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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) [X]
    
    Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Fiscal Year Ended February 29, 2004
 [   ]
    
    Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period
from _______ to _______.
 EMMIS COMMUNICATIONS CORPORATION
    
    EMMIS OPERATING COMPANY(Exact name of registrant as specified in its
charter)
    
    (Exact name of registrant as specified in its
charter)
 INDIANA
    
    INDIANA(State of incorporation or organization)
    
    (State of incorporation or organization)
 0-23264
    
    333-62172-13(Commission file number)
    
    (Commission file number)
 35-1542018
    
    35-2141064(I.R.S. Employer
Identification No.)
    
    (I.R.S. Employer
Identification No.)
 ONE EMMIS PLAZA
    
    ONE EMMIS PLAZA40 MONUMENT CIRCLE
    
    40 MONUMENT CIRCLESUITE 700
    
    SUITE 700INDIANAPOLIS, INDIANA 46204
    
    INDIANAPOLIS, INDIANA 46204(Address of principal executive offices)
    
    (Address of principal executive offices)
 (317) 266-0100
    
    (317) 266-0100(Registrants Telephone Number,
Including Area Code)
    
    (Registrants Telephone Number,
Including Area Code)
 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common
stock, $.01 par value of Emmis Communications Corporation; 6.25% Series A
Cumulative Convertible Preferred Stock, $.01 par value of Emmis Communications
Corporation. 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 [   ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes [X] No [   ]. The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of August 31, 2003, the Registrants most recently-completed
second fiscal quarter, was approximately $1,042,248. The number of shares outstanding of each of Emmis Communications
Corporations classes of common stock, as of April 30, 2004, was: 51,095,435
    
    Class A Common Shares, $.01 par value4,838,920
    
    Class B Common Shares, $.01 par value0
    
    Class C Common Shares, $.01 par value
 Emmis Operating Company has 1,000 shares of common stock outstanding as of
April 30, 2004, and all of these shares are owned by Emmis Communications
Corporation. 1




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DOCUMENTS INCORPORATED BY REFERENCE Documents
    
    Form 10-K ReferenceProxy Statement for 2004 Annual Meeting
    
    Part III
 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. [   ] 2




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES FORM 10-K TABLE OF CONTENTS PagePART I
    
    
    4Item 1. Business
    
    
    4Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART II
    
    
    23Item 5. Market for Registrants Common Equity and Related
Stockholder Matters
    
    
    23Item 6. Selected Financial Data
    
    
    25Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    
    28Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    57Item 8. Financial Statements and Supplementary Data
    
    
    59Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    116Item 9A. Controls and Procedures
    
    
    116PART III
    
    
    116Item 10. Directors and Executive Officers of the Registrant
    
    
    116Item 11. Executive Compensation
    
    
    117Item 12. Security Ownership of Certain Beneficial Owners,
and Management, and Related Stockholder Matters
    
    
    117Item 13. Certain Relationships and Related Transactions
    
    
    117Item 14. Principal Accountant Fees and Services
    
    
    117PART IV
    
    
    117Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    117Signatures
    
    
    122Supplemental IndentureSupplemental IndentureIndenture dated May 10, 2004Revolving Credit and Term Loan AgreementRegistration Rights AgreementAircraft Time Sharing AgreementTax Sharing AgreementSubsidiariesConsent of AccountantsPowers of AttorneyCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification of Principal Executive OfficerCertification of Principal Financial Officer
 3




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PART I 
 ITEM 1. BUSINESS. GENERAL We are a diversified media company with radio broadcasting, television
broadcasting and magazine publishing operations. We operate the ninth largest
publicly traded radio portfolio in the United States based on total listeners.
We own and operate six FM radio stations serving the nations top three markets
 New York, Los Angeles and Chicago. Additionally, we own and operate
seventeen FM and four AM radio stations with strong positions in Phoenix, St.
Louis, Austin (we have a 50.1% controlling interest in our radio stations
located there), Indianapolis and Terre Haute, IN. We also own and operate a
leading portfolio of television stations covering geographically diverse
mid-sized markets in the U.S., as well as the large markets of Portland and
Orlando. The sixteen television stations we own and operate have a variety of
network affiliations: five with CBS, five with FOX, three with NBC, one with
ABC and two with WB. Our focus is on maintaining our leadership position in broadcasting by
continuing to enhance the operating performance of our broadcast properties,
and by acquiring underdeveloped properties that offer the potential for
significant improvements through the application of our operational expertise.
We have created top performing radio stations that rank, in terms of primary
demographic target audience share, among the top ten stations in the New York,
Los Angeles and Chicago radio markets according to the Fall 2003 Arbitron
Survey. We believe that this strong large market radio presence and our
diversity of station formats make us attractive to a broad base of radio
advertisers and reduces our dependence on any one economic sector or specific
advertiser. We seek to be the largest local television presence in our
television markets by combining network-affiliated programming with leading
local news. We have created television stations with a strong local brand
within the stations market, allowing viewers and advertisers to identify with
the station while building the stations franchise value. We have generally
improved the profitability of our television stations since our acquisition of
them by applying the focused research and marketing techniques we utilize
successfully in our radio operations and by concentrating our sales efforts
locally. In addition to our domestic radio and TV broadcasting properties, we
operate a news information radio network in Indiana, publish Texas Monthly, Los
Angeles, Atlanta, Indianapolis Monthly, Cincinnatiand Country Samplerand
related magazines, and operate an international radio business.
Internationally, we operate nine FM radio stations in the Flanders region of
Belgium, have a 59.5% interest in a national top-ranked radio station in
Hungary, and own 75% of one FM and one AM radio station in Buenos Aires,
Argentina. In December 2003, we agreed to sell our radio stations in Buenos
Aires, Argentina and expect the transaction to close in our fiscal quarter
ended May 31, 2004. We also engage in various businesses ancillary to our
broadcasting business, such as consulting and broadcast tower leasing. The following discussion pertains to Emmis Communications Corporation
(ECC) and its subsidiaries (collectively, Emmis or the Company) and to
Emmis Operating Company and its subsidiaries (collectively EOC). EOC became
a wholly owned subsidiary of ECC in connection with the Companys
reorganization (see Note 1c. to our consolidated financial statements) on June
22, 2001. Unless otherwise noted, all disclosures contained in this Form 10-K
apply to Emmis and EOC. BUSINESS STRATEGY We are committed to maintaining our leadership position in broadcasting,
enhancing the performance of our broadcast and publishing properties, and
distinguishing ourselves through the quality of our operations. Our strategy
is focused on the following operating principles:  Develop Innovative Local 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 and to assure that we are meeting the needs of our
target audience. Utilizing the research results, we concentrate on providing
a focused programming format carefully tailored to the demographics of our
markets and our audiences preferences. Our local sales force has capitalized
on our local presence to increase the percentage of our net revenues from
local advertising. Historically, local advertising revenues have been a more
stable revenue source for the broadcast industry and we believe local sales
will continue to be less susceptible to economic swings than national sales. 4




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Focus Our Sales And Marketing Efforts. We design our local and national sales
efforts based on advertiser demand and our programming compared to the
competitive formats within each market. We provide our sales force with
extensive training and the technology for sophisticated inventory management
techniques, which provide frequent price adjustments based on regional and
market conditions. Our sales philosophy is to maintain the price integrity of
our available inventory. We will accept a lower sell-out percentage in
periods of weak advertiser demand instead of cutting price to fill all
available inventory. Additional company resources have been allocated to
locate, hire, train and retain top sales people. Under the Emmis Sales
Assault Plan, a company-wide initiative geared toward attracting and
developing sales leaders in the radio, television and magazine industries, we
have added and trained scores of sales people to our workforce in the last two
fiscal years, which was incremental to hirings in the normal course of
business. As a result, we have significantly increased our share of local
television revenues and maintained our share of local radio revenues, despite
direct format attacks from competitors in our New York and Chicago markets.Develop Strong Local Identities For Our Television Stations. We strive to
create television stations with a strong local brand within the stations
market, allowing viewers and advertisers to identify with the station while
building the stations franchise value. We believe that aggressive promotion
and strong local station management, strategies which we have found successful
in our radio operations, are critical to the creation of strong local
television stations as well. Additionally, we believe that the production and
broadcasting of local news and events programming can be an important link to
the community and an aid to the stations efforts to expand its viewership.
Local news and events programming can provide access to advertising sources
targeted specifically to the local or regional community. We believe that
strong local news generates high viewership and results in higher ratings both
for programs preceding and following the news.Pursue Strategic Acquisitions. We have built our portfolio by selectively
acquiring underdeveloped media properties in desirable markets at reasonable
purchase prices where our experienced management team has been able to enhance
value. We have been successful in acquiring these types of media properties
and improving their ratings, revenues and cash flow with our marketing focus
and innovative programming expertise. We intend to continue to selectively
acquire media properties in desirable markets to create value by developing
those properties to increase their cash flow. We find underdeveloped
properties particularly attractive because they offer greater potential for
revenue and cash flow growth than mature properties through the application of
our operational experience.Encourage A Performance-Based, Entrepreneurial Management Approach. We
believe that broadcasting is primarily a local business and that much of its
success is the result of the efforts of regional and local management and
staff. We have attracted and retained an experienced team of broadcast
professionals who understand the viewing and listening preferences,
demographics and competitive opportunities of their particular market. Our
decentralized approach to station management gives local management oversight
of station spending, long-range planning and resource allocation at their
individual stations, and rewards all employees based on those stations
performance. In addition, we encourage our managers and employees to own a
stake in the company, and most of our full-time employees have an equity
ownership position in Emmis. We believe that our performance-based,
entrepreneurial management approach has created a distinctive corporate
culture, making Emmis a highly desirable employer in the broadcasting industry
and significantly enhancing our ability to attract and retain experienced and
highly motivated employees and management. 5




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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 BIAs Investing in Radio 2004 (1st Edition). Ranking in Primary
Demographic Target is the ranking of the station among all radio stations in
its market based on the Fall 2003 Arbitron Survey. A t indicates the station
tied with another station for the stated ranking. Station Audience Share
represents a percentage generally computed by dividing the average number of
persons over age 12 listening to a particular station during specified time
periods by the average number of such persons for all stations in the market
area as determined by Arbitron. RANKING INMARKET
    
    
    
    PRIMARY
    
    PRIMARY
    
    STATIONSTATION AND
    
    RANK BY
    
    
    
    DEMOGRAPHIC
    
    DEMOGRAPHIC
    
    AUDIENCEMARKET
    
    REVENUE
    
    FORMAT
    
    TARGET AGES
    
    TARGET
    
    SHARELos Angeles, CA
    
    1KPWR-FM
    
    
    
    Hip-Hop/R&B
    
    18-34
    
    1
    
    5.1KZLA-FM
    
    
    
    Country
    
    25-54
    
    12
    
    2.6New York, NY
    
    2WQHT-FM
    
    
    
    Hip-Hop
    
    18-34
    
    1
    
    4.7WRKS-FM
    
    
    
    Classic Soul / Today's R&B
    
    25-54
    
    3
    
    4.4WQCD-FM
    
    
    
    Smooth Jazz
    
    25-54
    
    8t
    
    3.5Chicago, IL
    
    3WKQX-FM
    
    
    
    Alternative Rock
    
    18-34
    
    6
    
    2.0Phoenix, AZ
    
    14KKFR-FM
    
    
    
    Rythmic CHR
    
    18-34
    
    4
    
    4.0KTAR-AM
    
    
    
    News/Talk/Sports
    
    35-64
    
    7
    
    4.3KKLT-FM
    
    
    
    Adult Contemporary
    
    25-54
    
    12
    
    3.0KMVP-AM
    
    
    
    Sports
    
    25-54
    
    23
    
    1.2St. Louis, MO
    
    20KPNT-FM
    
    
    
    Alternative Rock
    
    18-34
    
    1
    
    4.8KIHT-FM
    
    
    
    Classic Hits
    
    25-54
    
    2t
    
    4.1KSHE-FM
    
    
    
    Album Oriented Rock
    
    25-54
    
    4t
    
    4.6WRDA-FM
    
    
    
    New Standards
    
    25-54
    
    15
    
    1.6KFTK-FM
    
    
    
    Talk
    
    25-54
    
    19
    
    1.5Indianapolis, IN
    
    31WIBC-AM
    
    
    
    News/Talk/Sports
    
    35-64
    
    4
    
    6.0WNOU-FM
    
    
    
    CHR
    
    18-34
    
    5
    
    5.0WYXB-FM
    
    
    
    Soft Adult Contemporary
    
    25-54
    
    5t
    
    4.6WENS-FM
    
    
    
    Adult Contemporary
    
    25-54
    
    13t
    
    1.7Austin, TX
    
    37KDHT-FM
    
    
    
    Rythmic CHR
    
    18-34
    
    1
    
    5.5KLBJ-AM
    
    
    
    News/Talk
    
    25-54
    
    3
    
    6.0KLBJ-FM
    
    
    
    Album Oriented Rock
    
    25-54
    
    4
    
    4.5KGSR-FM
    
    
    
    Adult Alternative
    
    25-54
    
    5
    
    3.9KROX-FM
    
    
    
    Alternative Rock
    
    18-34
    
    7t
    
    2.7KEYI-FM
    
    
    
    Oldies
    
    25-54
    
    10
    
    3.4Terre Haute, IN
    
    223WTHI-FM
    
    
    
    Country
    
    25-54
    
    1
    
    20.8WWVR-FM
    
    
    
    Classic Rock
    
    25-54
    
    3
    
    9.2
 6




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In addition to our other domestic radio broadcasting operations, we own and
operate Network Indiana, a radio network that provides news and other
programming to nearly 70 affiliated radio stations in Indiana.
Internationally, we operate nine FM radio stations in the Flanders region of
Belgium, have a 59.5% interest in a national top-ranked radio station in
Hungary, and own 75% of one FM and one AM radio station in Buenos Aires,
Argentina. In December 2003, we agreed to sell our radio stations in Buenos
Aires, Argentina and expect the transaction to close in our fiscal quarter
ended May 31, 2004. We also engage in various businesses ancillary to our
broadcasting business, such as consulting and broadcast tower leasing. TELEVISION STATIONS In the following table, DMA Rank is estimated by the A.C. Nielsen
Company (Nielsen) as of January 2004. 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 2004. A t indicates the station tied with another station for
the stated ranking. 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
    
    
    
    STATIONTELEVISION
    
    METROPOLITAN
    
    DMA
    
    AFFILIATION/
    
    STATIONS
    
    STATION
    
    AUDIENCE
    
    AFFILIATIONSTATION
    
    AREA SERVED
    
    RANK
    
    CHANNEL
    
    IN MARKET
    
    RANK
    
    SHARE
    
    EXPIRATIONWKCF-TV
    
    Orlando, FL
    
    20
    
    WB/18
    
    5
    
    5
    
    5
    
    December 31, 2009KOIN-TV
    
    Portland, OR
    
    24
    
    CBS/6
    
    6
    
    2
    
    12
    
    September 18, 2006WVUE-TV
    
    New Orleans, LA
    
    42
    
    Fox/8
    
    6
    
    3
    
    9
    
    March 5, 2006KRQE-TV
    
    Albuquerque, NM
    
    49
    
    CBS/13
    
    6
    
    2t
    
    10
    
    September 18, 2006WALA-TV
    
    Mobile, AL/Pensacola, FL
    
    62
    
    Fox/10
    
    5
    
    4
    
    9
    
    August 24, 2006WBPG-TV
    
    Mobile, AL/Pensacola, FL
    
    62
    
    WB/55
    
    5
    
    N/A
    
    2
    
    August 31, 2006WSAZ-TV
    
    Huntington, WV/Charleston, WV
    
    63
    
    NBC/3
    
    4
    
    1
    
    21
    
    January 1, 2009KSNW-TV
    
    Wichita, KS
    
    67
    
    NBC/3
    
    5
    
    2
    
    14
    
    January 1, 2009WLUK-TV
    
    Green Bay, WI
    
    68
    
    Fox/11
    
    4
    
    4
    
    9
    
    November 1, 2005WFTX-TV
    
    Fort Myers, FL
    
    70
    
    Fox/36
    
    5
    
    4
    
    6
    
    N/AKGUN-TV
    
    Tucson, AZ
    
    71
    
    ABC/9
    
    6
    
    3
    
    12
    
    February 6, 2005KHON-TV(1)
    
    Honolulu, HI
    
    72
    
    Fox/2
    
    5
    
    1
    
    15
    
    August 2, 2006KGMB-TV(1)
    
    Honolulu, HI
    
    72
    
    CBS/9
    
    5
    
    2
    
    14
    
    September 18, 2006KMTV-TV
    
    Omaha, NE
    
    77
    
    CBS/3
    
    5
    
    2
    
    15
    
    September 18, 2006KSNT-TV
    
    Topeka, KS
    
    137
    
    NBC/27
    
    4
    
    2
    
    13
    
    January 1, 2009WTHI-TV
    
    Terre Haute, IN
    
    148
    
    CBS/10
    
    3
    
    1
    
    23
    
    December 31, 2005
  (1)
    
    We are currently operating KGMB-TV under a temporary waiver issued by the
FCC. We may be required to sell one of these stations. See Managements
Discussion and Analysis of Financial Condition and Results of Operations
for further discussion. Emmis also owns and operates nine satellite stations that primarily
re-broadcast the signal of certain of our local stations. A local station and
its satellite station are considered one station for FCC and multiple ownership
purposes, provided that the stations are in the same market. Each of our television stations is affiliated with CBS, NBC, ABC, Fox or
WB (each a Network) pursuant to a written network affiliation agreement,
except WFTX in Ft. Myers, FL, which is affiliated with Fox pursuant to an oral
affiliation agreement. Each affiliation agreement provides the affiliated television station with the right to
rebroadcast all programs transmitted by the Network with which the television
station is affiliated. In return, the Network has the right to sell a
substantial portion of the advertising time during such broadcasts. 7




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The long established Networks (ABC, CBS and NBC) have historically paid
the affiliated station to broadcast the Networks programming. This Network
compensation payment used to vary depending on the time of day that a station
broadcast the Network programming. Typically, prime-time programming generated
the highest hourly Network compensation payments. In the recent years,
however, ABC, CBS and NBC have begun to eliminate or sharply reduce
compensation payments to stations for clearance of Network programming. In
some cases, Networks have undertaken to cut compensation when a station is to
be sold and the affiliation agreement is to be assigned or transferred, or when
an old affiliation agreement has expired. The more recently established
Networks (Fox and WB) generally pay little or no cash compensation for the
clearance of Network programming. They tend, however, to offer the affiliated
station more advertising availability for local sale within Network programming
than do the long established Networks. In the years ended February 2002, 2003 and 2004, we received approximately
$4.6 million, $3.3 million and $2.0 million in Network compensation payments,
which represented less than 1% of our total net revenues in each year. PUBLISHING OPERATIONS We publish the following magazines through our publishing division: MonthlyPaidCirculationRegional Magazines:Texas Monthly
    
    
    300,000Los Angeles
    
    
    153,000Atlanta
    
    
    67,000Indianapolis Monthly
    
    
    45,000Cincinnati Magazine
    
    
    28,000Specialty Magazines*:Country Sampler
    
    
    325,000Country Sampler Decorating Ideas
    
    
    160,000Country Sampler Decorating with Paint
    
    
    102,000Country Marketplace
    
    
    145,000
 * Our specialty magazines are circulated bimonthly. In addition to our monthly and bimonthly magazines, Emmis also owns and
operates a regional book publisher, Emmis Books. INTERNET AND NEW TECHNOLOGIES We believe that the development and explosive growth of the Internet
present not only a challenge, but an opportunity for broadcasters and
publishers. The primary challenge is increased competition for the time and
attention of our listeners, viewers and readers. The opportunity is to further
enhance the relationships we already have with our listeners, viewers and
readers by expanding products and services offered by our stations and
magazines. For that reason, we have individuals at each of our properties
dedicated to website maintenance and generating revenues from the propertys
website. We believe that there are opportunities to improve and expand our
television operations utilizing new technologies such as those that capitalize
on the digital spectrum. Each television broadcaster has spent considerable
capital complying with the digital conversion mandated by the FCC. Emmis has
spent approximately $23.5 million converting its stations to digital. We
believe we have developed a compelling business model to monetize this digital
spectrum. Our model contemplates local television operators pooling their
digital spectrum in individual markets and offering an over-the-air, low cost
alternative to cable and satellite. Although we believe this subscription
based model is viable, its ultimate success will depend upon industry
involvement, customer penetration and certain other contingencies. Emmis expects to incur approximately $3 to $5 million of
costs in fiscal 2005 related to the development of a formal business plan and
the organization of an industry consortium in a separate joint venture. These
costs will be included in corporate expenses. Once the joint venture has been
formed, our future costs, which are indeterminable at this time, will likely be
accounted for under the equity method as Emmis will not control
the new joint venture entity. 8




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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, United Ways September 11th Fund, The March of Dimes, American
Cancer Society, Riley Childrens Hospital, The Salvation Army and research
foundations seeking cures for ALS, cystic fibrosis, leukemia and AIDS and
helping to fight drug abuse. In addition to our planned activities, our
stations and magazines take leadership roles in community responses to natural
disasters, such as commercial-free news broadcasts covering the events of
September 11th and the war in Iraq. The National Association of Broadcasters
Education Foundation honored us with the Hubbard Award, honoring a broadcaster
for extraordinary involvement in serving the community. Emmis was only the
second broadcaster to receive this prestigious honor. 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 Television Operators Caucus, the Radio Advertising Bureau,
the Radio Futures Committee, the Arbitron Advisory Council, and as founding
members of the Radio Operators Caucus. Our chief executive has been honored
with the National Association of Broadcasters National Radio Award and as
Radio Inks Radio Executive of the Year. At various times we have been voted
Most Respected Broadcaster in polls of radio industry chief executive officers
and managers and our management and on-air personalities have won numerous
prestigious industry awards. 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, cable, 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 (e.g., New York) does not generally compete
with stations in other markets (e.g., Chicago). 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 in terms of the number of
listeners or viewers, authorized power, assigned frequency, audience
characteristics, local program acceptance and the number and characteristics of
other stations in the market area. We attempt to improve our competitive
position with programming and promotional campaigns aimed at the demographic
groups targeted by our stations, and through sales efforts designed to attract
advertisers that have done little or no broadcast advertising by emphasizing
the effectiveness of radio and television advertising in increasing the
advertisers revenues. Changes in the policies and rules of the FCC permit
increased joint ownership and joint operation of local stations. Those
stations taking advantage of these joint arrangements (including our New York,
Los Angeles, Phoenix, St. Louis, Indianapolis and Terre Haute clusters) may in
certain circumstances have lower operating costs and may be able to offer
advertisers more attractive rates and services. Although we believe that each
of our stations can compete effectively in its market, there can be no
assurance that any of our stations will be able to maintain or increase its
current audience ratings or advertising revenue market share. Although the broadcasting industry is highly competitive, barriers to
entry exist. The operation of a broadcasting station in the United States
requires a license from the FCC. Also, 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 and cross ownership rules which limit the types of media
properties in any given market that can be owned by the same person. The broadcasting industry historically has grown in terms of total
revenues despite the introduction of new technology for the delivery of
entertainment and information, such as cable television, the Internet,
satellite television, audio tapes and compact discs. We believe that radios
portability in particular makes it less vulnerable than other media to
competition from new methods of distribution or other technological advances.
There can be no assurance, however, that the development or introduction in the
future of any new media technology will not have an adverse effect on the radio
or television broadcasting industry. ADVERTISING SALES Our stations and magazines derive their advertising revenue from local and
regional advertising in the marketplaces in which they 9




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operate, as well as from the sale of national advertising. Local and most
regional sales are made by a stations or magazine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. During
the year ended February 29, 2004, approximately 28% of our total advertising
revenues were derived from national sales and 72% were derived from local and
regional sales. For the year ended February 29, 2004, our radio stations
derived a higher percentage of their advertising revenues from local and
regional sales (81%) than our television (67%) and publishing entities (49%). EMPLOYEES As of February 29, 2004 Emmis had approximately 2,529 full-time employees
and approximately 585 part-time employees. We have approximately 218 employees
at various radio and television stations represented by unions. We consider
relations with our employees to be good. INTERNET ADDRESS AND INTERNET ACCESS TO SEC REPORTS Our Internet address is www.emmis.com. You may obtain through our
Internet website, free of charge, copies of our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act. These reports will be available the same day we electronically
file such material with, or furnish such material to, the SEC. We have been
making such reports available on the same day as they are filed during the
period covered by this report. FEDERAL REGULATION OF BROADCASTING Television and radio broadcasting are subject to the jurisdiction of the
Federal Communications Commission (the FCC) under the Communications Act of
1934, as amended (in part 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 broadcast licenses for
television and radio stations in such a manner as will provide a fair,
efficient and equitable distribution of service throughout the United States.
The FCC determines the operating frequency, location and power of stations;
regulates the equipment 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 an entity holding such a license without the prior
approval of the FCC. Under the Communications Act, the FCC also regulates
certain aspects of the operation of cable television systems and other
electronic media that compete with broadcast stations. The 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 as well as FCC rules, public notices
and rulings for further information concerning the nature and extent of federal
regulation of radio and television 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 will be adopted
or what their effect would be on Emmis. LICENSE RENEWAL. Radio and television stations operate pursuant to broadcast
licenses that are ordinarily granted by the FCC for maximum terms of eight
years and are subject to renewal upon approval by the FCC. Our licenses
currently have the following expiration dates, until renewed: 10




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WENS(FM) (Indianapolis)
    
    August 1, 2004WIBC(AM) (Indianapolis)
    
    August 1, 2004WNOU(FM) (Indianapolis)
    
    August 1, 2004WYXB(FM) (Indianapolis)
    
    August 1, 2004WTHI(FM) (Terre Haute)
    
    August 1, 2004WWVR(FM) (Terre Haute)
    
    August 1, 2004WSAZ(TV) (Huntington)
    
    October 1, 2004WKQX(FM) (Chicago)
    
    December 1, 2004WMLL(FM) (St. Louis)
    
    December 1, 2004KSHE(FM) (St. Louis)
    
    February 1, 2005WFTX(TV) (Fort Myers)
    
    February 1, 2005WKCF(TV) (Orlando)
    
    February 1, 2005KFTK(FM) (St. Louis)
    
    February 1, 2005KIHT(FM) (St. Louis)
    
    February 1, 2005KPNT(FM) (St. Louis)
    
    February 1, 2005WALA(TV) (Mobile)
    
    April 1, 2005WBPG(TV) (Mobile)
    
    April 1, 2005WVUE(TV) (New Orleans)
    
    June 1, 2005KLBJ(AM) (Austin)
    
    August 1, 2005KLBJ(FM) (Austin)
    
    August 1, 2005KDHT(FM) (Austin)
    
    August 1, 2005KGSR(FM) (Austin)
    
    August 1, 2005KROX(FM) (Austin)
    
    August 1, 2005KEYI(FM) (Austin)
    
    August 1, 2005WTHI(TV) (Terre Haute)
    
    August 1, 2005KKLT(FM) (Phoenix)
    
