accounts receivable 797 (7,757) (1,429) - (8,389) Prepaid expenses and other current assets (5,234) 474 - - (4,760) Increase (decrease) in certain current liabilities (net of dispositions and acquisitions) - Accounts payable 1,021 4,058 481 - 5,560 Accrued salaries and commissions 779 553 - - 1,332 Accrued interest 2,247 - - - 2,247 Deferred revenue - 292 - - 292 Other current liabilities 1,084 (968) - - 116 (Increase) decrease in deposits and other assets (951) (6,136) (1,027) 6,282 (1,832) Increase (decrease) in other noncurrent liabilities (28) 196 - - 168 --------- -------- ------- -------- --------- Net cash provided (used in) operating activities (83,072) 94,567 6,585 4,407 22,487 --------- -------- ------- -------- --------- Investing Activities: Acquisition of WXTM-FM, WALC-AM and WKKX-FM - (36,964) - - (36,964) Acquisition of WTLC-FM and WTLC-AM - (15,336) - - (15,336) Acquisition of Texas Monthly - (37,389) - - (37,389) Acquisition of Cincinnati Magazine - (1,979) - - (1,979) Acquisition of Network Indiana and AgriAmerica - (709) - - (709) Purchases of property and equipment (13,349) (3,019) (623) - (16,991) Initial payment for purchase of Hungarian broadcast license - - (7,325) - (7,325) --------- -------- ------- -------- --------- Net cash used in investing activities (13,349) (95,396) (7,948) - (116,693) --------- -------- ------- -------- --------- Financing Activities: Proceeds of credit facility 288,378 - 6,282 (6,282) 288,378 Payments on credit facility (183,928) - - - (183,928) Payment on loan fees (4,291) - - - (4,291) Purchase of Company's Class A common stock (7,000) - - - (7,000) Proceeds from exercise of stock options and income tax benefits of certain equity transactions 3,922 - - - 3,922 Other (156) - - 1,875 1,719 --------- -------- ------- -------- --------- Net cash provided (used) by financing activities 96,925 - 6,282 (4,407) 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 ========= ======== ======= ======== =========
63 64 Emmis Communications Corporation Condensed Consolidating Statement of Operations For the Year Ended February 28, 1997 (in thousands of dollars)
Eliminations Parent and Company Subsidiary Consolidating Only Guarantors Entries Consolidated ---------- ---------- ------------- ------------ Net revenues $ 935 $112,785 $ - $113,720 Operating expenses 638 61,795 - 62,433 International business development expenses - 1,164 - 1,164 Corporate expenses 5,929 - - 5,929 Depreciation and amortization 179 5,302 - 5,481 Non-cash compensation 2,702 763 - 3,465 ---------- -------- -------- -------- Operating income ( 8,513) 43,761 - 35,248 ---------- -------- -------- -------- Other income (expense) Interest expense (9,573) (60) - (9,633) Other income (expense), net 351 (26) - 325 ---------- -------- -------- -------- Total other income (expense) (9,222) (86) - (9,308) ---------- -------- -------- -------- Income before income taxes (17,735) 43,675 - 25,940 Provision (benefit) for income taxes (7,094) 17,594 - 10,500 ---------- -------- -------- -------- (10,641) 26,081 - 15,440 Equity in earnings of subsidiaries 26,081 - (26,081) - ---------- -------- -------- -------- Net income (loss) $ 15,440 $ 26,081 $(26,081) $ 15,440 ========== ======== ======== ========
64 65 Emmis Communications Corporation Consolidating Statement of Cash Flows For the Year Ended February 28, 1997 (in thousands of dollars)
Parent Company Subsidiary Only Guarantors Eliminations Consolidated -------------- ---------- ------------ ------------ Operating Activities: Net income $ 15,440 $ 26,081 $(26,081) $ 15,440 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization of property and equipment 161 1,478 - 1,639 Amortization of debt issuance costs and cost of interest rate cap agreements 1,071 - - 1,071 Amortization of intangible assets 18 3,824 - 3,842 Provision of bad debts - 726 - 726 Equity in earnings of subsidiaries (26,081) - 26,081 - Provision (benefit) for deferred income taxes - 1,590 - 1,590 Non cash compensation 2,702 763 - 3,465 Other (195) - - (195) Intercompany 21,582 (21,582) - - (Increase) decrease in certain current assets (net of dispositions and acquisitions) - Accounts receivable 615 (3,000) - (2,385) Prepaid expenses and other current assets (517) (2,524) - (3,041) Increase (decrease) in certain current liabilities (net of dispositions and acquisitions) - Accounts payable 2,020 737 - 2,757 Accrued salaries and commissions (532) (1,467) - (1,999) Accrued interest (146) - - (146) Deferred revenue - 395 - 395 Other current liabilities (57) 83 - 26 (Increase) decrease in deposits and other assets (1,353) 455 - (898) Increase (decrease) in other noncurrent liabilities - (925) - (925) -------- -------- -------- -------- Net cash provided by operating activities 14,728 6,634 - 21,362 Investing Activities: Acquisition of WXTM-FM, WALC-AM and WKKX-FM (6,600) - - (6,600) Purchases of property and equipment (1,102) (6,457) - (7,559) Other 240 - - 240 -------- -------- -------- -------- Net cash used in investing activities (7,462) (6,457) - (13,919) -------- -------- -------- -------- Financing Activities: Proceeds of credit facility 19,000 - - 19,000 Payments on credit facility (28,102) - - (28,102) Proceeds from exercise of stock options and income tax benefits of certain equity transactions 1,632 - - 1,632 -------- -------- -------- -------- Net cash used in financing activities (7,470) - - (7,470) -------- -------- -------- -------- Increase (Decrease) in cash and cash equivalents (204) 177 - (27) Cash and cash equivalents Beginning of year 323 895 - 1,218 -------- -------- -------- -------- End of year $ 119 $ 1,072 $ - $ 1,191 ======== ======== ======== ========
65 66 16. SUBSEQUENT EVENT - ACQUISITION On April 1, 1999, the Company acquired substantially all the assets of Country Sampler, Inc. for approximately $19.0 million in cash, $2.0 million payable under contract with the principal shareholder through April 2003 and assumed liabilities of approximately $3.4 million (the "Country Sampler Acquisition"). The acquisition was accounted for as a purchase and was financed through additional bank borrowings. 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended -------------------------------------------- Full May 31 Aug. 31 Nov. 30 Feb. 28 Year ------ ------- ------- ------- -------- (In thousands, except per share data) Year ended February 28, 1998: Net revenues $31,330 $37,008 $39,809 $32,436 $140,583 Operating income 8,091 12,002 10,160 6,630 36,883 Net income (loss) 3,368 4,672 4,079 (1,035) 11,084 Basic net income per share $0.31 $0.43 $0.38 $(0.10) $1.02 Diluted net income per share $0.30 $0.41 $0.36 $(0.10) $0.98 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 before extraordinary item 1,788 4,161 3,012 (6,116) 2,845 Net income (loss) 1,788 2,564 3,012 (6,116) 1,248 Basic earnings per share: Income before extraordinary item $0.16 $0.27 $0.19 $(0.39) $0.20 Net Income $0.16 $0.17 $0.19 $(0.39) $0.09 Diluted earnings per share: Income before extraordinary item $0.16 $0.26 $0.19 $(0.39) $0.19 Net income $0.16 $0.16 $0.19 $(0.39) $0.08
66 67 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, 1999 and 1998, 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 28, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP /s/ ARTHUR ANDERSEN LLP Indianapolis, Indiana, April 30, 1999. 67 68 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 68 69 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" on pages 4-6 of the Emmis 1999 Proxy Statement and the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page 14 of the Emmis 1999 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, Treasurer 43 1999 and Chief Financial Officer (1)
- ------------- (1) Mr. Berger began serving in these positions on March 1, 1999. 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. 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. 69 70 ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the section entitled "Executive Compensation" on pages 6-7 and 9-11 of the Emmis 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the section entitled "Voting Securities and Beneficial Owners" on pages 3-4 of the Emmis 1999 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" on page 6 of the Emmis 1999 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 28, 1999. Reports on Form 8-K During its last fiscal quarter, Emmis filed a report on Form 8-K on December 2, 1998, to report its acquisition of radio station WQCD-FM in New York City. All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or related notes. Exhibits The following exhibits are filed or incorporated by reference as a part of this report: 3.1 Amended and Restated Articles of Incorporation of Emmis Communications Corporation, as amended, incorporated by reference to Exhibit 2.3 to Emmis' Registration Statement on Form S-1, File No. 33-73218, as amended (the "1994 Registration Statement"), and to Exhibit 3.1 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1998. 70 71 3.2 Amended and Restated Bylaws of Emmis Communications Corporation, as amended, incorporated by reference to Exhibit 2.4 to Emmis' Quarterly Report on Form 10-Q for the quarter ended May 31, 1995, and to Exhibit 3.2 to Emmis' Quarterly Report on Form 10-Q for the quarter ended August 31, 1998. 3.3 Form of stock certificate for Class A Common Stock, incorporated by reference from Exhibit 3.5 to 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"). 4.2 Registration Rights Agreement dated as of February 12, 1999, by and among Emmis Communications Corporation and its Subsidiary Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens Inc., First Union Capital Markets Corp., Goldman, Sachs & Co. and TD Securities (USA) Inc., incorporated by reference to Exhibit 4.2 to the 1999 Registration Statement. 10.1 Emmis Communications Corporation 1986 Stock Incentive Plan, as amended, incorporated by reference from Exhibit 10.1 to the 1994 Registration Statement.++ 10.2 Emmis Communications Corporation 1992 Stock Option Plan, incorporated by reference from Exhibit 10.3 to the 1994 Registration Statement.++ 10.3 Emmis Communications Corporation Profit Sharing Plan, incorporated by reference from Exhibit 10.4 to the 1994 Registration Statement.++ 10.4 Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated by reference from Exhibit 10.5 to the 1994 Registration Statement.++ 10.5 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").++ 10.6 The Emmis Communications Corporation 1995 Equity Incentive Plan incorporated by reference from Exhibit 10.16 to the 1995 10-K.++ 10.7 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").++ 10.8 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.++ 10.9 Employment Agreement dated as of March 1, 1999, by and between Emmis Communications Corporation and Walter Z. Berger.* ++ 10.10 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. 71 72 10.11 Second Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement.* 10.12 Asset Purchase Agreement dated October 31, 1997 between Emmis Broadcasting Corporation and Zimco, Inc. (with exhibits omitted which Emmis agrees to file supplementally upon request), incorporated by reference from Exhibit 2 to Emmis' report on Form 8-K filed April 15, 1997. 10.13 Stock Purchase Agreement Among Emmis Broadcasting Corporation, and Michael R. Levy, Dow Jones & Company, Inc., and Gregory Curtis, dated February 6, 1998, incorporated by reference from Exhibit 10.14 to the 1998 10-K. 10.14 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. 10.15 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. 10.16 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.* 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. 72 73 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 25, 1999 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 25, 1999 /s/ Jeffrey H. Smulyan President, Chairman of the Board ---------------------- and Director (Principal Executive Jeffrey H. Smulyan Officer) Date: May 25, 1999 /s/ Walter Z. Berger Executive Vice President, Treasurer -------------------- and Chief Financial Officer Walter Z. Berger (Principal Accounting Officer) Date: May 25, 1999 Susan B. Bayh* Director ------------------ Susan B. Bayh Date: May 25, 1999 Gary L. Kaseff* Executive Vice President, General ------------------- Counsel and Director Gary L. Kaseff Date: May 25, 1999 Richard A. Leventhal* Director ------------------------- Richard A. Leventhal Date: May 25, 1999 Greg A. Nathanson* Television Division President and ------------------- Director Greg A. Nathanson Date: May 25, 1999 Doyle L. Rose* Radio Division President and ------------------ Director Doyle L. Rose Date: May 25, 1999 Frank V. Sica* Director ------------------ Frank V. Sica Date: May 25, 1999 Lawrence B. Sorrel* Director ----------------------- Lawrence B. Sorrel
*By: /s/ J. Scott Enright --------------------- J. Scott Enright Attorney-in-Fact 73 74 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 April 30, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Indianapolis, Indiana, April 30, 1999. 75 EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS IN THE THREE YEAR PERIOD ENDED FEBRUARY 28, 1999 (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, 1997 $799 $726 $(705) $ - $820 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
(1) Represents additions to the allowance for doubtful accounts associated with certain acquisitions. EX-10.9 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of March 1, 1999, by and between EMMIS COMMUNICATIONS CORPORATION, an Indiana corporation (the "Employer"), and WALTER Z. BERGER, a Kentucky resident (the "Executive"). RECITALS WHEREAS, Employer and its subsidiaries are engaged in the ownership and operation of various radio and television stations, magazines, and related operations (together, the "Emmis Group"); WHEREAS, Employer desires to employ Executive as an executive, and Executive desires to be so employed. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT. Upon the terms and subject to the conditions of this Agreement, Employer hereby employs Executive and Executive hereby accepts employment by the Employer. 2. TERM. The term of Executive's employment hereunder (the "Term") shall commence on March 1, 1999 and continue until February 28, 2002, unless terminated earlier in accordance with the provisions herein. As used herein, the term "Contract Year" means the twelve (12) month period commencing on March 1, 1999 and on each anniversary thereof. Notwithstanding the foregoing, if Executive commences employment with Employer prior to March 1, 1999, Executive shall receive a pro-rated portion of the Base Salary (as hereinafter defined) in payment for services rendered during such period. 3. EXECUTIVE'S POSITION, DUTIES, AND AUTHORITY. 3.1 POSITION. Employer shall employ Executive, and Executive shall serve as an executive of Employer and of any successor by merger, acquisition of substantially all of the assets or stock of Employer or otherwise. Executive shall serve as Executive Vice President and Chief Financial Officer of Employer or in such other position or positions to which the Board of Directors of Employer (the "Board") shall, with Executive's consent in his sole discretion, appoint Executive; provided, however, that in the case of any Change in Control (as hereinafter defined) involving Employer, the 2 Board may change Executive's title or duties without Executive's consent so long as Executive's duties are not substantially diminished in importance. The term "Change in Control" means the acquisition by any person or group (other than Jeffrey H. Smulyan or a group of which he is an affiliate and an active participant) of beneficial ownership by purchase, merger, or otherwise, of either more than 50% of all classes of stock of Employer (such percentage to be computed in accordance with Rule 13d-3(d)(1)(i) of the SEC under the Exchange Act) or substantially all of the assets of the Employer or its successors; "person" means such term as used in Rule 13d-5 of the SEC under the Exchange Act; "group" means such term as defined in Section 13(d) of the Exchange Act; "beneficial owner" means such term as defined in Rule 13d-3 of the SEC under the Exchange Act; and affiliate means such term as defined in Rule 144of the SEC under the Securities Act. 3.2 DUTIES AND AUTHORITY. Executive shall have executive duties, functions, authority and responsibilities commensurate with the office or offices he from time to time holds with Employer. 3.3 EMMIS GROUP DIRECTORSHIPS AND OFFICES. If Executive is elected as a director of Employer, Executive shall serve in such position without additional remuneration other than the indemnification provided for in Section 10 hereof. Executive shall also serve without additional remuneration as a director and/or officer of one or more of Employer's subsidiaries if appointed to such position by Employer. 4. FULL-TIME SERVICES. Executive's services hereunder shall be performed on a full-time basis in a diligent and competent fashion to the best of his abilities. Executive shall not undertake any outside employment or outside business activities without the consent of the Board; provided, however, that subject to satisfaction of his obligations under the preceding sentence, Executive shall be allowed to (i) manage his personal, financial and legal affairs and (ii) serve on civic or charitable boards or committees. 5. LOCATION OF EMPLOYMENT. Unless Executive consents otherwise in writing in his sole discretion, the headquarters for performance of his services hereunder shall be the corporate headquarters of Employer in Indianapolis, Indiana, and Executive shall not be required to relocate 2 3 his office outside the metropolitan area of Indianapolis, Indiana, subject to such reasonable travel as the performance of Executive's duties in the business of the Emmis Group may require. 6. BASE COMPENSATION. 6.1 BASE SALARY. During each Contract Year hereunder, Employer shall pay or cause to be paid to Executive a base salary per annum (the "Base Salary") of Three Hundred Forty Thousand Dollars ($340,000.00), payable in bi-weekly installments. 6.2 CAR ALLOWANCE. During the Term Executive shall receive a car allowance paid monthly in the amount of One Thousand Dollars ($1,000.00). 7. ADDITIONAL COMPENSATION. 7.1 CASH INCENTIVE COMPENSATION. Executive shall be entitled to receive a cash bonus up to a maximum of One Hundred Thousand Dollars ($100,000.00) each Contract Year (the "Bonus"). The exact amount of the Bonus, if any, shall be determined by the Compensation Committee of the Board of Directors (the "Compensation Committee") based on the Compensation Committee's evaluation of the Executive's performance during the Contract Year (with input from such sources as it deems appropriate). 7.2 STOCK OPTIONS. On the first day of each Contract Year during the Term, Executive shall be granted an option (the "Executive Option") to acquire twenty thousand (20,000) shares of Class A Common Stock of Employer ("Common Stock"). On the last day of each Contract Year during the Term, Executive shall forfeit the Executive Option with respect to two thousand five hundred (2,500) shares of Common Stock if the average Fair Market Value (as defined in the Emmis Broadcasting Corporation 1997 Equity Incentive Plan, or any subsequent equity incentive plan adopted by Emmis and generally used to make equity-based awards to station management employees of the Emmis Group (the "Plan")) per share of Common Stock over the last ninety (90) days of the Contract Year is not more than one hundred and twenty-five percent (125%) of the average Fair Market Value per share of Common Stock over the ninety (90) days immediately preceding the start of the Contract Year. On the last day of each Contract Year during the Term, Executive shall also forfeit the Executive Option with respect to an additional two thousand five hundred (2,500) shares of Common Stock if the average Fair Market Value per share of Common Stock over the last ninety (90) days of the Contract Year is not more than one hundred and fifteen percent (115%) of the average Fair Market Value per share of Common Stock over the ninety (90) days immediately preceding the 3 4 start of the Contract Year. Each Executive Option shall: (i) have an exercise price per share equal to its Fair Market Value on the grant date, (ii) notwithstanding any other provision in this Agreement be granted and subject to the terms and conditions of the Plan; (iii) be evidenced by a written grant agreement containing such terms and conditions as are generally provided for other officers of the Emmis Group (which agreement shall include provisions for an eight year term and the lapse of the non-forfeited Executive Options covered by such agreement at a rate of twenty percent (20%) per year commencing at the end of the fourth year after grant); (iv) be exercisable for Common Stock without restrictive legends on the certificates therefor (other than those appearing on the Common Stock generally). 7.3 PERFORMANCE-BASED COMPENSATION. It is the intent of Employer and Executive that all compensation paid pursuant to Section 7.2 of this Agreement will be performance-based compensation which will qualify under Section 162(m) of the Internal Revenue Code of 1986, as amended, to be deducted by Employer, and all provisions in Section 7.2 will be construed to permit the compensation paid thereunder to so qualify. In addition, the Compensation Committee shall have the discretion to structure any Bonus to qualify under Section 162(m) of the Code. If the Compensation Committee so structures any Bonus, all provisions under Section 7.1 shall also be construed to permit the compensation paid thereunder to so qualify. 7.4 STOCK GRANT. If Executive completes the entire three-year Term and is still an employee of Employer on February 28, 2002, Executive will be entitled to a grant of ten thousand (10,000) shares of Common Stock (the "Stock Grant"); provided, however, that Executive shall be entitled to receive a prorated portion of the Stock Grant if this Agreement is terminated by Employer without Cause prior to a Change in Control or if Executive dies or becomes Disabled (as hereinafter defined) during the Term. Such prorated number of shares shall be an amount equal to ten thousand (10,000) times a fraction, the numerator of which is the number of full months from the effective date of this Agreement to the date Executive is so terminated, dies or becomes Disabled, and the denominator of which is thirty-six (36). Any fractional shares created by the pro-ration shall be rounded up to the nearest whole share. Employer, at its option, may pay the Stock Grant (or any prorated portion thereof) in Common Stock or in cash. If the Stock Grant (or any prorated portion thereof) is paid in cash, such cash payment shall be an 4 5 amount equal to the Fair Market Value of the Stock Grant (or prorated portion thereof) on the business day immediately preceding the payment date. 8. EXPENSES. Employer shall pay or reimburse Executive for all reasonable expenses actually incurred or paid by Executive during the Term in the performance of Executive's services hereunder upon presentation of expense statements or vouchers or such other supporting information as Employer may reasonably require of Executive. Employer shall also reimburse Executive for any reasonable expenses incurred by Executive in connection with his relocation to Indianapolis as more particularly described in Exhibit A. 9. VACATION AND OTHER BENEFITS. Executive shall be entitled to four (4) weeks of paid vacation per Contract Year in accordance with Employer's company practices. In addition, during the Term, Executive shall be eligible to participate in any pension or profit-sharing plan or program of Employer now or hereafter existing in accordance with and to the extent that he is eligible under the general provisions thereof. Executive shall also be eligible to participate in any group life insurance, hospitalization, medical, health and accident, disability or similar plan or program of Employer, now or hereafter existing in accordance with and to the extent that he is eligible under the general provisions thereof. 10. INDEMNIFICATION. Executive shall be entitled in connection with his employment hereunder to the benefit of the indemnification provisions contained in Employer's Amended and Restated Articles of Incorporation or By-Laws or any corporate resolution, as the same may be amended from time to time (not including any amendments or additions that limit or narrow, but including any that add to or broaden, the protection afforded to Executive), to the fullest extent permitted by applicable law. Employer shall in addition cause Executive to be indemnified in accordance with Chapter 37 of the Indiana Business Corporation Law, as the same may be amended from time to time, to the fullest extent permitted by such chapter, to the extent required to make Executive whole in connection with any loss, cost or expense indemnifiable thereunder. Executive shall be insured under the Employer's Director's and Officer's Liability Insurance Policy as in effect from time to time. Notwithstanding any other provision of this Agreement to the contrary, any termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10. 5 6 11. CONFIDENTIAL INFORMATION. 11.1 NON-DISCLOSURE. Executive acknowledges that certain information concerning the business of Employer is of a confidential nature and that as a result of his employment with Employer, Executive may have received or may hereafter receive confidential information concerning the business of Employer or its subsidiaries which, if known to competitors of Employer, would damage Employer, its subsidiaries or their respective businesses. Executive agrees that during the Term and for a period of one (1) year from the expiration or earlier termination of the Term (such additional one (1) year period, the "Applicable Period"), Executive will not divulge or appropriate to his own use, or to the use of any third party (other than Employer and its representatives or as directed in writing by Employer), any information or knowledge concerning the business of Employer or its subsidiaries which is not generally available to the public other than through the activities of Executive. Executive further agrees that upon termination of his employment for any reason, Employee will surrender to Employer all documents, brochures, writings, illustrations, price lists, marketing plans, budgets and other such materials which he received from or developed on behalf of Employer through his employment. Executive acknowledges that all such materials are at all times property of Employer. 