    October 1, 2005KKFR(FM) (Phoenix)
    
    October 1, 2005KTAR(AM) (Phoenix)
    
    October 1, 2005KMVP(AM) (Phoenix)
    
    October 1, 2005KPWR(FM) (Los Angeles)
    
    December 1, 2005WLUK(TV) (Green Bay)
    
    December 1, 2005KZLA(FM) (Los Angeles)
    
    December 1, 2005KREZ(TV) (Durango)
    
    April 1, 2006WQHT(FM) (New York)
    
    June 1, 2006WQCD(FM) (New York)
    
    June 1, 2006WRKS(FM) (New York)
    
    June 1, 2006KSNW(TV) (Wichita)
    
    June 1, 2006KMTV(TV) (Omaha)
    
    June 1, 2006KSNT(TV) (Topeka)
    
    June 1, 2006KSNG(TV) (Garden City)
    
    June 1, 2006KSNC(TV) (Great Bend)
    
    June 1, 2006KSNK(TV) (McCook-Oberlin)
    
    June 1, 2006KRQE(TV) (Albuquerque)
    
    October 1, 2006KGUN(TV) (Tucson)
    
    October 1, 2006KBIM(TV) (Roswell)
    
    October 1, 2006KHON(TV) (Honolulu)
    
    February 1, 2007KAII(TV) (Maui)
    
    February 1, 2007KHAW(TV) (Hawaii)
    
    February 1, 2007KOIN(TV) (Portland)
    
    February 1, 2007KGMB(TV) (Honolulu)
    
    February 1, 2007KGMD(TV) (Hawaii)
    
    February 1, 2007KGMV(TV) (Maui)
    
    February 1, 2007
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Under the Communications Act, at the time an application is filed for
renewal of 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 motion) that there is a substantial and material
question as to 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 the renewal application should be
granted. The Communications Act provides for the grant of a renewal
application upon a finding by the FCC that the licensee:  
    
    has served the public interest, convenience and necessity;  
    
    has committed no serious violations of the Communications Act or the FCC rules; and  
    
    has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse. If the FCC cannot make such a finding, it may deny the renewal
application, and only then may the FCC consider competing applications for the
same frequency. In a vast majority of cases, the FCC renews a broadcast
license even when petitions to deny have been filed against the renewal
application. REVIEW OF OWNERSHIP RESTRICTIONS. The 1996 Act required the FCC to review
all of its broadcast ownership rules every two years and to repeal or modify
any of its rules that are no longer necessary in the public interest.
Pursuant to recent congressional appropriations legislation, these reviews now
must be conducted once every four years. On June 2, 2003, the FCC adopted its most recent broadcast ownership
review decision, in which it modified several of its regulations governing the
ownership of radio and television stations in local markets. These rule
modifications are currently subject to further FCC and judicial review as well
as possible congressional action. Specifically, multiple petitions for review
of the Commissions June 2 decision have been consolidated in a proceeding
before the U.S. Court of Appeals for the Third Circuit. In September 2003, the
Third Circuit issued a stay order preventing the FCC from putting the new media
ownership rules into effect pending the outcome of the appeal. As a result,
the former broadcast ownership rules will remain in effect at least until the
Court issues a decision. Further, there are several legislative efforts
currently in process that ultimately may alter, roll back, or suspend the new
media ownership rules. The following describes the FCCs broadcast ownership rules prior to the
FCCs June 2, 2003 decision, and the changes that will occur if the new rules
go into effect: LOCAL RADIO OWNERSHIP: Pre-Existing Rule: The local radio ownership rule currently in effect limits
the number of radio stations that may be owned by one entity in a given radio
market based on the number of commercial radio stations in that market:  
    
    if the market has 45 or more commercial radio stations, one entity may
own up to eight stations, not more than five of which may be in the
same service (AM or FM);  
    
    if the market has between 30 and 44 commercial radio stations, one
entity may own up to seven stations, not more than four of which may
be in the same service;  
    
    if the market has between 15 and 29 commercial radio stations, a
single entity may own up to six stations, not more than four of which
may be in the same service; and  
    
    if the market has fourteen or fewer commercial radio stations, one
entity may own up to five stations, not more than three of which may
be in the same service, except that one entity may not own more than
fifty percent of the stations in the market. Each of the markets in which our radio stations are located has at least
15 commercial radio stations. New Rule: Although the FCCs June 2 decision did not change the numerical caps
under the local radio rule, the Commission adjusted the rule by deciding that
both commercial and noncommercial stations could be counted in determining the
number of stations in a radio market. The decision also altered the definition of the relevant local market
for purposes of the rule. In addition, the agency determined that radio
station Joint Sales Agreements (JSAs) will be attributable under the local
ownership rule where the brokering party sells more than 15 percent of the
brokered stations advertising time per week and owns or has an attributable
interest in another station in the 12




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local market. Existing JSAs that result in
attribution and cause the brokering station to exceed the ownership limits will
be grandfathered from the effective date of the Commissions decision (which,
as of this writing, has not occurred pursuant to the judicial stay discussed
above). In addition, over the past several years, the FCC has been aggressive in
examining issues of market concentration when considering radio station
acquisitions, even where the numerical limits described above are not violated.
In some instances, the FCC has delayed its approval of proposed radio station
purchases because of market concentration concerns, and in several recent
cases, the FCC has ordered evidentiary hearings to determine whether a proposed
transaction would result in excessive concentration. LOCAL TELEVISION OWNERSHIP: Pre-Existing Rule: The current local television ownership rule (or so-called
duopoly rule) permits an entity to own two or more television stations in
separate Designated Market Areas (DMAs). The rule also permits an entity to
own two or more television stations in the same DMA if:  
    
    the coverage areas of the stations do not overlap, or  
    
    at least eight, independently-owned and -operated full-power non-commercial and commercial operating TV stations
will remain in the market post-merger, and one of the two commonly-owned stations is not among the top four
television stations in the market (based on audience share ratings). Permanent waivers of the television duopoly rule are considered if one of the stations is:  
    
    a failed station, i.e., off-air for more than four months, or involved in an involuntary bankruptcy proceeding;  
    
    a failing station, i.e., having a low audience share and financially struggling; or  
    
    an unbuilt facility, where the permittee has made substantial progress towards constructing the facility. New Rule: The FCCs June 2 decision significantly relaxed the restriction on
television duopolies by permitting a company to own two TV stations in any DMA
with at least five television stations (regardless of whether the stations are
separately owned), but retaining the restriction on common ownership of two top
four stations. In DMAs with 18 or more TV stations, the new rule allows a
company to own three TV stations so long as no more than one is among the
markets top four. In addition to retaining the failed, failing, and unbuilt
station waiver standards, the new rule also allows parties to seek waivers of
the top four restriction in DMAs with 11 or fewer stations. Emmis acquisition of the Lee Enterprises stations required a waiver of
the pre-existing television duopoly rule because the signals of KHON-TV and
KGMB-TV (one of the Lee Enterprises stations) overlap, the stations serve the
same market, and both stations are rated among the top four in that market. In
approving the acquisition, the FCC granted a temporary waiver of the rule,
ordering that an application for divestiture of either KHON-TV or KGMB-TV (plus
associated satellite stations) be filed on or before April 1, 2001; that
deadline was subsequently extended at our request to April 1, 2002. In
February 2002, we filed a request for a further extension to April 1, 2003,
which was opposed by a Honolulu broadcaster. In response to our further
extension request, the FCC required us to file additional information
concerning our divestiture efforts. Pending its review of the information we
submitted, the FCC granted us an interim extension of our waiver until July 1,
2002. In addition, in May 2002, we filed a request for interim relief with the
Commission, asking that the divestiture requirement be stayed pending the
outcome of the 2002 broadcast ownership review. That request was opposed by
the same Honolulu broadcaster who opposed the February extension request, as
well as by two local public interest groups. In September 2002, we
supplemented the request for interim relief with additional information. As part of its June 2003 ownership decision, the Commission required all
entities (including Emmis) with pending waiver requests of the local television
ownership rule to come into compliance with the revised rule within 60 days of
the effective date of the Order. The effectiveness of the Commissions
decision has been stayed, however, pending the outcome of judicial review.
Since both KHON-TV and KGMB-TV are among the top four stations in the Honolulu
market, Emmis Hawaii television holdings are not in compliance with the
modified version of the ownership rule. Further, because the Honolulu market
contains more than 11 television stations, Emmis is not eligible for a waiver
of the rule under the additional waiver standard adopted in the June 2003
decision. Accordingly, when and if the stay is lifted, Emmis likely will be required either to divest one of its
Honolulu stations or to seek a permanent waiver of the television duopoly rule.
If such a waiver is requested and ultimately denied, divestiture of one
station will be required. 13




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NATIONAL TELEVISION OWNERSHIP Pre-Existing Rule: The 1996 Act required the FCC to relax its restriction on
the number of television stations that a single entity may own nationwide.
Specifically, the rule was adjusted to restrict ownership to stations reaching,
in the aggregate, no more than 35 percent of the total national audience.
An owner of a UHF station is attributed with only 50% of the TV households in
the stations market (UHF discount). New Rule: In its June 2003 decision, the Commission adjusted the national cap
to 45 percent and retained the UHF discount. Congress subsequently prevented
implementation of the revised national cap through appropriations legislation.
The recent Consolidated Appropriations Act of 2004 includes a compromise
provision directing the FCC to set the cap at 39 percent. As a result of this
congressional intervention, the national ownership cap is no longer under
consideration in the pending judicial review of the June 2003 decision. In
addition, there may be further legislative efforts to restore the former 35
percent cap. CROSS-MEDIA OWNERSHIP Pre-Existing Radio/Television Cross-Ownership Rule: The FCCs radio/television
cross-ownership rule generally permits the common ownership of the following
combinations in the same market, to the extent permitted under the FCCs
television duopoly rule:  
    
    up to two commercial television stations and six commercial radio
stations or one commercial television station and seven commercial
radio stations in a market where at least 20 independent media voices
will remain post-merger;  
    
    up to two commercial television stations and four commercial radio
stations in a market where at least 10 independent media voices will
remain post-merger; and  
    
    two commercial television stations and one commercial radio station in
a market with less than 10 independent media voices that will remain
post-merger. For purposes of this rule, the FCC counts as voices commercial and
non-commercial broadcast television and radio stations as well as some daily
newspapers and cable operators. The Commission will consider permanent waivers
of its revised radio/television cross-ownership rule only if one of the
stations is a failed station. Pre-Existing Newspaper/Broadcast Cross-Ownership Rule: The FCC rules also
prohibit common ownership of a daily newspaper and a radio or television
station in the same local market. New Cross-Media Limits: The cross-media limits adopted in the June 2003
decision would replace both the newspaper/broadcast cross-ownership restriction
and the radio/television cross-ownership limits as follows:  
    
    In DMAs with three or fewer commercial and noncommercial television
stations, the FCC will not permit cross-ownership between TV stations,
radio stations, and daily newspapers.  
    
    In DMAs with 4 to 8 television stations, the FCC will permit parties
to have one of the three following combinations: (a) one or more daily
newspaper(s), one TV station, and up to 50% of the radio stations that
would be permissible under the local radio ownership limits; (b) one
or more daily newspaper(s) and as many radio stations as can be owned
pursuant to the local radio ownership limits (But no television
stations); or (c) two television stations (so long as ownership would
be permissible under the local television ownership rule) and as many
radio stations as the local radio ownership limits permit (but no
daily newspapers).  
    
    In DMAs with nine or more television stations, the FCC will permit any
newspaper and broadcast cross-media combinations so long as they
comply with the local television ownership rule and local radio
ownership limits. We cannot predict the ultimate outcome of the proceedings described above,
future biennial reviews or other agency or legislative initiatives or the
impact, if any, that they will have on our business. ALIEN OWNERSHIP. Under the Communications Act, no FCC license may be held
by a corporation if more than one-fifth of its capital stock is owned or voted
by aliens or their representatives, a foreign government or representative
thereof, or an entity 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 an entity directly or indirectly controlled by another
entity of which more than one-fourth of its capital stock is 14




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owned or voted by
Non-U.S. Persons if the FCC finds that the public interest will be served by
the denial 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
types of business organizations, including partnerships and limited liability
companies. Our Second Amended and Restated Articles of Incorporation and
Amended and Restated Code of By-Laws authorize the Board of Directors to
prohibit such restricted alien ownership, voting or transfer of capital stock
as would cause Emmis to violate the Communications Act or FCC regulations. ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the
FCC has developed specific criteria in order to determine whether a certain
ownership interest or other relationship with a Commission licensee is
significant enough to be attributable or cognizable under its rules.
Specifically, among other relationships, certain stockholders, officers, and
directors of a broadcasting company are deemed to have an attributable interest
in the licenses held by that company, such that there would be a violation of
the Commissions rules where the broadcasting company and such a stockholder,
officer, or director together hold attributable interests in more than the
permitted number of stations or a prohibited combination of outlets in the same
market. The FCCs regulations generally deem the following relationships and
interests to be attributable for purposes of its ownership restrictions:  
    
    all officer and director positions in a licensee or its (in)direct parent(s);  
    
    voting stock interests of at least five percent (or twenty percent, if the holder is a passive institutional investor,
i.e., a mutual fund, , insurance company, or bank);  
    
    any equity interest in a limited partnership or limited liability company where the limited partner or member is
materially involved in the media-related activities of the LP or LLC and has not been insulated from such activities
pursuant to specific FCC criteria;  
    
    equity and/or debt interests which, in the aggregate, exceed 33 percent of the total asset value of a station or other
media entity (the equity/debt plus policy), if the interest holder supplies more than 15 percent of the stations total
weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a
same-market media entity (i.e., broadcast company or newspaper). 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. As a result of a recent transaction, Jeffrey H. Smulyans voting interest
in the Company has fallen below 50% for FCC control purposes. The FCC does not
take into account stock options exercisable within 60 days as does the Exchange
Act Rule 13D-1. As a result, the Company is no longer eligible for an
exemption from the broadcast attribution rules under which minority
shareholders are not deemed to hold attributable interests in the Company.
Accordingly, the other media interests of any shareholders whose voting
interests in the Company meet or exceed the attribution thresholds described
above will now be combined with the Companys interests for purposes of
determining compliance with FCC ownership rules. Under FCC policy, a one-year
grace period is provided for resolving any ownership conflicts between the
Company and its shareholders arising from the loss of the exemption. Ownership rule conflicts arising as a result of aggregating the media
interests of the Company and its attributable shareholders could require
divestitures by either the Company or the affected shareholders. Any such
conflicts could result in Emmis being unable to obtain FCC consents necessary
for future acquisitions. Conversely, Emmis media interests could operate to
restrict other media investments by shareholders having or acquiring an
interest in Emmis. ASSIGNMENTS AND 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 other statutory and regulatory
requirements. When evaluating an assignment or transfer of control
application, the FCC is prohibited from considering whether the public interest
might be served by an assignment of the broadcast license or transfer of
control of the licensee to a party other than the assignee or transferee
specified in the application. 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 had 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 15




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to present
programming that is responsive to community problems, needs and interests and
to maintain certain records demonstrating such responsiveness. Federal law prohibits the broadcast of obscene material at any time and
the broadcast of indecent material during specified time periods; these
prohibitions are subject to enforcement action by the FCC. The agency recently
has engaged in more aggressive enforcement of its indecency regulations than
has generally been the case in the past. In addition to imposing more
stringent fines, the Commission has indicated that it may begin license
revocation procedures for serious violations of the indecency law.
Furthermore, Congress is considering legislation that would substantially
increase the current per-violation maximum fine for indecency violations and
would mandate license revocation proceedings for licensees with repeated
violations. The FCC has imposed six (6) monetary forfeitures on Emmis based on
a finding that indecent material was broadcast on station WKQX. In addition,
the FCC has issued letters of inquiry to Emmis concerning five (5) additional
broadcasts on station WKQX and six (6) broadcasts on station KPNT. Those
inquiries could result in the imposition of additional forfeitures. Further,
there may be additional third-party complaints of which Emmis is unaware that could lead
to additional enforcement action. In addition to imposing forfeitures or initiating license revocation
proceedings for indecent broadcasts, the FCC could initiate proceedings and
take materially adverse actions relating to the license renewal applications
for stations WKQX and KPNT, which we must file this year. See Managements
Discussion and Analysis of Financial Condition and Results of Operation  Risk
Factors  The FCC has recently begun more vigorous enforcement of its indecency
rules against the broadcast industry, which could have a material adverse
effect on our business. 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 identification, contest and lottery
advertisements, and technical operations, including limits on radio frequency
radiation. In 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 (the 1992 Cable Act). Certain provisions of this
law, such as signal carriage and retransmission consent, have a direct effect
on television broadcasting. 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 assigns eligible broadcasters 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. Although the
Communications Act mandates that each television station return one of its two
channels to the FCC by the end of 2006, the Balanced Budget Act of 1997 may
effectively extend the transition deadline in some markets by allowing
broadcasters to keep both their analog and digital licenses until at least 85
percent of television households in their respective markets can receive a
digital signal. Local zoning laws and the lack of qualified tall-tower
builders to construct the facilities necessary for DTV operations, among other
factors, including the pace of DTV production and sales, may cause delays in
the DTV transition. The FCC has announced that it will review the progress of
DTV every two years and make adjustments to the 2006 target date, if necessary. Television broadcasters are allowed to use their DTV channels according to
their best business judgment, provided that they continue to offer at least one
free programming service that is at least comparable to todays analog service.
Digital services and programming can include multiple standard definition
program channels, data transfer, subscription video, interactive materials, and
audio signals (so-called ancillary services). The FCC has imposed a fee of
five percent of the annual gross revenues for television broadcasters use of
the DTV spectrum to offer ancillary services. 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.
Beginning April 1, 2003, broadcasters operating in digital mode were required
to simulcast at least 50 percent of their analog programming on the digital
channel. Affiliates of ABC, CBS, NBC and Fox in the top 10 television markets
were required to be on the air with a digital signal by May 1, 1999, and
affiliates of those networks in markets 11-30, including KOIN-TV, were required
to be on the air with a digital signal by November 1, 1999; KOIN-TV complied
with this deadline. The remaining commercial stations, including all other
television stations owned by Emmis, were required to file DTV construction
permit applications by November 1, 1999, and were required to be on the air
with a digital signal by May 1, 2002, absent an extension on a
station-by-station basis. All Emmis stations met the November 1, 1999
application deadline. Stations WALA, WKCF, and WFTX met the May 1, 2002 on-air
deadline, and all other stations subsequently initiated DTV service prior to
their extended deadlines, except stations KAII-TV, KHAW-TV, KGMD-TV, and
KGMV-TV, which, as satellite stations, have been granted an extension pending
a decision by the FCC on when to require buildout of such stations.
Additionally, all of the Emmis stations
filed timely applications to maximize (expand the coverage of) the DTV
facilities to ensure the DTV coverage is equal to or better than the coverage
of our analog channels. 16




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##### Table of Contents



WBPG is not subject to the usual DTV deadlines because it was not issued a
second channel for DTV operation; rather, WBPG will be required to convert to
DTV operation by the conclusion of the DTV transition period. Further, since
Channel 55, on which WBPG operates, is to be reallocated by the FCC for other
use at the end of the DTV transition period, the FCC will assign the station to
a different channel at that time unless it has already changed its channel. In January 2001, the FCC issued a further order on DTV transition issues,
setting a number of deadlines for commercial broadcasters. The order required
commercial stations with both analog and digital channel assignments within the
DTV core spectrum (channels 2-51) to elect by the end of December 2003 the
channel they will use for broadcasting after the transition is complete.
Similarly, the FCC decided in the order that, by the end of December 2004,
commercial broadcasters not replicating their existing analog service areas
will lose interference protection in those portions of their existing service
areas not covered by their digital signals. The order further held that, by
the end of December 2004, commercial broadcasters must provide a stronger
digital signal to their communities of license than was previously required. In November 2001, the FCC issued a reconsideration order on DTV transition
issues, which modified many of the rules established in January 2001.
Specifically, the reconsideration order temporarily defers the FCCs previously
established deadlines for broadcasters to: (1) choose their permanent
post-transition DTV channel; (2) provide a DTV signal that replicates their
analog service area; and (3) build maximized DTV facilities. The order also
permits broadcasters to request special temporary authority to construct
initial minimal DTV facilities (i.e.,facilities that only cover their cities
of license) while retaining interference protection for their allotted and
maximized facilities. In addition, the order allows commercial stations
subject to the May 1, 2002 construction deadline (i.e.,stations not in the top
30 markets) to initially broadcast a digital signal during prime time hours
only. In April 2002 the FCC Chairman challenged the broadcast, cable, satellite,
and consumer electronics industries to take certain voluntary actions designed
to speed the DTV transition. Although members of the broadcast, cable, and
satellite industries were quick to make commitments to comply with Chairman
Powells proposals, the consumer electronics industry was reluctant to embrace
the plan. Consequently, the Commission found it necessary to formally mandate
a phased-in DTV tuner requirement. As a result, all new television sets 13
inches and larger and all TV interface devices (VCRs, etc.) must include the
capability of tuning and decoding over-the-air digital signals by 2007. In January 2003, the FCC launched its second periodic review of its DTV
rules and proposed new deadlines for stations to choose their post-transition
digital channels, to replicate their analog service areas and maximize their
digital facilities in order to maintain protection of their allotted and/or
expanded service areas. The Commission proposed July 1, 2005 as the date for
affiliates of ABC, NBC, CBS and Fox in the top 100 markets to build out their
full facilities or lose protection for the unused areas. This deadline would
apply to all the Emmis television stations except WTHI, KSNT and WKCF. All
other stations, including WTHI, KSNT and WKCF, would be required to build out
their full facilities by July 1, 2006 under the Commissions proposal. The FCC
proposed May 1, 2005 as the deadline for choosing a permanent DTV channel. The
FCC also will decide in the proceeding how to evaluate when the transition to
digital television has been achieved and, accordingly, when broadcasters will
be required to operate exclusively in digital mode and turn in the channel not
used for digital broadcasting. Under current law, that date is set at December
31, 2006 or the date by which 85 percent of the television households in a
licensees market are capable of receiving the signals of DTV stations. The FCC also is considering cable operators obligations to carry the
digital signals of broadcast television stations, including the obligations
that should exist during the DTV transition period, when broadcasters analog
and digital signals will be operating simultaneously. The agency tentatively
has concluded that dual carriage (simultaneous carriage of analog and digital
signals) would be unconstitutional. With respect to broadcasters that choose
to use their digital capacity for multicastingairing multiple programming
streams concurrentlythe FCC has decided that cable operators will be required
to carry only the primary programming stream. This decision currently is
under reconsideration at the Commission. In addition, one carriage proposal
that has been suggested by the agencys Media Bureau could have the effect of
accelerating the transition. Specifically, the proposal would require cable
operators to carry the digital signals of all broadcasters within their
communities asserting mandatory carriage rights. The FCC would then base the
85 percent threshold on the number of households within a community that
subscribe to cable services that carry digital broadcast signals, rather than
on the actual capability of individual households to receive such signals
through digital television sets. This proposal is of concern to broadcasters
because it would push forward the date by which they must return their analog
channels to the FCC and
potentially could leave those consumers that do not subscribe to pay
television services and do not own digital television sets without access to
broadcast programming. 17




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##### Table of Contents



Another area of concern for the DTV transition is the technical standards
needed to ensure that digital television sets can connect to cable systems. At
the request of the FCC, the cable and consumer electronics industries entered
into a Memorandum of Understanding (MOU) setting forth an agreement on a
cable compatibility standard. The Commission put the MOU out for public
comment in January of 2003. On September 10, 2003 the FCC adopted
plug-and-play rules for cable adaptability that are substantially similar to
those proposed in the MOU. Under these rules, consumers will be able to plug
their cable directly into their digital televisions, without the need for a
set-top box. These rules cover one-way programming only, and the cable and
electronics industries continue to work towards an agreement on two-way
plug-and-play standards that would eliminate the need for set-top boxes for
advanced services such as video on demand, impulse pay-per-view, and cable
operator-enhanced electronic programming guides. Emmis cannot predict the
outcome of those negotiations. More recently, the FCC issued a decision regarding how over-the-air
digital broadcasts may be protected from unauthorized copying and distribution.
Specifically, on November 4, 2003 the Commission adopted anti-piracy
protection for digital television in the form of a broadcast flag mechanism,
which allows a broadcaster to prevent mass distribution of its digital signal
over the Internet, without affecting consumers ability to make digital copies.
The Commission also adopted a Further Notice of Proposed Rulemaking seeking
comment on a permanent objective process for the approval of digital recording
and output content protection technologies that will foster innovation and
marketplace competition. This proceeding remains pending. 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 over 500 channels of digital
television service directly to subscribers equipment with 18-inch receiving
dishes and decoders. At this time, several entities provide DBS service to
consumers throughout the country. In order to protect network-affiliated
broadcast stations from the effects of satellite importation of non-local
network signals into their markets, DBS operators are permitted to deliver
distant network signals only to unserved households in so-called white areas
(i.e., locations too distant from a local network affiliate to receive a
sufficiently strong over-the-air signal). In addition, in November 1999,
Congress enacted the Satellite Home Viewer Improvement Act (SHVIA), which
authorizes DBS companies to provide local television signals to their
subscribers pursuant to a retransmission consent agreement with the station.
In March 2000, the FCC adopted regulations governing the statutory requirements
for good faith negotiations and non-exclusive agreements in retransmission
consent contracts between broadcasters (and all multichannel video program
distributors). Broadcasters are required to negotiate non-exclusive
retransmission consent agreements in good faith until January 1, 2006; however,
the law explicitly provides that broadcasters may enter into agreements with
competing DBS carriers on different terms. Moreover, effective January 1, 2002, local television stations became
entitled to must-carry rights on a DBS system if the system is providing any
local television station(s) to its subscribers. In such markets, stations now
can choose whether to demand carriage on a DBS system by electing must-carry
status or to negotiate with the DBS operator for specific carriage terms by
electing retransmission consent status. SHVIA also grandfathered delivery of
the signals of television stations via DBS to certain subscribers who may have
been receiving such signals in violation of prior law. In November 2000, the
FCC adopted rules to implement SHVIA provisions regarding local-into-local
satellite service, must-carry election cycle rules and related policies for
satellite carriage of broadcast signals. Under the new FCC rules, a broadcast
television station must affirmatively elect must-carry status to require a DBS
operator to carry its station; the first elections were due by July 1, 2001.
In response to a challenge to certain provisions of SHVIA, a panel of the U.S.
Court of Appeals for the Fourth Circuit upheld the requirement that DBS
operators carry the signal of all local television stations in markets where
they elect to carry any local signals. The court also upheld an FCC rule that
permits DBS operators to offer all local television stations on a single tier
or on an a la carte basis. The rule allows consumers to choose between the two
options. In response to broadcasters first elections, DBS operators issued a
large number of carriage denial letters, prompting the FCC to issue an order in
September 2001 clarifying the DBS mandatory carriage rules. In particular, the
FCC emphasized that a satellite carrier must have a reasonable basis for
rejecting a broadcast stations carriage request. There are FCC rules and policies, and rules and policies of other federal
agencies, that regulate matters such as the use of auctions to resolve mutually
exclusive application requests, 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. Failure to observe FCC rules and policies can result in the imposition of
various sanctions, including monetary fines, the grant of short (less than
the maximum term) license renewals or, for particularly egregious violations,
the denial of a license renewal application or the revocation of a license. 18




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##### Table of Contents



ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The Commission has adopted
rules implementing a new low power FM (LPFM) service. The FCC has begun
accepting applications for LPFM stations and has granted some of those
applications. We cannot predict whether any LPFM stations will interfere with
the coverage of our radio stations. The FCC also has authorized two companies to launch and operate satellite
digital audio radio service (SDARS) systems. Both companiesSirius Satellite
Radio, Inc. and XM Radioare now providing nationwide service. In addition,
Sirius and XM recently have launched channels providing local traffic and
weather information in major cities. Broadcasters have objected to these local
services, contending that the provision of local news programming conflicts
with the FCCs intent to license satellite radio solely as a national service.
XM and Sirius contend, in response, that the services are not in contravention
of their FCC authorizations because the channels offering local information are
being offered nationwide, not on a local basis. We cannot predict the impact
of SDARS on our radio stations listenership. In October 2002, the FCC issued an order selecting a technical standard
for terrestrial digital audio broadcasting (DAB). The in-band, on-channel
(IBOC) technology chosen by the agency allows AM and FM radio broadcasters to
introduce digital operations and permits existing stations to operate on their
current frequencies in either full analog mode, full digital mode, or a
combination of both (at reduced power). In January 2001, the D.C. Circuit concluded that the FCCs Equal
Employment Opportunity (EEO) regulations were unconstitutional. The FCC
adopted new EEO rules in November 2002, which went into effect in March 2003. 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/or affect our
ability to acquire additional broadcast stations or finance such acquisitions.
Such matters include, but are not limited to:  
    
    proposals to impose spectrum use or other fees on FCC licensees;  
    
    proposals to repeal or modify some or all of the FCCs multiple ownership rules and/or policies;  
    
    proposals to change rules relating to political broadcasting;  
    
    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;  
    
    proposals to tighten safety guidelines relating to radio frequency radiation exposure;  
    
    proposals permitting FM stations to accept formerly impermissible interference;  
    
    proposals to reinstate holding periods for licenses;  
    
    changes to broadcast technical requirements, including those relative to the implementation of SDARS and DAB;  
    
    proposals to limit the tax deductibility of advertising expenses by advertisers. We cannot predict whether any proposed changes will be adopted, what other
matters might be considered in the future, or what impact, if any, the
implementation of any of these proposals or changes might have on our business. The foregoing is only a brief summary of certain provisions of the
Communications Act and of specific FCC regulations. Reference should be made
to the Communications Act as well as FCC regulations, public notices and
rulings for further information concerning the nature and extent of federal
regulation of broadcast stations. 19




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##### Table of Contents



GEOGRAPHIC FINANCIAL INFORMATION The Companys segments operate primarily in the United States with one
national radio station located in Hungary, two radio stations located in
Argentina and nine radio stations located in Belgium. We have signed an
agreement to sell our 75% interest in our two radio stations in Argentina. We
expect this transaction to close in our quarter ended May 31, 2004. The
following tables summarize relevant financial information by geographic area.
Financial information relating to our two stations in Argentina is included in
2002 and 2003, but excluded in 2004. 2002
    
    2003
    
    2004Net Revenues:Domestic
    
    $
    523,124
    
    
    $
    550,553
    
    
    $
    580,246International
    
    
    16,698
    
    
    
    11,810
    
    
    
    11,622Total
    
    $
    539,822
    
    
    $
    562,363
    
    
    $
    591,868
 2002
    
    2003
    
    2004Noncurrent Assets:Domestic
    
    $
    2,278,680
    
    
    $
    1,991,069
    
    
    $
    2,116,536International
    
    
    16,867
    
    
    
    14,663
    
    
    
    12,014Total
    
    $
    2,295,547
    
    
    $
    2,005,732
    
    
    $
    2,128,550
 With respect to EOC, the above information would be identical, except
domestic noncurrent assets would be $2,267,750, $1,983,540, and $2,109,953,
and total noncurrent assets would be $2,284,617, $1,998,203, and $2,121,967 as
of February 28 (29), 2002, 2003, and 2004 respectively. 
 ITEM 2. PROPERTIES. The following table sets forth information as of February 29, 2004 with
respect to offices, studios and broadcast towers of stations and magazines
currently owned by Emmis. Management believes that the properties are in good
condition and are suitable for Emmis operations. EXPIRATIONYEAR PLACED
    
    OWNED OR
    
    DATEPROPERTY
    
    IN SERVICE
    
    LEASED
    
    OF LEASECorporate and Publishing Headquarters/
    
    
    1998
    
    
    Owned
    
    
    WENS-FM/ WIBC-AM/WNOU-FM/WYXB-FM/ Indianapolis Monthly
One Emmis Plaza40 Monument CircleIndianapolis, IndianaWENS-FM Tower
    
    
    1985
    
    
    Owned
    
    
    WNOU-FM Tower
    
    
    1979
    
    
    Owned
    
    
    WIBC-AM Tower
    
    
    1966
    
    
    Owned
    
    
    WYXB-FM Tower
    
    
    2003
    
    
    Owned
    
    
    WRDA-FM/KFTK-FM/KIHT-FM/KPNT-FM/KSHE-FM
    
    
    1998
    
    
    Leased
    
    December 2007800 St. Louis Union StationSt. Louis, MissouriWRDA-FM Tower
    
    
    1984
    
    
    Owned
    
    
    KFTX-FM Tower
    
    
    1987
    
    
    Leased
    
    August 2009 with option to March 2023KIHT-FM Tower
    
    
    1995
    
    
    Leased
    
    September 2005 with two 5-year optionsKPNT-FM Tower
    
    
    1987
    
    
    Owned
    
    
    KSHE-FM Tower
    
    
    1985
    
    
    Leased
    
    April 2009
 20




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##### Table of Contents



EXPIRATIONYEAR PLACED
    
    OWNED OR
    
    DATEPROPERTY
    
    IN SERVICE
    
    LEASED
    
    OF LEASEKPWR-FM
    
    
    1988
    
    
    Leased
    
    October 2017KZLA-FM
    
    
    2002
    
    
    Leased
    
    October 20172600 West OliveBurbank, CaliforniaKPWR-FM Tower
    
    
    1993
    
    
    Leased
    
    Month-to-MonthKZLA-FM tower
    
    
    1991
    
    
    Leased
    
    December 2004WQHT-FM/WRKS-FM/WQCD-FM
    
    
    1996
    
    
    Leased
    
    January 2013395 Hudson
Street, 7th FloorNew York, New YorkWQHT-FM Tower
    
    
    1984
    
    
    Leased
    
    January 2010WRKS-FM Tower
    
    
    1984
    
    
    Leased
    
    November 2005WQCD-FM Tower
    
    
    1984
    
    
    Leased
    
    February 2007KTAR-AM/KMVP-AM/KKLT-FM/KKFR-FM
    
    
    1994
    
    
    Owned
    
    
    5300 N. Central Ave.Phoenix, AZKTAR-AM Tower
    
    
    1958
    
    
    Owned
    
    
    KMVP-AM Tower
    
    
    1996
    
    
    Leased
    
    December 2008KKLT-FM Tower
    
    
    1990
    
    
    Owned
    
    
    KKFR-FM Tower
    
    
    1998
    
    
    Leased
    
    April 2003(1)WKQX-FM
    
    
    2000
    
    
    Leased
    
    December 2015 with 5 year option230 Merchandise Mart PlazaChicago, IllinoisWKQX-FM Tower
    
    
    1975
    
    
    Leased
    
    September 2009KLBJ-AM/FM/KDHT-FM/KGSR-FM/KROX-FM/
    
    
    1998
    
    
    Leased
    
    March 2008KEYI-FM8309 N. IH 35Austin, TXKLBJ-AM Tower
    
    
    1963
    
    
    Owned
    
    
    KLBJ-FM Tower
    
    
    1972
    
    
    Leased
    
    July 2008KDHT-FM Tower
    
    
    1986
    
    
    Owned
    
    
    KGSR-FM Tower
    
    
    1997
    
    
    Owned
    
    
    KROX-FM Tower
    
    
    1999
    
    
    Leased
    
    September 2008KEYI-FM Tower
    
    
    1985
    
    
    Leased
    
    August 2010Atlanta Magazine Office
    
    
    1997
    
    
    Leased
    
    July 2013260 Peachtree St, Suite 300Atlanta, GeorgiaCincinnati Magazine
    
    
    1996
    
    
    Leased
    
    November 2006705 Central Ave., Suite 175Cincinnati, OHTexas Monthly
    
    
    1989
    
    
    Leased
    
    August 2009701 Brazos, Suite 1600Austin, TXKHON-TV
    
    
    1999
    
    
    Owned
    
    
    88 Piikoi StreetHonolulu, HIKHON-TV Tower
    
    
    1978
    
    
    Leased
    
    December 2008 with 10 year optionWALA-TV
    
    
    2002
    
    
    Owned
    
    
    WBPG-TV
    
    
    2003
    
    
    Owned
    
    
    1501 Satchel Paige Dr.Mobile, ALWALA-TV Tower
    
    
    1962
    
    
    Owned
    
    
    WBPG-TV Tower
    
    
    2001
    
    
    Leased
    
    July 2010WFTX-TV
    
    
    1987
    
    
    Owned
    
    
    621 Pine Island RoadCape Coral, FLWFTX-TV Tower
    
    
    1985
    
    
    Owned
    
    
    
 21




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##### Table of Contents



EXPIRATIONYEAR PLACED
    
    OWNED OR
    
    DATEPROPERTY
    
    IN SERVICE
    
    LEASED
    
    OF LEASEWLUK-TV
    
    
    1966
    
    
    Owned
    
    
    787 Lombardi AvenueGreen Bay, WIWLUK-TV Tower
    
    
    1961
    
    
    Owned
    
    
    WTHI-TV/FM/WWVR-FM
    
    
    1954
    
    
    Owned
    
    
    918 Ohio StreetTerre Haute, INWTHI-TV Tower
    
    
    1965
    
    
    Owned
    
    
    WTHI-FM Tower
    
    
    1954
    
    
    Owned
    
    
    WWVR-FM Tower
    
    
    1966
    
    
    Owned
    
    
    WVUE-TV
    
    
    1972
    
    
    Owned
    
    
    1025 South Jefferson Davis HighwayNew Orleans, LAWVUE-TV Tower
    
    
    1963
    
    
    Owned
    
    
    WKCF-TV
    
    
    1998
    
    
    Owned
    
    
    31 Skyline DriveLake Mary, FLWKCF-TV Tower
    
    
    2001
    
    
    Leased
    
    April 2016Los Angeles Magazine
    
    
    2000
    
    
    Leased
    
    November 20105900 Wilshire Blvd., Suite 1000Los Angeles, CA 90036Country Sampler
    
    
    1988
    
    
    Owned
    
    
    707 Kautz RoadSt. Charles, IL 60174RDS/Co-Opportunities
    
    
    1989
    
    
    Leased
    
    March 2007324 Campus Lane, Suite BSuisun, CA 94585Emmis West (Corporate)
    
    
    2004
    
    
    Leased
    
    February 201423500 West Olive Avenue, Suite 1450Burbank, CASlager Radio
    
    
    1998
    
    
    Leased
    
    December 2004Szabadsag Ut 117 (Atronyx Bldg. B)H-2040 Budaors, HungarySlager Tower
    
    
    1998
    
    
    Leased
    
    November 2004KOIN-TV
    
    
    1984
    
    
    Leased
    
    June 2083 with 99 year option222 S.W. Columbia St.Portland, ORKOIN-TV Tower
    
    
    1953
    
    
    Owned
    
    
    KSNT-TV
    
    
    1967
    
    
    Owned
    
    
    6835 N.W. U.S. Hwy 24Topeka, KSKSNT-TV Tower
    
    
    1967
    
    
    Owned
    
    
    WSAZ-TV
    
    
    1971
    
    
    Owned
    
    
    645 5th AvenueHuntington, WVWSAZ-TV Tower
    
    
    1954
    
    
    Owned
    
    
    KGMB-TV
    
    
    1952
    
    
    Owned
    
    
    1534 Kapiolani Blvd.Honolulu, HIKGMB-TV Tower
    
    
    1962
    
    
    Owned
    
    
    KMTV-TV
    
    
    1978
    
    
    Owned
    
    
    10714 Mockingbird Dr.Omaha, NEKMTV-TV Tower
    
    
    1967
    
    
    Owned
    
    
    
 22




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##### Table of Contents



EXPIRATIONYEAR PLACED
    
    OWNED OR
    
    DATEPROPERTY
    
    IN SERVICE
    
    LEASED
    
    OF LEASEKGUN-TV
    
    
    1990
    
    
    Owned
    
    
    7280 E. RosewoodTucson, AZKGUN-TV Tower
    
    
    1956
    
    
    Leased
    
    July 2016KRQE-TV
    
    
    1953
    
    
    Owned
    
    
    13 Broadcast Plaza S.W.Albuquerque, NMKRQE-TV Tower
    
    
    1959
    
    
    Owned
    
    
    KSNW-TV
    
    
    1955
    
    
    Owned
    
    
    833 N. Main St.Wichita, KSKSNW-TV Tower
    
    
    1955
    
    
    Owned
    
    
    
   1 Verbal agreement to lease on month-to-month basis2 Emmis has the right to terminate 5 years from inception of the lease 
 ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various legal proceedings arising in the
ordinary course of business. In the opinion of management of the Company,
however, there are no legal proceedings pending against the Company likely to
have a material adverse effect on the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER 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. There is no established
public trading market for Emmis Class B common stock or Class C common stock
or for the common stock of EOC. The following table sets forth the high and low bid prices of the Class A
common stock for the periods indicated. No dividends were paid during any such
periods. QUARTER ENDED
    
    HIGH
    
    LOWMay 2002
    
    
    31.85
    
    
    
    26.15August 2002
    
    
    30.15
    
    
    
    11.65November 2002
    
    
    24.05
    
    
    
    14.25February 2003
    
    
    24.86
    
    
    
    17.82May 2003
    
    
    21.24
    
    
    
    14.84August 2003
    
    
    23.87
    
    
    
    18.68November 2003
    
    
    24.06
    
    
    
    18.00February 2004
    
    
    28.65
    
    
    
    22.74
 At April 23, 2004 there were 4,841 record holders of the Class A common
stock, and there was one record holder of the Class B common stock. As of
April 23, 2004, there was one record holder of the EOC common stock. 23




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##### Table of Contents



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. Equity Compensation Plan Information The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of February 29, 2004. These plans
include the 1994 Equity Incentive Plan, the 1995 Equity Incentive Plan, the
Non-Employee Director Stock Option Plan, the 1997 Equity Incentive Plan, the
1999 Equity Incentive Plan, the 2001 Equity Incentive Plan, the 2002 Equity
Compensation Plan and the Employee Stock Purchase Plan. Our shareholders have
approved all of these plans. Number of Securities RemainingNumber of Securities to be Issued
    
    Weighted-Average Exercise
    
    Available for Future Issuance underUpon Exercise of Outstanding
    
    Price of Outstanding Options,
    
    Equity Compensation Plans (ExcludingOptions, Warrants and Rights
    
    Warrants and Rights
    
    Securities Reflected in Column (a))(a)
    
    (b)
    
    (c)Plan CategoryEquity Compensation Plans
Approved by Security Holders
    
    
    5,724,902
    (1)
    
    $
    25.77
    (1)
    
    
    3,045,945
    (2)Equity Compensation Plans
Not Approved by Security Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,724,902
    (1)
    
    $
    25.77
    (1)
    
    
    3,045,945
    (2)
  (1)
    
    Includes 435,000 shares estimated to be issuable in 2004 to employees
in lieu of current salary pursuant to contract rights under our stock
compensation program. See Note 1h to our Consolidated Financial
Statements. The exact number and price of shares to be issued depends
upon actual compensation during the period prior to issuance and changes
in our share price, neither of which can be determined at this time.
Thus, the weighted averages in Column B do not reflect these shares. The
amount in Column A excludes obligations under employment contracts to
issue bonus shares in the future.  (2)
    
    Includes 319,945 shares currently available under the initial
authorization for the Employee Stock Purchase Plan. The number of shares reserved for issuance under this plan is automatically increased
on the first day of each fiscal year by the lesser of 0.5% of the common shares outstanding on the last day of the immediately preceding fiscal
year or a lesser amount determined by our board of directors. On March
1, 2004, options were granted to employees to purchase an additional
1,391,645 shares of Emmis Communications Corporation common stock at
$25.53 per share. 24




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA Emmis Communications Corporation
FINANCIAL HIGHLIGHTS YEAR ENDED FEBRUARY 28 (29)(Dollars in thousands, except share data)2000
    
    2001
    
    2002
    
    2003
    
    2004OPERATING DATA:Net revenues
    
    $
    325,265
    
    
    $
    473,345
    
    
    $
    539,822
    
    
    $
    562,363
    
    
    $
    591,868Station operating expenses, excluding
noncash compensation
    
    
    199,818
    
    
    
    299,132
    
    
    
    354,157
    
    
    
    349,251
    
    
    
    371,423Corporate expenses, excluding
noncash compensation
    
    
    15,430
    
    
    
    17,601
    
    
    
    20,283
    
    
    
    21,359
    
    
    
    24,105Time brokerage fees
    
    
    
    
    
    
    7,344
    
    
    
    479
    
    
    
    
    
    
    
    Depreciation and amortization (1)
    
    
    44,161
    
    
    
    74,018
    
    
    
    100,258
    
    
    
    43,370
    
    
    
    46,468Noncash compensation
    
    
    7,357
    
    
    
    5,400
    
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Restructuring fees
    
    
    
    
    
    
    2,057
    
    
    
    768
    
    
    
    
    
    
    
    Impairment loss and other (2)
    
    
    896
    
    
    
    2,000
    
    
    
    10,672
    
    
    
    
    
    
    
    12,400Operating income
    
    
    57,603
    
    
    
    65,793
    
    
    
    44,110
    
    
    
    125,855
    
    
    
    114,022Interest expense
    
    
    51,986
    
    
    
    72,444
    
    
    
    129,100
    
    
    
    103,835
    
    
    
    85,958Loss on debt extinguishment
    
    
    3,272
    
    
    
    
    
    
    
    1,748
    
    
    
    13,506
    
    
    
    Other income (loss), net (3)
    
    
    3,247
    
    
    
    38,037
    
    
    
    (3,657
    )
    
    
    5,294
    
    
    
    (3,339
    )Income (loss) before income taxes, discontinued operations
and cumulative effect of accounting change
    
    
    5,592
    
    
    
    31,386
    
    
    
    (90,395
    )
    
    
    13,808
    
    
    
    24,725Income (loss) from continuing operations
    
    
    (33
    )
    
    
    13,736
    
    
    
    (64,108
    )
    
    
    2,932
    
    
    
    12,275Net income (loss) (4)
    
    
    (33
    )
    
    
    13,736
    
    
    
    (64,108
    )
    
    
    (164,468
    )
    
    
    2,256Net income (loss) available to
common shareholders
    
    
    (3,177
    )
    
    
    4,752
    
    
    
    (73,092
    )
    
    
    (173,452
    )
    
    
    (6,728
    )Net income (loss) per share available
to common shareholders:Basic:Continuing operations
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (1.54
    )
    
    $
    (0.11
    )
    
    $
    0.06Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.18
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.16
    )
    
    
    Net income (loss) available to common
shareholders
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Diluted:Continuing operations
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (1.54
    )
    
    $
    (0.11
    )
    
    $
    0.06Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.18
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.16
    )
    
    
    Net income (loss) available to common
shareholders
    
    $
    (0.09
    )
    
    $
    0.10
    
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Weighted average common shares outstanding (5):Basic
    
    
    36,156
    
    
    
    46,869
    
    
    
    47,334
    
    
    
    53,014
    
    
    
    54,716Diluted
    
    
    36,156
    
    
    
    47,940
    
    
    
    47,334
    
    
    
    53,014
    
    
    
    55,066
 25




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##### Table of Contents



FEBRUARY 28 (29),(Dollars in thousands)2000
    
    2001
    
    2002
    
    2003
    
    2004BALANCE SHEET DATA:Cash
    
    $
    17,370
    
    
    $
    59,899
    
    
    $
    6,362
    
    
    $
    16,079
    
    
    $
    19,970Working capital (6)
    
    
    28,274
    
    
    
    97,885
    
    
    
    19,828
    
    
    
    28,024
    
    
    
    53,127Net intangible assets
    
    
    1,033,970
    
    
    
    1,852,259
    
    
    
    1,953,331
    
    
    
    1,725,733
    
    
    
    1,858,857Total assets
    
    
    1,376,306
    
    
    
    2,555,872
    
    
    
    2,559,069
    
    
    
    2,165,413
    
    
    
    2,300,569Long-term credit facility, senior subordinated
debt and senior discount notes (7)
    
    
    300,000
    
    
    
    1,380,000
    
    
    
    1,343,507
    
    
    
    1,194,789
    
    
    
    1,261,568Shareholders equity
    
    
    776,367
    
    
    
    807,471
    
    
    
    735,557
    
    
    
    704,705
    
    
    
    748,946
 YEAR ENDED FEBRUARY 28 (29),(Dollars in thousands)2000
    
    2001
    
    2002
    
    2003
    
    2004OTHER DATA:Cash flows from (used in):Operating activities
    
    $
    26,360
    
    
    $
    97,730
    
    
    $
    69,377
    
    
    $
    95,149
    
    
    $
    118,165Investing activities
    
    
    (271,946
    )
    
    
    (1,110,755
    )
    
    
    (175,105
    )
    
    
    106,301
    
    
    
    (146,359
    )Financing activities
    
    
    256,839
    
    
    
    1,055,554
    
    
    
    52,191
    
    
    
    (191,733
    )
    
    
    32,085Capital expenditures
    
    
    29,316
    
    
    
    26,225
    
    
    
    30,135
    
    
    
    30,549
    
    
    
    30,191Cash paid for taxes
    
    
    9,589
    
    
    
    550
    
    
    
    1,281
    
    
    
    887
    
    
    
    1,143
  (1)
    
    Included in depreciation and amortization expense for fiscal 2000, 2001,
and 2002 is amortization expense of $28.4 million, $39.5 million, and
$58.2 million, respectively, related to amortization of our goodwill and
FCC licenses. We ceased amortization of our goodwill and FCC licenses in
fiscal 2003 in connection with our adoption of SFAS No. 142, Goodwill and
Other Intangible Assets.  (2)
    
    The loss in the fiscal year ended February 28, 2001 resulted from a $2.0
million impairment charge in connection with the sale of a radio asset.
The loss in the fiscal year ended February 28, 2002 resulted from a $9.1
million asset impairment charge in connection with the planned sale of a
radio station and a $1.6 million charge related to the early termination
of certain TV contracts. The loss in the fiscal year ended February 29,
2004 resulted from our annual SFAS No. 142 review.  (3)
    
    Other income (loss), net for the fiscal year ended February 28, 2001
includes a $22.0 million gain on exchange of assets and a $17.0 million
break-up fee received in connection with the sale of WALR-FM in Atlanta,
Georgia to Cox Radio, Inc., net of related expenses.  (4)
    
    The net loss in fiscal year ended February 28, 2003 includes a charge of
$167.4 million, net of tax, to reflect the cumulative effect of an
accounting change in connection with our adoption of SFAS No. 142,
Goodwill and Other Intangible Assets.  (5)
    
    In February 2000, Emmis effected a 2 for 1 stock split of the outstanding shares of common stock. Accordingly, all data shown has been
retroactively adjusted to reflect the stock split.  (6)
    
    February 28, 2002 balance excludes assets held for sale of $123.4 million
and credit facility debt to be repaid with proceeds of assets held for
sale of $135.0 million.  (7)
    
    February 28, 2002 balance excludes $135.0 million of credit facility debt
to be repaid with proceeds of assets held for sale. 26




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Emmis Operating Company
FINANCIAL HIGHLIGHTS YEAR ENDED FEBRUARY 28 (29),(Dollars in thousands, except share data)2000
    
    2001
    
    2002
    
    2003
    
    2004OPERATING DATA:Net revenues
    
    $
    325,265
    
    
    $
    473,345
    
    
    $
    539,822
    
    
    $
    562,363
    
    
    $
    591,868Station operating expenses,
excluding noncash compensation
    
    
    199,818
    
    
    
    299,132
    
    
    
    354,157
    
    
    
    349,251
    
    
    
    371,423Corporate expenses,
excluding noncash compensation
    
    
    15,430
    
    
    
    17,601
    
    
    
    20,283
    
    
    
    21,359
    
    
    
    24,105Time brokerage fees
    
    
    
    
    
    
    7,344
    
    
    
    479
    
    
    
    
    
    
    
    Depreciation and amortization (1)
    
    
    44,161
    
    
    
    74,018
    
    
    
    100,258
    
    
    
    43,370
    
    
    
    46,468Noncash compensation
    
    
    7,357
    
    
    
    5,400
    
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Restructuring fees
    
    
    
    
    
    
    2,057
    
    
    
    768
    
    
    
    
    
    
    
    Impairment loss and other (2)
    
    
    896
    
    
    
    2,000
    
    
    
    10,672
    
    
    
    
    
    
    
    12,400Operating income
    
    
    57,603
    
    
    
    65,793
    
    
    
    44,110
    
    
    
    125,855
    
    
    
    114,022Interest expense
    
    
    51,986
    
    
    
    72,444
    
    
    
    104,102
    
    
    
    78,058
    
    
    
    59,434Loss on debt extinguishment
    
    
    3,272
    
    
    
    
    
    
    
    1,748
    
    
    
    4,444
    
    
    
    Other income (loss), net (3)
    
    
    3,247
    
    
    
    38,037
    
    
    
    (4,643
    )
    
    
    5,293
    
    
    
    (3,338
    )Income (loss) before income taxes, discontinued operations
and cumulative effect of accounting change
    
    
    5,592
    
    
    
    31,386
    
    
    
    (66,383
    )
    
    
    48,646
    
    
    
    51,250Income (loss) from continuing operations
    
    
    (33
    )
    
    
    13,736
    
    
    
    (47,886
    )
    
    
    27,835
    
    
    
    29,438Net income (loss) (4)
    
    
    (33
    )
    
    
    13,736
    
    
    
    (47,886
    )
    
    
    (139,565
    )
    
    
    19,419
 FEBRUARY 28 (29),(Dollars in thousands)2000
    
    2001
    
    2002
    
    2003
    
    2004BALANCE SHEET DATA:Cash
    
    $
    17,370
    
    
    $
    59,899
    
    
    $
    6,362
    
    
    $
    16,079
    
    
    $
    19,970Working capital (5)
    
    
    28,274
    
    
    
    97,885
    
    
    