11.2 INJUNCTIVE RELIEF. Executive acknowledges that his breach of Section 11.1 will cause irreparable injury and damage to Employer, the exact amount of which will be difficult to ascertain, that the remedies at law for any such breach would be inadequate, and that the provisions of this Section 11 have been negotiated and written to prevent such irreparable injury and damage. Accordingly, if Executive breaches Section 11.1, then Employer shall be entitled to injunctive relief enforcing Section 11.1 to the extent reasonably necessary to protect Employer's legitimate interests, without posting bond or other security. If Executive violates Section 11.1 and Employer brings legal action for injunctive or other relief, Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of non-disclosure set forth herein. Accordingly, the obligations set forth in Sections 11.1 shall be deemed to have the duration set forth therein, computed from the date such relief is granted but reduced by the time expired between the date the Applicable Period began to run and the date of the first violation of the covenants by Executive. 6 7 12. NON-INTERFERENCE AND NON-COMPETITION. 12.1 NON-INTERFERENCE. During the Term and for the Applicable Period, Executive will not, directly or indirectly, take any action (or permit any action to be taken by an entity with which he is associated) which has the effect of interfering with (i) on-air talent of Employer or its subsidiaries or (ii) any other employee of Employer. Without limiting the generality of the foregoing, Executive specifically agrees that during the Term and for the Applicable Period neither he nor any entity with which he is associated shall hire or engage any on-air talent of Employer or any other employee of Employer to provide services for any other business or solicit them to cease their employment with Employer. 12.2 NON-COMPETITION (DURING EMPLOYMENT). During the Term, Executive will not, without the prior written approval of the Board, engage directly or indirectly in, or become employed by, serve as an agent or consultant to or become an officer, director, partner, principal or shareholder of any corporation, partnership or other entity which is engaged in (i) the radio or television broadcasting business in any ADI radio or television market in which any member of the Emmis Group owns, operates or has an interest in (or has owned, operated or had an interest in) any broadcasting station at such time or at any time during the preceding two (2) years or (ii) publishing, selling or distributing any local or regional magazine or other publication within the smaller of (A) 50 miles of the principal place of publication of any magazine or other publication of any member of the Emmis Group at such time or (B) the geographic territory represented by a circle in which are located seventy percent (70%) of the subscribers to any magazine or other publication of any member of the Emmis Group at such time, or (iii) operates any other business which directly competes with any business of any member of the Emmis Group at such time. As long as Executive does not engage in any other activity prohibited by the immediately preceding sentence, Executive's ownership of less than five percent (5%) of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with Employer for the purpose of this Section 12.2. 12.3 NON-COMPETITION (POST-EMPLOYMENT). During the Applicable Period, Executive will not, without the prior written approval of the Board, engage directly or indirectly in, or become employed by, serve as an agent or consultant to or become an officer, director, partner, principal or shareholder of any corporation, partnership or other 7 8 entity which is engaged in (i) the radio or television broadcasting business in any ADI radio or television market in which any member of the Emmis Group owns, operates or has an interest in (or has owned, operated or had an interest in) any broadcasting station at such time or at any time during the preceding two (2) years or (ii) publishing, selling or distributing any local or regional magazine or other publication within the smaller of (A) 50 miles of the principal place of publication of any magazine or other publication of any member of the Emmis Group at such time or (B) the geographic territory represented by a circle in which are located seventy percent (70%) of the subscribers to any magazine or other publication of any member of the Emmis Group at such time, or (iii) operates any other business which directly competes with any business of any member of the Emmis Group at such time. As long as Executive does not engage in any other activity prohibited by the immediately preceding sentence, Executive's ownership of less than five percent (5%) of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with Employer for the purpose of this Section 12.3. 12.4 INJUNCTIVE RELIEF. Executive acknowledges and agrees that the provisions of this Section 12 have been specifically negotiated and carefully worded in recognition of the opportunities which will be afforded to Executive by Employer by virtue of his continued association with Employer, and the influence that Executive will have over Employer's employees, customers and suppliers by virtue of Executive's relationships with such persons. Executive further acknowledges that his breach of Section 12.1, 12.2 or 12.3 will cause irreparable injury and damage to Employer, the exact amount of which will be difficult to ascertain, that the remedies at law for any such breach would be inadequate, and that the provisions of this Section 12 have been negotiated and written to prevent such irreparable injury and damage. Accordingly, if Executive breaches Section 12.1, Section 12.2 or Section 12.3, then Employer shall be entitled to injunctive relief enforcing Section 12.1, 12.2 or 12.3, as the case may be, to the extent reasonably necessary to protect Employer's legitimate interests, without posting bond or other security. If Executive violates Section 12.1 or 12.3 and Employer brings legal action for injunctive or other relief, Employer shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of non-interference or non-competition set forth herein. Accordingly, the obligations set forth in Sections 12.1 and 12.3 shall be deemed to have the duration set forth therein, computed from the date such relief is granted but 8 9 reduced by the time expired between the date the Applicable Period began to run and the date of the first violation of the covenants by Executive. 12.5 CONSTRUCTION. In the event that, despite the express agreement herein of Employer and Executive, any provisions of this Section shall be determined by any court or other tribunal of competent jurisdiction to be unenforceable for any reason whatsoever, the parties agree that this Section 12 shall be interpreted to extend only to the maximum extent as to which it may be enforceable, and that the Section shall be severable into its component parts, all as determined by such court or tribunal. 13. TERMINATION OF AGREEMENT BY EMPLOYER. 13.1 TERMINATION FOR CAUSE. Employer may, by action of the Board, terminate Executive's employment hereunder for Cause (as defined in Section 13.3 below) in accordance with the terms and conditions of this Section. Following a determination by the Board that Executive should be terminated for Cause, Employer shall give written notice (the "Preliminary Notice") to Executive specifying the grounds for such termination, and Executive shall have ten (10) days after receipt of the Preliminary Notice to respond. If following expiration of such ten (10) day period the Board reaffirms its determination that Executive should be terminated for Cause, such termination shall be effective upon delivery by Employer to Executive of a final notice of termination (the "Final Notice"). 13.2 EFFECT OF TERMINATION. In the event of termination for Cause as provided in Section 13.1 above: (i) Executive shall have no further obligations or liabilities hereunder except his obligations under Sections 11 and 12, which shall survive such termination of this Agreement. (ii) Employer shall have no further obligations or liabilities hereunder, except that Employer shall, not later than two (2) weeks after the termination date: (A) Pay to Executive all unpaid Base Salary with respect to any period ending on or before the termination date, plus the compensation equivalent of all unused vacation days earned in the then current Contract Year prior to the termination date; and (B) Pay to Executive any Bonus which may have been earned for a Contract Year ending on or prior to the termination date pursuant to Section 7.2 but which is unpaid as of the termination date. 9 10 13.3 DEFINITION OF CAUSE. As used herein, "Cause" means either (i) action by Executive involving willful or repeated failure, neglect or refusal to perform any material obligation under this Agreement (or any duties assigned to Executive consistent with the terms of this Agreement) at the time and in the manner set forth herein (or in such assignment), and continuation of such breach after written notice and the expiration of a thirty (30) day cure period (provided, however, that it is not the parties' intention that Employer shall be required to provide successive such notices, and in the event Employer has provided Executive with a notice and opportunity to cure pursuant to this clause (i), it may terminate this Agreement for a subsequent breach similar or related to the breach for which notice was previously given or for a continuing series or pattern of breaches (whether or not similar or related) without providing notice or an opportunity to cure); or (ii) Executive's commission of a felony involving moral turpitude or Executive's action, knowing allowance of actions, or omissions which are in violation of the Communications Act of 1934, as amended, or the rules and regulations of the Federal Communications Commission (the "FCC") or which otherwise jeopardize the FCC licenses granted to Employer or its subsidiaries. 13.4 TERMINATION BY EMPLOYER OTHER THAN FOR CAUSE PRIOR TO A CHANGE IN CONTROL. Prior to a Change in Control, Employer shall have the right to terminate Executive's employment hereunder other than for Cause, death or because Executive is Disabled. However, if Employer terminates Executive's employment hereunder other than for Cause, death or because Executive is Disabled, Employer shall (i) pay Executive in bi-weekly payments the Base Salary for a period of one year after the date of such termination, (ii) not later than two (2) weeks after such termination date, grant to Executive any Executive Option required to be granted under the terms of Section 7.2 prior to such termination date but not yet granted as of such date, and (iii) not later than two (2) weeks after such termination date grant to Executive the prorated portion of the Stock Grant. 13.5 TERMINATION OTHER THAN FOR CAUSE OR MATERIAL BREACH BY EMPLOYER AFTER A CHANGE IN CONTROL. If, after any Change in Control, Employer 10 11 terminates Executive's employment other than for Cause or because Executive dies or becomes Disabled, or if, after any Change in Control Employer otherwise breaches any material provision of this Agreement and fails to cure such breach within ten (10) business days after written notice of such breach (which material provisions shall include but not be limited to Sections 3.1 or 5), (i) Employer shall pay Executive the Base Salary under Section 6 attributable to the remainder of the Term and the full portion of the Bonus for the remainder of the Term as if such Bonus had been awarded by the Compensation Committee, (ii) Employer shall grant to Executive any Executive Option required to be granted under the terms of Section 7.2 prior to such date but not yet granted as of such date, (iii) any Executive Options granted prior to such date which are subject to forfeiture pursuant to Section 7.2 shall vest, (iv) Employer shall pay to Executive in cash the fair market value (determined using the black-scholes option pricing method) of any Executive Options not granted as of such date to which Executive would have been entitled over the remainder of the Term assuming that no such Executive Options would have been forfeited under Section 7.2 and assuming a grant price equal to the Fair Market Value per share on such date and (v) Executive shall be automatically released from the restrictions under Section 12.. Any payments or grants required above shall be made by Employer not later than two (2) weeks after such termination date or the expiration of such cure period for which the material breach remains uncured. 14. DISABILITY. 14.1 TERMINATION OF EMPLOYMENT. If Executive shall become Disabled (as defined in Section 14.2), Employer shall continue to compensate Executive under the terms of this Agreement without diminution and otherwise without regard to such disability or nonperformance of duties, until Executive has been disabled for a cumulative period of six (6) months, at which time Executive's employment shall automatically terminate on the last day of such six (6) month period. The date that Executive's employment terminates pursuant to this Section is referred to herein as the "Disability Termination Date." 11 12 14.2 DISABILITY DEFINITION. Executive shall be deemed to have become "Disabled" for purposes of this Agreement if, during the Term, because of ill health, physical or mental disability or for other causes beyond his control he shall have been unable or unwilling or shall have failed to perform his duties hereunder, as determined by the written opinion of an independent medical physician designated by Employer and reasonably acceptable to Executive. 14.3 OBLIGATIONS AFTER TERMINATION. Unless Employer exercises its option under Section 14.6 below to reinstate Executive to his full compensation, duties, functions, responsibilities and authority hereunder for the then balance of the original Term, Executive shall have no further obligations or liabilities hereunder after a Disability Termination Date except his obligations under Sections 11 and 12 which shall survive. After a Disability Termination Date, Employer shall have no further obligations or liabilities hereunder except its obligations under Sections 10, 14.4, 14.5 and 14.6 below which shall survive. 14.4 PAYMENT OF UNPAID SALARY AFTER TERMINATION. Employer shall, not later than two (2) weeks after a Disability Termination Date, pay to Executive all unpaid Base Salary with respect to any period ending on or before the Disability Termination Date, plus the compensation equivalent of all unused vacation days earned in the then current Contract Year prior to the Disability Termination Date. 14.5 POST-TERMINATION COMPENSATION. Following a Disability Termination Date, Employer shall (i) pay to Executive in bi-weekly payments during each Contract Year or partial Contract Year remaining under this Agreement an amount equal to fifty percent (50%) of the Base Salary for such Contract Year or partial Contract Year and (ii) not later than two (2) weeks after a Disability Termination Date, grant to Executive any Executive Option required to be granted under the terms of Section 7.2 prior to such Disability Termination Date but not yet granted as of such date, and (iii) not later than two (2) weeks after a Disability Termination Date grant to Executive the prorated portion of the Stock Grant. The benefits required to be paid under this Section 14.5 (beginning with the Base Salary amount) shall be reduced by the amount of any benefits payable to Executive under any group or individual disability insurance plan or policy, the premiums for which are paid by Employer. 14.6 REINSTATEMENT. If during the original Term and subsequent to a Disability Termination Date, Executive shall fully recover from a disability, Employer shall have the 12 13 right (exercisable within sixty (60) days after written notice from Executive of such recovery), but not the obligation, to reinstate Executive to employment hereunder for the then balance of the original Term. In the event of such reinstatement, Employer shall pay Executive at his full level of compensation hereunder and otherwise employ Executive in accordance with the terms and provisions of this Agreement, and Executive shall be considered to have performed under this Agreement during the period between the Disability Termination Date and the date of such reinstatement for purposes of Sections 7.2 and 7.4 and any Stock Grant or Executive Options granted thereunder (with any Executive Options to have been granted during the period between the Disability Termination date and the date of such reinstatement to be granted as of the date of such reinstatement.). 15. DEATH OF EXECUTIVE. 15.1 TERMINATION OF AGREEMENT. This Agreement shall terminate upon Executive's death. In the event of such termination, Employer shall have no further obligations or liabilities hereunder (including, but not limited to, any obligation to make payments under Section 14 for any period after Executive's date of death) except its obligations under Section 15.2 below which shall survive such termination. 15.2 COMPENSATION. Upon Executive's death, Employer shall: (i) Not later than two (2) weeks after Executive's date of death, pay to Executive's estate or designated beneficiary all unpaid Base Salary with respect to any period ending on or before Executive's date of death, plus the compensation equivalent of all unused vacation days earned in the then current Contract Year prior to the termination date; (ii) Not later than two (2) weeks after Executive's date of death, grant to Executive's estate or designated beneficiary any Executive Option required to be granted under the terms of Section 7.2 prior to Executive's date of death but not yet granted as of such date; and (iii) Not later than two (2) weeks after Executive's date of death, grant to Executive's estate or designated beneficiary the prorated portion of the Stock Grant. 15.3 NO REDUCTION. Amounts payable pursuant to this Section shall not be reduced by the value of any benefits payable to the Executive's estate or designated beneficiary under any life insurance plan or policy. 13 14 15.4 DEATH AFTER TERMINATION. In the event Executive dies after termination of this Agreement pursuant to Sections 13 or 14, all amounts required to be paid by Employer prior to Executive's death in connection with such termination that remain unpaid as of Executive's date of death shall be paid to Executive's estate or designated beneficiary. 16. RENEWAL AFTER CHANGE IN CONTROL. If upon the expiration of the Term after the occurrence of a Change in Control Executive has not been offered a multi-year contract on substantially comparable or better terms than those set forth in this Agreement, Employer shall pay Executive after the Term a prorated portion of his Base Salary for up to nine months; provided, however, that Executive shall have a duty to mitigate Employer's obligations under this Section and any amounts payable to Executive under this Section shall be reduced by any compensation to Executive attributable to Executive's direct or indirect employment (whether as employee, consultant or other agent) by any person or entity during such nine month period. 17. NO MITIGATION REQUIRED. Executive shall not be required to mitigate any damages suffered by him by reason of Employer's breach hereof. Except as otherwise provided in this Agreement, no amounts payable to Executive by reason of the termination of his employment hereunder shall be subject to reduction or offset, or otherwise diminished, by reason of any other compensation received by Executive. 18. NOTICES. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): (a) If to Employer: Emmis Communications Corporation One Emmis Plaza, 7th Floor 40 Monument Circle Indianapolis, Indiana 46204 Attn.: Board of Directors (b) If to Executive, to him at his address on the personnel records of Employer. 14 15 19. GENERAL. 19.1 GOVERNING LAW. Employer and Executive acknowledge that Employer is based in Indiana and that Executive may travel extensively throughout the United States in the course of his duties for Employer. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Indiana. Employer and Executive agree that any and all actions or suits in connection with, arising out of or related to this Agreement or Executive's employment with Employer will be litigated only in courts of record located in Marion County, Indiana, and Employer and Executive each (i) consent and submit to the personal jurisdiction of any state or federal court located within Marion County, Indiana, (ii) waive any right to transfer or change the venue of any such litigation to a court located outside Marion County, Indiana and (iii) agree to service of process, to the extent permitted by law, by registered or certified mail, return receipt requested, addressed to such party's address as determined pursuant to Section 18 of this Agreement. Each of the agreements in this Section 19.1 is irrevocable to the fullest extent permitted by applicable law. 19.2 CAPTIONS. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 19.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties. 19.4 SUCCESSORS AND ASSIGNS. This Agreement, and Executive's rights and obligations hereunder, may not be assigned by Executive, except that Executive may designate pursuant to Section 19.6 one or more beneficiaries to receive any amounts that would otherwise be payable hereunder to Executive's estate. 19.5 AMENDMENTS; WAIVERS. This Agreement cannot be changed, modified or amended, and no provision or requirement hereof may be waived, without the consent in writing of Executive and Employer. The failure of a party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce such provision. No waiver by a party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach or a waiver of the breach of any other term or covenant contained in this Agreement. 15 16 19.6 BENEFICIARIES. Whenever this Agreement provides for any payment to Executive's estate, such payment may be made instead to such beneficiary or beneficiaries as Executive may have designated in a writing filed with Employer. Executive shall have the right to revoke any such designation and to redesignate a beneficiary or beneficiaries by written notice to Employer (and to any applicable insurance company). 19.7 SEVERABILITY. If any provision of this Agreement shall be declared invalid or unenforceable, the remainder of this Agreement will continue in full force and effect so far as the intent of the parties can be carried out. 16 17 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. EMMIS COMMUNICATIONS CORPORATION By: /s/ Jeffrey H. Smulyan ----------------------------- Jeffrey H. Smulyan Chairman of the Board and Chief Executive Officer "Employer" /s/ Walter Z. Berger --------------------------------- Walter Z. Berger "Executive" 17 18 Exhibit A Relocation terms: 1. reasonable house hunting expenses for family for up to 7 days; 2. payment of prevailing market broker's commission (of up to 7%) and typical seller's closing costs for sale of Louisville home; 3. payment of reasonable origination fee and points if required by the mortgage lender without affecting the rate or terms (not to exceed 2 points) for first mortgage loan on Indianapolis home; 4. reasonable packing and moving van expenses, including two vehicles; 5. reasonable temporary housing costs for up to 6 months; 6. for any period in which Walter is obligated to make regular monthly payments on both his Louisville mortgage and the mortgage on his new Indianapolis residence, Emmis shall reimburse Walter for the interest portion of his Louisville mortgage, not to exceed $2,508 per month, for a period not to exceed 6 months. 7. tax gross up on above amounts payable by Emmis to extent not qualified moving or relocation expenses under IRC. 18 EX-10.11 3 2ND AMEND. TO 2ND AMENDED & RESTATED AGREEMENT 1 EXHIBIT 10.11 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT This SECOND AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT dated as of February 11, 1999 (this "Amendment"), by and among (a) EMMIS COMMUNICATIONS CORPORATION (f/k/a/ EMMIS BROADCASTING CORPORATION), an Indiana corporation (the "Borrower"), (b) the lending institutions party to the Credit Agreement (as defined below) and listed on Schedule 1 thereto (collectively, the "Banks"), (c) TORONTO DOMINION (TEXAS), INC., a Delaware corporation, as administrative agent (the "Administrative Agent"), (d) BANKBOSTON, N.A., a national banking association, as documentation agent (the "Documentation Agent"), and (e) FIRST UNION NATIONAL BANK, a national banking association, as syndication agent (the "Syndication Agent" and, collectively with the Administrative Agent and the Documentation Agent, the "Agents"). Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Credit Agreement, defined below. WHEREAS, the Borrower, the Banks and the Agents are parties to a Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 16, 1998 (as amended and in effect from time to time, the "Credit Agreement"), pursuant to which the Banks have extended credit to the Borrower on the terms and subject to the conditions set forth therein; WHEREAS, the Borrower, the Banks and the Agents have agreed to amend the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the Credit Agreement as follows: 1. AMENDMENTS TO SECTION 1.1. OF THE CREDIT AGREEMENT. (a) The definition of "Applicable Margin" is hereby amended by (i) deleting the table in clause (a) of such definition and substituting in its place the following table:
- ------------------------------------------------------------------------------------------------ Base Rate Applicable Eurodollar Rate Applicable Total Leverage Ratio Margin Margin -------------------- ------ ------ - ------------------------------------------------------------------------------------------------ Greater than or equal to 7.00:1.00 1.625% 2.625% - ------------------------------------------------------------------------------------------------ Less than 7.00:1.00 but greater 1.375% 2.375% than or equal to 6.75:1.00 - ------------------------------------------------------------------------------------------------
2 - ------------------------------------------------------------------------------------------------ Less than 6.75:1.00 but greater 1.125% 2.125% than or equal to 6.50:1.00 - ------------------------------------------------------------------------------------------------ Less than 6.50:1.00 but greater 0.875% 1.875% than or equal to 6.00:1.00 - ------------------------------------------------------------------------------------------------ Less than 6.00:1.00 but greater 0.375% 1.375% than or equal to 5.50:1.00 - ------------------------------------------------------------------------------------------------ Less than 5.50:1.00 but greater 0.125% 1.125% than or equal to 5.00:1.00 - ------------------------------------------------------------------------------------------------ Less than 5.00:1.00 but greater 0.000% 0.875% than or equal to 4.50:1.00 - ------------------------------------------------------------------------------------------------ Less than 4.50:1.00 0.000% 0.625% - ------------------------------------------------------------------------------------------------
and (ii) deleting the table in clause (b) of such definition and substituting in its place the following table:
- ------------------------------------------------------------------------------------------------ Base Rate Applicable Eurodollar Rate Applicable Total Leverage Ratio Margin Margin -------------------- ------ ------ - ------------------------------------------------------------------------------------------------ Greater than or equal to 7.00:1.00 1.750% 2.750% - ------------------------------------------------------------------------------------------------ Less than 7.00:1.00 but greater than or equal to 5.00:1.00 1.500% 2.500% - ------------------------------------------------------------------------------------------------ Less than 5.00:1.00 1.375% 2.375% - ------------------------------------------------------------------------------------------------
(b) The definition of "Borrower Security Agreement" is hereby amended by inserting the word "Borrower" after the words "Second Amended and Restated" and before the words "Security Agreement" contained in such definition. (c) The definition of "Borrower Stock Pledge Agreement" is hereby amended by inserting the word "Borrower" after the words "Second Amended and Restated" and before the words "Stock Pledge Agreement" contained in such definition. (d) The definition of "Copyright Notice" is hereby amended by deleting the word "Second" contained in such definition. (e) The definition of "Guaranty" is hereby amended by deleting the phrase "Second Amended and Restated Guaranty" contained in such definition and substituting therefor the phrase "Third Amended and Restated Subsidiary Guaranty". 3 (f) The definition of "Partnership Pledge Agreement" is hereby amended by inserting the words "Amended and Restated" after the word "The" and before the words "Collateral Assignment of Partnership Interests" contained in such definition. (g) The definition of "Subsidiary Pledge Agreement" is hereby amended by deleting the word "Second" contained in such definition and substituting therefor the word "Third". (h) The definition of "Subsidiary Security Agreement" is hereby amended by deleting the phrase "Second Amended and Restated Security Agreement" contained in such definition and substituting therefor the phrase "Third Amended and Restated Subsidiary Security Agreement". (i) The definition of "Trademark Assignment" is hereby amended by deleting such definition in its entirety and restating it as follows: "Trademark Assignments. Collectively, the Second Amended and Restated Borrower Trademark Collateral Security and Pledge Agreement, dated as of the date hereof, as the same may be amended from time to time hereafter, between the Borrower and the Administrative Agent, and the Second Amended and Restated Subsidiary Trademark Collateral Security and Pledge Agreement, dated as of the date hereof, as the same may be amended from time to time hereafter, among the Subsidiaries of the Borrower named therein and the Administrative Agent, each in form and substance satisfactory to the Banks and the Administrative Agent." (j) The definition of "Excluded Subsidiary" is hereby amended by deleting such definition in its entirety and restating it as follows: "Excluded Subsidiaries. Radio Hungary, Emmis Pledge Corporation, a Delaware corporation, a wholly owned Subsidiary of Emmis and any other Subsidiary formed or acquired in the future and designated as an Excluded Subsidiary by Borrower, so long as such designation would not cause a Default or Event of Default." (k) The definitions of "Holdco", "Senior Debt" and "Total Funded Debt" are hereby amended by deleting the references to "Section 10.1(k)" contained therein and substituting therefor "Sections 10.1(k) and 10.1(l)". (l) The definition of "Leverage Ratio" is hereby amended, and all references to such definition contained in the Credit Agreement and the other Loan Documents are likewise amended, by substituting for the term "Leverage Ratio" the phrase "Total Leverage Ratio". "Total Leverage Ratio" shall have the same meaning as "Leverage Ratio" in the Credit Agreement as in effect immediately prior to the Second Amendment Effective Date. (m) The definition of "Restricted Payments" is hereby amended by deleting such definition in its entirety and restating it as follows: 4 "Restricted Payments. Collectively, distributions, dividends or other payments in respect of the capital stock of the Borrower, whether in cash or assets, other than distributions of shares of Borrower's common stock; payments, defeasance or repurchases of, or in respect of, any subordinated debt (including, without limitation, any Indebtedness permitted under Sections 10.1(k) or 10.1(l) hereof); and payments of management, consulting or similar fees to Affiliates of the Borrower." (n) The definition of "Tranche A Commitment Amount" shall be amended by deleting the reference to "$150,000,000" contained therein and substituting in its place a reference to "$400,000,000". (o) Section 1.1 to the Credit Agreement is further amended by adding the following definitions in correct alphabetical order: "Second Amendment Effective Date. The date on which all conditions to effectiveness set forth in Section 15 of the Second Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of February 11, 1999, among the Borrower, the Agents and the Banks, are satisfied." "Subordinated Note Documents. Each of the documents, instruments (including the Subordinated Notes) and other agreements entered into or delivered by the Borrower (including, without limitation, the Subordinated Note Indenture) and/or any Subsidiary of the Borrower relating to the issuance by the Borrower of the Subordinated Notes and any guaranties or other documents related thereto, as in effect on the Second Amendment Effective Date and as the same may be supplemented, amended or modified from time to time in accordance with the terms hereof (including, without limitation, Section 10.12) and thereof." "Subordinated Note Indenture. The Indenture, dated as of February 12, 1999, by and between the Borrower and IBJ Whitehall Bank & Trust Company, as trustee thereunder, with respect to the Subordinated Notes, as in effect on the Second Amendment Effective Date and as the same may be supplemented, amended or modified from time to time in accordance with the terms hereof (including, without limitation, Section 10.12) and thereof." "Subordinated Notes. The 8.125% Subordinated Notes due 2009 in the aggregate principal amount of $300,000,000 issued by the Borrower under the Subordinated Note Indenture." "Subordinated Note Proceeds. See Section 4.3(f) hereof." "Surplus Proceeds. See Section 4.3(f) hereof." 2. AMENDMENT TO SECTION 2.1.2 OF THE CREDIT AGREEMENT. Section 2.1.2 of the Credit Agreement is hereby amended by inserting at the end of the first sentence of such Section the following phrase: 5 "; provided, however, in the event that during any calendar quarter in respect of which a commitment fee is payable the average daily amount of outstanding Tranche A Loans plus the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations is less than fifty percent (50%) of the Tranche A Commitment Amount, then the commitment fee for such calendar quarter for Tranche A Loans shall be increased above the otherwise applicable rate by 0.125% per annum." 3. AMENDMENT TO SECTION 4.2 OF THE CREDIT AGREEMENT. Section 4.2 of the Credit Agreement is hereby amended by deleting such Section in its entirety and restating it as follows: "4.2 OPTIONAL PREPAYMENT OF TERM LOANS. The Borrower shall have the right at any time to prepay the Term Notes on or before the Maturity Date relating thereto, as a whole, or in part, upon not less than three (3) Business Days' prior written notice to the Administrative Agent, without premium or penalty; provided that, (a) each partial prepayment shall be in the principal amount of $500,000 or in integral multiples of $100,000 in excess thereof, (b) any portion of the Term Loans bearing interest at the Eurodollar Rate may only be prepaid pursuant to this Section 4.2 on the last day of the Interest Period relating thereto, and (c) each partial prepayment shall be allocated among the Banks, in proportion, as nearly as practicable, to the respective outstanding amount of each Bank's Tranche C Term Note and Fund Tranche Term Note, with adjustments to the extent practicable to equalize any prior prepayments not exactly in proportion. Each prepayment of principal of the Term Loans shall include all interest accrued to the date of prepayment and shall be applied against the scheduled installments of principal due on the Tranche C Term Loan and the Fund Tranche Term Loan, in the inverse order of maturity. No amount repaid with respect to the Term Loans may be reborrowed." 4. AMENDMENT OF SECTION 4.3(e) OF THE CREDIT AGREEMENT. Section 4.3(e) of the Credit Agreement is hereby amended by deleting such Section in its entirety and restating it as follows: "(e) If as of the last day of the fiscal quarter most recently ended prior to the issuance of unsecured and subordinated debt by HoldCo, the Borrower or any of its Subsidiaries pursuant to Section 10.1(l) hereof, the Total Leverage Ratio calculated for the period of four consecutive fiscal quarters ending on such last day as if such unsecured and subordinated debt were outstanding on such date is greater than 6.50:1.00, then within ten (10) days after such issuance the Borrower shall prepay the Loans by an amount equal to fifty percent (50%) of the gross proceeds from such issuance. Such proceeds shall be applied (i) (A) prior to the Tranche C Conversion Date, to the principal installments of the Fund Tranche Term Loans and (B) after the Tranche C Conversion Date, pro rata to the remaining principal installments of the Fund Tranche Term Loan and the Tranche C Term Loan, and (ii) if the Term Loans have been paid in full, to repay Tranche A Loans and the Tranche C Loans (if such repayment is prior to the Tranche C Conversion Date). If the Term Loans have been paid in full, and all outstanding borrowings under the Revolving Credit Loans have been paid in full, the Tranche A Commitment Amount and 6 Tranche C Commitment Amount shall be permanently reduced by the unapplied portion of fifty percent (50%) of such gross proceeds. Any mandatory prepayment of principal of the Loans required hereunder shall be accompanied by a payment of all interest accrued to the date of such prepayment. Any mandatory prepayment of Term Loans hereunder shall not reduce the scheduled repayment installments required under Section 3.4 hereof. The Tranche A Commitment Amount and the Tranche C Commitment Amount, respectively, shall be permanently reduced by the amount of such proceeds applied to repay Tranche A Loans and Tranche C Loans (as the case may be); provided that, such reduction shall not reduce the scheduled Tranche A Commitment Amount reductions set forth in Section 2.1.3 above. Each such mandatory prepayment shall be allocated among the Banks in proportion, as nearly as practicable, to the respective aggregate amounts outstanding on each Bank's Notes evidencing the Loan or Loans advanced under the applicable Tranche. In the event that any Term Loan is required to be prepaid hereunder, all principal amounts prepaid shall be applied against the scheduled installments of principal due on such Term Loan in the inverse order of maturity. (f) In the event the gross proceeds from the Subordinated Notes (the "Subordinated Note Proceeds") exceed $300,000,000, in the aggregate, then within ten (10) days after the issuance of the Subordinated Notes, the Borrower shall prepay the Loans by an amount equal to the difference between the Subordinated Note Proceeds and $300,000,000 (the "Surplus Proceeds"). The Surplus Proceeds shall be applied pro rata to prepay outstanding Loans in all Tranches and to the extent applied to repay Revolving Credit Loans, the Tranche A Commitment Amount and the Tranche C Commitment Amount (as the case may be) shall be permanently reduced by the amount of Revolving Credit Loans in such Tranche which were so repaid. In the event all outstanding Loans have been paid in full, the Tranche A Commitment Amount and Tranche C Commitment Amount shall be permanently reduced by the amount of any remaining Surplus Proceeds. Any mandatory prepayment of principal of the Loans required hereunder shall be accompanied by a payment of all interest accrued to the date of such prepayment. Any mandatory prepayment of Term Loans hereunder shall not reduce the scheduled repayment installments required under Section 3.4 hereof. Any reductions in the Tranche A Commitment Amount shall not reduce the scheduled Tranche A Commitment Amount reductions set forth in Section 2.1.3. Each such mandatory prepayment shall be allocated among the Banks in proportion, as nearly as practicable, to the respective aggregate amounts outstanding on each Bank's Notes evidencing the Loan or Loans advanced under the applicable Tranche. In the event that any Term Loan is required to be prepaid hereunder, all principal amounts prepaid shall be applied against the scheduled installments of principal due on such Term Loan in the inverse order of maturity." 5. AMENDMENT TO SECTION 10.1 OF THE CREDIT AGREEMENT. Section 10.1 of the Credit Agreement is hereby amended be deleting Sections 10.1(k) and 10.1(l) in their entirety and inserting the following in substitution therefor: "(k) unsecured Indebtedness in the aggregate principal amount of $300,000,000 evidenced by the Subordinated Notes and guaranteed by certain Subsidiaries of the Borrower which guarantees are junior and subordinated to the obligations of the 7 Subsidiaries (other than the Excluded Subsidiaries) under the Guaranty on the same basis and to the same extent as the Indebtedness evidenced by the Subordinated Notes is subordinated to the Obligations; provided, that the Surplus Proceeds are applied pursuant to Section 4.3(f) of this Credit Agreement; (l) Indebtedness of the Borrower and/or HoldCo (exclusive of Indebtedness incurred in connection with the Subordinated Notes issued in February of 1999), in an aggregate amount not to exceed $250,000,000; provided that (i) such Indebtedness is unsecured and fully subordinated, on terms satisfactory to the Agents and the Majority Banks, to the Obligations and the Agents' and the Banks' rights hereunder and under the other Loan Documents and is subject to terms and conditions which are in the judgement of the Agents and the Majority Banks, less restrictive to the Borrower and its Subsidiaries than are the terms set forth herein and in the other Loan Documents, (ii) no Default or Event of Default has occurred and is continuing immediately prior to the incurrence thereof and no Default or Event of Default will result therefrom, and (iii) the proceeds of such Indebtedness are applied pursuant to Section 4.3(e) of this Credit Agreement; (m) other Indebtedness, contingent or otherwise, in an aggregate amount outstanding at any one time not to exceed $10,000,000." 6. AMENDMENTS TO SECTION 10.3 OF THE CREDIT AGREEMENT. Section 10.3 of the Credit Agreement is hereby amended as follows: (a) Section 10.3(d) is amended by deleting such Section in its entirety and restating it as follows: "(d) Investments existing on the Second Amendment Effective Date and listed on Schedule 10.3 hereto, including the Investments described elsewhere in this Section 10.3 and existing on the Second Amendment Effective Date;" (b) Section 10.3(l) is amended by deleting the reference to "$25,000,000" in such Section and substituting in its place "$50,000,000"; and (c) Section 10.3(n) is amended by deleting the reference to "$5,000,000" in such Section and substituting in its place "$10,000,000". 7. AMENDMENT TO SECTION 10.4. OF THE CREDIT AGREEMENT. Section 10.4. of the Credit Agreement is hereby amended by deleting clause (d) of such Section in its entirety and restating it as follows: "(d) so long as no Default or Event of Default has occurred or is continuing or would occur as a result thereof, scheduled payments of interest by the Borrower on subordinated Indebtedness permitted by Sections 10.1(k) and 10.1(l) above." 8. AMENDMENTS TO SECTION 10.5 OF THE CREDIT AGREEMENT. Section 10.5 of the Credit Agreement is hereby amended as follows: 8 (a) Section 10.5(g) of the Credit Agreement is hereby amended by deleting the reference to "$1,000,000" contained therein and replacing the same with "$10,000,000"; and (b) Section 10.5(h) of the Credit Agreement is hereby amended by deleting the references to "$50,000,000" and "$75,000,000" contained therein and replacing the same with "$75,000,000" and "$100,000,000" respectively. 9. AMENDMENT TO SECTION 10.9 OF THE CREDIT AGREEMENT. Section 10.9 of the Credit Agreement is hereby amended by deleting such Section in its entirety and restating it as follows: "10.9. SUBSIDIARY DISTRIBUTIONS. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement or otherwise become subject to any restriction or requirement which has the effect of prohibiting or limiting any Subsidiary's ability to (a) make Distributions to the Borrower, (b) pay any Indebtedness owed to the Borrower or the Borrower's other Subsidiaries (other than an Excluded Subsidiary), (c) make loans or advances to the Borrower or the Borrower's other Subsidiaries (other than an Excluded Subsidiary), or (d) transfer any of its properties or assets to the Borrower or the Borrower's other Subsidiaries (other than an Excluded Subsidiary)." 10. AMENDMENT TO SECTION 10.10 OF THE CREDIT AGREEMENT. Section 10.10 of the Credit Agreement is hereby amended by deleting the reference to "Section 10.1(k)" contained therein and substituting in its place a reference to "Section 10.1(l)". 11. AMENDMENT TO SECTION 10 OF THE CREDIT AGREEMENT. Section 10 of the Credit Agreement is hereby further amended by inserting the following Section 10.12 in its correct numerical position therein: "10.12 AMENDMENTS TO SUBORDINATED NOTE DOCUMENTS. Borrower will not amend, modify or change the terms of any Subordinated Note Document if the effect of such amendment is to (a) increase the interest rate on the Subordinated Notes, (b) change the dates upon which payments of principal or interest are due on the Subordinated Notes (other than to extend such dates), (c) change any default or event of default relating thereto other than to delete or make less restrictive any default provision therein, or add any covenant with respect to any Subordinated Note Document, (d) change the redemption or prepayment provisions of the Subordinated Notes other than to extend the dates therefor or to reduce the premiums payable in connection therewith, (e) grant any security or liens to secure the Subordinated Notes, (f) change any subordination provisions, terms or conditions, or (g) change or amend any other term if such change or amendment would materially increase the obligations of the obligor or confer additional material rights to the holders of the Subordinated Notes in a manner adverse to the Borrower, its Subsidiaries, the Agents or the Banks." 9 12. AMENDMENT TO SECTION 11.2 OF THE CREDIT AGREEMENT. Section 11.2 of the Credit Agreement is hereby amended by deleting such Section in its entirety and restating it as follows: 11.2. TOTAL LEVERAGE RATIO. The Borrower will not permit the Total Leverage Ratio, determined as at the last day of any fiscal quarter ending on any date or during any period described in the table set forth below, to exceed the ratio set forth opposite such date or period in such table:
----------------------------------------------------------------- PERIOD RATIO ----------------------------------------------------------------- Closing Date - 11/30/98 7.35:1.00 ----------------------------------------------------------------- 12/01/98 - 8/31/99 7.00:1.00 ----------------------------------------------------------------- 9/01/99 - 2/29/00 6.75:1.00 ----------------------------------------------------------------- 3/01/00 - 8/31/00 6.50:1.00 ----------------------------------------------------------------- 9/01/00 - 2/28/01 6.25:1.00 ----------------------------------------------------------------- 3/01/01 - 2/28/02 6.00:1.00 ----------------------------------------------------------------- Thereafter 5.00:1.00 -----------------------------------------------------------------
13. AMENDMENT TO SECTION 11.5 OF THE CREDIT AGREEMENT. Section 11.5 of the Credit Agreement is hereby amended by deleting such Section in its entirety and restating it as follows: 11.5 SENIOR LEVERAGE RATIO. The Borrower will not permit the Senior Leverage Ratio, determined as of the last day of any fiscal quarter ending on any date or during any period described in the table set forth below, to exceed the ratio set forth opposite such date or period in such table:
----------------------------------------------------------------- PERIOD RATIO ----------------------------------------------------------------- Closing Date - 8/31/99 5.50:1.00 ----------------------------------------------------------------- 9/01/99 - 2/29/00 5.25:1.00 ----------------------------------------------------------------- 3/01/00 - 8/31/00 5.00:1.00 ----------------------------------------------------------------- 9/01/00 - 2/28/01 4.75:1.00 ----------------------------------------------------------------- 3/01/01 - 2/28/02 4.50:1.00 ----------------------------------------------------------------- Thereafter 3.50:1.00 -----------------------------------------------------------------