    20,951
    
    
    
    29,147
    
    
    
    54,250Net intangible assets
    
    
    1,033,970
    
    
    
    1,852,259
    
    
    
    1,953,331
    
    
    
    1,725,733
    
    
    
    1,858,857Total assets
    
    
    1,376,306
    
    
    
    2,555,872
    
    
    
    2,548,139
    
    
    
    2,157,884
    
    
    
    2,293,986Long-term credit facility and
senior subordinated debt (6)
    
    
    300,000
    
    
    
    1,380,000
    
    
    
    1,117,000
    
    
    
    996,945
    
    
    
    1,038,145Shareholders equity
    
    
    776,367
    
    
    
    807,471
    
    
    
    944,467
    
    
    
    878,418
    
    
    
    939,822
 YEAR ENDED FEBRUARY 28 (29),(Dollars in thousands)2000
    
    2001
    
    2002
    
    2003
    
    2004OTHER DATA:Cash flows from (used in):Operating activities
    
    $
    23,471
    
    
    $
    86,871
    
    
    $
    67,393
    
    
    $
    94,189
    
    
    $
    115,390Investing activities
    
    
    (271,946
    )
    
    
    (1,110,755
    )
    
    
    (175,105
    )
    
    
    106,301
    
    
    
    (146,359
    )Financing activities
    
    
    259,728
    
    
    
    1,066,413
    
    
    
    54,175
    
    
    
    (190,773
    )
    
    
    34,860Capital expenditures
    
    
    29,316
    
    
    
    26,225
    
    
    
    30,135
    
    
    
    30,549
    
    
    
    30,191Cash paid for taxes
    
    
    9,589
    
    
    
    550
    
    
    
    1,281
    
    
    
    887
    
    
    
    1,143
  (1)
    
    Included in depreciation and amortization expense for fiscal 2000, 2001,
and 2002 is amortization expense of $28.4 million, $39.5 million, and
$58.2 million, respectively, related to amortization of our goodwill and
FCC licenses. We ceased amortization of our goodwill and FCC licenses in
fiscal 2003 in connection with our adoption of SFAS No. 142, Goodwill and
Other Intangible Assets.  (2)
    
    The loss in the fiscal year ended February 28, 2001 resulted from a $2.0
million impairment charge in connection with the sale of a radio asset.
The loss in the fiscal year ended February 28, 2002 resulted from a $9.1
million asset impairment charge in connection with the planned sale of a
radio station and a $1.6 million charge related to the early termination
of certain TV contracts. The loss in the fiscal year ended February 29,
2004 resulted from our annual SFAS No. 142 review.  (3)
    
    Other income (loss), net for the fiscal year ended February 28, 2001
includes a $22.0 million gain on exchange of assets and a $17.0 million
break-up fee received in connection with the sale of WALR-FM in Atlanta,
Georgia to Cox Radio, Inc., net of related expenses. 27




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(4)
    
    The net loss in fiscal year ended February 28, 2003 includes a charge of
$167.4 million, net of tax, to reflect the cumulative effect of an
accounting change in connection with our adoption of SFAS No. 142,
Goodwill and Other Intangible Assets.  (5)
    
    February 28, 2002 balance excludes assets held for sale of $123.4 million
and credit facility debt to be repaid with proceeds of assets held for
sale of $ 135.0 million.  (6)
    
    February 28, 2002 balance excludes $135.0 million of credit facility debt
to be repaid with proceeds of assets held for sale. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. GENERAL The following discussion pertains to Emmis Communications Corporation
(ECC) and its subsidiaries (collectively, Emmis or the Company) and to
Emmis Operating Company and its subsidiaries (collectively EOC). EOC became
a wholly owned subsidiary of ECC in connection with the Companys
reorganization (see Note 1c. to our consolidated financial statements) on June
22, 2001. Unless otherwise noted, all disclosures contained in the
Managements Discussion and Analysis of Financial Condition and Results of
Operation in the Form 10-K apply to Emmis and EOC. We own and operate radio, television and publishing properties located
primarily in the United States. Our revenues are mostly affected by the
advertising rates our entities charge, as advertising sales represent more than
85% of our consolidated revenues. These rates are in large part based on our
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, our strategy is to use market research and advertising and promotion
to attract and retain audiences in each stations chosen demographic target
group. Our revenues vary throughout the year. As is typical in the broadcasting
industry, our revenues and operating income are usually lowest in our fourth
fiscal quarter. Our television divisions revenues typically fluctuate from
year to year due to political spending, which is the highest in our
odd-numbered fiscal years. 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. We generally confine the use of such trade
transactions to promotional items or services for which we would otherwise have
paid cash. In addition, it is our general policy not to pre-empt advertising
spots paid for in cash with advertising spots paid for in trade. The following table summarizes the sources of our revenues for each of the
past three years. The category Non Traditional principally consists of
ticket sales and sponsorships of events our stations and magazines conduct in
their local markets. The category Other includes, among other items,
revenues generated by the websites of our entities and barter. Year ended February 28 (29),2002
    
    % of Total
    
    2003
    
    % of Total
    
    2004
    
    % of TotalNet revenues:Local
    
    $
    339,899
    
    
    
    63.0
    %
    
    $
    333,264
    
    
    
    59.3
    %
    
    $
    364,065
    
    
    
    61.5
    %National
    
    
    130,939
    
    
    
    24.3
    %
    
    
    132,486
    
    
    
    23.6
    %
    
    
    139,865
    
    
    
    23.6
    %Political
    
    
    1,232
    
    
    
    0.2
    %
    
    
    17,836
    
    
    
    3.2
    %
    
    
    4,049
    
    
    
    0.7
    %Publication Sales
    
    
    19,659
    
    
    
    3.6
    %
    
    
    20,683
    
    
    
    3.7
    %
    
    
    21,765
    
    
    
    3.7
    %Non Traditional
    
    
    27,060
    
    
    
    5.0
    %
    
    
    27,550
    
    
    
    4.9
    %
    
    
    29,897
    
    
    
    5.1
    %Other
    
    
    21,033
    
    
    
    3.9
    %
    
    
    30,544
    
    
    
    5.3
    %
    
    
    32,227
    
    
    
    5.4
    %Total net revenues
    
    $
    539,822
    
    
    
    
    
    
    $
    562,363
    
    
    
    
    
    
    $
    591,868
 A significant portion of our expenses varies in connection with changes in
revenue. These variable expenses primarily relate to 28




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costs in our sales
department, such as salaries, commissions, and bad debt. Our costs that do not
vary as much in relation to revenue are mostly in our programming and general
and administrative departments, such as talent costs, syndicated programming
fees, utilities and office salaries. Lastly, our costs that are highly
discretionary are costs in our marketing and promotions department, which we
primarily incur to maintain and/or increase our audience and market share. CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those that encompass
significant judgments and uncertainties, and potentially derive materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are those described below. Impairment of Goodwill and Indefinite-lived Intangibles The annual impairment tests for goodwill and indefinite-lived intangibles
under SFAS No. 142 require us to make certain assumptions in determining fair
value, including assumptions about the cash flow growth rates of our
businesses. Additionally, the fair values are significantly impacted by
macro-economic factors, including market multiples at the time the impairment
tests are performed. Accordingly, we may incur additional impairment charges
in future periods under SFAS No. 142 to the extent we do not achieve our
expected cash flow growth rates, or to the extent that market values decrease. Allocations for Purchased Assets We typically engage an independent appraisal firm to value assets acquired
in a material acquisition. We use the appraisal report to allocate the
purchase price of the acquisition. To the extent that purchased assets are not
allocated appropriately, depreciation and amortization expense could be
materially different. Allowance for Doubtful Accounts Our allowance for doubtful accounts requires us to estimate losses
resulting from our customers inability to make payments. When evaluating the
adequacy of the allowance for doubtful accounts, we specifically review
historical write-off activity by market, large customer concentrations, and
changes in our customer payment patterns. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, then additional allowances might be required. ACQUISITIONS, DISPOSITIONS AND INVESTMENTS During the three year period ended February 29, 2004, we acquired three
domestic radio stations, one television station, nine international radio
stations, and a controlling interest in six domestic radio stations for an
aggregate cash purchase price of $281.9 million. We also disposed of two
domestic radio stations for an aggregate cash sales price of $135.5 million and
we have agreed to sell our interest in two international radio stations for
$7.3 million. A recap of the transactions completed during the three years
ended February 29, 2004 is summarized hereafter. These transactions impact the
comparability of operating results year over year. On December 23, 2003, Emmis agreed to sell its controlling interest in
Votionis, S.A. (Votionis), which owns and operates two radio stations in
Buenos Aires, Argentina, to its minority partners for $7.3 million in cash.
The sale is subject to Argentine regulatory approvals and is expected to close
during our quarter ended May 31, 2004. Emmis acquired its interest in Votionis
in November 1999. In October 2003, we exercised our right to purchase the
equity interests of our minority partners. During negotiations with our
minority partners, we instead elected to sell our controlling interest. In
connection with the sale, Emmis recorded a loss from discontinued operations of
$10.0 million in fiscal 2004. The Argentine peso substantially devalued
relative to the U.S. dollar early in 2002. The loss is primarily attributable
to the devaluation of the peso. Votionis has historically been included in the
radio reporting segment. On December 19, 2003, the Flemish Government awarded licenses to operate
nine FM radio stations in the Flanders region of Belgium to several
not-for-profit entities that have granted Emmis the exclusive right to provide
the programming and sell the advertising on the stations. Five of these
licenses are for the stations that Emmis began programming in August 2003 and
the remaining four related to new stations that Emmis began operating in
February 2004. The licenses are for an initial term of nine years and do not
require the payment of any license fees to the Flemish Government. 29




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##### Table of Contents



On July 1, 2003, Emmis effectively acquired a controlling interest of
50.1% in a partnership that owns six radio stations in the Austin, Texas
metropolitan area for a cash purchase price of approximately $106.5 million,
including transaction costs of $1.0 million. These six stations are KLBJ-AM,
KLBJ-FM, KDHT-FM, (formerly KXMG-FM), KROX-FM, KGSR-FM and KEYI-FM. This
acquisition allowed Emmis to diversify its radio portfolio and participate in
another large, high-growth radio market. The acquisition was financed through
borrowings under the credit facility and was accounted for as a purchase. The
Company recorded $35.3 million of goodwill, all of which is deductible for
income tax purposes. In addition, Emmis has the option, but not the
obligation, to purchase its partners entire 49.9% interest in the partnership
after December 2007 based on an 18-multiple of trailing 12-month cash flow. Effective March 1, 2003, Emmis completed its acquisition of substantially
all of the assets of television station WBPG-TV in Mobile, AL-Pensacola, FL
from Pegasus Communications Corporation for approximately $11.7 million,
including transaction costs of $0.2 million. We financed the acquisition
through borrowings under the credit facility and the acquisition was accounted
for as a purchase. This acquisition will allow us to achieve duopoly
efficiencies in the market, such as lower programming acquisition costs and
consolidation of general and administrative functions, since we already own a
television station in the market, WALA. Effective May 1, 2002 Emmis completed the sale of substantially all of the
assets of KALC-FM in Denver, Colorado to Entercom Communications Corporation
for $88.0 million. Emmis had purchased KALC-FM on January 17, 2001, from Salem
Communications Corporation for $98.8 million in cash plus a commitment fee of
$1.2 million and transaction related costs of $0.9 million. On February 12,
2002, Emmis entered into a definitive agreement to sell KALC-FM to Entercom and
Entercom began operating KALC-FM under a time brokerage agreement on March 16,
2002. Proceeds were used to repay amounts outstanding under our credit
facility. Since the agreed-upon sales price for this station was less than its
carrying amount as of February 28, 2002, we recognized an impairment loss of
$9.1 million in fiscal 2002. Additionally, in fiscal 2003 we recorded an
incremental $1.3 million loss in connection with the sale. Both of these
losses are reflected in the accompanying consolidated statements of
operations. Effective May 1, 2002 Emmis completed the sale of substantially all of the
assets of KXPK-FM in Denver, Colorado to Entravision Communications Corporation
for $47.5 million. Emmis had purchased KXPK-FM on August 24, 2000, from AMFM,
Inc. for an allocated purchase price of $35.0 million in cash plus liabilities
recorded of $1.2 million and transaction related costs of $0.4 million. Emmis
entered into a definitive agreement to sell KXPK-FM to Entravision on February
12, 2002. Proceeds were used to repay amounts outstanding under our credit
facility. In fiscal 2003 we recorded a gain on sale of assets of $10.2
million. On March 28, 2001, Emmis completed its acquisition of substantially all of
the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona
from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus
transaction related costs of $0.7 million. The Company financed the
acquisition through a $20.0 million advance payment borrowed under the credit
facility in June 2000 and the remainder with borrowings under the credit
facility and proceeds from ECCs March 2001 senior discount notes offering.
The acquisition was accounted for as a purchase. Emmis began programming and
selling advertising on the radio stations on August 1, 2000 under a time
brokerage agreement. The total purchase price was allocated to property and
equipment and broadcast licenses based on an independent appraisal. Broadcast
licenses are included in intangible assets in the accompanying consolidated
balance sheets and, effective March 1, 2002, are no longer amortized in the
consolidated statements of operations in accordance with SFAS No. 142. 30




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RESULTS OF OPERATIONS YEAR ENDED FEBRUARY 29, 2004 COMPARED TO YEAR ENDED FEBRUARY 28, 2003 Net revenue pro forma reconciliation: Since March 1, 2002, we have sold two radio stations in Denver, Colorado,
acquired a 50.1% controlling interest in six radio stations in Austin, Texas,
purchased one television station in Mobile, Alabama, announced the sale of two
radio stations in Argentina and sold a television production company (see Note
6 in the accompanying Notes to Consolidated Financial Statements). The
following table reconciles actual results to pro forma results. Year ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % ChangeReported net revenuesRadio
    
    $
    279,822
    
    
    $
    254,818
    
    
    $
    25,004
    
    
    
    9.8
    %Television
    
    
    235,938
    
    
    
    234,752
    
    
    
    1,186
    
    
    
    0.5
    %Publishing
    
    
    76,108
    
    
    
    72,793
    
    
    
    3,315
    
    
    
    4.6
    %Total
    
    
    591,868
    
    
    
    562,363
    
    
    
    29,505
    
    
    
    5.2
    %Plus: Net revenues from stations acquiredRadio
    
    
    8,860
    
    
    
    23,395Television
    
    
    
    
    
    
    1,033Publishing
    
    
    
    
    
    
    Total
    
    
    8,860
    
    
    
    24,428Less: Net revenues from stations disposedRadio
    
    
    
    
    
    
    (3,884
    )Television
    
    
    (1,140
    )
    
    
    (3,401
    )Publishing
    
    
    
    
    
    
    Total
    
    
    (1,140
    )
    
    
    (7,285
    )Pro forma net revenuesRadio
    
    
    288,682
    
    
    
    274,329
    
    
    
    14,353
    
    
    
    5.2
    %Television
    
    
    234,798
    
    
    
    232,384
    
    
    
    2,414
    
    
    
    1.0
    %Publishing
    
    
    76,108
    
    
    
    72,793
    
    
    
    3,315
    
    
    
    4.6
    %Total
    
    $
    599,588
    
    
    $
    579,506
    
    
    $
    20,082
    
    
    
    3.5
    %
 For further disclosure of segment results, see Note 12 to the accompanying
consolidated financial statements. For additional pro forma results, see Note
7 to the accompanying consolidated financial statements. Consistent with
managements review of the company, the pro forma results above include the
impact of all announced or consummated acquisitions and dispositions,
irrespective of materiality. These pro forma results include the impact of the
sale of our two radio stations in Denver and our television production company
and thus differ from the pro forma financial results reflected in Note 7 to the
accompanying consolidated financial statements, which were prepared in
accordance with GAAP. Net revenues discussion: Radio net revenues increased principally as a result of our acquisition of
six radio stations in Austin in July 2003. On a pro forma basis (assuming the
Austin radio stations had been purchased on March 1, 2002 and the Denver radio
stations had been sold on March 1, 2002), radio net revenues for the year ended
February 29, 2004 would have increased $14.4 million, or 5.2%. We monitor the 31




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performance of our stations against the aggregate performance of the markets in
which we operate. On a pro forma basis, for the year ended February 29, 2004
net revenues of our domestic radio stations were up 4.5%, whereas net revenues
in the domestic radio markets in which we operate were up only 2.7%, based on
reports for the periods prepared by Miller, Kaplan, Arase & Co., LLP. We
believe we were able to outperform the markets in which we operate due to our commitment
to training and developing local sales forces, as well as higher ratings,
resulting, in part, from increased promotional spending in prior quarters. The
higher ratings allowed us to charge higher rates for the advertisements we sold
in the current period versus the same period in the prior year. Our
advertising inventory sellout decreased slightly year over year. The increase in television net revenues for the year ended February 29,
2004 is due to strong growth in local advertising revenues offset by a
substantial reduction in net political revenues as there were fewer political
election campaigns in our fiscal 2004. Net political advertising revenues for
the year ended February 29, 2004 were approximately $4.0 million. Net
political advertising revenues for the year ended February 28, 2003 were
approximately $17.5 million. Despite this decrease in net political revenues,
ratings improvements and our commitment to training and developing local sales
forces have enabled us to increase our share of local advertising revenues. Although publishing revenues increased for the year ended February 29,
2004 as compared to the same period in the prior year, the national advertising
environment continues to be challenging for our publishing division. However,
our magazines have been able to overcome shortfalls in national advertising
revenues by producing more custom publications and by increasing special
advertiser sections in our magazines. On a consolidated basis, net revenues for the year ended February 29, 2004
increased due to the effect of the items described above. On a pro forma
basis, net revenues for the year ended February 29, 2004 increased $20.1
million, or 3.5% due to the effect of the items described above. 32




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Station operating expenses, excluding noncash compensation pro forma reconciliation: Since March 1, 2002, we have sold two radio stations in Denver, Colorado,
acquired a 50.1% controlling interest in six radio stations in Austin, Texas,
purchased one television station in Mobile, Alabama, announced the sale of two
radio stations in Argentina and sold a television production company (see Note
6 in the accompanying Notes to Consolidated Financial Statements). The
following table reconciles actual station operating expenses, excluding noncash
compensation to pro forma station operating expenses, excluding noncash
compensation: Year ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % ChangeReported station operating expenses,
excluding noncash compensationRadio
    
    $
    155,129
    
    
    $
    138,385
    
    
    $
    16,744
    
    
    
    12.1
    %Television
    
    
    150,485
    
    
    
    148,041
    
    
    
    2,444
    
    
    
    1.7
    %Publishing
    
    
    65,809
    
    
    
    62,825
    
    
    
    2,984
    
    
    
    4.7
    %Total
    
    
    371,423
    
    
    
    349,251
    
    
    
    22,172
    
    
    
    6.3
    %Plus: Station operating expenses,
excluding noncash compensation
from stations acquired:Radio
    
    
    5,182
    
    
    
    13,704Television
    
    
    
    
    
    
    2,431Publishing
    
    
    
    
    
    
    Total
    
    
    5,182
    
    
    
    16,135Less: Station operating expenses,
excluding noncash compensation
from stations disposed:Radio
    
    
    
    
    
    
    (3,286
    )Television
    
    
    (944
    )
    
    
    (2,322
    )Publishing
    
    
    
    
    
    
    Total
    
    
    (944
    )
    
    
    (5,608
    )Pro forma station operating expenses,
excluding noncash compensationRadio
    
    
    160,311
    
    
    
    148,803
    
    
    
    11,508
    
    
    
    7.7
    %Television
    
    
    149,541
    
    
    
    148,150
    
    
    
    1,391
    
    
    
    0.9
    %Publishing
    
    
    65,809
    
    
    
    62,825
    
    
    
    2,984
    
    
    
    4.7
    %Total
    
    $
    375,661
    
    
    $
    359,778
    
    
    $
    15,883
    
    
    
    4.4
    %
 For further disclosure of segment results, see Note 12 to the accompanying
consolidated financial statements. For additional pro forma results, see Note
7 to the accompanying consolidated financial statements. Consistent with
managements review of the company, the pro forma results above include the
impact of all announced or consummated acquisitions and dispositions,
irrespective of materiality. These pro forma results include the impact of the
sale of our two radio stations in Denver and our television production company
and thus differ from the pro forma financial results reflected in Note 7 to the
accompanying consolidated financial statements, which were prepared in
accordance with GAAP. Station operating expenses, excluding noncash compensation discussion: Radio station operating expenses, excluding noncash compensation increased
as a result of our acquisition of six radio stations in Austin in July 2003.
The increase also relates to higher sales-related costs, higher insurance and
health-related costs, higher programming costs and the reduction of $2.5
million in noncash compensation expense as more bonuses were paid in cash as
opposed to 33




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stock in fiscal 2004, which had the impact of increasing cash expenses by an
equal amount. On a pro forma basis (assuming the Austin radio stations had
been purchased on March 1, 2002 and the Denver radio stations had been sold on
March 1, 2002), radio station operating expenses, excluding noncash
compensation, for the year ended February 29, 2004 would have increased $11.5
million, or 7.7%. Our acquisition of WBPG-TV in March 2003 contributed to the increase in
television station operating expenses, excluding noncash compensation. On a
pro forma basis (assuming the purchase of WBPG-TV and sale of Mira Mobile
Television had occurred on March 1, 2002), television station operating
expenses, excluding noncash compensation, for the year ended February 29, 2004
would have increased $1.4 million, or 0.9%. Higher programming costs and
higher insurance and health-related costs were generally offset by lower
sales-related costs. As previously discussed, our publishing division has replaced lost
national advertising revenues with revenues from custom publications and
special advertiser sections, which are more expensive to produce due
principally to higher editorial and production costs. Our publishing division
also experienced higher insurance and health-related costs. On a consolidated basis, station operating expenses, excluding noncash
compensation, for the year ended February 29, 2004 increased due to the effect
of the items described above. On a pro forma basis, station operating
expenses, excluding noncash compensation, for the year ended February 29, 2004
increased $15.9 million, or 4.4% due to the effect of the items described
above. Noncash compensation expenses: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Noncash compensation expense:Radio
    
    $
    7,682
    
    
    $
    10,151
    
    
    $
    (2,469
    )
    
    
    (24.3
    )%Television
    
    
    7,715
    
    
    
    6,528
    
    
    
    1,187
    
    
    
    18.2
    %Publishing
    
    
    2,780
    
    
    
    2,358
    
    
    
    422
    
    
    
    17.9
    %Corporate
    
    
    5,273
    
    
    
    3,491
    
    
    
    1,782
    
    
    
    51.0
    %Total noncash compensation expense
    
    $
    23,450
    
    
    $
    22,528
    
    
    $
    922
    
    
    
    4.1
    %
 Noncash compensation includes compensation expense associated with
restricted common stock issued under employment agreements, common stock issued
to employees in lieu of cash bonuses, Company matches in our 401(k) plans, and
common stock issued to employees in exchange for cash compensation pursuant to
our stock compensation program. Our stock compensation program resulted in
noncash compensation expense of approximately $16.5 million and $16.7 million
for the years ended February 28 (29), 2003 and 2004, respectively. Effective
March 1, 2003, Emmis elected to double its 401(k) match to $2 per employee,
with one-half of the contribution made in Emmis stock. The increased 401(k)
match was made instead of making a contribution to the Companys profit sharing
plan. This resulted in approximately $1.5 million of additional noncash
compensation expense for the year ended February 29, 2004, over the same period
in the prior year. These increases were partially offset by the payment of
more bonuses in cash as opposed to stock in fiscal 2004 as compared to fiscal
2003. Effective January 1, 2004, we curtailed our stock compensation program by
eliminating mandatory participation for employees making less than $52,000 per
year. For calendar 2004, this change will result in an estimated $8 million

decrease in the Companys non-cash compensation expense and a corresponding
increase in the Companys cash operating expense. In all other respects, the
2004 stock compensation program remains comparable to the stock compensation
programs in effect for each of the last two calendar years. No formal
decisions have been made regarding its status beyond December 2004. 34




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Corporate expenses, excluding noncash compensation: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Corporate expenses, excluding
noncash compensation
    
    $
    24,105
    
    
    $
    21,359
    
    
    $
    2,746
    
    
    
    12.9
    %
 Corporate expenses, excluding noncash compensation increased due to higher
insurance and health care costs, professional fees associated with our
television digital spectrum initiative, funding for training and diversity
initiatives, and higher corporate governance costs. Depreciation and amortization: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Depreciation and amortization:Radio
    
    $
    9,331
    
    
    $
    8,133
    
    
    $
    1,198
    
    
    
    14.7
    %Television
    
    
    30,174
    
    
    
    28,453
    
    
    
    1,721
    
    
    
    6.0
    %Publishing
    
    
    873
    
    
    
    1,917
    
    
    
    (1,044
    )
    
    
    (54.5
    )%Corporate
    
    
    6,090
    
    
    
    4,867
    
    
    
    1,223
    
    
    
    25.1
    %Total depreciation and amortization
    
    $
    46,468
    
    
    $
    43,370
    
    
    $
    3,098
    
    
    
    7.1
    %
 Substantially all of the increase in radio depreciation and amortization
expense is attributable to our Austin radio acquisition, which closed on July
1, 2003. Television depreciation and amortization expense increased due to
additional depreciation of digital equipment upgrades. Publishing depreciation and amortization expense decreased due to certain
definite-lived intangible assets becoming fully amortized during fiscal 2003. Corporate depreciation and amortization expense increased due to higher
depreciation expense related to computer equipment and software purchases over
the past twelve months. Consolidated depreciation and amortization expense increased due to the
effect of the items described above. Operating income: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Operating income:Radio
    
    $
    107,680
    
    
    $
    98,149
    
    
    $
    9,531
    
    
    
    9.7
    %Television
    
    
    35,164
    
    
    
    51,730
    
    
    
    (16,566
    )
    
    
    (32.0
    )%Publishing
    
    
    6,646
    
    
    
    5,693
    
    
    
    953
    
    
    
    16.7
    %Corporate
    
    
    (35,468
    )
    
    
    (29,717
    )
    
    
    (5,751
    )
    
    
    19.4
    %Total operating income
    
    $
    114,022
    
    
    $
    125,855
    
    
    $
    (11,833
    )
    
    
    (9.4
    )%
 Radio operating income increased due to our Austin radio acquisition,
partially offset by higher station operating expenses at our existing stations
and depreciation and amortization expense, as discussed above. Also noncash
compensation in our radio segment decreased by approximately $2.5 million in
fiscal 2004 as we paid more bonuses in cash as opposed to stock. As discussed
above, the 35




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net revenue growth of our stations exceeded the revenue growth in
the markets in which we operate. We expect our stations to continue to
outperform the markets in which we operate as we seek to monetize sustained
audience ratings momentum. Television operating income in fiscal 2005 includes a $12.4 million
impairment charge relating to the companys annual SFAS No. 142 review. The
remaining decrease is attributable to higher noncash compensation expense,
higher depreciation and amortization expense, and the reduction in political
net revenues, as discussed above. We expect our television division to
increase operating income in fiscal 2005 as our stations will benefit from
political advertising spending and revenues from the Olympics. Publishing operating income increased due to higher net revenues and lower
depreciation and amortization, partially offset by higher station operating
expenses, as discussed above. Our publishing division has experienced slow,
steady growth, which we expect to continue. Our magazines are generally mature
properties with limited direct competition. Corporate operating income declined due to higher corporate expenses,
noncash compensation expense, and depreciation and amortization, as discussed
above. We expect corporate expenses to increase in fiscal 2005 by
approximately 30%, the majority of which results from professional
fees incurred in developing a business plan for our television
digital spectrum initiative as well as higher governance costs
attributable to Sarbanes-Oxley compliance and higher insurance costs. On a consolidated basis, total operating income decreased due to the
changes in radio, television and publishing operating income and higher
corporate expenses, as discussed above. Interest expense: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Interest expense:Emmis
    
    $
    85,958
    
    
    $
    103,835
    
    
    $
    (17,877
    )
    
    
    (17.2
    )%EOC
    
    $
    59,434
    
    
    $
    78,058
    
    
    $
    (18,624
    )
    
    
    (23.9
    )%
 With respect to Emmis, interest expense decreased primarily due to a
decrease in the interest rates we pay on amounts outstanding under our credit
facility, which is variable rate debt, repayments of amounts outstanding under
our credit facility and redemption of amounts outstanding under our senior
discount notes. The decreased interest rates reflect both a decrease in the
base interest rate for our credit facility due to a lower overall interest rate
environment, and a decrease in the margin applied to the base rate resulting
from the June 2002 credit facility amendment. A portion of the decrease in
interest expense is attributable to the expiration of interest rate swap
agreements originally entered into in fiscal 2001. These swaps, which began
expiring in February 2003, had an original aggregate notional amount of $350.0
million and fixed LIBOR at a weighted-average 4.76%. As of February 29, 2004,
we had no interest rate swap agreements outstanding and LIBOR was at
approximately 1.13%. In the quarter ended May 31, 2002, we repaid amounts
outstanding under our credit facility with the proceeds of our Denver radio
asset sales in May 2002 and a portion of the proceeds from our equity offering
in April 2002, with the remaining portion being used to redeem amounts
outstanding under our senior discount notes in the quarter ended August 31,
2002. We reduced our total debt outstanding by $270.6 million during the year
ended February 28, 2003. With respect to EOC, interest expense decreased primarily due to a
decrease in the interest rates we pay on amounts outstanding under our credit
facility, and repayments of amounts outstanding under our credit facility as
discussed for Emmis above. The difference between interest expense for Emmis
and EOC is due to interest expense associated with the senior discount notes,
for which ECC is the obligor, and thus it is excluded from the results of
operations of EOC. Subsequent to the balance sheet date, we refinanced our credit facility
and senior subordinated notes and retired substantially all of our senior
discount notes. These debt refinancings will result in significantly lower
interest expense in fiscal 2005. See Note 15 to the accompanying consolidated
financial statements for more discussion. 36




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##### Table of Contents



Income (loss) before income taxes, discontinued operations and accounting change: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Income (loss) before income taxes,
discontinued operations and accounting changes:Emmis
    
    $
    24,725
    
    
    $
    13,808
    
    
    $
    10,917
    
    
    
    79.1
    %EOC
    
    $
    51,250
    
    
    $
    48,646
    
    
    $
    2,604
    
    
    
    5.4
    %
 With respect to Emmis, income before income taxes, discontinued operations
and accounting change increased due to lower interest expense, partially offset
by lower operating income as discussed above and due to the following prior
year items: (1) the gain on sale of our Denver radio assets of $8.9 million in
fiscal 2003, offset by (2) loss on debt extinguishment of $13.5 million in
fiscal 2003, and (3) a loss from unconsolidated affiliates of $4.5 million in
fiscal 2003. With respect to EOC, income before income taxes, discontinued operations
and accounting change increased due to lower interest expense, partially offset
by lower operating income as discussed above and due to the following prior
year items: (1) the gain on sale of our Denver radio assets of $8.9 million in
fiscal 2003, offset by (2) loss on debt extinguishment of $4.4 million in
fiscal 2003, and (3) a loss from unconsolidated affiliates of $4.5 million in
fiscal 2003. Net loss: For the years ended February 28 (29),2004
    
    2003
    
    $ Change
    
    % Change(As reported, amounts in thousands)Net income (loss):Emmis
    
    $
    2,256
    
    
    $
    (164,468
    )
    
    $
    166,724
    
    
    
    (101.4
    )%EOC
    
    $
    19,419
    
    
    $
    (139,565
    )
    
    $
    158,984
    
    
    
    (113.9
    )%
 With respect to Emmis, net income increased mainly due to (1) the
inclusion in the prior year of a $167.4 million impairment charge, net of a
deferred tax benefit, under the cumulative effect of accounting change as an
accumulated transition adjustment attributable to the adoption on March 1, 2002
of SFAS No. 142, Goodwill and Other Intangible Assets, and (2) a reduction in
interest expense as a result of the factors described above, partially offset
by the gain on sale of our Denver radio assets of $8.9 million, loss on debt
extinguishment of $13.5 million and loss from unconsolidated affiliates of $4.5
million, all included in the prior year, all net of tax. With respect to EOC, net income increased mainly due to (1) the inclusion
in the prior year of a $167.4 million impairment charge, net of a deferred tax
benefit, under the cumulative effect of accounting change as an accumulated
transition adjustment attributable to the adoption on March 1, 2002 of SFAS No.
142, Goodwill and Other Intangible Assets, and (2) a reduction in interest
expense as a result of the factors described above, partially offset by the
gain on sale of our Denver radio assets of $8.9 million, loss on debt
extinguishment of $4.4 million and loss from unconsolidated affiliates of $4.5
million, all included in the prior year, and all net of tax. 37




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RESULTS OF OPERATIONS YEAR ENDED FEBRUARY 28, 2003 COMPARED TO YEAR ENDED FEBRUARY 28, 2002 Net revenue pro forma reconciliation: During fiscal 2003, we sold two radio stations in Denver (see Note 6 in
the accompanying Notes to Consolidated Financial Statements). The following
table reconciles actual net revenue to pro forma net revenue: Year ended February 28,2003
    
    2002
    
    $ Change
    
    % ChangeReported net revenuesRadio
    
    $
    254,818
    
    
    $
    262,077
    
    
    $
    (7,259
    )
    
    
    (2.8
    )%Television
    
    
    234,752
    
    
    
    206,529
    
    
    
    28,223
    
    
    
    13.7
    %Publishing
    
    
    72,793
    
    
    
    71,216
    
    
    
    1,577
    
    
    
    2.2
    %Total
    
    
    562,363
    
    
    
    539,822
    
    
    
    22,541
    
    
    
    4.2
    %Less: Net revenues from stations disposedRadio
    
    
    (1,238
    )
    
    
    (11,968
    )Television
    
    
    
    
    
    
    Publishing
    
    
    
    
    
    
    Total
    
    
    (1,238
    )
    
    
    (11,968
    )Pro forma net revenuesRadio
    
    
    253,580
    
    
    
    250,109
    
    
    
    3,471
    
    
    
    1.4
    %Television
    
    
    234,752
    
    
    
    206,529
    
    
    
    28,223
    
    
    
    13.7
    %Publishing
    
    
    72,793
    
    
    
    71,216
    
    
    
    1,577
    
    
    
    2.2
    %Total
    
    $
    561,125
    
    
    $
    527,854
    
    
    $
    33,271
    
    
    
    6.3
    %
 For further disclosure of segment results, see Note 12 to the accompanying
consolidated financial statements. For additional pro forma results, see Note
7 to the accompanying consolidated financial statements. Consistent with
managements review of the company, the pro forma results above include the
impact of all announced or consummated acquisitions and dispositions,
irrespective of materiality. These pro forma results include the impact of the
sale of our two radio stations in Denver and thus differ from the pro forma
financial results reflected in Note 7 to the accompanying consolidated
financial statements, which were prepared in accordance with GAAP. Net revenues discussion: Radio net revenues decreased due to the sale of our two radio stations in
Denver in May 2002. On a pro forma basis (assuming the sale of our two radio
stations in Denver occurred on March 1, 2001), radio net revenues for the year
ended February 28, 2003 would have increased $3.5 million, or 1.4%. Radio net
revenues were negatively impacted by the devaluation of the peso in Argentina,
as international radio net revenues for the year ended February 28, 2003
decreased $4.9 million, or 29.3%. Domestic radio net revenues were negatively
impacted by a format change by one of our competitors in the New York market.
The negative impact in our New York market, which represents approximately 30%
of our radio net revenues, was offset by improved performance in our other
radio markets, especially Los Angeles and Phoenix. Television net revenues increased due to our television stations selling a
higher percentage of their inventory and charging higher rates due to ratings
improvements, coupled with approximately $17.5 million of political advertising
net revenues in the year ended February 28, 2003. 38




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##### Table of Contents



Publishing revenues were essentially flat for the year, as our publishing
business has not seen the same level of recovery in advertisement spending
that, in general, our radio and television businesses have experienced. On a pro forma basis consolidated net revenues for the year ended February
28, 2003 would have increased $33.2 million, or 6.3% due to the effect of the
items described above. Station operating expenses, excluding noncash compensation pro forma reconciliation: During fiscal 2003, we sold two radio stations in Denver (see Note 6 in
the accompanying Notes to Consolidated Financial Statements). The following
table reconciles actual station operating expenses, excluding noncash
compensation to pro forma station operating expenses, excluding noncash
compensation: Year ended February 28,2003
    
    2002
    
    $ Change
    
    % ChangeReported station operating expenses,
excluding noncash compensationRadio
    
    $
    138,385
    
    
    $
    149,059
    
    
    $
    (10,674
    )
    
    
    (7.2
    )%Television
    
    
    148,041
    
    
    
    140,325
    
    
    
    7,716
    
    
    
    5.5
    %Publishing
    
    
    62,825
    
    
    
    64,773
    
    
    
    (1,948
    )
    
    
    (3.0
    )%Total
    
    
    349,251
    
    
    
    354,157
    
    
    
    (4,906
    )
    
    
    (1.4
    )%Less: Station operating expenses,
excluding noncash compensation
from stations disposed:Radio
    
    
    (708
    )
    
    
    (8,649
    )Television
    
    
    
    
    
    
    Publishing
    
    
    
    
    
    
    Total
    
    
    (708
    )
    
    
    (8,649
    )Pro forma station operating expenses,
excluding noncash compensationRadio
    
    
    137,677
    
    
    
    140,410
    
    
    
    (2,733
    )
    
    
    (1.9
    )%Television
    
    
    148,041
    
    
    
    140,325
    
    
    
    7,716
    
    
    
    5.5
    %Publishing
    
    
    62,825
    
    
    
    64,773
    
    
    
    (1,948
    )
    
    
    (3.0
    )%Total
    
    $
    348,543
    
    
    $
    345,508
    
    
    $
    3,035
    
    
    
    0.9
    %
 For further disclosure of segment results, see Note 12 to the accompanying
consolidated financial statements. For additional pro forma results, see Note
7 to the accompanying consolidated financial statements. Consistent with
managements review of the company, the pro forma results above include the
impact of all announced or consummated acquisitions and dispositions,
irrespective of materiality. These pro forma results include the impact of the
sale of our two radio stations in Denver and thus differ from the pro forma
financial results reflected in Note 7 to the accompanying consolidated
financial statements, which were prepared in accordance with GAAP. Station operating expenses, excluding noncash compensation discussion: Radio station operating expenses, excluding noncash compensation decreased
principally due to the sale of our two radio stations in Denver in May 2002.
On a pro forma basis (assuming the sale of our two radio stations in Denver
occurred on March 1, 2001), radio operating expenses, excluding noncash
compensation for the year ended February 28, 2003 would have decreased $2.7
million, or 1.9%. Increases in promotional spending for our radio stations
were offset by the implementation of our stock compensation 39




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##### Table of Contents



program in December
2001, whereby the salaries of our full-time employees were generally reduced by
10% and supplemented with a corresponding stock grant that is reflected in
noncash compensation expense. Television station operating expenses, excluding noncash compensation
increased due to higher programming, promotion and sales-related costs,
partially offset by the impact of our stock compensation program. Publishing operating expenses, excluding noncash compensation, decreased
due to cost control measures and our stock compensation program. On a pro forma basis, consolidated station operating expenses, excluding
noncash compensation for the year ended February 28, 2003 would have increased
$3.0 million, or 0.9% due to the effect of the items described above. Noncash compensation expenses: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Noncash compensation expense:Radio
    
    $
    10,151
    
    
    $
    5,505
    
    
    $
    4,646
    
    
    
    84.4
    %Television
    
    
    6,528
    
    
    
    2,345
    
    
    
    4,183
    
    
    
    178.4
    %Publishing
    
    
    2,358
    
    
    
    428
    
    
    
    1,930
    
    
    
    450.9
    %Corporate
    
    
    3,491
    
    
    
    817
    
    
    
    2,674

    
    
    
    327.3
    %Total noncash compensation expense
    
    $
    22,528
    
    
    $
    9,095
    
    
    $
    13,433
    
    
    
    147.7
    %
 Noncash compensation includes compensation expense associated with
restricted common stock issued under employment agreements, common stock issued
to employees at our discretion, and common stock issued to employees pursuant
to our stock compensation program. Our stock compensation program resulted in
noncash compensation expense of approximately $16.5 million for the year ended
February 28, 2003. Our stock compensation program began December 2001;
therefore, only $3.1 million of expense was included in noncash compensation
expense in the year ended February 28, 2002. Corporate expenses, excluding noncash compensation: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Corporate expenses, excluding
noncash compensation
    
    $
    21,359
    
    
    $
    20,283
    
    
    $
    1,076
    
    
    
    5.3
    %
 The increase in corporate expenses, excluding noncash compensation
increased due to higher professional fees associated with financing and other
transactions, and higher health care costs, partially offset by lower cash
compensation due to our stock compensation program. Depreciation and amortization: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Depreciation and amortization:Radio
    
    $
    8,133
    
    
    $
    33,516
    
    
    $
    (25,383
    )
    
    
    (75.7
    )%Television
    
    
    28,453
    
    
    
    53,513
    
    
    
    (25,060
    )
    
    
    (46.8
    )%Publishing
    
    
    1,917
    
    
    
    8,477
    
    
    
    (6,560
    )
    
    
    (77.4
    )%Corporate
    
    
    4,867
    
    
    
    4,752
    
    
    
    115
    
    
    
    2.4
    %Total depreciation and amortization
    
    $
    43,370
    
    
    $
    100,258
    
    
    $
    (56,888
    )
    
    
    (56.7
    )%
 40




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The Radio depreciation and amortization decrease was mainly attributable
to our adoption on March 1, 2002 of SFAS No. 142, Goodwill and Other
Intangible Assets. Adoption of this accounting standard had the impact of
eliminating our amortization expense for goodwill and FCC licenses. For
comparison purposes, for the year ended February 28, 2002, we recorded radio
amortization expense for goodwill and FCC licenses of $24.8 million. The Television depreciation and amortization expense decrease was also
mainly attributable to our adoption of SFAS No. 142, Goodwill and Other
Intangible Assets. For comparison purposes, for the year ended February 28,
2002, we recorded television amortization expense for goodwill and FCC licenses
of $28.0 million. The Publishing depreciation and amortization expense decrease was also
mainly attributable to our adoption of SFAS No. 142, Goodwill and Other
Intangible Assets. For comparison purposes, for the year ended February 28,
2002, we recorded publishing amortization expense for goodwill of $5.4 million. On a consolidated basis, the depreciation and amortization expense
decrease was also mainly attributable to our adoption of SFAS No. 142,
Goodwill and Other Intangible Assets. For comparison purposes, for the year
ended February 28, 2002, we recorded amortization expense for goodwill and FCC
licenses of $58.2 million. Operating income: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Operating income:Radio
    
    $
    98,149
    
    
    $
    64,455
    
    
    $
    33,694
    
    
    
    52.3
    %Television
    
    
    51,730
    
    
    
    8,737
    
    
    
    42,993
    
    
    
    492.1
    %Publishing
    
    
    5,693
    
    
    
    (2,462
    )
    
    
    8,155
    
    
    
    (331.2
    )%Corporate
    
    
    (29,717
    )
    
    
    (26,620
    )
    
    
    (3,097
    )
    
    
    11.6
    %Total operating income
    
    $
    125,855
    
    
    $
    44,110
    
    
    $
    81,745
    
    
    
    185.3
    %
 Radio operating income increased due to our adoption of SFAS No. 142,
Goodwill and Other Intangible Assets. Adoption of this accounting standard
had the impact of eliminating our radio amortization expense for goodwill and
FCC licenses, which totaled $24.8 million in the year ended February 28, 2002.
Fiscal 2002 radio operating income included a $9.1 million impairment loss
related to the sale of a radio station. Television operating income increased due to higher revenues, as
previously described, and our adoption of SFAS No. 142, Goodwill and Other
Intangible Assets. Adoption of this accounting standard had the impact of
eliminating our television amortization expense for goodwill and FCC licenses,
which totaled $28.0 million in the year ended February 28, 2003. Publishing operating income increased primarily due to our adoption of
SFAS No. 142, Goodwill and Other Intangible Assets. Adoption of this
accounting standard had the impact of eliminating our publishing amortization
expense for goodwill, which totaled $5.4 million in the year ended February 28,
2002. On a consolidated basis, operating income increased due to better
operating performance at our stations, especially our television stations, and
our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, each as
described above. Adoption of this accounting standard had the impact of
eliminating our amortization expense for goodwill and FCC licenses, which
totaled $58.2 million in the year ended February 28, 2002. 41




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##### Table of Contents



Interest expense: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Interest expense:Emmis
    
    $
    103,835
    
    
    $
    129,100
    
    
    $
    (25,265
    )
    
    
    (19.6
    )%EOC
    
    $
    78,058
    
    
    $
    104,102
    
    
    $
    (26,044
    )
    
    
    (25.0
    )%
 Emmis interest expense decreased due to a decrease in the interest rates
we pay on amounts outstanding under our credit facility, which is variable rate
debt, repayments of amounts outstanding under our credit facility and
redemption of amounts outstanding under our senior discount notes. The
decreased interest rates reflected both a decrease in the base interest rate
for our credit facility due to a lower overall interest rate environment, and a
decrease in the margin applied to the base rate resulting from the June 2002
credit facility amendment. In the quarter ended May 31, 2002, we repaid
amounts outstanding under our credit facility with the proceeds of our Denver
radio asset sales in May 2002 and a portion of the proceeds from our equity
offering in April 2002, with the remaining portion being used to redeem amounts
outstanding under our senior discount notes in the quarter ended August 31,
2002. We reduced our total debt outstanding by $270.6 million during the year
ended February 28, 2003. EOC interest expense decreased due to a decrease in the interest rates we
pay on amounts outstanding under our credit facility, and repayments of amounts
outstanding under our credit facility as discussed for Emmis above. The
difference between interest expense for Emmis and EOC is due to interest
expense associated with the senior discount notes, for which ECC is the
obligor, and thus it is excluded from the results of operations of EOC. Income (loss) before income taxes, discontinued operations and accounting
change: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Income (loss) before income taxes,
discontinued operations and accounting changes:Emmis
    
    $
    13,808
    
    
    $
    (90,395
    )
    
    $
    104,203
    
    
    
    N/AEOC
    
    $
    48,646
    
    
    $
    (66,383
    )
    
    $
    115,029
    
    
    
    N/A
 Emmis income before income taxes, discontinued operations and accounting
change increased mainly due to: (1) better operating results at our stations,
(2) the elimination of our amortization expense for goodwill and broadcasting
licenses of $58.2 million, (3) a reduction in interest expense as a result of
the factors described above under interest expense, and (4) the gain on sale of
our Denver radio assets of $8.9 million. The prior year loss before income
taxes, extraordinary loss and accounting change included a $9.1 million
impairment loss related to the sale of a radio station. EOC income before income taxes, discontinued operations and accounting
change increased mainly due to: (1) better operating results at our stations,
(2) the elimination of our amortization expense for goodwill and broadcasting
licenses of $58.2 million, (3) a reduction in interest expense as a result of
the factors described above under interest expense, (4) the gain on sale of our
Denver radio assets of $8.9 million, partially offset by a $13.5 million loss
on debt extinguishment relating to the premium paid on the redemption of our
discount notes and the write-off of deferred debt fees associated with debt
redeemed during the year. The prior year loss before income taxes,
extraordinary loss and accounting change included a $9.1 million impairment
loss related to the sale of a radio station. Net loss: For the years ended February 28,2003
    
    2002
    
    $ Change
    
    % Change(As reported, amounts in thousands)Net loss:Emmis
    
    $
    (164,468
    )
    
    $
    (64,108
    )
    
    $
    (100,360
    )
    
    
    (156.5
    )%EOC
    
    $
    (139,565
    )
    
    $
    (47,886
    )
    
    $
    (91,679
    )
    
    
    (191.5
    )%
 42




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##### Table of Contents



Emmis net loss increased mainly due to (1) a $167.4 million impairment
charge, net of a deferred tax benefit, under the cumulative effect of
accounting change as an accumulated transition adjustment attributable to the
adoption on March 1, 2002 of SFAS No. 142, Goodwill and Other Intangible
Assets. and (2) a $13.5 million loss on debt extinguishment relating to the
premium paid on the redemption of our discount notes and the write-off of
deferred debt fees associated with debt repaid during the year, partially
offset by, better operating results, the elimination of amortization expense,
the gain on asset sales and the reduction in interest expense, all described
above, and all net of taxes. EOC net loss increased mainly due to (1) a $167.4 million impairment
charge, net of a deferred tax benefit, under the cumulative effect of
accounting change as an accumulated transition adjustment attributable to the
adoption on March 1, 2002 of SFAS No. 142, Goodwill and Other Intangible
Assets; and (2) a $4.4 million loss on debt extinguishment relating to the
write-off of deferred debt fees associated with debt repaid during the year,
partially offset by better operating results, the elimination of amortization
expense, the gain on asset sales and the reduction in interest expense, all
described above, and all net of taxes. LIQUIDITY AND CAPITAL RESOURCES OFF-BALANCE SHEET FINANCINGS AND LIABILITIES Other than lease commitments, legal contingencies incurred in the normal
course of business, agreements for future barter and program rights not yet
available for broadcast at February 29, 2004, and employment contracts for key
employees, all of which are disclosed in Note 9 to the consolidated financial
statements, the Company does not have any off-balance sheet financings or
liabilities. The Company does not have any majority-owned and controlled
subsidiaries that are not included in the consolidated financial statements,
nor does the Company have any interests in or relationships with any
special-purpose entities that are not reflected in the consolidated financial
statements or disclosed in the Notes to Consolidated Financial Statements. SUMMARY DISCLOSURES ABOUT CONTRACTUAL CASH OBLIGATIONS The following table reflects a summary of our contractual cash obligations
as of February 29, 2004: PAYMENTS DUE BY PERIOD(AMOUNTS IN THOUSANDS)Less than
    
    1 to 3
    
    4 to 5
    
    After 5Contractual Cash Obligations:
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    YearsLong-term debt (1)
    
    $
    1,336,868
    
    
    $
    6,539
    
    
    $
    15,520
    
    
    $
    15,520
    
    
    $
    1,299,289Operating leases
    
    
    67,018
    
    
    
    8,951
    
    
    
    15,742
    
    
    
    13,139
    
    
    
    29,186TV program rights payable (2)
    
    
    53,768
    
    
    
    27,502
    
    
    
    19,915
    
    
    
    5,728
    
    
    
    623Future TV program rights payable (2)
    
    
    89,542
    
    
    
    9,315
    
    
    
    37,984
    
    
    
    26,789
    
    
    
    15,454Radio broadcast agreements
    
    
    5,265
    
    
    
    1,769
    
    
    
    2,394
    
    
    
    1,102
    
    
    
    Employment agreements
    
    
    56,455
    
    
    
    27,224
    
    
    
    24,635
    
    
    
    4,198
    
    
    
    398Total Contractual Cash Obligations
    
    $
    1,608,916
    
    
    $
    81,300
    
    
    $
    116,190
    
    
    $
    66,476
    
    
    $
    1,344,950
  (1)
    
    Includes ECCs senior discount notes accrete to a face value of $286.3
million in March 2006 and become due in March 2011. As of February 29,
2004, the carrying value of the senior discount notes was $223.4 million.
With respect to EOC, the above table would be the same except ECCs senior
discount notes would be excluded. Subsequent to the balance sheet date,
we refinanced substantially all of our long-term debt. The payment
amounts in the above table are based on the terms of the new indebtedness.
See Note 15 to the accompanying consolidated financial statements for
more discussion.  (2)
    
    TV program rights payable represents payments to be made to various
program syndicators and distributors in accordance with current contracts
for the rights to broadcast programs. Future TV program rights payable
represents commitments for program rights not available for broadcast as
of February 29, 2004. 43




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##### Table of Contents



We expect to fund these payments primarily with cash flows from operations, but
we may also issue additional debt or equity or sell assets. SOURCES OF LIQUIDITY Our primary sources of liquidity are cash provided by operations and cash
available through revolving loan borrowings under our credit facility. Our
primary uses of capital have been historically, and are expected to continue to
be, capital expenditures, working capital, debt service and funding
acquisitions and, in the case of ECC, preferred stock dividend requirements.
Since we manage cash on a consolidated basis, any cash needs of a particular
segment or operating entity are met by intercompany transactions. See
Investing Activities below for discussion of specific segment needs. At February 29, 2004, we had cash and cash equivalents of $20.0 million
and net working capital for Emmis and EOC of $53.1 million and $54.3 million,
respectively. At February 28, 2003, we had cash and cash equivalents of $16.1
million and net working capital for Emmis and EOC of $28.0 million and $29.1
million, respectively. The increase in net working capital primarily relates
to the reclassification of the assets of our 75% interest in two radio stations
in Argentina to current as the sale is expected to be completed within ninety
days of the balance sheet date. Operating Activities With respect to Emmis, net cash flows provided by operating activities
were $118.2 million for the year ended February 29, 2004 compared to $95.1
million for the same period of the prior year. With respect to EOC, net cash
flows provided by operating activities were $115.4 million for the year ended
February 29, 2004 compared to net cash flows provided by operating activities
of $94.2 million for the same period of the prior year. The increase in cash
flows provided by operating activities for the year ended February 29, 2004 as
compared to the same period in the prior year is due to our increase in net
revenues less station operating expenses and corporate expenses. Cash flows
provided by operating activities are historically the highest in our third and
fourth fiscal quarters as a significant portion of our accounts receivable
collections is derived from revenues recognized in our second and third fiscal
quarters, which are our highest revenue quarters. Investing Activities Cash flows used in investing activities were $146.4 million for the year
ended February 29, 2004 compared to cash provided by investing activities of
$106.3 million in the same period of the prior year. The decrease is primarily
attributable to our purchase of radio stations in the year ended February 29,
2004 as opposed to our sale of radio stations in the year ended February 28,
2003. Investing activities include capital expenditures and business
acquisitions and dispositions. As discussed in results of operations above and in Note 6 to the
accompanying consolidated financial statements, on July 1, 2003, Emmis
effectively acquired a controlling interest of 50.1% in a partnership that owns
six radio stations in the Austin, Texas metropolitan area for a cash purchase
price of approximately $106.5 million, including transaction costs of $1.0
million, all of which was funded with borrowings under the credit facility.
Emmis sold radio stations KALC-FM and KXPK-FM in Denver, Colorado for $135.5
million in cash in the quarter ended May 31, 2002. The net cash proceeds of
$135.5 million were used to repay outstanding borrowings under the credit
facility. In the years ended February 28 (29), 2002, 2003 and 2004, we had capital
expenditures of $30.1 million, $30.5 million, and $30.2 million, respectively.
These capital expenditures primarily relate to leasehold improvements to
various office and studio facilities, broadcast equipment purchases, tower
upgrades and costs associated with our conversion to digital television. We
anticipate that future requirements for capital expenditures will include
capital expenditures incurred during the ordinary course of business, including
approximately $3.1 million in fiscal 2005 for the conversion to digital
television. Although all but one of our stations as of April 2004 were
broadcasting a digital signal, we will incur approximately $12 million of
additional costs, after fiscal 2005, to upgrade the digital signals of three of
our local stations and six of our satellite stations and to accommodate the
channel changes required as analog licenses are retracted. We expect to fund
such capital expenditures with cash generated from operating activities and
borrowings under our credit facility. 44