14. AMENDMENTS TO SECTION 15.1 OF THE CREDIT AGREEMENT. Section 15.1 of the Credit Agreement is hereby amended as follows: (a) Section 15.1.(e) of the Credit Agreement is hereby amended by deleting Section 15.1.(e) in its entirety and restating it as follows: "(e) any representation or warranty of the Borrower, any of its Subsidiaries or HoldCo in this Credit Agreement, any other Loan Document, any Subordinated Note Document 10 or in any other document or instrument delivered pursuant to or in connection with this Credit Agreement shall prove to have been false in any material respect upon the date when made or deemed to have been made or repeated;" (b) Section 15.1.(u) of the Credit Agreement is hereby amended by deleting the reference to "Section 10.1(k)" contained therein and substituting in its place "Section 10.1(l)"; (c) Section 15.1.(v) of the Credit Agreement is hereby amended by deleting Section 15.1.(v) in its entirety and restating it as follows: "(v) the holders of any part of the Indebtedness described in Sections 10.1(k) or 10.1(l) hereof or the holders of the SF Broadcasting Seller Note shall accelerate the maturity of all or any part of such Indebtedness or such Indebtedness shall be prepaid, defeased, redeemed or repurchased in whole or in part or any default shall occur with respect thereto or if the subordination provisions of such Indebtedness are found by any court, or asserted by the trustee in respect of, or any holder of, Subordinated Debt in a judicial proceeding to be, invalid or unenforceable or in the case of the SF Broadcasting Seller Note any portion of the principal and interest obligations owing thereunder and/or any obligations under Section 2.5(e) of the SF Asset Purchase Agreement as in effect on the Closing Date shall be paid in any manner other than (i) by the issuance and delivery to the holder of the SF Broadcasting Seller Note, or its nominee, of Class A Common Stock of the Borrower or with cash proceeds from an issuance of such Class A Common Stock which occurred after the Closing Date and prior to the date of such payment or (ii) contemporaneously with the issuance of the Subordinated Notes, with the Subordinated Note Proceeds or with cash proceeds from Loans advanced in connection therewith; and" (d) Section 15.1 of the Credit Agreement is hereby amended by inserting the following in its entirety after clause (v) of such Section: "(w) at any time, any of the Borrower's Subsidiaries shall provide a guaranty of the Borrower's obligations under the Subordinated Notes if such Subsidiary is not at such time guarantying the Obligations pursuant to the Guaranty or if such guaranty of the Borrowers obligations under the Subordinated Note is not subordinated to such Subsidiary's Obligations under the Guaranty;" 15. AMENDMENT TO SECTION 16.1 OF THE CREDIT AGREEMENT. Section 16.1 of the Credit Agreement is hereby amended by inserting the following clause (f) in its entirety immediately following clause (e) in the first sentence of such Section: ", and (f) the additional Indebtedness represented by such additional commitments shall be considered "Senior Debt" under and as defined in the Subordinated Note Documents and the Banks and the Administrative Agent shall have received a legal opinion, in form and substance satisfactory to the Banks and the Administrative Agent, from Borrower's counsel to such effect". 11 16. AMENDMENTS TO SCHEDULES 1 AND 10.3 TO THE CREDIT AGREEMENT. Schedules 1 and 10.3 to the Credit Agreement are hereby amended by deleting such Schedules in their entirety and substituting therefor Schedules 1 and 10.3 attached hereto. 17. PAYMENT OF TRANCHE B TERM LOAN. The Borrower and the Banks hereby agree that on the Effective Date hereof, the outstanding principal amount of the Tranche B Term Loan shall be automatically converted to Tranche A Loans owing to each of the Banks in the same proportion as the Tranche B Loans advanced by each such Bank and outstanding immediately prior to such conversion and the Tranche B Term Loan shall be deemed to be repaid with the proceeds of such converted Tranche A Loans. The interest accrued on such Tranche B Loans shall be paid in accordance with the terms of the Credit Agreement as though such interest had accrued on Tranche A Loans and any Interest Period applicable to the Tranche B Loan immediately prior to such conversion shall continue to be applicable to the converted Tranche A Loans as though such Loans had been Tranche A Loans when initially advanced. 18. AMENDMENT FEES. In consideration of the Banks and the Agents amending the Credit Agreement as set forth herein, the Borrower hereby agrees to pay an amendment fee in an amount equal to $812,500 (the "Amendment Fee") to the Administrative Agent for the pro rata accounts of the Banks in accordance with each such Bank's Commitment Percentage of the Tranche A Commitment Amount (after giving effect to this Amendment) and the Fund Tranche Term Loan. The Borrower also hereby acknowledges that the Amendment Fee shall be deemed fully earned and payable upon satisfaction of the conditions to effectiveness set forth in Section 19 hereof and shall constitute an Obligation of the Borrower under the Credit Agreement. 19. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective (the "Effective Date") upon the satisfaction of the following conditions: (a) this Amendment shall have been executed and delivered to the Administrative Agent by each of the Banks, the Agent and the Borrower and shall have been acknowledged and agreed to by each Subsidiary party to the Guaranty; (b) the Borrower shall have executed and delivered to the Administrative Agent amended Tranche A Notes payable to each Bank in the principal amount of each Bank's Tranche A Commitment Amount (as increased after giving effect to this Amendment); (c) the Administrative Agent shall have received copies of all Subordinated Note Documents executed or delivered in connection with the issuance of the Subordinated Notes (including, without limitation, any legal opinions delivered in connection therewith) certified by an officer of the Borrower to be true and complete copies of such Subordinated Note Documents; 12 (d) the Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent that the Borrower has received gross proceeds from the Subordinated Notes in an amount equal to or greater than $300,000,000; (e) the Administrative Agent shall have received a certificate signed by duly authorized financial officer of the Borrower that each of the representations and warranties of any of the Borrower and its Subsidiaries contained in this Amendment, the Credit Agreement, the other Loan Documents, the Subordinated Note Documents or in any document or instrument delivered pursuant to or in connection herewith or therewith shall have been true as of the date as of which they were originally made and shall also be true on the date hereof, that no Default or Event of Default shall have occurred and be continuing and that the Subordinated Notes have been issued in accordance with the terms of the Subordinated Note Indenture; (f) each of the Banks and the Administrative Agent shall have received a favorable opinion addressed to the Banks and the Administrative Agent, dated as of the date hereof, in form and substance satisfactory to the Banks and the Administrative Agent, from Bose McKinney & Evans, counsel to the Borrower and its Subsidiaries; and (g) all corporate action necessary for the valid execution, delivery and performance by the Borrower and each of its Subsidiaries of this Amendment, the amended and restated Tranche A Notes and any Subordinated Note Document to which it is or is to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Banks shall have been provided to each of the Banks. 20. AFFIRMATION OF THE BORROWER. The Borrower hereby affirms all of its Obligations under the Credit Agreement and under each of the other Loan Documents to which it is a party and hereby affirms its absolute and unconditional promise to pay to the Banks the Loans and all other amounts due under the Credit Agreement and the other Loan Documents. The Borrower hereby represents, warrants and confirms that the Obligations are and remain secured pursuant to the Security Documents. 21. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Banks and the Administrative Agent as follows: (a) Representations and Warranties. Each of the representations and warranties contained in Section 8 of the Credit Agreement were true and correct in all material respects when made, and, after giving effect to this Amendment, are true and correct on and as of the date hereof, except to the extent that such representations and warranties relate specifically to a prior date. (b) Enforceability. The execution and delivery by the Borrower of this Amendment and the new Tranche A Notes, and the performance by the Borrower of this Amendment, the Credit Agreement and the other Loan Documents, all as amended hereby, are within the corporate authority of the Borrower and have been duly authorized by all necessary corporate proceedings. This Amendment, the Credit Agreement and the 13 other Loan Documents, all as amended hereby, constitute valid and legally binding obligations of the Borrower, enforceable against it in accordance with their terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditors' rights in general. (c) No Default. No Default or Event of Default has occurred and is continuing, and no Default or Event of Default will result from the execution, delivery and performance by the Borrower of this Amendment. 22. NO OTHER AMENDMENTS, ETC. Except as expressly provided in this Amendment, (a) all of the terms and conditions of the Credit Agreement and the other Loan Documents remain unchanged and (b) all of the terms and conditions of the Credit Agreement, as amended hereby, and of the other Loan Documents are hereby ratified and confirmed and remain in full force and effect. Nothing herein shall be construed to be an amendment, modification or waiver of any requirements of the Borrower or of any other Person under the Credit Agreement or any of the other Loan Documents except as expressly set forth herein. 23. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 24. MISCELLANEOUS. This Amendment shall for all purposes be construed in accordance with and governed by the laws of The State of New York. The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof. The Borrower agrees to pay to the Administrative Agent, on demand by the Administrative Agent, all reasonable out-of-pocket costs and expenses incurred or sustained by the Administrative Agent in connection with the preparation of this Amendment, including reasonable legal fees. 14 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. EMMIS COMMUNICATIONS CORPORATION (f/k/a Emmis Broadcasting Corporation) By: -------------------------------- Name: Title: 15 TORONTO DOMINION (TEXAS), INC. By: --------------------------- Title: 16 BANKBOSTON, N.A. By: --------------------------- Title: 17 FIRST UNION NATIONAL BANK By: -------------------------- Title: 18 THE BANK OF NEW YORK By: ------------------------------- Title: 19 PARIBAS (f/k/a BANQUE PARIBAS) By: ------------------------------- Title: By: ------------------------------- Title: 20 BARCLAYS BANK PLC By: ------------------------------- Title: 21 COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By: ------------------------------- Title: 22 FLEET BANK, N.A. By: ------------------------------- Title: 23 KEY CORPORATE CAPITAL INC. By: ------------------------------- Title: 24 MELLON BANK, N.A. By: ------------------------------- Title: 25 COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND," NEW YORK BRANCH By: ------------------------------- Title: By: ------------------------------- Title: 26 UNION BANK OF CALIFORNIA, N.A. By: ------------------------------- Title: 27 FIRST DOMINION CAPITAL LLC By: ------------------------------- Title: 28 BANK OF MONTREAL By: ------------------------------- Title: 29 BANK ONE, INDIANA, N.A. By: ------------------------------- Title: 30 SUNTRUST BANK, CENTRAL FLORIDA, N.A. By: ------------------------------- Title: 31 CITY NATIONAL BANK By: ------------------------------- Title: 32 CREDIT LYONNAIS NEW YORK BRANCH By: ------------------------------- Title: 33 CREDIT SUISSE FIRST BOSTON By: ------------------------------- Title: 34 FIRST HAWAIIAN BANK By: ------------------------------- Title: 35 MERCANTILE BANK NATIONAL ASSOCIATION By: ------------------------------- Title: 36 NATIONAL CITY BANK OF INDIANA By: ------------------------------- Title: 37 SUMMIT BANK By: ------------------------------- Title: 38 AG CAPITAL FUNDING PARTNERS, L.P. BY: ANGELO, GORDON & CO., L.P., AS INVESTMENT ADVISER By: ------------------------------- Title: 39 GCB INVESTMENT PORTFOLIO BY: CITIBANK, N.A. AS MANAGER By: ------------------------------- Title: 40 CYPRESSTREE INSTITUTIONAL FUND, LLC BY: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., ITS MANAGING MEMBER By: ------------------------------- Title: CYPRESSTREE SENIOR FLOATING RATE FUND BY: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., AS PORTFOLIO MANAGER By: ------------------------------- Title: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC. AS: ATTORNEY-IN-FACT AND ON BEHALF OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY AS PORTFOLIO MANAGER By: ------------------------------- Title: 41 OCTAGON LOAN TRUST BY: OCTAGON CREDIT INVESTORS, AS MANAGER By: ------------------------------- Title: 42 KZH CYPRESSTREE-1 LLC By: ------------------------------- Title: KZH SHOSHONE LLC By: ------------------------------- Title: KZH ING-1 LLC By: ------------------------------- Title: 43 STEIN ROE & FARNHAM INCORPORATED, AS AGENT FOR KEYPORT LIFE INSURANCE COMPANY By: ------------------------------- Title: 44 THE TRAVELERS INSURANCE COMPANY By: ------------------------------- Title: 45 OXFORD STRATEGIC INCOME FUND BY EATON VANCE MANAGEMENT AS INVESTMENT ADVISOR By: ------------------------------- Title: 46 MORGAN STANLEY SENIOR FUNDING, INC. By: ------------------------------- Title: 47 MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: ------------------------------- Title: 48 TCW LEVERAGED INCOME TRUST II, L.P. BY: TCW ADVISERS (BERMUDA), LTD., AS GENERAL PARTNER By: ----------------------------------- Name: Mark L. Gold Title: Managing Director BY: TCW INVESTMENT MANAGEMENT COMPANY, AS INVESTMENT ADVISER By: ----------------------------------- Name: Title: 49 VAN KAMPEN SENIOR INCOME TRUST By: ------------------------------- Title: 50 MERRILL LYNCH SENIOR FLOATING RATE FUND By: ------------------------------- Title: MERRILL LYNCH PRIME RATE PORTFOLIO By: ------------------------------- Title: 51 SENIOR DEBT PORTFOLIO BY BOSTON MANAGEMENT AND RESEARCH AS INVESTMENT ADVISOR By: ------------------------------- Title: 52 PAM CAPITAL FUNDING L.P. By: ------------------------------- Title: 53 ARCHIMEDES FUNDING II LTD. By: ------------------------------- Title: 54 BANK OF HAWAII By: ------------------------------- Title: 55 THE CIT GROUP/EQUIPMENT FINANCING, INC. By: ------------------------------- Title: 56 FRANKLIN FLOATING RATE TRUST By: ------------------------------- Title: 57 Each of the undersigned Subsidiaries hereby (a) acknowledges the foregoing Amendment and (b) ratifies and confirms all of its obligations under the Guaranty and under each of the other Loan Documents to which it is a party. EMMIS BROADCASTING CORPORATION OF NEW YORK EMMIS FM BROADCASTING CORPORATION OF INDIANAPOLIS EMMIS FM BROADCASTING CORPORATION OF CHICAGO EMMIS FM BROADCASTING CORPORATION OF ST. LOUIS KPWR, INC. EMMIS PUBLISHING CORPORATION EMMIS FM RADIO CORPORATION OF INDIANAPOLIS EMMIS AM RADIO CORPORATION OF INDIANAPOLIS EMMIS 104.1 FM RADIO CORPORATION OF ST. LOUIS EMMIS 106.5 FM BROADCASTING CORPORATION OF ST.LOUIS EMMIS INTERNATIONAL BROADCASTING CORPORATION EMMIS INTERNATIONAL CORPORATION EMMIS DAR, INC. EMMIS 105.7 FM RADIO CORPORATION OF INDIANAPOLIS EMMIS 1310 AM RADIO CORPORATION OF INDIANAPOLIS EMMIS MEADOWLANDS CORPORATION EMMIS 1380 AM RADIO CORPORATION OF ST. LOUIS MEDIATEX COMMUNICATIONS CORPORATION TEXAS MONTHLY, INC. MEDIATEX DEVELOPMENT CORPORATION EMMIS FM HOLDING CORPORATION OF NEW YORK EMMIS 101.9 FM RADIO CORPORATION OF NEW YORK EMMIS RADIO CORPORATION OF NEW YORK (f/k/a Emmis Holding Corporation of New York) 58 EMMIS INDIANA BROADCASTING, L.P. (f/k/a Emmis Indiana Radio, L.P.) By: Emmis Communications Corporation (f/k/a Emmis Broadcasting Corporation), its General Partner EMMIS PUBLISHING, L.P. By: Emmis Communications Corporation (f/k/a Emmis Broadcasting Corporation), its General Partner EMMIS TELEVISION BROADCASTING, L.P. By: Emmis Communications Corporation (f/k/a Emmis Broadcasting Corporation), its General Partner By: ------------------------------- Title: EMMIS LICENSE CORPORATION KPWR LICENSE, INC. EMMIS FM LICENSE CORPORATION OF ST. LOUIS EMMIS TELEVISION LICENSE CORPORATION OF MOBILE EMMIS 104.1 FM RADIO LICENSE CORPORATION OF ST. LOUIS EMMIS FM LICENSE CORPORATION OF INDIANAPOLIS EMMIS FM RADIO LICENSE CORPORATION OF INDIANAPOLIS EMMIS AM RADIO LICENSE CORPORATION OF INDIANAPOLIS EMMIS LICENSE CORPORATION OF NEW YORK EMMIS RADIO LICENSE CORPORATION OF NEW YORK 59 EMMIS 1310 AM RADIO LICENSE CORPORATION OF INDIANAPOLIS EMMIS TELEVISION LICENSE CORPORATION OF HONOLULU EMMIS 105.7 FM RADIO LICENSE CORPORATION OF INDIANAPOLIS EMMIS TELEVISION LICENSE CORPORATION OF NEW ORLEANS EMMIS 106.5 FM LICENSE CORPORATION OF ST. LOUIS EMMIS FM LICENSE CORPORATION OF CHICAGO EMMIS TELEVISION LICENSE CORPORATION OF GREEN BAY By: ------------------------------- Title: 60 TRAVELERS CORPORATE LOAN FUND, INC. BY: TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION By: ------------------------------- Title: 61 WEBSTER BANK By: ------------------------ Title: EX-10.16 4 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.16 ASSET PURCHASE AGREEMENT (COUNTRY SAMPLER PUBLICATIONS) THIS ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of February 23, 1999, by and among COUNTRY SAMPLER, INC., an Illinois corporation ("Seller"), MARK A. NICKEL, an Illinois resident ("Owner") and EMMIS PUBLISHING, L.P., an Indiana limited partnership ("Buyer"). RECITALS: 1. Seller owns, produces, publishes, sells, and offers for distribution Country Sampler, Country Sampler Decorating Ideas, Decorating Ideas Special Interest Publications, Country Sampler's Country Business, Country Sampler Group Connections, and Country Sampler on the Web (together, the "Publications"). 2. Buyer desires to acquire substantially all the assets used or useful in the business and operation of each of the Publications, and certain ancillary businesses, and Seller is willing to convey such assets to Buyer, all pursuant to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual covenants contained herein, Seller, Owner and Buyer hereby agree as follows: ARTICLE I TERMINOLOGY 1.1 Defined Terms. As used herein, the following terms shall have the meanings indicated: Affiliate: With respect to any specified person or entity, another person or entity which, or a member of an immediate family which, directly or indirectly controls, is controlled by, or is under common control with, the specified person or entity. Consulting Agreement: The Consulting Agreement to be entered into by and between Buyer and Owner on the Closing Date, the form of which is attached as Exhibit A. Benefit Plans: With respect to Seller or any employee or former employee of Seller or the beneficiaries or dependents of such employee or former employee, all compensation or benefit plans, policies, practices, arrangements and agreements which are or have been established or maintained or to which contributions have been made by Seller or by any other trade or business, whether or not incorporated, which is or has been treated as a single employer together with Seller under Section 414 of the Code (such other trades and businesses referred to collectively as the "Related Persons") or 2 to which Seller or any Related Person is or has been obligated to contribute including, but not limited to, "employee benefit plans" within the meaning of Section 3(3) of ERISA, employment, retention, change of control, severance, stock option or other equity based, bonus, incentive compensation, deferred compensation, retirement, fringe benefit and welfare plans, policies, practices, arrangements and agreements. Business: The business of owning, producing, publishing, selling and offering for distribution the Publications, as well as the ownership and operation of all the related ancillary businesses of Seller (other than Seller's equity interest in The Country Sampler Store, L.L.C.). Code: The Internal Revenue Code of 1986, as amended. Documents: This Agreement and all Exhibits if any and Schedules hereto, and each other agreement, certificate or instrument delivered pursuant to or in connection with this Agreement. HSR Act: The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Lien: Any mortgage, deed of trust, pledge, hypothecation, title defect, right of first refusal, security or other adverse interest, encumbrance, claim, option, lien, lease or charge of any kind, whether voluntarily incurred or arising by operation of law or otherwise, affecting any assets or property, including any written or oral agreement to give or grant any of the foregoing, any conditional sale or other title retention agreement, and the filing of or agreement to give any financing statement with respect to any assets or property under the Uniform Commercial Code or comparable law of any jurisdiction. Loss: With respect to any person or entity, any and all costs, obligations, liabilities, demands, claims, settlement payments, awards, judgments, fines, penalties, damages and reasonable out-of-pocket expenses, including court costs and reasonable attorneys' fees, whether or not arising out of a third party claim. Material Adverse Condition: A condition which would restrict, limit, increase the cost or burden of or otherwise adversely affect or impair in any material respect the right of Buyer to the ownership, use, control, enjoyment or operation of the Business or the proceeds therefrom. Material Adverse Effect: A material adverse effect on the assets, business, operations, financial condition or results of operations of (i) the Business or (ii) Seller. Office Building: All of Seller's right, title and interest in the real property and all improvements thereon at 707 Kautz Road, Saint Charles, Illinois. Permitted Lien: Any statutory lien which secures a payment not yet due that arises, and is customarily discharged, in the ordinary course of Seller's business; or any other imperfections in Seller's title to any of its assets or properties that, individually and 2 3 in the aggregate, are not material in character or amount and do not and could not reasonably be expected to impair the value or interfere with the use of any of the Sale Assets. Seller's Knowledge: Actual knowledge, after reasonable investigation, of Mark A. Nickel, Margaret Kernan, Stephen Borst, or John Dziewiatkowski. Taxes: All federal, state, local and foreign taxes including, without limitation, income, unemployment, withholding, payroll, social security, real property, personal property, excise, sales, use and franchise taxes, levies, assessments, imposts, duties, licenses and registration fees and charges of any nature whatsoever, including interest, penalties and additions with respect thereto and any interest in respect of such additions or penalties. Tax Return: Any return, filing, report, declaration, questionnaire or other document required to be filed for any period with any taxing authority (whether domestic or foreign) in connection with any Taxes (whether or not payment is required to be made with respect to such document). 1.2 Additional Defined Terms. As used herein, the following terms shall have the meanings defined in the introduction, recitals or section indicated below: Acquisition Proposal Section 5.11 Adjustment Amount Section 2.6(a) Arbitrating Firm Section 2.6(e) Assumed Obligations Section 2.3(a) Business Agreements Section 2.1(f) Buyer's Trade Credit Section 2.6(b)(ii) Closing Section 8.1 Closing Date Section 8.1 Effective Time Section 8.1 Excluded Assets Section 2.2 Indemnified Party Section 10.4(a) Indemnifying Party Section 10.4(a) Initial Adjusted Purchase Price Section 2.4 Intellectual Property Section 2.1(a) Interim Balance Sheet Section 3.12(a)(iii) License Agreement Section 12.7(b) Other Permitted Exceptions Section 6.4.1 3 4 Permitted Tax Lien Section 6.4.1 Preliminary Adjustment Report Section 2.6(d) Publications Recitals Purchase Price Section 2.4 Real Property Section 2.1(b) Sale Assets Section 2.1 Seller's Trade Credit Section 2.6(b)(ii) Standard Exceptions Section 6.4.1 Survey Section 6.4.2 Survival Period Section 10.1 Tangible Personal Property Section 2.1(c) Title Commitment Section 6.4.1 Title Insurance Company Section 6.4.1 Trade Agreements Section 2.1(j) ARTICLE II PURCHASE AND SALE 2.1 Sale Assets. Upon and subject to the terms and conditions provided herein, on the Closing Date, Seller will sell, transfer, assign and convey to Buyer, and Buyer will purchase from Seller, all of Seller's right, title and interest, legal and equitable, in and to all tangible and intangible assets (except Excluded Assets) used or useful in the operation of the Business as it has been and is now operated (the "Sale Assets"), including the following: (a) Intellectual Property. All trade names, trademarks, service marks, symbols, logos, copyrights, publishing rights, domain names, websites, and any other proprietary material or trade right used in the operation of the Business, all goodwill associated therewith, and all state and federal registrations, applications and licenses for any of the foregoing, including, without limitation, the trademarks and registrations listed in Schedule 2.1(a) (the "Intellectual Property"). (b) Real Property. The Office Building (the legal description of which is listed in Schedule 3.10) and all fixtures and improvements thereon, together with such additional improvements and interests in real estate made or acquired between the date hereof and the Closing Date (the "Real Property"). (c) Tangible Personal Property. All computers and office and other equipment, furniture, fixtures, library and research materials, all copies of past or current issues of any Publication now in the possession of or owned by the Seller and other tangible personal property owned by Seller and used in the operation of the Business as it has been and is now operated, including, but not limited to, the items listed in Schedule 2.1(c) (the "Tangible Personal Property"). (d) Inventory. All inventories, supplies, computer software (to he extent of Seller's interests therein) and materials of any kind, including without limitation all work in process (to the extent of Seller's interests therein) on any issue of any Publication, photographs, layouts, advertising materials, paper, film, stripped material, pre-press materials or transparencies produced or designed for any past, present, or future issue of any Publication. 4 5 (e) Business Records. The originals or true and complete copies of all circulation records and other sales and distribution records and documents, books, files, logs, and other business records or documents, including but not limited to copies of current and expired advertising contracts, in whatever existing form or format. (f) Business Agreements. The agreements (other than trade or barter), if any, relating principally to the operation of the Business (including advertising contracts and personal property leases) if, and only if, listed in Schedule 2.1(f) and the License Agreement (the "Business Agreements"). (g) Accounts Receivable. All accounts receivable relating to subscriptions (i.e., unpaid subscriptions) to any Publication, all accounts receivable relating to advertising (i.e., unpaid advertising) published in any Publication, receivables related to Trade Agreements (as hereinafter defined), and other receivables of any Publication such as newsstand receivables (collectively, the "Accounts Receivable"). (h) Subscription Records. The current complete paid subscription list, complimentary subscription list, and a list of all available past subscribers (as maintained by or on behalf of Seller), including in each case the subscriber's name, address, payment status and renewal date, and all other relevant subscription information such as carrier routes, gift codes, tracking codes, source codes, all other information relating to subscription records, and all physical subscription records, including subscription cards, telephone orders and any other physical subscription record documents, in whatever existing form or format. (i) Prepaid Expenses. Any and all rights to prepaid expenses of Seller relating to items used in the operation of the Business. (j) Trade or Barter Agreements. Trade or barter agreements relating to the operation of any Publication if, and only if, listed in Schedule 2.1(j) (the "Trade Agreements"). (k) Miscellaneous Assets: Any other tangible or intangible assets, properties or rights of any kind or nature not otherwise described above in this Section 2.1 and now or hereafter owned or used by Seller in connection with the operation of the Business, including but not limited to all goodwill of the Business. 