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##### Table of Contents



Financing Activities Cash flows provided by financing activities for Emmis and EOC were $32.1
million and $34.9 million, respectively, for the year ended February 29, 2004.
Cash flows used in financing activities for Emmis and EOC were $191.7 million
and $190.8 million, respectively, for the same period of the prior year. As discussed in Note 2 to the accompanying consolidated financial
statements, in April 2002, ECC completed the sale of 4.6 million shares of its
Class A common stock at $26.80 per share resulting in total proceeds of $123.3
million. The net proceeds of $120.2 million were contributed to EOC and 50% of
the net proceeds were used in April 2002 to repay outstanding borrowings under
our credit facility. The remainder was invested, and in July 2002 distributed
to ECC to redeem approximately 22.6% of ECCs $370.0 million, face value,
senior discount notes (see discussion below). As indicated in Investing
Activities above, we paid $106.5 million on July 1, 2003 for a controlling
50.1% interest in six radio stations in Austin, Texas. These funds were
borrowed under our senior credit facility. Also, net proceeds of $135.5
million from the sale of two radio stations in Denver were also used to repay
outstanding indebtedness under the credit facility during the year ended
February 28, 2003. On March 27, 2001, ECC received $202.6 million of proceeds from the
issuance of $370.0 million face value, 12 1/2% senior discount notes due
2011. The net proceeds of $190.6 million, less $93.0 million held in escrow at
ECC, were distributed to EOC and used to fund the acquisition of the Phoenix
radio stations. In June 2001, upon completion of the Companys reorganization
to form EOC and make ECC a holding company, the proceeds held in escrow were
released and used to reduce outstanding borrowings under the credit facility. As of February 29, 2004, EOC had $1,039.8 million of corporate
indebtedness outstanding under our credit facility ($739.8 million) and senior
subordinated notes ($300.0 million), and other indebtedness ($10.8 million).
As of February 29, 2004, total indebtedness outstanding for Emmis included all
of EOCs indebtedness as well as $223.4 million of ECCs senior discount notes.
ECC also had $143.8 million of our convertible preferred stock outstanding.
All outstanding amounts under our credit facility bear interest, at our option,
at a rate equal to LIBOR or an alternative Base Rate plus a margin. As of
February 29, 2004, our weighted average borrowing rate under our credit
facility was approximately 3.4% and our overall weighted average borrowing
rate, after taking into account amounts outstanding under our senior
subordinated notes and senior discount notes, was approximately 6.1%. The
overall weighted average borrowing rate for EOC, which would exclude the senior
discount notes, was approximately 4.8%. The debt service requirements of EOC over the next twelve month period
(net of interest under our credit facility) are expected to be $27.5 million,
after giving effect to the refinancing of the credit facility and senior
subordinated notes in May 2004 (see below). This amount is comprised of $25.8
million for interest under our new senior subordinated notes and $1.7 million
for repayment of term notes under our new credit facility. Although interest
will be paid under the credit facility at least every three months, the amount
of interest is not presently determinable given that the credit facility bears
interest at variable rates. ECC has no additional debt service requirements in
the next twelve-month period since interest on its senior discount notes
accretes into the principal balance of the notes until March 2006. However,
ECC has preferred stock dividend requirements of $9.0 million for the next
twelve-month period. The terms of ECCs preferred stock provide for a quarterly
dividend payment of $.78125 per share on each January 15, April 15, July 15 and
October 15. While Emmis had sufficient liquidity to declare and pay the
dividends as they become due, it was not permitted to do so for the April 15,
2002 payment because Emmis leverage ratio under the senior discount notes
indenture exceeded 8:1 and its leverage ratio under the senior subordinated
notes indenture exceeded 7:1. ECCs board of directors set a record date for
the April 15, 2002 payment, but did not declare the dividend. Instead, a
wholly-owned, unrestricted subsidiary of EOC made a payment of $.78125 per
share to each preferred shareholder of record. This subsidiary was permitted
under the senior discount notes and senior subordinated notes indentures to
make the payment to the preferred shareholders. Currently, Emmis meets its
leverage ratio requirements under both the senior discount notes indenture and
the senior subordinated notes indenture. On July 2, 2002, ECCs board of
directors declared the April 15, 2002 dividend, as well as dividends payable
October 15, 2001 and January 15, 2002, and deemed the obligation to pay each
dividend to have been discharged by the subsidiarys prior payment. At April 23, 2004, we had $170.5 million available under our credit
facility, net of $2.5 million in outstanding letters of credit. As part of our
business strategy, we continually evaluate potential acquisitions of radio and
television stations, as well as publishing properties. If we elect to take
advantage of future acquisition opportunities, we may incur additional debt or
issue additional equity or debt securities, depending on market conditions and
other factors. In addition, Emmis has the option, but not the obligation, to
purchase our minority partners entire interest in six radio stations in
Austin, Texas after a period of approximately five years based on an
18-multiple of trailing 12-month cash flow. 45




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On May 10, 2004, we refinanced substantially all of our long-term debt.
EOC received $368.4 million in proceeds from the issuance of its
6 7/8% senior
subordinated notes due 2012 in the principal amount of $375 million, net of the
initial purchasers discount of $6.6 million, and EOC borrowed $978.5 million
under a new $1.025 billion senior credit facility. The gross proceeds from
these transactions and $2.8 million of cash on hand were used to (i) repay the
remaining principal indebtedness under EOCs former credit facility of
approximately $744.3 million, (ii) repurchase $295.1 million aggregate
principal amount of EOCs 8 1/8% senior subordinated notes due 2009, (iii)
repurchase $227.7 million aggregate accreted value of our 12 1/2% senior
discount notes due 2011, (iv) pay $4.6 million in accrued interest, (v) pay an
estimated $12.6 million in transaction fees and (vi) pay $72.0 million in
prepayment and redemption fees. In connection with the transactions, we
incurred an estimated loss of $97.1 million, consisting of (i) $72.0 million
for the prepayment and redemption fees, (ii) $24.3 million for the write-off of
deferred debt costs associated with the retired debt, and (iii) an estimated
$0.8 million in expenses related to the repurchase of indebtedness existing at
February 29, 2004. On May 10, 2004, EOC gave notice to redeem the remaining $4.9 million of
principal amount of its 8 1/8% senior subordinated notes due 2009. These notes
will be redeemed at 104.063% plus accrued and unpaid interest and will be
financed with additional borrowings on our new credit facility. The
transaction is expected to close on June 10, 2004 and will result in an
additional loss of $0.3 million. The new senior credit facility provides for total borrowings of up to
$1.025 billion, including (i) a $675 million term loan and (ii) a $350 million
revolver, of which $100.0 million may be used for letters of credit. The new
senior credit facility also provides for the ability to have incremental
facilities of up to $675.0 million, of which up to $350.0 million may be
allocated to a revolver. EOC issued $375.0 million aggregate principal amount
of its 6 7/8% senior subordinated notes. The notes have no sinking fund
requirement and are due in full on May 15, 2012. Interest is payable
semi-annually on May 15 and November 15 of each year. See Note 15 to the
accompanying consolidated financial statements for more discussion. Emmis has explored the possibility of separating its radio and television
businesses into two publicly traded companies. Emmis continues to monitor the
operating environment and evaluate the possibility of effecting a separation.
Emmis would consider the separation in connection with a significant
acquisition of either radio or television properties. However, a potential
separation is not dependent upon the occurrence of such an event. INTANGIBLES At February 29, 2004, approximately 81% of our total assets consisted of
intangible assets, such as FCC broadcast licenses, goodwill, subscription lists
and similar assets, the value of which depends significantly upon the
operational results of our businesses. In the case of our radio and television
stations, we would not be able to operate the properties without the related
FCC license for each property. FCC licenses are renewed every eight years;
consequently, we continually monitor the activities of our stations for
compliance with all regulatory requirements. Historically, all of our licenses
have been renewed at the end of their respective eight-year periods, and we
expect that all of our FCC licenses will continue to be renewed in the future. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses financial accounting and reporting for business combinations
and supersedes Accounting Principle Board (APB) Opinion No. 16, Business
Combinations and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
SFAS No. 141 also changes the criteria to recognize intangible assets apart
from goodwill. The Company adopted this Statement on July 1, 2001. The
Company has historically used the purchase method to account for all business
combinations and the adoption of this Statement did not have a material impact
on the Companys financial position, cash flows or results of operations. In June 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets that requires companies to cease amortizing goodwill and certain other
indefinite-lived intangible assets, including broadcast licenses. Under SFAS
142, goodwill and certain indefinite-lived intangibles will not be amortized
into results of operations, but instead the recorded value of certain
indefinite-lived intangibles will be tested for impairment at least annually
with impairment being measured as the excess of the assets carrying amount
over its fair value. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives and 46




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measured for impairment in accordance with SFAS 121. In connection with
the adoption of SFAS 142 effective March 1, 2002, we recorded an impairment
loss of $167.4 million, net of tax, reflected as the cumulative effect of an
accounting change in the accompanying consolidated statements of operations.
The adoption of this accounting standard reduced our amortization of goodwill
and intangibles by approximately $61.0 million in the year ended February 28,
2003. However, our future impairment reviews may result in additional periodic
write-downs, such as our $12.4 million impairment loss in fiscal 2004 (see Note
8 to the accompanying consolidated financial statements). In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations that applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. The Company adopted this Statement on March 1, 2003 and it did not
have a material impact on the Companys financial position, cash flows or
results of operations. Effective March 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets that addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it removes
certain assets such as deferred tax assets, goodwill and intangible assets not
being amortized from its scope and retains the requirements of SFAS No. 121
regarding the recognition of impairment losses on other long-lived assets held
for use. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring events and Transactions for the disposal of a segment
of a business. However, SFAS No. 144 retains the requirement in Opinion 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Adoption of
this statement did not have a material impact on the Companys financial
position, cash flows or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 supersedes Emerging
Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, not at the date of an entitys commitment to an exit or
disposal plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows. As of December 2002, we adopted SFAS No. 148, Accounting for Stock-Based
Compensation-Transaction and Disclosure, an Amendment of SFAS No. 123. SFAS
No. 148 revises the methods permitted by SFAS No. 123 of measuring compensation
expense for stock-based employee compensation plans. We use the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25, as
permitted under SFAS No. 123. Therefore, this change did not have a material
effect on our financial statements. SFAS No. 148 requires us to disclose pro
forma information related to stock-based compensation, in accordance with SFAS
No. 123, on a quarterly basis in addition to the current annual basis
disclosure. We reported the pro forma information on an interim basis
beginning with our May 31, 2003 Form 10-Q. On January 1, 2003, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). FIN 46 addresses consolidation of
business enterprises of variable interest entities. FIN 46 is effective
immediately for all variable interest entities created after January 31, 2003
and for the first fiscal year or interim period ending after March 15, 2004 for
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company has not acquired any
variable interest entities subsequent to January 31, 2003 and has no interests
in structures that are commonly referred to as special-purpose entities. The
Company will therefore adopt FIN 46 in its interim report for the quarter
ending May 31, 2004. The Company does not expect this pronouncement will have
a material impact on its future consolidated results of operations or financial
position. On March 1, 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45).
FIN 45 applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on changes
in an underlying obligation that is related to an asset, liability, or an
equity security of the guaranteed party. FIN 45s disclosure requirements were
effective for financial statements of interim or annual periods ending after
December 15, 2002. FIN 45s initial recognition and initial measurement
provisions were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The Company adopted the disclosure requirements of FIN 45 for its 47




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fiscal 2003 annual report. Adoption of the initial recognition and
initial measurement requirements of FIN 45 did not materially impact the
Companys financial position, results of operations or applicable disclosures. On March 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 145, Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No.
13, and Technical Corrections(SFAS No. 145). SFAS No. 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, and SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting
for Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This pronouncement
requires gains and losses related to debt transactions to be classified in
income from continuing operations. Although we did not have any gains or
losses from debt transactions in the current year, ECC had recorded an
extraordinary loss of $11.1 million, net of tax, in the year ended February 28,
2003, and EOC had recorded an extraordinary loss of $2.9 million, net of tax,
in the year ended February 28, 2003, in connection with debt extinguishments.
Accordingly, we retroactively reclassified the losses of $13.5 million for ECC
and $4.4 million for EOC and the related income tax effects to include them in
income from continuing operations. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity(SFAS No.
150). SFAS No. 150 requires financial instruments within its scope to be
classified as a liability (or an asset in some circumstances). Many of these
instruments were previously classified as equity. The provisions of SFAS 150
regarding limited life subsidiaries have been deferred indefinitely. These
provisions applied to one of our subsidiaries. The settlement value of the
minority partners interest in our subsidiary was not material at February 29,
2004. However, the subsidiary is held for sale as of February 29, 2004. SEASONALITY Our results of operations are usually subject to seasonal fluctuations,
which result in higher second and third quarter revenues and operating income.
For our radio operations, this seasonality is due to the younger demographic
composition of many of our stations. Advertisers increase spending during the
summer months to target these listeners. In addition, advertisers generally
increase spending across all of our segments during the months of October and
November, which are part of our third quarter, in anticipation of the holiday
season. Finally, particularly in our television operations, revenues from
political advertising tend to be higher in our odd-numbered fiscal years. INFLATION The impact of inflation on our 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 our operating results, particularly
since our senior bank debt is entirely floating rate debt. RISK FACTORS The risk factors listed below, in addition to those set forth elsewhere in
this report, could affect the business and future results of the Company. Past
financial performance may not be a reliable indicator of future performance and
historical trends should not be used to anticipate results or trends in future
periods. Decreased spending by advertisers or a decrease in our market ratings or market
share can adversely affect our advertising revenues. We believe that advertising is a discretionary business expense. Spending
on advertising tends to decline disproportionately during an economic recession
or downturn as compared to other types of business spending. Consequently, the
recent downturn in the United States economy had an adverse effect on our
advertising revenue and, therefore, our results of operations. A recession or
another downturn in the United States economy or in the economy of any
individual geographic market, particularly a major market such as Los Angeles,
New York or Orlando, in which we own and operate sizeable stations, could have
a significant effect on us. The overall weakness of the United States economy
resulted in an economic downturn in New York, and the terrorist attacks of
September 11, 2001 exacerbated the downturn. The slow New York economy had an
adverse effect on the revenues of our New York stations in the fiscal 48




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years ended February 28, 2002 and 2003. The New York stations accounted
for approximately 12% of our net revenue for the year ended February 29, 2004. Even in the absence of a general recession or downturn in the economy, an
individual business sector that tends to spend more on advertising than other
sectors might be forced to reduce its advertising expenditures if that sector
experiences a downturn. If that sectors spending represents a significant
portion of our advertising revenues, any reduction in its advertising
expenditures may affect our revenue. In addition, since political advertising at times accounts for a
significant portion of our advertising revenues, normal election cycles may
cause our revenues to fluctuate. Changes in government limitations on spending
or fundraising for campaign advertisements may also have a negative effect on
our earnings derived from political advertising. We may lose audience share and advertising revenue to competing television and
radio stations or other types of media competitors. We operate in highly competitive industries. Our television and radio
stations compete for audiences and advertising revenue with other television
and radio stations and station groups, as well as with other media. Shifts in
population, demographics, audience tastes and other factors beyond our control
could cause us to lose market share. Any adverse change in a particular market,
or adverse change in the relative market positions of the stations located in a
particular market, could have a material adverse effect on our revenue or
ratings, could require increased promotion or other expenses in that market,
and could adversely affect our revenue in other markets.
Other television and radio broadcasting companies may enter the markets in
which we operate or may operate in the future. These companies may be larger
and have more financial resources than we have. Our television and radio
stations may not be able to maintain or increase their current audience ratings
and advertising revenue in the face of such competition. In addition, from time to time, other stations may change their format or
programming, a new station may adopt a format to compete directly with our
stations for audiences and advertisers, or stations might engage in aggressive
promotional campaigns. These tactics could result in lower ratings and
advertising revenue or increased promotion and other expenses and,
consequently, lower earnings and cash flow for us. Any failure by us to
respond, or to respond as quickly as our competitors, could have an adverse
effect on our business and financial performance. Because of the competitive factors we face, we cannot assure you that we
will be able to maintain or increase our current audience ratings and
advertising revenue. We must respond to the rapid changes in technology, services and standards that
characterize our industry in order to remain competitive. The television and radio broadcasting industries are subject to rapid
technological change, evolving industry standards and the emergence of
competition from new media technologies and services. We cannot assure you that
we will have the resources to acquire new technologies or to introduce new
services that could compete with these new technologies. Various new media
technologies and services are being developed or introduced, including:  -
    
    satellite-delivered digital audio radio service, which has resulted
in the introduction of new subscriber-based satellite radio services
with numerous niche formats;-
    
    audio programming by cable systems, direct-broadcast satellite
systems, personal communications systems, Internet content providers and
other digital audio broadcast formats;-
    
    in-band on-channel digital radio, which provides multi-channel,
multi-format digital radio services in the same bandwidth currently
occupied by traditional AM and FM radio services;-
    
    low-power FM radio, which could result in additional FM radio
broadcast outlets; and-
    
    digital video recorders that allow viewers to digitally record and
play back television programming, which may decrease viewership of
commercials and, as a result, lower our advertising revenues. 49




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In addition, cable providers and direct broadcast satellite companies are
developing new techniques that allow them to transmit more channels on their
existing equipment to highly targeted audiences, reducing the cost of creating
channels and potentially leading to the division of the television industry
into ever more specialized niche markets. Competitors who target programming to
such sharply defined markets may gain an advantage over us for television
advertising revenues. Lowering the cost of creating channels may also encourage
new competitors to enter our markets and compete with us for advertising
revenue. We cannot predict the effect, if any, that competition arising from new
technologies or regulatory change may have on the television and radio
broadcasting industries or on our financial condition and results of
operations. Our substantial indebtedness could adversely affect our financial health. We have a significant amount of indebtedness. At February 29, 2004, our
total indebtedness was approximately $1,274.0 million, and our shareholders
equity was approximately $748.9 million. Our substantial indebtedness could
have important consequences to you. For example, it could:  -
    
    make it more difficult for us to satisfy our obligations with respect to our indebtedness;-
    
    increase our vulnerability to general adverse economic and industry conditions;-
    
    require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;-
    
    result in higher interest expense in the event of increases in
interest rates because some of our debt is at variable rates of
interest;-
    
    limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;-
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and-
    
    limit, along with the financial and other restrictive covenants in
our credit facility and our other debt instruments, our ability to
borrow additional funds. Failing to comply with those covenants could
result in an event of default, which if not cured or waived, could have
a material adverse effect on our businesses. The terms of our indebtedness and the indebtedness of our direct and indirect
subsidiaries may restrict our current and future operations, particularly our
ability to respond to changes in market conditions or to take some actions. Our credit facility and our bond indentures impose significant operating
and financial restrictions on us. These restrictions significantly limit or
prohibit, among other things, our ability and the ability of our subsidiaries
to incur additional indebtedness, issue preferred stock, incur liens, pay
dividends, enter into asset sale transactions, merge or consolidate with
another company, dispose of all or substantially all of our assets or make
certain other payments or investments. These restrictions currently limit our ability to grow our business
through acquisitions and could limit our ability to respond to market
conditions or meet extraordinary capital needs. They also could restrict our
corporate activities in other ways. These restrictions could adversely affect
our ability to finance our future operations or capital needs. To service our indebtedness and other obligations, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control. Our ability to make payments on and to refinance our indebtedness, to pay
dividends and to fund capital expenditures will depend on our ability to
generate cash in the future. This ability to generate cash, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Our businesses might
not generate sufficient cash flow from operations. We might not be able to
complete future offerings, and future borrowings might not be available to us
in an amount sufficient to enable us to pay our indebtedness or to fund our
other liquidity needs. We may need to refinance all or a portion of our 50




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indebtedness on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness on commercially reasonable terms or
at all. Our operating results have been and may again be adversely affected by acts of
war and terrorism. Acts of war and terrorism against the United States, and the countrys
response to such acts, may negatively affect the U.S. advertising market, which
could cause our advertising revenues to decline due to advertising
cancellations, delays or defaults in payment for advertising time, and other
factors. In addition, these events may have other negative effects on our
business, the nature and duration of which we cannot predict. For example, the war in Iraq caused the networks to pre-empt regularly
scheduled programming in the last month of the first quarter of fiscal 2003 and
caused several advertisers to cancel their advertising spots, resulting in a
loss of revenue in the first quarter of fiscal 2003. After the September 11,
2001 terrorist attacks, we decided that the public interest would be best
served by the presentation of continuous commercial-free coverage of the
unfolding events on our stations. This temporary policy had a material adverse
effect on our advertising revenues and operating results for the month of
September 2001. Future events like those of September 11, 2001 or the war in
Iraq may cause us to adopt similar policies, which could have a material
adverse effect on our advertising revenues and operating results. Additionally, the attacks on the World Trade Center on September 11, 2001
resulted in the destruction of the transmitter facilities that were located
there. Although we had no transmitter facilities located at the World Trade
Center, broadcasters that had facilities located in the destroyed buildings
experienced temporary disruptions in their ability to broadcast. Since we tend
to locate transmission facilities for stations serving urban areas on tall
buildings or other significant structures, such as the Empire State Building in
New York, further terrorist attacks or other disasters could cause similar
disruptions in our broadcasts in the areas affected. If these disruptions
occur, we may not be able to locate adequate replacement facilities in a
cost-effective or timely manner or at all. Failure to remedy disruptions caused
by terrorist attacks or other disasters and any resulting degradation in signal
coverage could have a material adverse effect on our business and results of
operations. Television programming costs may negatively impact our operating results. One of our most significant operating cost components is television
programming. We may be exposed in the future to increased programming costs
which may adversely affect our operating results. Acquisitions of program
rights are usually made two or three years in advance and may require
multi-year commitments, making it difficult to accurately predict how a program
will perform. In some instances, programs must be replaced before their costs
have been fully amortized, resulting in write-offs that increase station
operating costs. In addition, we have recently experienced increased
competition to acquire programming, primarily due to the increased acquisition
of syndicated programming by cable operators. Our television stations depend on affiliations with major networks that may be
canceled or revoked by the networks. All of our television stations are affiliated with a network. Under the
affiliation agreements, the networks possess, under certain circumstances, the
right to terminate the agreement without giving the station enough advance
notice to implement a contingency plan. The affiliation agreements may not
remain in place, and the networks may not continue to provide programming to
affiliates on the same basis that currently exists. The non-renewal or
termination of any of our stations network affiliation agreements could have a
material adverse effect on our operations. The success of our television stations depends on the success of the network
each station carries. The ratings of each of the television networks, which is based in large
part on their programming, vary from year to year, and this variation can
significantly impact a stations revenues. The future success of any network or
its programming is unpredictable. 51




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To continue to grow our business, we will require significant additional
capital. The continued development, growth and operation of our businesses will
require substantial capital. In particular, additional acquisitions will
require large amounts of capital. We intend to fund our growth, including
acquisitions, if any, with cash generated from operations, borrowings under our
new credit facility, and proceeds from future issuances of debt and equity both
public and private. Our ability to raise additional debt or equity financing is
subject to market conditions, our financial condition and other factors. If we
cannot obtain financing on acceptable terms when needed, our results of
operations and financial condition could be adversely impacted. Our ability to grow through acquisitions may be limited by competition for
suitable properties or other factors we cannot control. We intend to selectively pursue acquisitions of radio and television
stations and publishing properties, when appropriate, in order to grow. To be
successful with this strategy, we must be effective at quickly evaluating
markets, obtaining financing to buy stations and publishing properties on
satisfactory terms and obtaining the necessary regulatory approvals, including,
as discussed below, approvals of the FCC and the Department of Justice. We also
must accomplish these tasks at reasonable costs. The radio industry in
particular has rapidly consolidated. In general, we compete with many other
buyers for radio and television stations as well as publishing properties.
These other buyers may be larger and have more resources. We cannot predict
whether we will be successful in buying stations or publishing properties, or
whether we will be successful with any station or publishing property we
acquire. Our strategy is generally to buy underperforming properties and use
our experience to improve their performance. Thus, the benefits resulting from
the properties we buy may not manifest themselves immediately, and we may need
to pay large initial costs for these improvements. If we are not able to obtain regulatory approval for future acquisitions, our
growth may be impaired. Although part of our growth strategy is the acquisition of additional
radio and television stations, we may not be able to complete all the
acquisitions that we agree to make. Station acquisitions are subject to the
approval of the FCC and, potentially, other regulatory authorities. Also, the
FCC sometimes undertakes review of transactions to determine whether they would
result in excessive concentration, even where the transaction complies with the
numerical ownership limits. Specifically, the staff has had a policy of
''flagging for closer scrutiny the anticompetitive impact of any transactions
that will put one owner in a position to earn 50% or more of the markets radio
advertising revenues or will result in the two largest owners receiving 70% or
more of those revenues. While the FCC has noted ''flagging in public notices
in the past, current transactions may be ''flagged internally by the FCC
without public notice. As discussed below, the FCCs new rules with respect to
media ownership are under court review. We cannot predict how the FCCs
approval process will change based on the outcome of the FCCs media ownership
proceeding or whether such changes would adversely impact us. Additionally, since the passage of the Telecommunications Act of 1996, the
U.S. Department of Justice has become more involved in reviewing proposed
acquisitions of radio stations and radio station networks. The Justice
Department is particularly concerned when the proposed buyer already owns one
or more radio stations in the market of the station it is seeking to buy.
Recently, the Justice Department has challenged a number of radio broadcasting
transactions. Some of those challenges ultimately resulted in consent decrees
requiring, among other things, divestitures of certain stations. In general,
the Justice Department has more closely scrutinized radio broadcasting
acquisitions that result in local market shares in excess of 40% of radio
advertising revenue. We may not be able to integrate acquired stations successfully, which could
affect our financial performance. Our ability to operate our company effectively depends, in part, on our
success in integrating acquired stations into our operations. These efforts may
impose significant strains on our management and financial resources. The
pursuit and integration of acquired stations will require substantial attention
from our management, and will limit the amount of time they can devote to other
important matters. Successful integration of acquired stations will depend
primarily on our ability to manage our combined operations. If we fail to
successfully integrate acquired stations or manage our growth or if we
encounter unexpected difficulties during expansion, it could have a negative
impact on the performance of acquired stations as well as on our company as a
whole. 52