2.2 Excluded Assets. Notwithstanding any provision of this Agreement to the contrary, Seller shall not transfer, convey or assign to Buyer, but shall retain all of its right, title and interest in and to, the following assets owned or held by it on the Closing Date (the "Excluded Assets"): (a) Any and all cash, bank deposits and other cash equivalents, cash deposits to secure contract obligations (except to the extent Seller receives a credit therefor under Section 2.6, which excepted deposits are set forth in the List of Deposits set forth in Schedule 2.2(a)); 5 6 (b) Any and all claims of Seller with respect to transactions occurring or other matters arising prior to the Closing Date including, without limitation, claims for tax refunds; (c) A note owing to Seller from the Country Sampler Store, L.L.C.; (d) All Benefit Plans and collective bargaining agreements; (e) All employment agreements; (f) All policies of insurance owned by Seller; (g) All tangible personal property disposed of or consumed between the date hereof and the Closing Date in accordance with the terms and provisions of this Agreement; (h) Seller's corporate records except to the extent such records pertain to or are used in the operation of the Business, in which case Seller shall deliver true and accurate copies thereof to Buyer; (i) Seller's equity interest in The Country Sampler Store, L.L.C.; and (j) Those assets specifically listed in Schedule 2.2(j). 2.3 Assumption of Liabilities. (a) At the Closing, Buyer shall assume and agree to perform, without duplication, the following liabilities and obligations of Seller (the "Assumed Obligations"): (i) The obligations of Seller arising under the Business Agreements listed in Schedule 2.1(f) that are transferred to Buyer at Closing in accordance with this Agreement, but only to the extent such obligations relate to any period from and after the Closing Date. (ii) The obligations of Seller to be performed on or after the Closing Date under subscription agreements for any Publication in effect as of the Closing Date. (iii) The obligations of Seller to provide advertising in any Publication after Closing under the Trade Agreements transferred to Buyer in accordance with this Agreement. (iv) Provided that Seller pays Buyer the amount, if any, owed by Seller after Closing under Section 2.6, the Assumed Obligations shall also include such other liabilities of Seller to the extent, and only to the extent, the amount thereof is included as a credit to Buyer in calculating the Adjustment Amount as ultimately determined pursuant to Section 2.6. 6 7 (b) The Assumed Obligations shall in no event include any liability or obligation arising (i) from the assignment to Buyer of any Business Agreement in violation of its terms or (ii) from any other breach or default by Seller upon or prior to Closing under any Business Agreement. (c) Except for the Assumed Obligations, Buyer shall not assume or in any manner be liable for any duties, responsibilities, obligations or liabilities of Seller of any kind or nature, whether express or implied, known or unknown, contingent or absolute, all of which Seller shall pay, discharge and perform when due. 2.4 Purchase Price. The purchase price ("Purchase Price") shall equal the sum (i) Sixteen Million Five Hundred Thousand ($16,500,000.00) in consideration of the Sale Assets other than the Real Property, and One Million Five Hundred Thousand Dollars ($1,500,000.00) in consideration of the purchase of the Real Property, all subject to adjustment as provided in Section 2.6 (as adjusted, the "Initial Adjusted Purchase Price"), plus (ii) Five Hundred Thousand Dollars ($500,000.00) to be paid by the six-month anniversary of the Closing Date as a holdback on the Purchase Price (the "Holdback"). The Initial Adjusted Purchase Price shall be paid by Buyer to Seller at Closing by wire transfer of immediately available funds. Seller shall furnish Buyer wire instructions at least three (3) business days prior to the Closing Date. The Holdback, subject to offset as provided in Section 2.6(g) and Article X, shall be paid by Buyer to Seller by the six-month anniversary of the Closing Date by wire transfer of immediately available funds. 2.5 Allocation of the Purchase Price. Seller and Buyer shall use good faith efforts to agree, prior to Closing, upon an allocation of the Purchase Price among the Sale Assets which, if agreed, will be incorporated in a schedule to be executed by the parties prior to or at Closing. Buyer and Seller each agree to report such allocation, if agreed upon, to the Internal Revenue Service in the form required by Treasury Regulation 1.1060-IT and to use such allocation for all other reporting purposes in connection with federal, state and local income and, to the extent permitted under applicable law, franchise taxes. 7 8 2.6 Adjustment of Purchase Price. (a) All operating income and operating expenses of the Business shall be adjusted and allocated between Seller and Buyer, and an adjustment in the Purchase Price shall be made as provided in this Section, to the extent necessary to reflect the principle that all such income and expenses attributable to any issue of the Publications prior to and including the Cut-Off issues shall be attributable to Seller, and all income and expenses attributable to the Publications subsequent to the Cut-Off issues shall be attributable to the Buyer, provided further that any such income and expenses which cannot be attributed to a specific issue of any Publication shall be allocated to reflect the principle that all such all such income and expenses attributable to the operation of the Business on or before the date preceding the Closing Date shall be for the account of Seller, and all such income and expenses attributable to the operation of the Business on and after the Closing Date shall be for the account of Buyer. A list of Cut-Off issues for each Publication is set forth in Schedule 2.6(a). The net amount by which the Purchase Price is to be increased or decreased in accordance with this Section is herein referred to as the "Adjustment Amount". (b) Without limiting the generality of the foregoing: (i) Seller shall receive a credit for the unapplied portion, as of the Closing Date, of the security deposits made by Seller under those Business Agreements assumed by Buyer at Closing in accordance with Section 2.3. (ii) Buyer shall be given a credit ("Buyer's Trade Credit") in the amount equal to the financial value (determined in accordance with generally accepted accounting principles consistently applied) of all advertisements required to be published in the Publications on or after the Closing Date under the Trade Agreements, and Seller shall be given a credit ("Seller's Trade Credit") for the financial value (determined in accordance with generally accepted accounting principles consistently applied) of the goods and services to be received on or after the Closing Date under the Trade Agreements; provided that Seller's Trade Credit shall in no event exceed Buyer's Trade Credit. (iii) With respect to each vacation or personal day earned but not taken or for which compensation has not been paid by Seller to Employee in lieu of time off before the Closing Date by each Employee hired by Buyer, Buyer shall receive a credit equal to the compensation equivalent thereof, including applicable payroll taxes. (iv) The credit given Seller for each prepaid expense shall not exceed an amount commensurate with the benefit therefrom to be received by Buyer after Closing. (c) To the extent not inconsistent with the express provisions of this Agreement, the allocations made pursuant to this Section 2.6 shall be made in accordance with generally accepted accounting principles. 8 9 (d) Three (3) business days prior to the Closing Date, Seller shall provide Buyer with a statement setting forth a detailed computation of Seller's reasonable and good faith estimate of the Adjustment Amount as of the Closing Date (the "Preliminary Adjustment Report"). The Preliminary Adjustment Report shall include an itemization of all prepaid expenses included in estimating the Adjustment Amount as of the Closing Date. If the Adjustment Amount reflected on the Preliminary Adjustment Report is a credit to Buyer, then the Purchase Price payable on the Closing Date shall be reduced by the amount of the preliminary Adjustment Amount, and if the Adjustment Amount reflected on the Preliminary Adjustment Report is a charge to Buyer, then the Purchase Price payable on the Closing Date shall be increased by the amount of such preliminary Adjustment Amount. Thereafter, Seller and its auditors and Buyer and its auditors shall have ninety (90) days after the Closing Date to review the Preliminary Adjustment Report and the related books and records of Seller, and Buyer and Seller will in good faith seek to reach agreement on the computation of the Adjustment Amount as of the Closing Date. If agreement is reached within ninety (90) days after the Closing Date, then upon reaching such agreement, Seller shall pay to Buyer or Buyer shall pay to Seller, as the case may be, an amount equal to the difference between (i) the agreed Adjustment Amount and (ii) the preliminary Adjustment Amount indicated in the Preliminary Adjustment Report. Any such payment shall be made as provided in Section 2.6(g). If agreement is not reached within such 90-day period, then the dispute resolutions of Section 2.6(e) shall apply. (e) If Seller and its auditors and Buyer and its auditors do not, within the 90-day period specified in Section 2.6(d), reach an agreement on the Adjustment Amount as of the Closing Date, then an independent accounting firm of recognized national standing (the "Arbitrating Firm") selected by Seller and Buyer shall resolve the disputed items. If Seller and Buyer are unable to agree on the Arbitrating Firm, the Arbitrating Firm shall be a "national" accounting firm selected by lot (after excluding one firm designated by Seller and one firm designated by Buyer, as well as any firm with which either party has or has had a business relationship, which relationship shall be promptly disclosed by the relevant party). Buyer and Seller shall each inform the Arbitrating Firm in writing as to their respective positions concerning the Adjustment Amount as of the Closing Date, and each shall make readily available to the Arbitrating Firm any books and records and work papers relevant to the preparation of such firm's computation of the Adjustment Amount. Such firm shall be instructed to complete its analysis within thirty (30) days from the date of its engagement and upon completion to inform the parties in writing of its own determination of the Adjustment Amount, and the basis for its determination. Any determination by the Arbitrating Firm in accordance with this Section shall be final and binding on the parties for purposes of this Section. Within five (5) days after the Arbitrating Firm delivers to the parties its written determination of the Adjustment Amount, Seller shall pay to Buyer, or Buyer shall pay to Seller, as the case may be, an amount equal to the difference between (i) the Adjustment Amount as determined by the Arbitrating Firm and (ii) the preliminary Adjustment Amount indicated in the Preliminary Adjustment Report. Any such payment shall be made as provided in Section 2.6(g). (f) Seller and Buyer shall each pay one-half of the fees and disbursements of the Arbitrating Firm in connection with its analysis. 9 10 (g) Any payments required under foregoing Subsection (d) or (e) shall be paid by wire transfer in immediately available funds to the account of the payee with a financial institution in the United States and shall for all purposes be deemed an adjustment to the Purchase Price; provided however, that if such payment is to be made to Buyer, Buyer may setoff such amount against the Holdback. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: 3.1 Organization, Good Standing and Corporate Power. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois, and has all requisite power to own, operate and lease its properties and carry on its business. Seller is duly licensed, qualified to do business and in good standing in each jurisdiction, domestic and foreign, where the failure to be so licensed or qualified would have a Material Adverse Effect, which jurisdictions are set forth in Schedule 3.1. 3.2 Ownership. All of the issued and outstanding capital stock of Seller is owned beneficially and of record by Owner. 3.3 Authorization and Binding Effect of Documents. Seller has all requisite corporate power and authority to enter into this Agreement and the other Documents and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and each of the other Documents by Seller and the consummation by Seller of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action (including shareholder approval) on the part of Seller. This Agreement has been, and each of the other Documents at or prior to Closing will be, duly executed and delivered by Seller. This Agreement constitutes (and each of the other Documents, when executed and delivered, will constitute) the valid and binding obligation of Seller enforceable against Seller in accordance with its terms. 3.4 Absence of Conflicts. Except as set forth in Schedule 3.4, the execution, delivery and performance by Seller of this Agreement and the other Documents, and consummation by Seller of the transactions contemplated hereby and thereby, do not and will not (i) conflict with or result from any breach of any of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in a violation of, (iv) give any third party the right to modify, terminate or accelerate any obligation under, or (v) result in the creation of any material Lien upon the Sale Assets under, the provisions of the articles of incorporation and by-laws of Seller, any material indenture, mortgage, lease, loan agreement or other agreement or instrument to which Seller is bound or affected, or any law, statute, rule, judgment, order or decree to which Seller is subject. 10 11 3.5 Consents. Except as set forth in Schedule 3.5 and except for the filing required by the HSR Act, the execution, delivery and performance by Seller of this Agreement and the other Documents, and consummation by Seller of the transactions contemplated hereby and thereby, do not and will not require the authorization, consent, approval, exemption, clearance or other action by or notice or declaration to, or filing with, any court or administrative or other governmental body, or the consent, waiver or approval of any other person or entity. 3.6 Sale Assets; Title. The Sale Assets include all of the assets, properties and rights of every type and description, real, personal and mixed, tangible and intangible, that are used in the operation of the Business in the manner in which it is now conducted, with the exception of the Excluded Assets. Other than as noted in Schedule 3.6, which Liens will be removed prior to or at Closing, Seller has good and marketable title to, or a valid lessee's interest in, all of the Sale Assets free and clear of all Liens except Permitted Liens. 3.7 Circulation. For those of the Publications which are so audited, Seller has provided or caused to be provided to Buyer (i) the audited circulation reports (the "White Sheet") of the Audit Bureau of Circulations ("ABC") with respect to each Publication for the twelve months ended December 31, 1997, and (ii) the unaudited publisher's circulation statement (the "Pink Sheet") published by ABC with respect to each Publication for the six months ended June 30, 1998. Such White Sheet and Pink Sheet fairly present the information shown thereon in all material respects. Schedule 3.7 sets forth which Publications are audited and which are not. 3.8 Business Agreements. (a) Schedule 3.8(a) lists all agreements, contracts, understandings and commitments as of the date indicated thereon for advertising in any Publication of the Business for other than monetary consideration ("Trade Agreements") as of January 31, 1999, and sets forth the parties thereto, the financial value of the advertisements required to be provided from and after the date of such Schedule and the financial value of the goods or services to be received by Seller from and after the date of such Schedule. True and complete copies of all written Trade Agreements in effect as of such date, including all amendments, modifications and supplements thereto, have been delivered to Buyer and each Trade Agreement hereafter entered into prior to Closing shall be promptly delivered to Buyer. (b) Schedule 3.8(b) lists all the following types of Business Agreements now in effect, whether written or oral relating to the Business or the Sale Assets: (i) Agreements for sale of advertising in any Publication for monetary consideration; (ii) All affiliation agreements; (iii) All sales agency, advertising representation, or distribution contracts; 11 12 (iv) Each lease of any Sale Asset (including a description of the Sale Asset leased thereunder); (v) All employment agreements and agreements with independent contractors; (vi) All agreements to which an Affiliate of Seller is a party; (vii) Each of the other Business Agreements (other than Trade Agreements) involving a commitment by any party thereto with a fair market value of, or requiring any party thereto to pay over the life of the contract, more than Five Thousand Dollars ($5,000); and (viii) Any other Business Agreement that is material to the business, operations or financial condition of any Publication or the Business. True and complete copies of all the foregoing Business Agreements that are in writing, and true and accurate summaries of all the foregoing Business Agreements that are oral, including all amendments, modifications and supplements thereto, have been delivered to Buyer. The Business Agreements (other than Trade Agreements) that are not listed in Schedule 3.8(b) do not involve commitments by parties thereto with an aggregate fair market value of more than Fifty Thousand Dollars ($50,000). (c) Except as set forth in Schedule 3.8(c), (i) all Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of any Publication or the Business are valid and in full force and effect; (ii) neither Seller nor, to the Seller's Knowledge, any other party is in material default under, and no event has occurred which (after the giving of notice or the lapse of time or both) would constitute a material default under, any Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of the Business; (iii) neither Seller nor an Affiliate has granted or been granted any material waiver or forebearance with respect to any Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of the Business; (iv) Seller holds the right to enforce and receive the benefits under all the Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of the Business, free and clear of Liens (other than Permitted Liens) but subject to the terms and provisions of each such agreement; (v) none of the rights of Seller or an Affiliate under Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of the Business is subject to termination or modification as a result of the consummation of the transactions contemplated by this Agreement; and (vi) no consent or approval by any party to Business Agreements which are, individually or in the aggregate, material to the business, operations or financial condition of the Business is required thereunder for the consummation of the transactions contemplated hereby. 3.9 Tangible Personal Property. Except as set forth in Schedule 3.9: 12 13 (a) Such Schedule lists all Tangible Personal Property (other than office supplies and other incidental items) material to the conduct of the Business and operations of any Publication or the Business in the manner in which it has been and is now operated. (b) The Tangible Personal Property has been properly maintained in accordance with industry practices in all material respects, is in a good state of repair and operating condition (normal wear and tear excepted), and complies in all material respects with applicable laws, rules, regulations and ordinances. 3.10 Real Property. The list of Real Property set forth in Schedule 3.10 is a true and correct list of all of the interests in real estate which Seller holds which are used to any material extent in the operation of any Publication or the Business in the manner in which it has been and is now operated. 3.11 Intellectual Property. Schedule 3.11 lists all of the Intellectual Property, including all registrations, applications and licenses for any of the Intellectual Property. Except as disclosed in Schedule 3.11: (a) To the Seller's Knowledge, Seller owns, free and clear of Liens, all right and interest in, and right and authority to use in connection with the conduct of the Business as presently conducted, all of the Intellectual Property listed in Schedule 3.11, and all of the rights and properties constituting a part of the Intellectual Property are in full force and effect; (b) There are no outstanding or, to the Seller's Knowledge, threatened judicial or adversary proceedings with respect to any of the Intellectual Property; (c) Seller has not granted to any other person or entity any license or other right or interest in or to any of the Intellectual Property or to the use thereof; (d) Seller has no knowledge of any infringement or unlawful use of any of the Intellectual Property; (e) Seller has not knowingly violated any provisions of the Copyright Act of 1976, 17 U.S.C. Section 101, et. seq., in any material respect; and (f) Seller has delivered to Buyer copies of all state or federal registrations, applications, and other material documents, if any, establishing any of the rights and properties constituting a part of the Intellectual Property. 3.12 Financial Statements. (a) Seller has delivered to Buyer: (i) The reviewed balance sheets of the Business as of December 31, 1997 and 1996; 13 14 (ii) The reviewed statements of income of the Business for the years ended December 31, 1997 and 1996; (iii) The unaudited balance sheet of the Business as of December 31, 1998 (the "Interim Balance Sheet"); and (iv) The unaudited statement of income of the Business for the interim period ended December 31, 1998. All such statements (i) are in accordance with the books and records of Seller and (ii) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and fairly present the assets and liabilities of Seller as of the dates stated and accurately reflect the results of operations of Seller for the periods covered by the statements, with the exceptions, as to the Interim Balance Sheet and related unaudited statement of income, that (A) statements of cash flows are not included (B) federal income tax, expense or benefit are not reflected therein, (C) such statements do not contain the disclosures required by generally accepted accounting principles in notes accompanying financial statements, and (D) such statements are subject to normal year-end adjustments. (b) With respect to the Business or the Sale Assets, Seller has no debt, liability or obligation, secured or unsecured (whether absolute, accrued, contingent or otherwise, and whether due or to become due), of a nature required by generally accepted accounting principles to be reflected in a corporate balance sheet or disclosed in the notes thereto, except such debts, liabilities and obligations which (i) are fully accrued or fully reserved against in the Interim Balance Sheet, or (ii) are incurred after the date of the Interim Balance Sheet in the ordinary course of business consistent with past practices and in an amount not material to the business or financial condition of Seller. (c)(i) Seller is not now, and, on the date of Closing, after giving effect to the transactions contemplated by this Agreement, Seller will not be insolvent as such term is defined in the Bankruptcy Code of 1978, as amended; (ii) after giving effect to the transactions contemplated by this Agreement, the property remaining with Seller shall not constitute an unreasonably small capital to conduct its current business or its business as proposed to be conducted after consummation of the transactions contemplated hereby; and (iii) Seller does not intend to incur, or believe that Seller will incur, concurrently with or after consummation of the transactions contemplated hereby, debts beyond Seller's ability to pay as debts mature. 3.13 Absence of Certain Changes or Events. Since the date of the Interim Balance Sheet, other than as described in Schedule 3.13: (a) There has not been any damage, destruction or other casualty loss with respect to the Sale Assets (whether or not covered by insurance) which, individually or in the aggregate has, or could reasonably be expected to have, a Material Adverse Effect. 14 15 (b) Neither Seller nor the Business has suffered any adverse change or development which, individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect. (c) Seller has not, with respect to the Business or the Sale Assets: (i) amended or terminated any Business Agreement set forth in Schedule 3.8(a), 3.8(b) or 3.8(c) except in the ordinary course of business; (ii) mortgaged, pledged or subjected to any Lien, any of its properties or assets, tangible or intangible, except for Permitted Liens; (iii) acquired or disposed of any assets or properties or entered into any agreement or other arrangement for such acquisition or disposition, except in the ordinary course of business; (iv) with the exception of this Agreement, entered into any agreement, commitment or other transaction other than in the ordinary course of business; (v) paid any bonus to any officer, director or employee or granted to any officer, director or employee any other increase in compensation in any form, except in the ordinary course of business consistent with past practices; (vi) adopted or amended any collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, severance or other plan, agreement, trust, fund or arrangement for the benefit of employees (whether or not legally binding) or made any material changes in its policies of employment; (vii) entered into any agreement (other than agreements that will be terminated prior to Closing) with any Affiliate of Seller; or (viii) operated other than in the ordinary course. 