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A recently adopted change in accounting principles that affects the accounting
treatment of goodwill and FCC licenses could cause future losses due to asset
impairment. In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 ''Goodwill and Other Intangible Assets
that requires companies to cease amortizing goodwill and certain other
indefinite-lived intangible assets, including broadcast licenses. Under SFAS
142, goodwill and some indefinite-lived intangibles will not be amortized into
results of operations, but instead will be tested for impairment at least
annually, with impairment being measured as the excess of the carrying value of
the goodwill or intangible over its fair value. In addition, goodwill and
intangible assets will be tested more often for impairment as circumstances
warrant. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives and will be measured for impairment in
accordance with SFAS 144, ''Accounting for the Impairment or Disposal of
Long-Lived Assets. After initial adoption, any impairment losses under SFAS
142 or 144 will be recorded as operating expenses. In connection with the
adoption of SFAS 142 effective March 1, 2002, we recorded an impairment loss of
$167.4 million, net of tax, reflected as the cumulative effect of an accounting
change in the accompanying consolidated statements of operations. The adoption
of this accounting standard reduced our amortization of goodwill and
intangibles by approximately $61.0 million in the year ended February 28, 2003.
We also incurred a $12.4 million impairment loss in the fiscal year ended
February 29, 2004 as a result of our annual SFAS 142 review. Our future
impairment reviews could result in additional write-downs. One shareholder controls a majority of the voting power of our common stock,
and his interest may conflict with yours. As of April 30, 2004, our Chairman of the Board of Directors, Chief
Executive Officer and President, Jeffrey H. Smulyan, beneficially owned shares
representing approximately 52% of the outstanding combined voting power of all
classes of our common stock, as calculated pursuant to Rule 13D-1 of the
Exchange Act. He therefore is in a position to exercise a majority of the
outstanding combined voting power of all classes of our common stock.
Accordingly, Mr. Smulyan is able to control the outcome of most matters
submitted to a vote of our shareholders, including the election of a majority
of the directors. The FCC has recently begun more vigorous enforcement of its indecency rules
against the broadcast industry, which could have a material adverse effect on
our business. The FCCs rules prohibit the broadcast of obscene material at any time and
indecent material between the hours of 6 am and 10 pm. Broadcasters risk
violating the prohibition on the broadcast of indecent material because of the
FCCs broad definition of such material, coupled with the spontaneity of live
programming. Recently, the FCC has begun more vigorous enforcement of its indecency
rules against the broadcasting industry as a whole. Two Congressional
committees have recently conducted hearings relating to indecency. Legislation
has also been introduced in Congress that would increase the penalties for
broadcasting indecent programming, and depending on the number of violations
engaged in, would automatically subject broadcasters to license revocation,
renewal or qualifications proceedings in the event that they broadcast indecent
material. The FCC has indicated that it is stepping up its enforcement
activities as they apply to indecency, and has threatened to initiate license
revocation proceedings against broadcast licensees for future ''serious
indecency violations. The FCC has found on a number of occasions recently,
chiefly with regard to radio stations, that the content of broadcasts has
contained indecent material. The FCC issued fines to the offending licensees.
Moreover, the FCC has recently begun imposing separate fines for each allegedly
indecent ''utterance, in contrast with its previous policy, which generally
considered all indecent words or phrases within a given program as constituting
a single violation. The FCC has imposed fines totaling $42,000 for six allegedly-indecent
broadcasts at our Chicago station; we have filed administrative appeals of four
of those fines, totaling $28,000, and are currently considering what action, if
any, to take regarding the remaining fines, as to which the administrative
appeal process has recently concluded. Further, the FCC has sent letters of
inquiry to us relating to five additional broadcasts on the Chicago station and
five broadcasts on one of our St. Louis stations. These inquiries could result
in additional fines or other enforcement action. In addition, the FCC has
dismissed a number of complaints alleging indecent broadcasts at the Chicago
station, but the complainant has asked the FCC to reinstate eleven of them.
There may also be additional complaints of which we are currently unaware
alleging indecent broadcasts by our stations. The foregoing inquiries and
complaints could result in additional fines or other enforcement action. The
FCC has so far assessed fines against us of $7,000 for each alleged 53




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indecency violation. During the period since those fines were imposed the
Commission has frequently imposed fines against broadcasters at the statutory
maximum of $27,500 per violation, particularly where there have been prior
violations. Accordingly, any additional fines imposed on us could be at that
level. Moreover, five of the broadcasts which are
under inquiry by the FCC are sufficiently recent that they could be subject to
the ''per utterance approach described above, which could increase the total
amount of any fines imposed. If the FCC were to bring enforcement proceedings against any of our
television or radio stations, our results of operations could be adversely
affected. Further, the alleged violations described above, along with any
additional violations that may be asserted by the FCC in the future, could have
a material adverse effect on our ability to obtain renewal of the Chicago and
St. Louis broadcast licenses, for which we must file license renewal
applications this year. The Communications Act provides that the FCC must renew
a broadcast license if (i) the station involved has served the ''public
interest, convenience and necessity and (ii) there have been no ''serious
violations of the Act or FCC rules, and no ''other violations of the Act or
rules which ''taken together, would constitute a pattern of abuse. If the
Commission were to determine that the alleged violations described above fall
within either or both of those definitions, the agency could (x) grant one or
both license renewal applications with burdensome conditions, such as
requirements for periodic reports, (y) grant one or both applications for less
than the full eight-year term in order to allow an early reassessment of the
station or stations, or (z) order an evidentiary hearing before an
administrative law judge to determine whether renewal of either or both
licenses should be denied. If a stations license renewal were ultimately
denied, the station would be required to cease operation permanently.
As a result of these developments, we have implemented measures to reduce the
risk of broadcasting indecent material in violation of the FCCs rules. These
and other future modifications to our programming to reduce the risk of
indecency violations could have an adverse effect on our competitive position. Our need to comply with comprehensive, complex and sometimes unpredictable
federal regulations could have an adverse effect on our businesses. We are dependent on licenses from the FCC, which regulates the radio and
television broadcasting industries in the United States. The radio and
television broadcasting industries in the United States are subject to
extensive and changing regulation by the FCC. Among other things, the FCC is
responsible for the following:  -
    
    assigning frequency bands for broadcasting;-
    
    determining the particular frequencies, locations and operating power of stations;-
    
    issuing, renewing, revoking and modifying station licenses;-
    
    determining whether to approve changes in ownership or control of station licenses;-
    
    regulating equipment used by stations; and-
    
    adopting and implementing regulations and policies that directly
affect the ownership, operation, programming and employment practices of
stations. The FCC has the power to impose penalties for violation of its rules or
the applicable statutes. While in the vast majority of cases licenses are
renewed by the FCC, we cannot be sure that any of our United States stations
licenses will be renewed at their expiration date. Even if our licenses are
renewed, we cannot be sure that the FCC will not impose conditions or
qualifications that could cause problems in our businesses. The FCC regulations and policies also affect our growth strategy because
the FCC has specific regulations and policies about the number of stations,
including radio and television stations, and daily newspapers that an entity
may own in any geographic area. As a result of these rules, we may not be able
to acquire more properties in some markets or on the other hand, we may have to
sell some of our properties in a particular market. For example, as a result of
our acquisition of Lee Enterprises in October 2000, we own two ''top 4 rated
television stations in the Honolulu market, which is not permitted by FCC
rules. As a result, we have been operating both stations under various
temporary waivers to the FCCs ownership rules. The FCC has adopted new local
television ownership rules which continue to prohibit the ownership of two
top-rated television stations in a single market, and in so doing the FCC
ordered companies with temporary waivers (including us) to file divesting
applications to achieve compliance. However, the implementation of the new
rules has been appealed in Federal court by a number of broadcasters (including
us) and other groups, and the court has issued 54




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an indefinite stay, which has prevented the new rules from becoming
effective. We cannot predict when or how the court will rule on the appeal.
When and if the stay is lifted, we will likely have to either file a divesting
application or seek a permanent waiver of the new rules. If we are required to
divest a station on short notice, we may not realize the full value of that
station. As a result of a recent transaction, Jeffrey H. Smulyans voting interest
in the Company has fallen below 50% for FCC control purposes. The FCC does not
take into account stock options exercisable within 60 days as does the Exchange
Act Rule 13D-1. As a result, the Company is no longer eligible for an
exemption from the FCCs ownership attribution rules. Therefore, the media
interests of minority shareholders who have voting interests in the company of
5% or more20% or more in the case of certain categories of institutional
investorswill be attributed to us. The FCC rules provide for a one-year
grace period for resolving ownership conflicts resulting from loss of the
exemption. Attribution of minority shareholders media interests to us could
materially and adversely affect our business as a result of the increased cost
of regulatory compliance and monitoring activities, the increased obstacles to
our growth strategy or the mandatory divestment of our properties. Further,
though we obtained FCC approval for the recent reduction in Mr. Smulyans
voting interest, we may need to seek additional approval prior to further
material reductions in his interest. FCC regulations also limit the ability of non-U.S. persons to own our
capital stock and to participate in our affairs, which could limit our ability
to raise equity. Our articles of incorporation contain provisions which place
restrictions on the ownership, voting and transfer of our capital stock in
accordance with the law. A 2002 court decision invalidated an FCC rule that prohibited common
ownership of a broadcast station and a cable television system in the same
market. The elimination of that restriction could increase the amount of
competition that our television stations face. Finally, a number of federal
rules governing broadcasting have changed significantly in recent years and
additional changes may occur, particularly with respect to the rules governing
digital television, digital audio broadcasting, satellite radio services,
multiple ownership and attribution. We cannot predict the effect that these
regulatory changes may ultimately have on our operations. Any changes in current FCC ownership regulations may negatively impact our
ability to compete or otherwise harm our business operations. In June of 2003, the FCC substantially modified its rules governing
ownership of broadcast stations. The new rules (i) increase to 45% the national
''cap on the number of television stations that can be owned nationwide by an
entity or affiliated group, (ii) generally permit common ownership of two
television stations within a given market (and three stations in some of the
largest markets), (iii) allow, for the first time in many years, common
ownership of broadcast stations and daily newspapers in most markets, (iv)
generally allow common ownership of television and radio stations within a
given market, and (v) change the definition of ''market for purposes of the
rules restricting the number of radio stations that may be commonly owned
within a given market. The new rules were appealed in federal court, and in
September of 2003, the court stayed the effectiveness of the new rules, pending
a decision in the appeal. As a result of the stay, the former ownership rules
were reinstated. We cannot predict the outcome of the appeal. Recent federal legislation set the national TV ownership ''cap at 39%,
superseding the increase to 45% adopted by the FCC. This represents an increase
from the 35% limit previously in place, and its immediate effect is to allow on
a permanent basis the existing levels of station ownership by the Fox and CBS
networks, which previously had been allowed only as a result of a temporary
waiver of the 35% limit. This may give Fox and CBS a competitive advantage over
us, since they have much greater financial and other resources than we have. We cannot predict the impact of these developments on our business. In
particular, we cannot predict the outcome of FCCs media ownership proceeding
or its effect on our ability to acquire broadcast stations in the future or to
continue to own and freely transfer stations that we have already acquired. In 2003, we acquired a controlling interest in five FM stations and one AM
station in the Austin, Texas market. Under the method of defining radio markets
contained in the new ownership rules, it appears that we would be permitted to
own or control only four FM stations in the Austin market (ownership of one AM
station would continue to be allowed). The new rules do not require divestiture
of existing non-conforming station combinations, but do provide that such
clusters may be transferred only to defined small business entities.
Consequently, if the new rules go into effect and we wish to sell our interest
in the Austin stations, we will have to either sell to an entity that meets the
FCC definition or exclude at least one FM station from the transaction. As a result of the Lee Enterprises acquisition, we own two ''top-4 rated
television stations in the Honolulu market. The new ownership rules, like the
former rules, generally prohibit common ownership of such stations, and in
adopting the new rules, the FCC 55




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ordered companies that had requested temporary waivers (including us) to
file divesting applications to achieve compliance. When and if the court stay
of the new rules is lifted, we will likely have to either file a divesting
application or request a permanent waiver of the new rules. If we are required
to divest a station on short notice, we may not realize the full value of that
station. Our business strategy and our ability to operate profitably depends on the
continued services of our key employees, the loss of whom could materially
adversely affect our business. Our ability to maintain our competitive position depends to a significant
extent on the efforts and abilities of our senior management team and certain
key employees. Their managerial, technical and other services would be
difficult to replace and if we lose the services of one or more of our
executive officers or key personnel. Our business could be seriously harmed if
one of them decides to join a competitor or otherwise competes directly or
indirectly against us. Our radio and television stations employ or independently contract with
several on-air personalities and hosts of syndicated radio and television
programs with significant loyal audiences in their respective broadcast areas.
These on-air personalities are sometimes significantly responsible for the
ranking of a station, and thus, the ability of the station to sell advertising.
These individuals may not remain with our radio and television stations and may
not retain their audiences. Our current and future operations are subject to certain risks that are unique
to operating in a foreign country. We currently have several international operations, including a 59.5%
interest in a national radio station in Hungary and operations in Belgium and,
therefore, we are exposed to risks inherent in international business
operations. We may pursue opportunities to buy additional broadcasting
properties in other foreign countries. The risks of doing business in foreign
countries include the following:  -
    
    changing regulatory or taxation policies;-
    
    currency exchange risks;-
    
    changes in diplomatic relations or hostility from local populations;-
    
    seizure of our property by the government, or restrictions on our
ability to transfer our property or earnings out of the foreign country;-
    
    potential instability of foreign governments, which might result in losses against which we are not insured; and-
    
    difficulty of enforcing agreements and collecting receivables through some foreign legal systems. You may be unable to pursue any legal claims against Arthur Andersen LLP, our
former independent public accountants. Our consolidated financial statements for the fiscal years ending February
28, 2002 and 2001 were audited by Arthur Andersen LLP, our former independent
public accountant. Arthur Andersen LLP was convicted on federal obstruction of
justice charges arising from the federal governments investigation of Enron
Corp. In light of the conviction, Arthur Andersen ceased practicing before the
SEC on August 31, 2003. As a result, Arthur Andersen LLP has not reissued its
audit report with respect to our consolidated financial statements. Further,
Arthur Andersen LLP has not consented to the inclusion of its audit report in
our various shelf registration statements currently in effect. As a result,
our current and future security holders may not have an effective remedy
against Arthur Andersen LLP in connection with a material misstatement or
omission in the consolidated financial statements for the fiscal years ending
February 28, 2002 and 2001. Even if our security holders were able to assert
such a claim, because Arthur Andersen LLPs operations have ceased, there will
likely be insufficient assets to satisfy claims made by investors or by us that
might arise under federal securities laws or otherwise. FORWARD-LOOKING STATEMENTS This report includes or incorporates forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. You
can identify these forward-looking statements by our use of words such as
intend, plan, may, will, project, estimate, anticipate,
believe, expect, continue, potential, opportunity, and similar
expressions, whether in the negative or affirmative. We cannot guarantee that
we actually will achieve these plans, intentions or expectations. All
statements 56




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regarding our expected financial position, business and financing plans
are forward-looking statements. Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we
make. We have included important facts in various cautionary statements in
this report that we believe could cause our actual results to differ materially
from forward-looking statements that we make. These include, but are not
limited to, the following:  
    
    material adverse changes in economic conditions in the markets of our company;
    
    the ability of our stations and magazines to attract and retain advertisers;
    
    loss of key personnel
    
    the ability of our stations to attract quality programming and our
magazines to attract good editors, writers, and photographers;
    
    uncertainty as to the ability of our stations to increase or sustain
audience share for their programs and our magazines to increase or
sustain subscriber demand;
    
    competition from other media and the impact of significant competition for advertising revenues from other media;
    
    future regulatory actions and conditions in the operating areas of our company;
    
    the necessity for additional capital expenditures and whether our
programming and other expenses increase at a rate faster than expected;
    
    financial community and rating agency perceptions of our business,
operations and financial condition and the industry in which we operate;
    
    the effects of terrorist attacks, political instability, war and other significant events;
    
    whether pending transactions, if any, are completed on the terms and at the times set forth, if at all;
    
    other risks and uncertainties inherent in the radio and television broadcasting and magazine publishing businesses. The forward-looking statements do not reflect the potential impact of any
future acquisitions, mergers or dispositions. We undertake no obligation to
update or revise any forward-looking statements because of new information,
future events or otherwise. 
 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 interest rate 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. On June 15, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended in June of 2000 by SFAS No.
138, Accounting for Derivative Instruments and Hedging Activities. These
statements, which were effective for Emmis on March 1, 2001, establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts. These statements
require that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. Changes in the fair
value of derivatives are to be recorded each period in earnings or
comprehensive income, depending on whether the derivative is designated and
effective as part of a hedged transaction, and on the type of hedge
transaction. Gains or losses on derivative instruments reported in the other
comprehensive income must be reclassified as earnings in the period in which
earnings are affected by the underlying hedged item, and the ineffective
portion of all hedges must be recognized in earnings in the current period.
These standards result in additional volatility in reported assets,
liabilities, earnings and other comprehensive income. SFAS No. 133 requires that as of the date of initial adoption the
difference between the fair value of the derivative instruments to be recorded
on the balance sheet and the previous carrying amount of those derivatives be
reported in net income or other 57




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comprehensive income, as appropriate, as the cumulative effect of a change in
accounting principle in accordance with APB 20 Accounting Changes. On March 1, 2001, Emmis recorded the effect of the adoption of SFAS No.
133 which resulted in an immaterial impact to the results of operations and the
financial position of Emmis. SFAS No. 133 further requires that the fair value and effectiveness of
each hedging instrument must be measured quarterly. The result of each
measurement could result in fluctuations in reported assets, liabilities, other
comprehensive income and earnings as these changes in fair value and
effectiveness are recorded to the financial statements. INTEREST RATES At February 29, 2004, the entire outstanding balance under our credit
facility, approximately 70% of EOCs total outstanding debt (credit facility
and senior subordinated debt) and 58% of Emmis total outstanding debt (EOCs
debt plus our senior discount notes), bears interest at variable rates. The
credit facility requires EOC to have fixed interest rates for a two year period
on at least 50% of its total outstanding debt, as defined (including the senior
subordinated debt), if EOCs total leverage ratio, as defined, is greater than
6:1 at any quarter end. EOC currently has no interest rate swap arrangements
as its total leverage ratio, as defined, was less than 6:1 as of February 29,
2004. Based on amounts outstanding at February 29, 2004, if the interest rate on
our variable debt were to increase by 1.0%, our annual interest expense would
be higher by approximately $7.4 million. FOREIGN CURRENCY Emmis owns a 59.5% interest in a Hungarian subsidiary which is
consolidated in the accompanying financial statements. This subsidiarys
operations are measured in its local currency (forint). Emmis has a natural
hedge against currency fluctuations between the forint and the U.S. dollar
since most of the subsidiarys long-term obligations are denominated in
Hungarian forints. Emmis owns nine radio stations in Belgium, which are
consolidated in the accompanying financial statements, and its investment to
date is approximately $3 million. These subsidiaries operations are measured
in their local currency (Euro). Emmis owns a 75% interest in an Argentinean
subsidiary, but Emmis has agreed to sell its interest to the minority partner.
Consequently, the operations for this subsidiary have been classified as
discontinued operations and the assets are classified as held for sale as of
February 29, 2004. While Emmis management cannot predict the most likely
average or end-of-period forint to dollar, or Euro to dollar exchange rates for
calendar 2004, we believe any devaluation of the forint or Euro would have an
immaterial effect on our financial statements taken as a whole, as the
Hungarian and Belgium stations accounted for approximately 2% of Emmis total
revenues and approximately 1% of Emmis total assets as of, and for the year
ended, February 29, 2004. At February 29, 2004, the Hungarian subsidiary had $0.7 million of U.S.
dollar denominated loans outstanding. The Hungarian subsidiary repaid $0.6
million of U.S. dollar denominated loans during fiscal 2004. The Argentinean
subsidiary had no U.S. dollar denominated loans outstanding during fiscal 2004
or at February 29, 2004. Emmis currently does not maintain any derivative instruments to mitigate
the exposure to foreign currency translation and/or transaction risk. However,
this does not preclude the adoption of specific hedging strategies in the
future. 58




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004GROSS REVENUES
    
    $
    620,456
    
    
    $
    646,157
    
    
    $
    679,927LESS: AGENCY COMMISSIONS
    
    
    80,634
    
    
    
    83,794
    
    
    
    88,059NET REVENUES
    
    
    539,822
    
    
    
    562,363
    
    
    
    591,868OPERATING EXPENSES:Station operating expenses, excluding
noncash compensation
    
    
    354,157
    
    
    
    349,251
    
    
    
    371,423Corporate expenses, excluding
noncash compensation
    
    
    20,283
    
    
    
    21,359
    
    
    
    24,105Time brokerage fees
    
    
    479
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    100,258
    
    
    
    43,370
    
    
    
    46,468Noncash compensation
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Restructuring fees
    
    
    768
    
    
    
    
    
    
    
    Impairment loss and other
    
    
    10,672
    
    
    
    
    
    
    
    12,400Total operating expenses
    
    
    495,712
    
    
    
    436,508
    
    
    
    477,846OPERATING INCOME
    
    
    44,110
    
    
    
    125,855
    
    
    
    114,022OTHER INCOME (EXPENSE):Interest expense
    
    
    (129,100
    )
    
    
    (103,835
    )
    
    
    (85,958
    )Gain on sale of assets
    
    
    
    
    
    
    9,313
    
    
    
    1,130Loss in unconsolidated affiliates
    
    
    (5,003
    )
    
    
    (4,544
    )
    
    
    (375
    )Loss on debt extinguishment
    
    
    (1,748
    )
    
    
    (13,506
    )
    
    
    Minority interest income (expense)
    
    
    59
    
    
    
    (428
    )
    
    
    (3,029
    )Other income (expense), net
    
    
    1,287
    
    
    
    953
    
    
    
    (1,065
    )Total other income (expense)
    
    
    (134,505
    )
    
    
    (112,047
    )
    
    
    (89,297
    )INCOME (LOSS) BEFORE INCOME TAXES,
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE
    
    
    (90,395
    )
    
    
    13,808
    
    
    
    24,725PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (26,287
    )
    
    
    10,876
    
    
    
    12,450INCOME (LOSS) FROM CONTINUING OPERATIONS
    
    
    (64,108
    )
    
    
    2,932
    
    
    
    12,275LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
OF $0 IN 2004
    
    
    
    
    
    
    
    
    
    
    (10,019
    )INCOME (LOSS) BEFORE ACCOUNTING CHANGE
    
    
    (64,108
    )
    
    
    2,932
    
    
    
    2,256CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX OF $102,600
    
    
    
    
    
    
    (167,400
    )
    
    
    NET INCOME (LOSS)
    
    
    (64,108
    )
    
    
    (164,468
    )
    
    
    2,256PREFERRED STOCK DIVIDENDS
    
    
    8,984
    
    
    
    8,984
    
    
    
    8,984NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS
    
    $
    (73,092
    )
    
    $
    (173,452
    )
    
    $
    (6,728
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. In the years ended February 28 (29), 2002, 2003, and 2004, $8.3 million, $19.0 million, and $18.2 million respectively, of our
noncash compensation was attributable to our stations, while $0.8 million, $3.5 million, and
$5.3 million was attributable to corporate. 59




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS:Continuing operations, before accounting change
    
    $
    (1.54
    )
    
    $
    (0.11
    )
    
    $
    0.06Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.18
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    (3.16
    )
    
    
    Net income (loss) available to common
shareholders
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )DILUTED NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS:Continuing operations, before accounting change
    
    $
    (1.54
    )
    
    $
    (0.11
    )
    
    $
    0.06Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.18
    )Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    (3.16
    )
    
    
    Net income (loss) available to common
shareholders
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. 60




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) FEBRUARY 28 (29),2003
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    16,079
    
    
    $
    19,970Accounts receivable, net of allowance for doubtful
accounts of $3,240 and $3,453, respectively
    
    
    102,345
    
    
    
    105,225Current portion of TV program rights
    
    
    11,309
    
    
    
    13,373Prepaid expenses
    
    
    15,596
    
    
    
    15,273Other
    
    
    14,352
    
    
    
    10,190Assets held for sale
    
    
    
    
    
    
    7,988Total current assets
    
    
    159,681
    
    
    
    172,019PROPERTY AND EQUIPMENT:Land and buildings
    
    
    93,660
    
    
    
    95,298Leasehold improvements
    
    
    14,591
    
    
    
    15,224Broadcasting equipment
    
    
    172,489
    
    
    
    186,779Office equipment and automobiles
    
    
    54,082
    
    
    
    60,217Construction in progress
    
    
    7,111
    
    
    
    12,929341,933
    
    
    
    370,447Less-Accumulated depreciation and amortization
    
    
    118,503
    
    
    
    153,145Total property and equipment, net
    
    
    223,430
    
    
    
    217,302INTANGIBLE ASSETS:Indefinite lived intangibles
    
    
    1,638,171
    
    
    
    1,736,966Goodwill
    
    
    58,701
    
    
    
    94,042Other intangibles
    
    
    64,189
    
    
    
    69,5481,761,061
    
    
    
    1,900,556Less-Accumulated amortization
    
    
    35,328
    
    
    
    41,699Total intangible assets, net
    
    
    1,725,733
    
    
    
    1,858,857OTHER ASSETS:Deferred debt issuance costs, net of accumulated
amortization of $11,482 and $16,120, repectively
    
    
    29,260
    
    
    
    25,268TV program rights, net of current portion
    
    
    10,416
    
    
    
    10,909Investments
    
    
    9,261
    
    
    
    10,025Deposits and other
    
    
    7,632
    
    
    
    6,189Total other assets, net
    
    
    56,569
    
    
    
    52,391Total assets
    
    $
    2,165,413
    
    
    $
    2,300,569
 The accompanying notes to consolidated financial statements are an integral part of these statements. 61




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS  (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) FEBRUARY 28 (29),2003
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    39,526
    
    
    $
    35,791Current maturities of long-term debt
    
    
    14,912
    
    
    
    6,539Current portion of TV program rights payable
    
    
    27,424
    
    
    
    27,502Accrued salaries and commissions
    
    
    14,247
    
    
    