3.14 Litigation. Except as described in Schedule 3.14, (i) there are no actions, suits, claims, investigations or administrative, arbitration or other proceedings pending or, to the Seller's Knowledge, threatened against Seller before or by any court, arbitration tribunal or governmental department or agency, domestic or foreign; (ii) neither Seller nor, to the Seller's Knowledge, any of the officers or employees of Seller, has been charged with, or is under investigation with respect to, any violation of any provision of any federal, state, foreign or other applicable law or administrative regulation in respect of the business of Seller; and (iii) neither Seller nor any properties or assets of Seller nor, to the Seller's Knowledge, any officer or employee of Seller is a party to or bound by any order, arbitration award, judgment or decree of any court, arbitration tribunal or governmental department or agency, domestic or foreign, in respect of any business practices, the acquisition of any property, or the conduct of any 15 16 business, of Seller, which, individually or in the aggregate, has or could reasonably be expected to have, a Material Adverse Effect or materially impair the ability of Seller to perform its obligations hereunder and consummate the transactions contemplated hereby. 3.15 Labor Matters. (a) Except as listed in Schedule 3.15(a): (i) To the Seller's Knowledge, no present or former employee (or independent contractor) of the Business has a pending claim or charge which has been asserted or threatened against Seller for (A) overtime pay; (B) wages, salaries or profit sharing; (C) vacations, time off or pay in lieu of vacation or time off; (D) any violation of any statute, ordinance, contract or regulation relating to minimum wages, maximum hours of work or the terms or conditions of employment; (E) discrimination against employees on any basis; (F) unlawful or wrongful employment or termination practices; (G) unlawful retirement, termination or labor relations practices or breach of contract; or (H) any violation of occupational safety or health standards. (ii) There is not pending or, to the Seller's Knowledge, threatened against Seller any labor dispute, strike or work stoppage that affects or interferes with, or is likely to affect or interfere with, the operation of any Publication or the Business. Seller has no knowledge of any organizational effort currently being made or threatened by or on behalf of any labor union with respect to employees of any Publication or the Business. There are no unresolved unfair labor charges against Seller. Seller has not experienced any strike, work stoppage or other similar significant labor difficulties within the past twelve (12) months. (b) Seller is not a signatory or a party to, or otherwise bound by, a collective bargaining agreement which covers employees or former employees of Seller or who are involved in the operation of any Publication or the Business, (ii) Seller has not agreed to recognize any union or other collective bargaining unit with respect to any employees of any Publication or the Business, and (iii) no union or other collective bargaining unit has been certified as representing any employees of any Publication or the Business. (c) Schedule 3.15(c) sets forth a true and complete list of all persons employed by Seller or at any Publication or the Business as of the date of this Agreement, and states for each such employee (i) the compensation paid to such employee and the termination pay or other severance benefits, if any, that may be payable to such employee upon termination of employment, (ii) accrued but unused vacation and personal days, (iii) whether such employee is employed under a written contract, and (iv) the policies applicable to the employee if not employed under a written contract. A true and complete copy of each written employment agreement and of any handbook, policy manual or similar written guidelines furnished to employees of any Publication or the Business has been delivered to Buyer. 16 17 3.16 Employee Benefit Plans. Buyer will not acquire any rights or interests in, or assume any obligations under, any Benefit Plan. Buyer shall not, as a result of the transactions contemplated by this Agreement (or the employment of any of Seller's current employees), become liable for any contribution, tax, lien, penalty, cost, interest, damage or other similar type of liability or expense of Seller with regard to any Benefit Plan. 3.17 Compliance with Law. Seller has operated and is operating in all material respects in compliance with all federal, state, local or other laws, statutes, ordinances, regulations, licenses, permits or exemptions therefrom and all applicable orders, writs, injunctions and decrees of any court, commission, board, agency or other instrumentality, and Seller has not received any notice of noncompliance pertaining to Seller's operations that has not been cured. 3.18 Tax Returns and Payments. (a) Seller has accurately prepared and is not delinquent in the filing of any Tax Returns required to be filed by Seller, including filings regarding employees, sales, operations or assets. All Taxes due and payable pursuant thereto and all other Taxes or assessments due and payable by Seller or chargeable as a Lien upon its assets have been paid. (b) Except as set forth in Schedule 3.18, (i) no outstanding unsatisfied deficiency, delinquency or default for any Tax has been claimed, proposed or assessed against Seller, (ii) Seller has not received notice of any such deficiency, delinquency or default, and (iii) to the Seller's Knowledge, no taxing authority is now threatening to assert any such deficiency, delinquency or default and, to the Seller's Knowledge, there is no reasonable basis for any such assertion. (c) No Tax is required to be withheld pursuant to Section 1445 of the Code as a result of the transactions contemplated by this Agreement. (d) Seller has withheld any Tax required to be withheld under applicable law and regulations, and such withholdings have either been paid to the proper governmental agency or set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of Seller. 3.19 Environmental Matters. To the Seller's Knowledge, there are no conditions or circumstances associated with the Sale Assets which may give rise to any material liability or cost under applicable environmental law. 3.20 Broker's or Finder's Fees. Except for The Jordan Edmiston Group, Inc., whose fee is the sole responsibility of Seller, no agent, broker, investment banker or other person or firm acting on behalf of or under the authority of Seller or any Affiliate of Seller is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, in connection with the transactions contemplated by this Agreement. 17 18 3.21 Insurance. There is now in full force and effect with reputable insurance companies fire and extended coverage insurance with respect to all tangible Sale Assets and public liability and publisher's liability insurance, all in amounts consistent with past practices. 3.22 Year 2000 Compliance. To the Seller's Knowledge, the technology embodied in the Business' operating systems, other computer programs, and websites is Year 2000 Compliant (to the extent applicable). "Year 2000 Compliant" means that the technology will accurately and without interruption process (including but not limited to calculate, compare, interpret, and sequence) (i) date and time data before, during and after the year 2000, (ii) year dates in a manner that is explicit and unambiguous for operation with interfacing software and for data storage, (iii) year 2000 as a leap year, and (iv) year dates specified as "99" and "00" regardless of any other meanings that may be given to those numbers. The Seller has received from each material vendor listed on Schedule 3.22 a year 2000 compliance certificate, and has provided copies of them to Buyer. 3.23 Disclosure. To the Seller's Knowledge, no representation or warranty by Seller in this Agreement or any other Document furnished by Seller or on its behalf contains any untrue statement of a material fact, or omits to state a material fact, necessary to make any statement contained herein or therein not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 4.1 Organization and Good Standing. Buyer is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Indiana. Buyer has all requisite partnership power to own, operate and lease its properties and carry on its business as it is now being conducted and as the same will be conducted following the Closing. 4.2 Authorization and Binding Effect of Documents. Buyer has all requisite partnership power and authority to enter into this Agreement and the other Documents and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and each of the other Documents by Buyer and the consummation by Buyer of the transactions contemplated by this Agreement have been duly authorized by all necessary partnership action on the part of Buyer. This Agreement has been, and each of the other Documents at or prior to Closing will be, duly executed and delivered by Buyer. This Agreement constitutes (and each of the other Documents, when executed and delivered, will constitute) the valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. 4.3 Absence of Conflicts. Except for obtaining all necessary approvals under the HSR Act, the execution, delivery and performance by Buyer of this Agreement and the other Documents, and consummation by Buyer of the transactions contemplated hereby and thereby, do not and will not (i) conflict with or result from any 18 19 breach of any of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in a violation of, (iv) give any third party the right to modify, terminate or accelerate any obligation under, the provisions of the articles of partnership or limited partnership agreement of Buyer, any indenture, mortgage, lease, loan agreement or other agreement or instrument to which Buyer is bound or affected, or any law, statute, rule, judgment, order or decree to which Buyer is subject. 4.4 Consents. Except for obtaining all necessary approvals under the HSR Act, the execution, delivery and performance by Buyer of this Agreement and the other Documents, and consummation by Buyer of the transactions contemplated hereby and thereby, do not and will not require the authorization, consent, approval, exemption, clearance or other action by or notice or declaration to, or filing with, any court or administrative or other governmental body, or the consent, waiver or approval of any other person or entity. 4.5 Broker's or Finder's Fees. No agent, broker, investment banker, or other person or firm acting on behalf of Buyer or under its authority is or will be entitled to any broker's or finder's fee or any other commission or similar fee, directly or indirectly, from Buyer in connection with the transactions contemplated by this Agreement. 4.6 Litigation. There are no legal, administrative, arbitration or other proceedings or governmental investigations pending or, to the knowledge of Buyer, threatened against Buyer that would give any third party the right to enjoin the transactions contemplated by this Agreement. ARTICLE V OTHER COVENANTS 5.1 Conduct of the Business Prior to the Closing Date. Seller covenants and agrees with Buyer that from the date hereof through the Closing Date, unless Buyer otherwise agrees in writing, and provided that none of the following shall impede Seller's ability to conduct the Business consistent with past practices, Seller shall: (a) Operate each Publication and the Business only in the ordinary course of business, including (i) incurring promotional expenses consistent with the amount currently budgeted, (ii) the use of reasonable commercial efforts to preserve each Publication's and the Business' present business operations, organization and goodwill and its relationships with material customers, employees, advertisers, suppliers and other contractors, and (iii) the continuance of each Publication's and the Business' usual and customary policy with respect to extending credit and collection of accounts receivable and the maintenance of its facilities and equipment; (b) Operate each Publication and the Business in all material respects in accordance with the terms or conditions of all rules, regulations, laws and orders of all governmental authorities having jurisdiction over any aspect of the operation of each Publication and the Business; 19 20 (c) Maintain Seller's books and records in accordance with generally accepted accounting principles on a basis consistent with prior periods; (d) Promptly notify Buyer in writing of any event or condition which, with notice or the lapse of time or both, would constitute an event of material default under any of the Business Agreements which are, individually or in the aggregate, material to the Sale Assets or the operations, financial condition or results of operations of any Publication or the Business; (e) Timely comply in all material respects with the Business Agreements which are, individually or in the aggregate, material to the Sale Assets or the operations, financial condition or results of operations of any Publication or the Business; (f) Not sell, lease, grant any rights in, or to otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of the Sale Assets except for dispositions of assets that (A) are in the ordinary course of business consistent with past practice and (B) if material, are replaced by similar assets of substantially equal or greater value and utility; (g) Not amend or enter into any employment contracts or other Business Agreements except on terms comparable to those of Business Agreements now in existence and otherwise in the ordinary course of business consistent with past practice; (h) Maintain its technical equipment currently in use in normal operating condition and repair, except for ordinary wear and tear; (i) Not increase in any manner the compensation (including severance pay or plans) or benefits of any employees, independent contractors, consultants or commission agents of the Business, except in the ordinary course of business consistent with past practice; (j) Not introduce any material change with respect to the operation of any Publication or the Business; (k) Not enter into any agreement (other than agreements that will be terminated prior to Closing) with any Affiliate of Seller which pertain to the Business or the Sale Assets; (l) Not voluntarily enter into any collective bargaining agreement applicable to any employees of any Publication or the Business or otherwise voluntarily recognize any union as the bargaining representative of any such employees; and not enter into or amend any collective bargaining agreement applicable to any employees of any Publication or the Business to provide that it shall be binding upon any "successor" employer or such employees; and (m) Not take or agree to take any action inconsistent with consummation of the Closing as contemplated by this Agreement. 20 21 5.2 Notification of Certain Matters. Seller shall give prompt notice to Buyer, and Buyer shall give prompt notice to Seller, of (i) the occurrence, or failure to occur, of any event that would be likely to cause any of their respective representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Closing Date, and (ii) any failure on their respective parts to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by any of them under this Agreement. 5.3 HSR Filing. Within ten (10) days after the execution of this Agreement, Seller and Buyer shall make the filings required to be made under the HSR Act in connection with the transactions contemplated herein. As promptly as practicable, Seller and Buyer shall make the additional filings, if any, required to be made under the HSR Act, or other applicable laws, in connection with the purchase and sale of the Sale Assets and shall otherwise take all commercially reasonable actions necessary and proper to comply with any requests for additional information with respect to such HSR Act filings. 5.4 Title; Additional Documents. At the Closing, Seller shall transfer and convey to Buyer good and marketable title to all of the Sale Assets free and clear of any Liens except Permitted Liens. Seller shall execute or cause to be executed such documents, in addition to those delivered at the Closing, as may be necessary to confirm in Buyer such title to the Sale Assets and to carry out the purposes and intent of this Agreement. 5.5 Other Consents. Seller shall use its best efforts to obtain the consents or waivers to the transactions contemplated by this Agreement required under the Business Agreements. 5.6 Inspection and Access. Seller will, prior to the Closing Date, open the assets, books, accounting records, correspondence and files of Seller (to the extent related to the operation of the Business) for examination by Buyer, its officers, attorneys, accountants and agents, with the right to make copies of such books, records and files or extracts therefrom. Such access will be available during normal business hours, upon reasonable notice and in such manner as will not unreasonably interfere with the conduct of the Business. Seller will furnish to Buyer monthly unaudited financial statements of Seller prepared in a manner consistent with the unaudited statements identified in Section 3.12. Seller will furnish to Buyer such additional financial and operating data and other available information regarding Seller as Buyer may reasonably request. Those books, records and files the possession of which is not being transferred to Buyer pursuant to this Agreement which relate to the Sale Assets shall be preserved and maintained by Seller for four (4) years after the Closing and those books, records and files relating to the Sale Assets the possession of which is being transferred to Buyer hereunder shall be maintained and preserved by Buyer for a period of four (4) years after the Closing. Each such party shall give to the other party and its authorized representatives, during normal business hours, such access to, and 21 22 the opportunity at the other party's expense to copy, such books and records retained by it as may be reasonably requested by the other party. 5.7 Confidentiality. The parties shall continue to be bound by the Non-Disclosure Agreement executed on November 2, 1998; subject thereto, all information delivered to Buyer and otherwise disclosed in writing as confidential by Seller (or its representatives) before or after the date hereof, in connection with the transactions contemplated by this Agreement, shall be kept confidential by Buyer and its representatives and shall not be used other than as contemplated by this Agreement, except to the extent that such information (i) was otherwise publicly available or known by the recipient when received, (ii) is or hereafter becomes lawfully obtainable from third parties not related to Buyer or its Affiliates, (iii) is necessary to disclose to a governmental authority, (iv) is required by law or the rules of any stock exchange to be disclosed or (v) to the extent such duty as to confidentiality is waived in writing by Seller. 5.8 Publicity. The parties agree that no public release or announcement concerning the transactions contemplated hereby shall be issued by any party without the prior written consent of the other party, except as such release or announcement may be required by law or applicable regulations, in which event the party so required will give prior written notice to the other party. 5.9 Reasonable Best Efforts. Subject to the terms and conditions of this Agreement, each party will use its reasonable best efforts to take all action and to do all things necessary, proper or advisable to satisfy any condition hereunder in its power to satisfy and to consummate and make effective as soon as practicable the transactions contemplated by this Agreement. 5.10 Tax Returns and Payments. Seller will timely file with the appropriate governmental agencies all Tax Returns required to be filed by Seller and timely pay all Taxes owed by Seller that could result in a lien on the Sale Assets. 5.11 No Solicitation. From the date hereof until the earlier of Closing or termination of this Agreement, neither Seller nor any Affiliate of Seller shall directly or indirectly (i) solicit or encourage submission of any proposal or offer from any person relating to the acquisition or purchase of any interest in Seller or any material assets of Seller or any merger, consolidation or other business combination with Seller (each an "Acquisition Proposal"), or (ii) otherwise assist or participate in any effort or attempt by any person to make or effect an Acquisition Proposal. Seller shall promptly notify Buyer in writing if an Acquisition Proposal is made in writing after the date of this Agreement. 5.12 Certified Resolutions. (a) Within five (5) business days after the date hereof, Seller shall furnish Buyer with certified resolutions of the Board of Directors of Seller evidencing the authorization and approval of the execution and delivery of this Agreement and each of the other Documents and the consummation of the transactions contemplated hereby and thereby. 22 23 (b) Within five (5) business days after the date hereof, Buyer shall furnish Seller with certified resolutions of the general partner of Buyer evidencing the authorization and approval of the execution and delivery of this Agreement and each of the other Documents and the consummation of the transactions contemplated hereby and thereby. 5.13 Audited Financial Statements. Seller recognizes that Buyer's general partner is a publicly reporting company and agrees that notwithstanding the restrictions in Section 5.7, that entity shall be entitled at its expense, following Closing, to cause audited and unaudited financial statements of the Business to be prepared for such periods and filed with the Securities and Exchange Commission, and included in a prospectus distributed to prospective investors, as required by laws and regulations applicable to Buyer's general partner as a publicly reporting company or registrant. Seller agrees to cooperate with Buyer and the auditing accountants as reasonably requested by Buyer in connection with the preparation and filing of such financial statements, including providing a customary management representation letter in the form prescribed by generally accepted auditing standards. 5.14 Post-Closing Assistance. Following Closing, Buyer shall cooperate with Seller and make available to Seller, at Seller's reasonable request and at no expense to Seller, such facilities, equipment, personnel and assistance as shall be necessary to enable Seller to carry out its post-closing obligations under this Agreement and to otherwise effectuate the transfers and transition contemplated hereunder. Buyer further agrees to cooperate with and assist Seller to the extent reasonably necessary to permit Seller to adequately prosecute or defend itself in connection with any claim, demand, action, lawsuit, proceeding, investigation, audit, or other similar matter brought by or against any third party or governmental entity relative to the Business or the Sale Assets, and Buyer shall make available to Seller such facilities, equipment, personnel and assistance as reasonably requested by Seller in that regard. Notwithstanding the foregoing, nothing in this Section shall require Buyer to expend any significant amounts of money, or require any of its employees to expend any significant amounts of time, to fulfill Buyer's obligations in this Section. ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF BUYER TO CLOSE Buyer's obligation to close the transaction contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, unless waived by Buyer in writing: 6.1 Accuracy of Representations and Warranties; Closing Certificate. (a) The representations and warranties of Seller contained in this Agreement or in any other Document shall be true and correct in all material respects on the date hereof, and at the Closing Date with same effect as though made at such time except for changes permitted hereunder. 23 24 (b) Seller shall have delivered to Buyer on the Closing Date a certificate that the conditions specified in Sections 6.1(a), 6.2, 6.7, and 7.5 are satisfied as of the Closing Date. 6.2 Performance of Agreement. Seller shall have performed in all material respects all of its covenants, agreements and obligations required by this Agreement and each of the other Documents to be performed or complied with by it prior to or upon the Closing Date. 6.3 HSR Act. The waiting period (including any extension thereof) under the HSR Act applicable to the sale and purchase of the Sale Assets pursuant to this Agreement shall have expired or been terminated. 6.4 Title Insurance and Survey. 6.4.1 Seller shall have obtained, at Seller's expense, a title commitment (the "Title Commitment") on the current ALTA form from a title insurance company (the "Title Insurance Company") wherein the Title Insurance Company shall agree to insure in Buyer fee simple title to the Real Property. The exceptions to title specified in the Title Commitment shall be limited to the preprinted or standard exceptions to title (the "Standard Exceptions"), the lien for taxes not yet due and payable (the "Permitted Tax Lien") and such other exceptions (the "Other Permitted Exceptions") that will neither (1) materially impair Buyer's ability to use the Real Property in the operation of the Business in the manner in which it is now used, nor (2) constitute or evidence a mortgage or other lien (other than a Permitted Tax Lien) against such title, except mortgages or other liens that will be released at Closing at Seller's expense. 6.4.2 Seller shall have obtained, at Seller's expense, a current "as built" survey (each, a "Survey") of the Real Property. Such Survey shall be prepared by a registered surveyor, shall comply with current ALTA Minimum Standard Detail Requirements, shall be accompanied by a certification sufficient for the Title Insurance Company's deletion of the Standard Exceptions relating to survey matters, and shall not disclose any matters which would materially impair Buyer's ability to use any of the Real Property in the operation of the Business in the manner in which it is now used. 6.4.3 On the Closing Date, the Title Insurance Company shall have unconditionally agreed in writing to issue pursuant to the Title Commitment a final title policy as of the Closing Date insuring fee simple title in Buyer to the Real Property, subject only to the Permitted Tax Lien and Other Permitted Exceptions. On or before the Closing Date, Seller shall execute and deliver to the Title Insurance Company an affidavit regarding mechanic's liens sufficient to allow deletion of such liens as a Standard Exception in the final title policy. 6.4.4 If within sixty (60) days after the date hereof: 24 25 6.4.4.1 A Title Commitment has not been obtained for the Real Property, Buyer shall be deemed to have waived the conditions precedent in foregoing Subsections 6.4.1 and 6.4.3 with respect to the Real Property. 6.4.4.2 A Survey has not been obtained by Seller and provided to Buyer for the Real Property, Buyer shall be deemed to have waived the condition precedent in foregoing Subsection 6.4.2 with respect to the Real Property, and shall be deemed to have waived the condition precedent in foregoing Subsection 6.4.3 to the extent satisfaction of such condition with respect to the Real Property would require such Survey. 6.4.4.3 Buyer does not by written notice to Seller specifically identify and object to a defect or exception to title to the Real Property, Buyer shall be deemed to have waived its right to object to such defect or exception. 6.5 Environmental Inspection. At Buyer's expense, Buyer shall have caused an environmental inspection to be performed by a reputable environmental engineering company of the Real Property, and the inspection report shall not disclose a reasonable basis for a determination that the Real Property in its current condition would cause Buyer as the owner thereof to incur a material liability under any applicable environmental law, rule or regulation. Buyer shall cause the environmental consultant to deliver to Seller a copy of each such inspection report at the same time such report is delivered to Buyer. In the event that within sixty (60) days after the date hereof, Buyer shall have failed to give Seller written notice specifying in detail the manner in which such report discloses a reasonable basis for a determination that the Real Property in its current condition would cause Buyer as the owner thereof to incur a material liability under applicable environmental laws, rules or regulations, Buyer shall be deemed to have waived the condition precedent set forth in this Section 6.5. 6.6 Opinion of Seller's Counsel. Buyer shall have received the written opinion of Seller's and Owner's outside counsel, dated as of the Closing Date, that (i) Seller is a corporation duly formed and in good standing under the laws of Illinois, (ii) the execution, delivery and performance of the Agreement and each of the other Documents have been duly authorized by all requisite corporate action (including all necessary shareholder approval) on the part of Seller, (iii) the Agreement and each of the other Documents have been duly and validly executed and delivered by Seller and Owner and constitute valid and legally binding obligations enforceable against Seller and Owner in accordance with their terms, subject to bankruptcy, insolvency and other laws affecting the enforcement of creditors' rights generally and general principles of equity, and (iv) the execution, delivery and performance by Seller and Owner of this Agreement and the other Documents do not violate or contravene, to counsel's knowledge, any judgment, order, or material agreement to which Seller or Owner is subject or a party or to which the Sale Assets are bound. 6.7 Other Consents. Seller shall have obtained in writing (in form reasonably satisfactory to Buyer's counsel) and provided to Buyer on or before the Closing Date, without any condition materially adverse to Buyer, any Publication, or the 25 26 Business, the consents or waivers to the transactions contemplated by this Agreement required under each Business Agreement. 6.8 Delivery of Closing Documents. Seller shall have delivered or caused to be delivered to Buyer on the Closing Date each of the documents required to be delivered pursuant to Section 8.2. 6.9 No Adverse Proceedings. No judgment or order shall have been rendered, and no action or proceeding shall be pending, against Buyer that would restrain or make unlawful the purchase and sale of the Sale Assets as contemplated by this Agreement. 6.10 No Material Adverse Change. There shall have been no change nor development affecting the Seller, any Publication or the Business after the date hereof which has resulted in, or could reasonably be expected to result in, a Material Adverse Condition. 6.11 The Country Sampler Store, L.L.C. Seller shall have delivered to Buyer the written consent of the Managers of the LLC (as hereinafter defined) as to the assignment of the License Agreement to Buyer contemplated in Section 12.7(b). ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE The obligation of Seller to close the transaction contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, unless waived by Seller in writing: 7.1 Accuracy of Representations and Warranties. (a) The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects on the date hereof and at the Closing Date with the same effect as though made at such time, except for changes that are not materially adverse to Seller. (b) Buyer shall have delivered to Seller on the Closing Date a certificate that the conditions specified in Sections 7.1(a), 7.2, and 6.9 are satisfied as of the Closing Date. 7.2 Performance of Agreements. Buyer shall have performed in all material respects all of its covenants, agreements and obligations required by this Agreement and each of the other Documents to be performed or complied with by it prior to or upon the Closing Date. 7.3 HSR Act. The waiting period (including any extension thereof) under the HSR Act applicable to the sale and purchase of the Sale Assets pursuant to this Agreement shall have expired or been terminated. 26 27 7.4 Opinion of Buyer's Counsel. Seller shall have received the written opinion of Buyer's counsel, dated as of the Closing Date, that (i) Buyer is a limited partnership duly formed and in good standing under the laws of the State of Indiana, (ii) the execution, delivery and performance of the Agreement and each of the other Documents have been duly authorized by all requisite partnership action on the part of Buyer, (iii) the Agreement and each of the other Documents have been duly and validly executed and delivered by Buyer and constitute valid and legally binding obligations enforceable against Buyer in accordance with their terms, subject to bankruptcy, insolvency and other laws affecting the enforcement of creditors' rights generally and general principles of equity, and (iv) the execution, delivery and performance by Buyer of this Agreement and the other Documents do not violate or contravene, to counsel's knowledge, any judgment, order or agreement to which Buyer is subject or a party or to which Buyer's assets are bound. 7.5 No Adverse Proceedings. No judgment or order shall have been rendered, and no action or proceeding shall be pending, against Seller that would restrain or make unlawful the purchase and sale of the Sale Assets as contemplated by this Agreement. 7.6 Delivery of Closing Documents. Buyer shall have delivered or cause to be delivered to Seller on the Closing Date each of the Documents required to be delivered pursuant to Section 8.3. ARTICLE VIII CLOSING 8.1 Time and Place. Closing of the purchase and sale of the Sale Assets pursuant to this Agreement (the "Closing") shall take place at the offices of Bose McKinney & Evans, 135 North Pennsylvania Street, Suite 2700, Indianapolis, Indiana, at 10:00 o'clock A.M. on the date (the "Closing Date") that is the fifth business day following satisfaction or waiver of the conditions precedent hereunder to Closing, effective as of 12:01 AM on the Closing Date (the "Effective Time"). 8.2 Documents to be Delivered to Buyer by Seller. At the Closing, Seller shall deliver or cause to be delivered to Buyer the following, in each case in form and substance reasonably satisfactory to Buyer: (a) The opinion of Seller's counsel, dated the Closing Date, to the effect set forth in Section 6.6; (b) Governmental certificates, dated as of a date as near as practicable to the Closing Date, showing that Seller is duly formed and in good standing in the State of Illinois and is qualified to do business and in good standing under the laws of the jurisdictions listed in Schedule 3.1; (c) A certificate of the Secretary of Seller attesting as to the incumbency of each officer of Seller who executes this Agreement and any of the other Documents and to similar customary matters; 27 28 (d) A bill of sale and other instruments of transfer and conveyance transferring the Sale Assets (except the Real Property) to Buyer; (e) A general warranty deed, in a form recordable in the State of Illinois, for the Real Property, which deed shall convey insurable, fee simple title for that parcel free and clear of all Liens except the Permitted Tax Lien and the Other Permitted Exceptions. (f) A certificate of nonforeign status under Section 1445 of the Code, complying with the requirements of the Income Tax Regulations promulgated pursuant to such section; (g) The Consulting Agreement executed by Owner; (h) The certificate described in Section 6.1(b); and (i) Such additional information and materials as Buyer shall have reasonably requested to evidence the satisfaction of the conditions to its obligations hereunder, including without limitation, evidence that all consents and approvals required as a condition to Buyer's obligation to close hereunder have been obtained, and any other documents expressly required by this Agreement to be delivered by Seller at Closing. 8.3 Deliveries to Seller by Buyer. At the Closing, Buyer shall deliver or cause to be delivered to Seller the following, in each case in form and substance reasonably satisfactory to Seller: (a) The Initial Adjusted Purchase Price in accordance with Section 2.4, as adjusted under Section 2.6(d); (b) The certificate described in Section 7.1(b); (c) The opinion of Buyer's counsel, dated the Closing Date, to the effect set forth in Section 7.4; (d) An agreement by Buyer assuming the Assumed Obligations; (e) The Consulting Agreement executed by Buyer; and (f) Such additional information and materials as Seller shall have reasonably requested to evidence satisfaction of the conditions to its obligations hereunder, and any other documents expressly required by this Agreement to be delivered by Buyer at Closing. ARTICLE IX RESTRICTIVE AGREEMENT 28 29 9.1 Covenant Not to Compete. Neither Seller nor Owner shall, during the period of three (3) years after the Closing Date (which period shall be extended by any amount of time this covenant is violated), engage directly or indirectly (whether as owner, employee, or otherwise) in the business of (i) producing or publishing, managing, selling or offering for distribution a magazine or periodical publication the content of which primarily pertains to the craft industry or craft enthusiasts anywhere within North America or (ii) maintaining a website with a craft focus on the Internet (or similar medium). Notwithstanding the foregoing, Buyer, Seller and Owner each acknowledge that Owner has an ownership interest in Independent Direct Distributors, Inc. and Store Level Service Group, Inc. and that Seller is the majority owner of County Sampler Store, L.L.C., and that the conduct of the business or operations of such entities consistent with past activities shall not constitute a violation of this Covenant Not to Compete by Seller or Owner. Each of Seller and Owner acknowledges that this covenant not to compete constitutes material consideration for Buyer's agreement to purchase the Sale Assets in accordance with this Agreement. 9.2. Remedies for Violation. Each of Seller and Owner acknowledges and agrees that Buyer will be irreparably harmed by a violation of Seller's restrictive covenant set forth in Section 9.1, and that Buyer shall be entitled in the event of such a violation to obtain an injunction in a court of competent jurisdiction restraining any such violation, without prejudice to other remedies available to Buyer at law or in equity and without the necessity of posting a bond, and shall be entitled to reimbursement of reasonable attorneys' fees and related costs and expenses in enforcing its rights in this Section. ARTICLE X INDEMNIFICATION 10.1 Survival. All representations, warranties, covenants and agreements in this Agreement or any other Document shall survive the Closing regardless of any investigation, inquiry or knowledge on the part of either party, and the Closing shall not be deemed a waiver by either party of the representations, warranties, covenants or agreements of the other party in this Agreement or any other Document; provided however, that the period of survival shall in all cases end two (2) years after the Closing Date (the "Survival Period") with the exception of tax and environmental matters, with respect to which the period of survival (the "Environmental and Tax Survival Period") shall be three (3) years. No claim may be brought under this Agreement or any other Document unless written notice describing in reasonable detail the nature and basis of such claim is given on or prior to the last day of the applicable Survival Period. In the event such notice of a claim is so given, the right to indemnification with respect to such claim shall survive the Survival Period until the claim is finally resolved and any obligations with respect to the claim are fully satisfied. The rights to indemnification set forth in this Article X shall be exclusive of all other rights to monetary damages that any party (or the party's successors or assigns) would otherwise have by statute or common law in connection with the transactions contemplated by this Agreement or any other Document. 29 30 10.2 Indemnification by Seller. (a) Subject to Section 10.1 and Sections 10.2(b) and (c), Seller shall indemnify, defend, and hold harmless Buyer and its officers, directors, employees, Affiliates, successors and assigns from and against, and pay or reimburse each of them for and with respect to, any Loss relating to, arising out of or resulting from: (i) Any breach by Seller of any of its representations, warranties, covenants or agreements in this Agreement or any other Document; or (ii) Any obligation, indebtedness or liability of Seller (other than the Assumed Obligations) regardless of whether disclosed to Buyer and regardless of whether constituting a breach by Seller of any representation, warranty, covenant or agreement hereunder or under any other Document; or (iii) Noncompliance by Seller with the provisions of the Bulk Sales Act, if applicable, in connection with the transactions contemplated by this Agreement. (b) Seller shall not be obligated to indemnify Buyer unless and until the aggregate amount of Buyer's Losses exceeds Twenty-Five Thousand Dollars ($25,000.00) (the "Basket"), in which case Buyer shall then be entitled to indemnification in the entire amount of Buyer's Losses (i.e., back to the first dollar of Loss), provided that any adjustment to the Purchase Price pursuant to Section 2.6 or any payment owed by Seller to Buyer for any Liability pursuant to or under Section 10.2(a)(ii) shall not be counted in determining whether the Basket limitation is satisfied, and Buyer shall have the right to recover any such payment without regard to such limitation. (c) The aggregate amount of all payments made by Seller in satisfaction of claims for indemnification pursuant to this Section 10.2 shall not exceed Eighteen Million Five Hundred Thousand Dollars ($18,500,000.00) (the "Cap"), provided that any payment owed by Seller to Buyer pursuant to Section 2.6 or any payment owed by Seller to Buyer for any Liability pursuant to or under Section 10.2(a)(ii) shall not be counted in determining whether the Cap has been met. 10.3 Indemnification by Buyer. Subject to Section 10.1, Buyer shall indemnify and hold harmless Seller and its officers, directors, employees, agents, representatives, Affiliates, successors and assigns from and against, and pay or reimburse each of them for and with respect to any Loss relating to, arising out of or resulting from: (i) Any breach by Buyer of any of its representations, warranties, covenants or agreements in this Agreement or any other Document; (ii) The Assumed Obligations; and 30 31 (iii) Unless Seller is obligated to indemnify Buyer pursuant to Section 10.2, all other obligations and liabilities associated with the operation of the Business after Closing. 10.4 Administration of Indemnification. For purposes of administering the indemnification provisions set forth in Sections 10.2 and 10.3, the following procedure shall apply: (a) Whenever a claim shall arise for indemnification under this Article, the party entitled to indemnification (the "Indemnified Party") shall reasonably promptly give written notice to the party from whom indemnification is sought (the "Indemnifying Party") setting forth in reasonable detail, to the extent then available, the facts concerning the nature of such claim and the basis upon which the Indemnified Party believes that it is entitled to indemnification hereunder. The parties agree to negotiate in good faith in order to attempt to resolve any claim for indemnification with as small as possible liability of the Indemnifying Party, and the Indemnified Party shall take no action in connection with such indemnification claim until thirty (30) days have expired from the day the notice of the indemnification claim is given to the Indemnifying Party. (b) In the event of any claim for indemnification resulting from or in connection with any claim by a third party, the Indemnifying Party shall be entitled, at its sole expense, either (i) to participate in defending against such claim or (ii) to assume the entire defense with counsel which is selected by it and which is reasonably satisfactory to the Indemnified Party provided that (A) the Indemnifying Party agrees in writing that it does not and will not contest its responsibility for indemnifying the Indemnified Party in respect of such claim or proceeding and (B) no settlement shall be made and no judgment consented to without the prior written consent of the Indemnified Party which shall not be unreasonably withheld (except that no such consent shall be required if the claimant is entitled under the settlement to only monetary damages actually paid by the Indemnifying Party). If, however, (i) the claim, action, suit or proceeding would, if successful, result in the imposition of damages for which the Indemnifying Party would not be solely responsible, or (ii) representation of both parties by the same counsel would otherwise be inappropriate due to actual or potential differing interests between them, then the Indemnifying Party shall not be entitled to assume the entire defense and each party shall be entitled to retain counsel who shall cooperate with one another in defending against such claim. In the case of Clause (i) of the preceding sentence, the Indemnifying Party shall be obligated to bear only that portion of the expense of the Indemnified Party's counsel that is in proportion to the damages indemnifiable by the Indemnifying Party compared to the total amount of the third-party claim against the Indemnified Party. (c) If the Indemnifying Party does not choose to defend against a claim by a third party, the Indemnified Party may defend in such manner as it deems appropriate or settle the claim (after giving notice thereof to the Indemnifying Party) on such terms as the Indemnified Party may deem appropriate, and the Indemnified Party shall be entitled to periodic reimbursement of defense expenses incurred and prompt indemnification from the Indemnifying Party in accordance with this Article. 31 32 (d) Failure or delay by an Indemnified Party to give a reasonably prompt notice of any claim (if given prior to expiration of the applicable Survival Period) shall not release, waive or otherwise affect an Indemnifying Party's obligations with respect to the claim, except to the extent that the Indemnifying Party can demonstrate actual loss or prejudice as a result of such failure or delay. Buyer shall not be deemed to have notice of any claim by reason of any knowledge acquired on or prior to the Closing Date by an employee of the Business. (e) To the extent the Holdback has not been paid to Seller, Buyer shall be entitled to setoff against the Holdback the amount of any indemnifiable Loss pursuant to Section 10.2 (subject to the Basket), provided that Buyer has complied with the applicable obligations in this Section 10.4. ARTICLE XI TERMINATION 11.1 Right of Termination. This Agreement may be terminated prior to Closing: (a) By written agreement of Seller and Buyer; or (b) By written notice from Seller or Buyer, provided such terminating party is not then in material breach of this Agreement if: (i) The other party has continued in material breach of this Agreement for twenty (20) days after written notice of such breach from the terminating party; or (ii) Closing does not occur within sixty (60) days after the date hereof other than due to a failure to satisfy the condition precedent set forth in Section 6.3 and Section 7.3. 11.2 Obligations Upon Termination. Upon termination of this Agreement, each party shall thereafter remain liable for breach of this Agreement prior to such termination and remain liable to pay and perform its indemnity obligation under Article X. 32 33 ARTICLE XII POST CLOSING 12.1 Termination of Employees. Seller shall pay, discharge and be solely responsible for all liabilities, obligations, costs and expenses which arise or become payable as a result of or in connection with Seller's termination of any of its employees before, upon or after Closing, including, without limitation, all severance or termination pay and all accrued vacation and personal days, salary, wages and other compensation payments or benefits, if any, which arise or become payable as a result of or in connection with such terminations, except to the extent included as a credit to Buyer in determining the Adjustment Amount. Seller acknowledges and agrees that Buyer shall not acquire any rights or interest in, or assume or have any obligations or liabilities under, any employment agreements or Benefit Plans between Seller and its employees, except to the extent included as part of the Assumed Obligations. 12.2 Employee Benefit Plans. Buyer shall not acquire any rights or interest in, or assume or have any obligations or liabilities under, any of the Benefit Plans, and Seller or the Benefit Plans, as applicable, will retain all assets and liabilities in respect of Seller's employees under the Benefit Plans. Seller shall comply with the provisions of the Continuation Coverage Under Group Health Plan of ERISA, Title I, Part 6, to the extent applicable in connection with the transactions contemplated by this Agreement. 12.3 Offer of Employment. Buyer hereby agrees to offer employment (effective as of the Effective Time) to all current employees of Seller on terms and conditions generally offered and imposed on other prospective employees of Buyer and its Affiliates. Furthermore, as to such employees who accept employment with Buyer, Buyer will (i) waive benefit eligibility waiting periods and pre-existing condition exclusions consistent with its other acquisitions of publication companies and to the extent permitted under the applicable plan and (ii) consider the employees' tenure, or a portion of such tenure, with Seller in computing vacation eligibility and other tenure-based benefits (subject to limitations imposed by Buyer pursuant to applicable company policies). 12.4 Change of Corporate Name. Seller agrees to deliver to Buyer, within three (3) business days of the Closing Date, copies of articles of amendment changing the Seller's corporate name to not include "Country Sampler" or any similar name thereto, certified by the Office of the Secretary of State of Illinois. 12.5 Stay Bonus. Seller shall comply with and pay all amounts due and owing under the stay bonus program Seller adopted, prior to entering into this Agreement, for the benefit of certain of Seller's key employees. 12.6 Accounts Receivable. (a) For a period of one-hundred twenty (120) days after the Closing Date (the "Collection Period"), Buyer will use its usual and customary procedures to collect the Accounts Receivable outstanding as of the Effective Time, provided that Buyer shall not be required to commence litigation, employ legal counsel or a collection 33 34 agency or make any other extraordinary collection efforts. For the purpose of determining amounts collected by Buyer with respect to the Accounts Receivables, each payment by an account debtor shall be applied to the older or oldest accounts receivable of such account debtor unless the account debtor identifies such an account in writing as being in dispute and directs in writing that a particular payment be applied to a specific newer account receivable. (b) Seller shall be required to purchase from Buyer all unpaid Accounts Receivable for the full amount thereof at the expiration of the Collection Period, less an amount equal to the product of (i) two percent (2%) multiplied by (ii) the aggregate amount of the Accounts Receivable as of the Effective Time (as adjusted, the "Adjusted Receivables Amount"). Within ten (10) business days after the expiration of the Collection Period, Buyer shall provide such written evidence as reasonably requested by Seller as to the calculation and documentation of the Adjusted Receivables Amount. Seller shall, with ten (10) business days receipt of such materials, pay the Adjusted Receivables Amount in cash to Buyer, and Buyer shall assign all such unpaid Accounts Receivable to Seller. 12.7 Possible Purchase of Seller's Interest in Country Sampler Store, L.L.C. Each of the parties agrees and acknowledges that various discusses have occurred as to Buyer purchasing Seller's fifty-one percent (51.0%) equity interest (the "Equity Interest") in The Country Sampler Store, L.L.C. (the "LLC"), but that no agreement has been reached as to if, and upon what terms, such purchaser would occur. In order that such discussions can continue and Buyer can continue to learn more about the operations of the LLC, the parties hereto agree as follows: (a) From the period from the date hereof and ending on the three-month anniversary of the Closing Date (the "CSS Period"), as long as Buyer desires to pursue the possible purchase of the Equity Interest, Buyer and Seller shall continue the discussions as to Buyer's possible purchase of the Equity Interest. (Buyer agrees to promptly notify Seller if Buyer no longer desires to pursue the possible purchase of the Equity Interest, and the CSS Period shall end upon delivery of such notice to Seller.) During the CSS Period, Buyer shall have a right of first refusal to match any offer, the terms of which are acceptable to Seller (the "Offer"), to purchase all or any portion of the Equity Interest on the same terms (including the form of consideration and the timing of payments of such consideration) as offered by the potential purchaser. Promptly upon receipt of any Offer during the CSS Period, Seller shall promptly give written notice to Buyer of all of the terms of the Offer, and Buyer shall have thirty (30) days in which to match the Offer by providing written acceptance to Seller. If such acceptance is given, the purchase of the Equity Interest (or portion thereof) by Buyer shall close within thirty (30) days of the Seller's receipt of the acceptance. (b) Seller agrees and acknowledges that one of the Business Agreements transferred to Buyer pursuant Section 2.1(f) is the License Agreement between Seller's predecessor, Sampler Publications, Inc., and the LLC, dated as of June 30, 1997 (the "License Agreement"). Accordingly, as long as Seller owns the Equity Interest, Seller agrees to cause the LLC to make all payments required to be 34 35 made under the License Agreement to be paid to Buyer and to otherwise fulfill its obligations under the License Agreement. (c) During the CSS Period, Buyer shall cause the employees of Seller who become employed by Buyer to provide the same administrative and managerial services to the LLC as currently provided or required to be provided pursuant to the LLC's operative documents (the "CSS Services"). Buyer shall be reimbursed by Seller for all of its wage and benefit costs incurred in providing the CSS Services, to the extent quantifiable, without any mark-up for corporate or other overhead expenses. On a monthly basis, Buyer shall provide to Seller written documentation as to such costs, and Seller shall promptly reimburse Buyer in cash for such costs. ARTICLE XIII MISCELLANEOUS 13.1 Further Actions. From time to time before, at and after the Closing, each party, at its expense and without further consideration, will execute and deliver such documents as reasonably requested by the other party in order more effectively to consummate the transactions contemplated hereby. 13.2 Payment of Expenses. (a) All sales, use, stamp, transfer, grant and other similar taxes payable in connection with consummation of the transactions contemplated hereby shall be paid by Seller. (b) Seller and Buyer shall split equally payment of all filing fees under the HSR Act. (c) Except as otherwise expressly provided in this Agreement, each of the parties shall bear its own expenses, including the fees of any attorneys and accountants engaged by such party, in connection with this Agreement and the consummation of the transactions contemplated herein. 13.3 Specific Performance. Seller acknowledges that each Publication is of a special, unique and extraordinary character, and that damages alone are an inadequate remedy for a breach of this Agreement by Seller. Accordingly, as an alternative to termination of this Agreement under Section 11.1, Buyer shall be entitled in the event of Seller's breach to enforcement of this Agreement (subject to obtaining any required approval of the HSR Act) by a decree of specific performance or injunctive relief requiring Seller to fulfill its obligations under this Agreement. Such right of specific performance or injunctive relief shall be in addition to, and not in lieu of, Buyer's right to recover damages and to pursue any other remedies available to Buyer for Seller's breach. In any action to specifically enforce Seller's obligation to close the transactions contemplated by this Agreement, Seller shall waive the defense that there is an adequate remedy at law or in equity and agrees that Buyer shall be entitled to obtain specific performance of Seller's obligation to close without being required to prove actual damages. As a condition to seeking specific performance, Buyer shall not be 35 36 required to tender the Purchase Price as contemplated by Section 2.4 but shall be required to demonstrate that Buyer is ready, willing and able to tender the Purchase Price as contemplated by such Section. 13.4 Notices. All notices, demands or other communications given hereunder shall be in writing and shall be sufficiently given if delivered by courier (including overnight delivery service) addressed as follows: (a) if to Buyer, to: Emmis Publishing, L.P. c/o Emmis Communications Corporation One Emmis Plaza, Suite 700 40 Monument Circle Indianapolis, Indiana 46204 Attention: J. Scott Enright, Vice President and Associate General Counsel Copy to: Bose McKinney & Evans 2700 First Indiana Plaza Indianapolis, Indiana 46204 Attention: Dwight L. Miller, Esq. (b) if to Seller, to: Country Sampler, Inc. c/o Rooks, Pitts and Poust 4200 Commerce Court, #300 Lisle, Illinois 60532 Attention: David Bressler, Esq. Copy to: Rooks Pitts & Poust 4200 Commerce Court, #300 Lisle, Illinois 60532 Attention: David Bressler, Esq. or such other address as a party may from time to time notify the other party in writing (as provided above). Any such notice, demand or communication shall be deemed to have been given (i) if so mailed, as of the close of the third business day following the date so mailed, and (ii) if delivered by courier, on the date received. 13.5 Entire Agreement. This Agreement, the Schedules, Exhibits and the other Documents constitute the entire agreement and understanding between the parties with respect to the subject matter hereof and supersede any prior negotiations, 36 37 agreements, understandings or arrangements between the parties hereto with respect to the subject matter hereof. 13.6 Binding Effect; Benefits. Except as otherwise provided herein, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors or permitted assigns. Except to the extent specified herein, nothing in this Agreement, express or implied, shall confer on any person other than the parties hereto and their respective successors or permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 13.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by either party without the prior written consent of the other party, provided that: (a) Either party may assign its rights under this Agreement as collateral security to any lender providing financing to the party or any of its Affiliates; and (b) Buyer may assign all of its rights under this Agreement to an Affiliate, provided that (i) the representations and warranties of Buyer hereunder shall be true and correct in all material respects as applied to the assignee, (ii) both Buyer and the assignee shall execute and deliver to Seller a written instrument in form and substance satisfactory to Seller within its reasonable judgment in which both Buyer and the assignee agree to be jointly and severally liable for performance of all of Buyer's obligations under this Agreement, and (iii) Buyer and the assignee shall deliver such other documents and instruments as reasonably requested by Seller, including appropriate certified resolutions of the boards of directors of Buyer and the assignee. 13.8 Governing Law. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of Indiana without regard to its principles of conflicts of laws. 13.9 Amendments and Waivers. No term or provision of this Agreement may be amended, waived, discharged or terminated orally but only by an instrument in writing signed by the party against whom the enforcement of such amendment, waiver, discharge or termination is sought. Any waiver shall be effective only in accordance with its express terms and conditions. 13.10 Severability. Any provision of this Agreement which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability without invalidating the remaining provisions hereof, and any such unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, the parties hereto hereby waive any provision of law now or hereafter in effect which renders any provision hereof unenforceable in any respect. 13.11 Attorneys' Fees. If one party brings suit against the other in connection with this Agreement or any other Document and the party against whom suit is brought 37 38 (the "Defendant") is successful in denying substantially all the relief sought by the claimant, then the Defendant shall be entitled to recover from the claimant the reasonable attorneys' fees and other costs and expenses incurred by the Defendant in connection with such suit regardless of whether such suit is prosecuted to judgment. 13.12 Headings. The captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 13.13 Counterparts. This Agreement may be executed in any number of counterparts, and by either party on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.14 References. All references in this Agreement to Articles and Sections are to Articles and Sections contained in this Agreement unless a different document is expressly specified. 13.15 Schedules and Exhibits. Unless otherwise specified herein, each Schedule and Exhibit referred to in this Agreement is attached hereto, and 4each such Schedule and Exhibit is hereby incorporated by reference and made a part hereof as if fully set forth herein. 38 39 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above. COUNTRY SAMPLER, INC. By: /s/ MARK A. NICKEL ------------------ Mark A. Nickel, Chief Executive Officer "Seller" /s/ MARK A. NICKEL ------------------ Mark A. Nickel, Individually "Owner" EMMIS PUBLISHING, L.P. By: Emmis Communications Corporation, Its General Partner By: /s/ JEFFREY H. SMULYAN ---------------------- Jeffrey H. Smulyan, Chairman "Buyer" 39 40 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement"), made this 1st day of April, 1999, by and between EMMIS PUBLISHING, L.P., an Indiana limited partnership (the "Company"), and MARK A. NICKEL, an Illinois resident ("Consultant"). W I T N E S S E T H: THAT WHEREAS, of even date herewith, the Company purchased substantially all the assets of Country Sampler, Inc., of which Consultant was an owner and by which the Consultant was employed, pursuant to an Asset Purchase Agreement, dated as of February 23, 1999, by and among Country Sampler, Inc. (to be known as "Archdale Holding, Inc. ("Archdale"), the Company and Consultant; and WHEREAS, the Company desires to obtain future services of Consultant, and to safeguard the Company against disclosure of confidential data. NOW, THEREFORE, in consideration of the engagement of Consultant by the Company and the other benefits provided him under this Agreement and the mutual covenants herein contained, and in consideration of other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. Consulting. During the Term (as hereinafter defined), Consultant, individually or through Archdale, shall serve as a consultant to the Company with such reasonable duties and responsibilities as are specified by the Company's chief executive officer or his designee (collectively, the "Duties") from time to time consistent with Consultant's prior position with Country Sampler, Inc. In fulfilling his Duties, Consultant shall be required (i) to travel only as reasonably requested by the Company and (ii) to provide his services on an as-available basis. 2. Best Efforts. Consultant shall at all times faithfully and diligently perform his obligations under this Agreement, and in connection with the performance of his duties hereunder shall act in the best interest of the Company and its affiliated companies including any parent or subsidiaries (hereinafter, where applicable, the reference to the "Company" shall include the Company and such affiliated companies together). 3. Consulting Fees. On the date hereof and on each April 1 of 2000, 2001, 2002, and 2003, the Company shall pay to Consultant, or to Archdale if designated by Consultant, consulting fees of Five Hundred Thousand Dollars ($500,000.00), payable in cash. Consultant shall be responsible for all Federal, State and local taxes applicable to the amounts paid by the Company under this Agreement. In no case shall the Company be liable for any additional payments to Consultant due to any tax liability incurred by Consultant as a result of this Agreement. Consultant agrees to indemnify the Company, and its officers, directors, employees and agents, for any and all tax liability (including but not limited to, fines, penalties, interest and costs and expenses 41 including attorneys' fees) arising from or relating to any amounts paid pursuant to this Agreement. Consultant is at all times during this Agreement an independent contractor and shall not be considered an employee of the Company. 4. Expenses. Consultant shall be entitled to reimbursement for such reasonable expenses as shall be determined in accordance with the Company's policies regarding reimbursement of expenses and pursuant to the prior determinations of the Company's officers. 5. Fringe Benefits. Consultant will be entitled to no benefits of any type as he is an independent contractor. 6. Use of Office and Storage Space. During the period of this Consulting Agreement, the Company shall provide and make available to Consultant, the occupancy and use of the office and storage space and equipment and furniture that is currently available to Consultant at 707 Kautz Road, St. Charles, Illinois. 7. Non-Disclosure of Confidential Information. (a) As used herein, the term "Confidential Information" means: any oral or written information disclosed to Consultant or known by Consultant which relates to the Company's business, products, processes, or services, including, but not limited to, information relating to research, sales, development, inventions, computer program designs, programming techniques, flow charts, source code, object code, passwords, access codes, products under development, costs, pricing, purchasing, accounting, technical data, marketing, business plans, and objectives of the Company and its affiliates; identity and requirements of customers of the Company and its affiliates; and the documentation thereof, provided that Confidential Information shall not include: (i) information which is published or is or becomes publicly known through no wrongful action of the publisher or the recipient; (ii) information obtained from or by a third party within such third party's legal rights; or (iii) information developed independently by Consultant or any third party. It will be presumed that information supplied to Consultant from affiliates of the Company and other outside sources is Confidential Information unless and until it is designated otherwise. (b) Consultant acknowledges that all Confidential Information shall at all times remain the property of the Company, and the Company shall have free and unlimited access at all times to all materials containing Confidential Information and shall have the right to claim and take possession of such materials on demand. (c) Consultant will not, during Consultant's consulting with the Company or thereafter, directly or indirectly use, divulge, disseminate, disclose, lecture upon, or publish any Confidential Information without having first obtained written permission from the Company to do so. (d) Consultant will safeguard and maintain secret all Confidential Information and all documents and things that include or embody Confidential Information. 2 42 (e) Upon termination of Consultant's consulting, for whatever reason, or upon request by the Company, Consultant will deliver to the Company all notes, computer program listings, flow charts, drawings, memoranda, correspondence, documents, records, notebooks, tapes, disks, and similar repositories of Confidential Information, including all copies thereof then in Consultant's possession or under Consultant's control, whether prepared by Consultant or by others. (f) Consultant acknowledges that the legal remedy available to the Company for any breach of covenants in this Agreement on the part of Consultant may be inadequate, and therefore, in the event of any threatened or actual breach of this Agreement and in addition to any other right or remedy which the Company may have, the Company shall be entitled to specific enforcement of this Agreement through injunctive or other equitable relief in a court with appropriate jurisdiction. Further, in addition to other equitable and legal relief available to the Company, Consultant shall pay the Company's costs and reasonable attorney fees incurred in enforcing this Agreement or in seeking relief from Consultant's breach of this Agreement. 8. Term. The term of this Agreement is from the date hereof and until March 31, 2004. 9. Obligation to Make Payments. In the event of Consultant's death or his sustaining a condition which disables him from performing the obligations imposed by this Agreement (which condition is expected to be permanent or of greater than two years duration), within thirty (30) days of the Consultant's death or disability, as additional consideration for services rendered, Company shall pay the balance of the unpaid consulting fees which will become due under the remaining term of this Agreement to Archdale, unless otherwise directed by Consultant during his lifetime, his guardian or his estate, as appropriate. 10. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the consulting by Consultant for the Company, superseding any and all such prior agreements and cannot be amended, modified or supplemented in any respect except by subsequent written agreement entered into by the parties. 11. Assignment. Consultant acknowledges that the services to be rendered by Consultant are unique and personal; accordingly, Consultant may not assign any of the Consultant's rights or delegate any of the Consultant's duties or obligations under this Agreement. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the legal representatives, successors and assigns of the Company. 12. No Waiver. No failure on the part of either party to require the performance by the other party of any term of this Agreement shall be taken or held to be a waiver of such term or in any way affecting such party's right to enforce such term, and no waiver on the part of either party of any term in this Agreement shall be taken or held to be a waiver of any other term hereof or the breach thereof. 3 43 13. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had not been contained herein. 14. Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of Indiana. 4 44 IN WITNESS WHEREOF, executed as of the date and year first above written. EMMIS PUBLISHING, L.P. By: Emmis Communications Corporation, Its General Partner By: /s/ J. Scott Enright -------------------------------------- J. Scott Enright, Vice President The "Company" /s/ Mark A. Nickel -------------------------------------- "Consultant" 5 45 EMMIS COMMUNICATIONS CORPORATION April 1, 1999 Mr. Mark A. Nickel RE: Consulting Agreement (the "Agreement") between Emmis Publishing, L.P. and you, dated as of the date hereof. Dear Mark: This letter will augment and clarify Section 1 in the Agreement and your obligation to fulfill your Duties (as defined in the Agreement) and Emmis Publishing's obligation to make the payments to you required in Section 3 of the Agreement. Specifically, if you fail to fulfill the Duties for any reason besides your death or disability (which situations are covered in Section 9 of the Agreement), the Company will remain obligated to make the payments in the amounts and at the times provided in Section 3 of the Agreement. If you have any questions about this, please call the undersigned. Thank you. Sincerely, EMMIS PUBLISHING, L.P. By: Emmis Communications Corporation, Its General Partner By: /s/ J. Scott Enright ------------------------------- J. Scott Enright, Vice President EX-21 5 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF EMMIS COMMUNICATIONS CORPORATION
Other Names Jurisdiction of Under Which Subsidiary Organization Business is Done ---------- ------------ ---------------- Emmis FM Broadcasting Corporation of Indianapolis Indiana -- Emmis FM Broadcasting Corporation of St. Louis Indiana KSHE-FM KPWR, Inc. Indiana -- Emmis Broadcasting Corporation of New York Indiana WQHT-FM Emmis FM Broadcasting Corporation of Chicago Indiana WKQX-FM Emmis Meadowlands Corporation Indiana -- Emmis Publishing Corporation Indiana -- Emmis AM Radio Corporation of Indianapolis Indiana -- Emmis FM Radio Corporation of Indianapolis Indiana -- Emmis Broadcasting Corporation Indiana -- Emmis 104.1 FM Radio Corporation of St. Louis Indiana WXTM-FM Emmis 106.5 FM Broadcasting Corporation of St. Louis Indiana WKKX-FM Emmis 1310 AM Radio Corporation of Indianapolis Indiana -- Emmis 105.7 FM Radio Corporation of Indianapolis Indiana -- Emmis DAR, Inc. Indiana -- Emmis International Corporation Indiana - Emmis 1380 AM Radio Corporation of St. Louis Indiana - Duncan American Radio, LLC Indiana - Emmis Publishing, L.P. Indiana Indianapolis Monthly Cincinnati Atlanta Country Sampler Emmis Indiana Broadcasting, L.P. Indiana WENS WIBC WNAP WTLC-FM WTLC-AM WTHI-FM WTHI-AM WWVR-FM Emmis Television Broadcasting, L.P. Indiana WVUE-TV WALA-TV WLUK-TV KHON-TV WFTX-TV WTHI-TV Emmis FM License Corporation of Indianapolis California -- Emmis FM License Corporation of St. Louis California -- KPWR License, Inc. California -- Emmis License Corporation of New York California -- Emmis FM License Corporation of Chicago California -- Emmis AM Radio License Corporation of Indianapolis California -- Emmis FM Radio License Corporation of Indianapolis California -- Emmis Radio License Corporation of New York California - Emmis 104.1 FM Radio License Corporation of St. Louis California - Emmis 106.5 FM License Corporation of St. Louis California -
2 Emmis 1310 AM Radio License Corporation of Indianapolis California - Emmis 105.7 FM License Corporation of Indianapolis California - Emmis License Corporation California -- Emmis International Broadcasting Corporation California - Emmis 1480 AM Radio License Corporation of Terre Haute California -- Emmis 99.9 FM Radio License Corporation of Terre Haute California -- Emmis 105.5 FM Radio License Corporation of Terre Haute California -- Emmis Television License Corporation of Honolulu California -- Emmis Television License Corporation of Mobile California -- Emmis Television License Corporation of Cape Coral California -- Emmis Television License Corporation of Green Bay California -- Emmis Television License Corporation of Terre Haute California -- Emmis Television License Corporation of New Orleans California -- Emmis FM Holding Corporation of New York Delaware -- Emmis Radio Corporation of New York Delaware WRKS-FM Emmis 101.9 FM Radio Corporation of New York Michigan WQCD-FM Mediatex Communications Corporation Texas -- Mediatex Development Corporation Texas -- Texas Monthly, Inc. Texas -- Radio Hungaria Co. Ltd. Hungary -- Big Hit Marketing, Inc. Illinois Big Hit Marketing
EX-23 6 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, 333-14657 and 333-74377. ARTHUR ANDERSEN LLP Indianapolis, Indiana, May 25, 1999. EX-24 7 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger and Norman H. Gurwitz, or any of them, his or her attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her 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 28, 1999, 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 or her substitute or substitutes may do or cause to be done by virtue hereto. Dated: May 8, 1999 /s/ Susan B. Bayh ----------------------------- Susan B. Bayh 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 12, 1999 /s/ Gary L. Kaseff ----------------------------- Gary L. Kaseff 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 7, 1999 /s/ Richard A. Leventhal ----------------------------- Richard A. Leventhal 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 21, 1999 /s/ Greg Nathanson ----------------------------- Greg Nathanson 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 21, 1999 /s/ Doyle L.Rose ----------------------------- Doyle L. Rose 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 21, 1999 /s/ Frank V. Sica ----------------------------- Frank V. Sica 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 21, 1999 /s/ Jeffrey H. Smulyan ----------------------------- Jeffrey H. Smulyan 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below, hereby constitutes and appoints Jeffrey H. Smulyan, J. Scott Enright, Walter Z. Berger 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 28, 1999, 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 21, 1999 /s/ Lawrence B. Sorrel ----------------------------- Lawrence B. Sorrel EX-27 8 FDS
5 0000783005 EMMIS BROADCASTING CORPORATION 3-MOS FEB-28-1999 DEC-01-1998 FEB-28-1999 6,117 0 53,177 1,698 0 71,082 132,322 26,262 1,014,831 69,833 595,805 0 0 158 235,391 1,014,831 58,911 58,911 9,238 9,238 48,986 185 11,768 (11,266) (5,150) (6,116) 0 0 0 (6,116) (.39) (.38)
-----END PRIVACY-ENHANCED MESSAGE-----