    14,519Accrued interest
    
    
    11,641
    
    
    
    11,697Deferred revenue
    
    
    15,805
    
    
    
    14,393Other
    
    
    8,102
    
    
    
    7,813Liabilities associated with assets held for sale
    
    
    
    
    
    
    638Total current liabilities
    
    
    131,657
    
    
    
    118,892CREDIT FACILITY AND SENIOR SUBORDINATED
DEBT, NET OF CURRENT PORTION
    
    
    996,945
    
    
    
    1,038,145SENIOR DISCOUNT NOTES
    
    
    197,844
    
    
    
    223,423OTHER LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    13,087
    
    
    
    5,909TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION
    
    
    32,044
    
    
    
    26,266OTHER NONCURRENT LIABILITIES
    
    
    17,065
    
    
    
    9,322MINORITY INTEREST
    
    
    721
    
    
    
    47,672DEFERRED INCOME TAXES
    
    
    71,345
    
    
    
    81,994Total liabilities
    
    
    1,460,708
    
    
    
    1,551,623COMMITMENTS AND CONTINGENCIES (NOTE 10)SHAREHOLDERS EQUITY:Series A cumulative convertible preferred stock, $0.01 par value;
$50.00 liquidation preference; authorized 10,000,000 shares;
issued and outstanding 2,875,000 shares in 2003 and 2004
    
    
    29
    
    
    
    29Class A common stock, $0.01 par value; authorized 170,000,000
shares; issued and outstanding 48,874,017 shares and
50,689,834 shares in 2003 and 2004, respectively
    
    
    489
    
    
    
    507Class B common stock, $0.01 par value; authorized 30,000,000
shares; issued and outstanding 5,011,348 shares and
5,038,920 shares in 2003 and 2004, respectively
    
    
    50
    
    
    
    50Additional paid-in capital
    
    
    990,770
    
    
    
    1,025,483Accumulated deficit
    
    
    (269,274
    )
    
    
    (276,002
    )Accumulated other comprehensive loss
    
    
    (17,359
    )
    
    
    (1,121
    )Total shareholders equity
    
    
    704,705
    
    
    
    748,946Total liabilities and shareholders equity
    
    $
    2,165,413
    
    
    $
    2,300,569
 The accompanying notes to consolidated financial statements are an integral part of these statements. 62




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE THREE YEARS ENDED FEBRUARY 29, 2004
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Series A
    
    Class A
    
    Class BPreferred Stock
    
    Common Stock
    
    Common StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBALANCE, FEBRUARY 28, 2001
    
    
    2,875,000
    
    
    $
    29
    
    
    
    41,900,315
    
    
    $
    419
    
    
    
    5,230,396
    
    
    $
    52Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and
related income tax benefits
    
    
    
    
    
    
    
    
    
    
    314,258
    
    
    
    3
    
    
    
    
    
    
    
    Issuance of Class A Common Stock
to profit sharing plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Class A Common Stock to employees
and officers and related income tax benefits
    
    
    
    
    
    
    
    
    
    
    520,579
    
    
    
    6
    
    
    
    19,731
    
    
    
    1Sale of Class A Common Stock
to employees through ESPP
    
    
    
    
    
    
    
    
    
    
    26,147
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE, FEBRUARY 28, 2002
    
    
    2,875,000
    
    
    
    29
    
    
    
    42,761,299
    
    
    
    428
    
    
    
    5,250,127
    
    
    
    53Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    3
    
    
    
    (300,000
    )
    
    
    (3
    )Issuance of common stock to employees
and officers and related income tax benefits
    
    
    
    
    
    
    
    
    
    
    1,212,718
    
    
    
    12
    
    
    
    61,221
    
    
    
    Sale of Class A Common Stock
via secondary offering
    
    
    
    
    
    
    
    
    
    
    4,600,000
    
    
    
    46
    
    
    
    
    
    
    
    Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE FEBRUARY 28, 2003
    
    
    2,875,000
    
    
    
    29
    
    
    
    48,874,017
    
    
    
    489
    
    
    
    5,011,348
    
    
    
    50Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and
related income tax benefits
    
    
    
    
    
    
    
    
    
    
    657,857
    
    
    
    6
    
    
    
    
    
    
    
    Issuance of Class A Common Stock to employees
and officers and related income tax benefits
    
    
    
    
    
    
    
    
    
    
    1,157,960
    
    
    
    12
    
    
    
    27,572
    
    
    
    Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE, FEBRUARY 29, 2004
    
    
    2,875,000
    
    
    $
    29
    
    
    
    50,689,834
    
    
    $
    507
    
    
    
    5,038,920
    
    
    $
    50
 The accompanying notes to consolidated financial statements are an integral part of these statements. 63




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY  (CONTINUED)
FOR THE THREE YEARS ENDED FEBRUARY 29, 2004
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) AccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalPaid-in
    
    Accumulated
    
    Comprehensive
    
    ShareholdersCapital
    
    Deficit
    
    Loss
    
    EquityBALANCE, FEBRUARY 28, 2001
    
    $
    830,299
    
    
    $
    (22,730
    )
    
    $
    (598
    )
    
    $
    807,471Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and
related income tax benefits
    
    
    3,610
    
    
    
    
    
    
    
    
    
    
    
    3,613Issuance of Class A Common Stock
to profit sharing plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Class A Common Stock to employees
and officers and related income tax benefits
    
    
    8,770
    
    
    
    
    
    
    
    
    
    
    
    8,777Sale of Class A common stock
to employees through ESPP
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    575Preferred stock dividends paid
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    (64,108
    )
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    (6,303
    )Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    (5,484
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,895
    )BALANCE, FEBRUARY 28, 2002
    
    
    843,254
    
    
    
    (95,822
    )
    
    
    (12,385
    )
    
    
    735,557Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock to employees
and related income tax benefits
    
    
    27,323
    
    
    
    
    
    
    
    
    
    
    
    27,335Sale of Class A Common Stock
via secondary offering
    
    
    120,193
    
    
    
    
    
    
    
    
    
    
    
    120,239Preferred stock dividends paid
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    (164,468
    )
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    (8,079
    )Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    3,105Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169,442
    )BALANCE, FEBRUARY 28, 2003
    
    
    990,770
    
    
    
    (269,274
    )
    
    
    (17,359
    )
    
    
    704,705Issuance of Class A Common Stock in
exchange for Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and
related income tax benefits
    
    
    12,826
    
    
    
    
    
    
    
    
    
    
    
    12,832Issuance of Class A Common Stock to employees
and officers and related income tax benefits
    
    
    21,887
    
    
    
    
    
    
    
    
    
    
    
    21,899Preferred stock dividends paid
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    2,256
    
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    13,859Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    2,379Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,494BALANCE, FEBRUARY 29, 2004
    
    $
    1,025,483
    
    
    $
    (276,002
    )
    
    $
    (1,121
    )
    
    $
    748,946
 The accompanying notes to consolidated financial statements are an integral part of these statements. 64




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    (64,108
    )
    
    $
    (164,468
    )
    
    $
    2,256Adjustments to reconcile net income (loss)
to net cash provided by operating activities -Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    8,615Impairment loss
    
    
    9,063
    
    
    
    
    
    
    
    12,400Loss on debt extinguishment
    
    
    1,748
    
    
    
    13,506
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    167,400
    
    
    
    Depreciation and amortization
    
    
    124,335
    
    
    
    68,193
    
    
    
    74,911Accretion of interest on senior discount note
including amortization of related debt costs
    
    
    24,998
    
    
    
    25,777
    
    
    
    26,524Provision for bad debts
    
    
    4,005
    
    
    
    4,102
    
    
    
    3,290Provision (benefit) for deferred income taxes
    
    
    (26,287
    )
    
    
    10,876
    
    
    
    12,450Noncash compensation
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Gain on sale of assets
    
    
    
    
    
    
    (9,313
    )
    
    
    (1,130
    )Tax benefits of exercise of stock options
    
    
    999
    
    
    
    958
    
    
    
    2,775Other
    
    
    (5,928
    )
    
    
    (8,079
    )
    
    
    3,640Changes in assets and liabilities -Accounts receivable
    
    
    (2,118
    )
    
    
    (11,207
    )
    
    
    (4,132
    )Prepaid expenses and other current assets
    
    
    5,127
    
    
    
    (3,392
    )
    
    
    359Other assets
    
    
    (5,953
    )
    
    
    (4,181
    )
    
    
    (2,760
    )Accounts payable and accrued liabilities
    
    
    (2,709
    )
    
    
    804
    
    
    
    (2,314
    )Deferred revenue
    
    
    (963
    )
    
    
    (587
    )
    
    
    (1,458
    )Payments of TV program rights payable and other
    
    
    (1,927
    )
    
    
    (17,768
    )
    
    
    (40,711
    )Net cash provided by operating activities
    
    
    69,377
    
    
    
    95,149
    
    
    
    118,165INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (30,135
    )
    
    
    (30,549
    )
    
    
    (30,191
    )Disposal of property and equipment
    
    
    1,719
    
    
    
    2,354
    
    
    
    2,106Cash paid for acquisitions
    
    
    (140,746
    )
    
    
    
    
    
    
    (121,126
    )Proceeds from sale of stations, net
    
    
    
    
    
    
    135,500
    
    
    
    3,650Deposits on acquisitions and other
    
    
    (5,943
    )
    
    
    (1,004
    )
    
    
    (798
    )Net cash provided by (used in) investing activities
    
    
    (175,105
    )
    
    
    106,301
    
    
    
    (146,359
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. 65




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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  (CONTINUED)
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004FINANCING ACTIVITIES:Payments on long-term debt
    
    
    (133,000
    )
    
    
    (313,525
    )
    
    
    (105,066
    )Proceeds from long-term debt
    
    
    5,000
    
    
    
    15,000
    
    
    
    138,000Proceeds from the issuance of the Companys
Class A Common Stock, net of transaction costs
    
    
    
    
    
    
    120,239
    
    
    
    Purchase of Class A Common Stock
    
    
    
    
    
    
    (1,937
    )
    
    
    (1,774
    )Proceeds from senior discount notes offering
    
    
    202,612
    
    
    
    
    
    
    
    Premium paid to redeem senior discount notes
    
    
    
    
    
    
    (6,678
    )
    
    
    Proceeds from exercise of stock options
and employee stock purchases
    
    
    3,189
    
    
    
    6,906
    
    
    
    10,555Payments for debt related costs
    
    
    (16,626
    )
    
    
    (2,754
    )
    
    
    (646
    )Preferred stock dividends
    
    
    (8,984
    )
    
    
    (8,984
    )
    
    
    (8,984
    )Net cash provided by (used in) financing activities
    
    
    52,191
    
    
    
    (191,733
    )
    
    
    32,085INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (53,537
    )
    
    
    9,717
    
    
    
    3,891CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    59,899
    
    
    
    6,362
    
    
    
    16,079End of period
    
    $
    6,362
    
    
    $
    16,079
    
    
    $
    19,970SUPPLEMENTAL DISCLOSURES:Cash paid for-Interest
    
    $
    99,824
    
    
    $
    77,090
    
    
    $
    56,720Income taxes
    
    
    1,281
    
    
    
    887
    
    
    
    1,143Non-cash financing transactions-Value of stock issued to employees under stock
compensation program and to satisfy
accrued incentives
    
    
    9,766
    
    
    
    22,308
    
    
    
    25,932ACQUISITION OF KKLT-FM, KTAR-AM, AND KMVP-AM:Fair value
of assets acquired
    
    $
    160,746Cash paid, net of deposit
    
    
    140,746Deposit paid in June 2000
    
    
    20,000Liabilities recorded
    
    $
    ACQUISITION OF WBPG-TVFair value
of assets acquired
    
    
    
    
    
    
    
    
    
    $
    11,854Cash paid
    
    
    
    
    
    
    
    
    
    
    11,656Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    198ACQUISITION OF AUSTIN RADIOFair value
of assets acquired
    
    
    
    
    
    
    
    
    
    $
    154,867Cash paid
    
    
    
    
    
    
    
    
    
    
    106,478Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    48,389ACQUISITION OF BELGIUM RADIOFair value
of assets acquired
    
    
    
    
    
    
    
    
    
    $
    2,992Cash paid
    
    
    
    
    
    
    
    
    
    
    2,992Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    
 The accompanying notes to consolidated financial statements are an integral part of these statements. 66




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EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004GROSS REVENUES
    
    $
    620,456
    
    
    $
    646,157
    
    
    $
    679,927LESS: AGENCY COMMISSIONS
    
    
    80,634
    
    
    
    83,794
    
    
    
    88,059NET REVENUES
    
    
    539,822
    
    
    
    562,363
    
    
    
    591,868OPERATING EXPENSES:Station operating expenses, excluding
noncash compensation
    
    
    354,157
    
    
    
    349,251
    
    
    
    371,423Corporate expenses, excluding
noncash compensation
    
    
    20,283
    
    
    
    21,359
    
    
    
    24,105Time brokerage fees
    
    
    479
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    100,258
    
    
    
    43,370
    
    
    
    46,468Noncash compensation
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Restructuring fees
    
    
    768
    
    
    
    
    
    
    
    Impairment loss and other
    
    
    10,672
    
    
    
    
    
    
    
    12,400Total operating expenses
    
    
    495,712
    
    
    
    436,508
    
    
    
    477,846OPERATING INCOME
    
    
    44,110
    
    
    
    125,855
    
    
    
    114,022OTHER INCOME (EXPENSE):Interest expense
    
    
    (104,102
    )
    
    
    (78,058
    )
    
    
    (59,434
    )Gain on sale of assets
    
    
    
    
    
    
    9,313
    
    
    
    1,130Loss in unconsolidated affiliates
    
    
    (5,003
    )
    
    
    (4,544
    )
    
    
    (375
    )Loss on debt extinguishment
    
    
    (1,748
    )
    
    
    (4,444
    )
    
    
    Minority interest income (expense)
    
    
    59
    
    
    
    (428
    )
    
    
    (3,029
    )Other income (expense), net
    
    
    301
    
    
    
    952
    
    
    
    (1,064
    )Total other income (expense)
    
    
    (110,493
    )
    
    
    (77,209
    )
    
    
    (62,772
    )INCOME (LOSS) BEFORE INCOME TAXES,
DISCONTINUED OPERATIONS AND ACCOUNTING CHANGE
    
    
    (66,383
    )
    
    
    48,646
    
    
    
    51,250PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (18,497
    )
    
    
    20,811
    
    
    
    21,812INCOME (LOSS) FROM CONTINUING OPERATIONS
    
    
    (47,886
    )
    
    
    27,835
    
    
    
    29,438LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
OF $0 IN 2004
    
    
    
    
    
    
    
    
    
    
    (10,019
    )INCOME (LOSS) BEFORE ACCOUNTING CHANGE
    
    
    (47,886
    )
    
    
    27,835
    
    
    
    19,419CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, NET OF TAX OF $102,600
    
    
    
    
    
    
    (167,400
    )
    
    
    NET INCOME (LOSS)
    
    $
    (47,886
    )
    
    $
    (139,565
    )
    
    $
    19,419
 The accompanying notes to consolidated financial statements are an integral part of these statements. In the years ended February 28 (29), 2002, 2003, and 2004, $8.3 million, $19.0 million, and $18.2 million respectively, of our noncash compensation was
attributable to our stations, while $0.8 million, $3.5 million, and $5.3 million was attributable to corporate. 67




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##### Table of Contents



EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) FEBRUARY 28 (29),2003
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    16,079
    
    
    $
    19,970Accounts receivable, net of allowance for doubtful
accounts of $3,240 and $3,453, respectively
    
    
    102,345
    
    
    
    105,225Current portion of TV program rights
    
    
    11,309
    
    
    
    13,373Prepaid expenses
    
    
    15,596
    
    
    
    15,273Other
    
    
    14,352
    
    
    
    10,190Assets held for sale
    
    
    
    
    
    
    7,988Total current assets
    
    
    159,681
    
    
    
    172,019PROPERTY AND EQUIPMENT:Land and buildings
    
    
    93,660
    
    
    
    95,298Leasehold improvements
    
    
    14,591
    
    
    
    15,224Broadcasting equipment
    
    
    172,489
    
    
    
    186,779Office equipment and automobiles
    
    
    54,082
    
    
    
    60,217Construction in progress
    
    
    7,111
    
    
    
    12,929341,933
    
    
    
    370,447Less-Accumulated depreciation and amortization
    
    
    118,503
    
    
    
    153,145Total property and equipment, net
    
    
    223,430
    
    
    
    217,302INTANGIBLE ASSETS:Indefinite lived intangibles
    
    
    1,638,171
    
    
    
    1,736,966Goodwill
    
    
    58,701
    
    
    
    94,042Other intangibles
    
    
    64,189
    
    
    
    69,5481,761,061
    
    
    
    1,900,556Less-Accumulated amortization
    
    
    35,328
    
    
    
    41,699Total intangible assets, net
    
    
    1,725,733
    
    
    
    1,858,857OTHER ASSETS:Deferred debt issuance costs, net of accumulated
amortization of $9,704 and $13,396, repectively
    
    
    21,731
    
    
    
    18,685TV program rights, net of current portion
    
    
    10,416
    
    
    
    10,909Investments
    
    
    9,261
    
    
    
    10,025Deposits and other
    
    
    7,632
    
    
    
    6,189Total other assets, net
    
    
    49,040
    
    
    
    45,808Total assets
    
    $
    2,157,884
    
    
    $
    2,293,986
 The accompanying notes to consolidated financial statements are an integral part of these statements. 68




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##### Table of Contents



EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS  (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) FEBRUARY 28 (29),2003
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    39,526
    
    
    $
    35,791Current maturities of long-term debt
    
    
    14,912
    
    
    
    6,539Current portion of TV program rights payable
    
    
    27,424
    
    
    
    27,502Accrued salaries and commissions
    
    
    14,247
    
    
    
    14,519Accrued interest
    
    
    11,641
    
    
    
    11,697Deferred revenue
    
    
    15,805
    
    
    
    14,393Other
    
    
    6,979
    
    
    
    6,690Liabilities associated with assets held for sale
    
    
    
    
    
    
    638Total current liabilities
    
    
    130,534
    
    
    
    117,769CREDIT FACILITY AND SENIOR SUBORDINATED
DEBT, NET OF CURRENT PORTION
    
    
    996,945
    
    
    
    1,038,145OTHER LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    13,087
    
    
    
    5,909TV PROGRAM RIGHTS PAYABLE, NET OF CURRENT PORTION
    
    
    32,044
    
    
    
    26,266OTHER NONCURRENT LIABILITIES
    
    
    17,065
    
    
    
    9,322MINORITY INTEREST
    
    
    721
    
    
    
    47,672DEFERRED INCOME TAXES
    
    
    89,070
    
    
    
    109,081Total liabilities
    
    
    1,279,466
    
    
    
    1,354,164COMMITMENTS AND CONTINGENCIES (NOTE 10)SHAREHOLDERS EQUITY:Common stock, no par value; authorized, issued and
outstanding 1,000 shares in 2003 and 2004
    
    
    1,027,221
    
    
    
    1,027,221Additional paid-in capital
    
    
    95,582
    
    
    
    130,313Accumulated deficit
    
    
    (227,026
    )
    
    
    (216,591
    )Accumulated other comprehensive loss
    
    
    (17,359
    )
    
    
    (1,121
    )Total shareholders equity
    
    
    878,418
    
    
    
    939,822Total liabilities and shareholders equity
    
    $
    2,157,884
    
    
    $
    2,293,986
 The accompanying notes to consolidated financial statements are an integral part of these statements. 69




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##### Table of Contents



EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE THREE-YEARS ENDED FEBRUARY 29, 2004
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Common StockAccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalShares
    
    
    
    
    
    Paid-in
    
    Accumulated
    
    Comprehensive
    
    ShareholdersOutstanding
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    EquityBALANCE, FEBRUARY 28, 2001
    
    
    1,000
    
    
    $
    830,799
    
    
    $
    
    
    
    $
    (22,730
    )
    
    $
    (598
    )
    
    $
    807,471Accrued dividend at reorganization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,123
    
    
    
    
    
    
    
    1,123Distrubutions to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Contributions from parent
    
    
    
    
    
    
    196,422
    
    
    
    8,108
    
    
    
    
    
    
    
    
    
    
    
    204,530Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,886
    )
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,303
    )Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,484
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,673
    )BALANCE, FEBRUARY 28, 2002
    
    
    1,000
    
    
    
    1,027,221
    
    
    
    8,108
    
    
    
    (78,477
    )
    
    
    (12,385
    )
    
    
    944,467Distrubutions to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Contributions from parent
    
    
    
    
    
    
    
    
    
    
    87,474
    
    
    
    
    
    
    
    
    
    
    
    87,474Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (139,565
    )
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,079
    )Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,105Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,539
    )BALANCE, FEBRUARY 28, 2003
    
    
    1,000
    
    
    
    1,027,221
    
    
    
    95,582
    
    
    
    (227,026
    )
    
    
    (17,359
    )
    
    
    878,418Distrubutions to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,984
    )
    
    
    
    
    
    
    (8,984
    )Contributions from parent
    
    
    
    
    
    
    
    
    
    
    34,731
    
    
    
    
    
    
    
    
    
    
    
    34,731Comprehensive Income:Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,419
    
    
    
    Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,859Change in fair value of hedged derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,379Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,657BALANCE, FEBRUARY 29, 2004
    
    
    1,000
    
    
    $
    1,027,221
    
    
    $
    130,313
    
    
    $
    (216,591
    )
    
    $
    (1,121
    )
    
    $
    939,822
 The accompanying notes to consolidated financial statements are an integral part of these statements. 70




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##### Table of Contents



EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    (47,886
    )
    
    $
    (139,565
    )
    
    $
    19,419Adjustments to reconcile net income (loss)
to net cash provided by operating activities -Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    8,615Impairment loss
    
    
    9,063
    
    
    
    
    
    
    
    12,400Loss on debt extinguishment
    
    
    1,748
    
    
    
    4,444
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    167,400
    
    
    
    Depreciation and amortization
    
    
    124,335
    
    
    
    68,193
    
    
    
    74,911Provision for bad debts
    
    
    4,005
    
    
    
    4,102
    
    
    
    3,290Provision (benefit) for deferred income taxes
    
    
    (18,497
    )
    
    
    20,811
    
    
    
    21,812Noncash compensation
    
    
    9,095
    
    
    
    22,528
    
    
    
    23,450Gain on sale of assets
    
    
    
    
    
    
    (9,313
    )
    
    
    (1,130
    )Other
    
    
    (5,928
    )
    
    
    (8,079
    )
    
    
    3,640Changes in assets and liabilities -Accounts receivable
    
    
    (2,118
    )
    
    
    (11,207
    )
    
    
    (4,132
    )Prepaid expenses and other current assets
    
    
    5,127
    
    
    
    (3,392
    )
    
    
    359Other assets
    
    
    (5,952
    )
    
    
    (4,182
    )
    
    
    (2,761
    )Accounts payable and accrued liabilities
    
    
    (2,709
    )
    
    
    804
    
    
    
    (2,314
    )Deferred revenue
    
    
    (963
    )
    
    
    (587
    )
    
    
    (1,458
    )Payments of TV program rights payable and other
    
    
    (1,927
    )
    
    
    (17,768
    )
    
    
    (40,711
    )Net cash provided by operating activities
    
    
    67,393
    
    
    
    94,189
    
    
    
    115,390INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (30,135
    )
    
    
    (30,549
    )
    
    
    (30,191
    )Disposal of property and equipment
    
    
    1,719
    
    
    
    2,354
    
    
    
    2,106Cash paid for acquisitions
    
    
    (140,746
    )
    
    
    
    
    
    
    (121,126
    )Proceeds from sale of stations, net
    
    
    
    
    
    
    135,500
    
    
    
    3,650Deposits on acquisitions and other
    
    
    (5,943
    )
    
    
    (1,004
    )
    
    
    (798
    )Net cash provided by (used in) investing activities
    
    
    (175,105
    )
    
    
    106,301
    
    
    
    (146,359
    )
 The accompanying notes to consolidated financial statements are an integral part of these statements. 71




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##### Table of Contents



EMMIS OPERATING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED FEBRUARY 28 (29),2002
    
    2003
    
    2004FINANCING ACTIVITIES:Payments on long-term debt
    
    
    (133,000
    )
    
    
    (260,101
    )
    
    
    (105,066
    )Proceeds from long-term debt
    
    
    5,000
    
    
    
    15,000
    
    
    
    138,000Distributions to parent
    
    
    (8,984
    )
    
    
    (8,984
    )
    
    
    (8,984
    )Contributions from parent
    
    
    195,753
    
    
    
    66,066
    
    
    
    11,556Payments for debt related costs
    
    
    (4,594
    )
    
    
    (2,754
    )
    
    
    (646
    )Net cash provided by (used in) financing activities
    
    
    54,175
    
    
    
    (190,773
    )
    
    
    34,860INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (53,537
    )
    
    
    9,717
    
    
    
    3,891CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    59,899
    
    
    
    6,362
    
    
    
    16,079End of period
    
    $
    6,362
    
    
    $
    16,079
    
    
    $
    19,970SUPPLEMENTAL DISCLOSURES:Cash paid for-Interest
    
    $
    99,824
    
    
    $
    77,090
    
    
    $
    56,720Income taxes
    
    
    1,281
    
    
    
    887
    
    
    
    1,143Non-cash financing transactions-Value of stock issued to employees under stock compensation
program and to satisfy accrued incentives
    
    
    9,766
    
    
    
    22,308
    
    
    
    25,932ACQUISITION OF KKLT-FM, KTAR-AM, AND KMVP-AM:Fair value
of assets acquired
    
    $
    160,746Cash paid, net of deposit
    
    
    140,746Deposit paid in June 2000
    
    
    20,000Liabilities recorded
    
    $
    ACQUISITION OF WBPG-TVFair value of assets aquired
    
    
    
    
    
    
    
    
    
    $
    11,854Cash paid
    
    
    
    
    
    
    
    
    
    
    11,656Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    198ACQUISITION OF AUSTIN RADIOFair value
of assets acquired
    
    
    
    
    
    
    
    
    
    $
    154,867Cash paid
    
    
    
    
    
    
    
    
    
    
    106,478Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    48,389ACQUISITION OF BELGIUM RADIOFair value
of assets acquired
    
    
    
    
    
    
    
    
    
    $
    2,992Cash paid
    
    
    
    
    
    
    
    
    
    
    2,992Liabilities recorded
    
    
    
    
    
    
    
    
    
    $
    
 The accompanying notes to consolidated financial statements are an integral part of these statements. 72




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##### Table of Contents



EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
AND EMMIS OPERATING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  a.
    
    Principles of Consolidation The following discussion pertains to Emmis Communications Corporation
(ECC) and its subsidiaries (collectively, Emmis, the Company, or We)
and to Emmis Operating Company and its subsidiaries (collectively EOC). EOC
became a wholly owned subsidiary of ECC in connection with the Companys
reorganization (see Note 1c. below) on June 22, 2001. Unless otherwise noted,
all disclosures contained in these Notes to Consolidated Financial Statements
apply to Emmis and EOC. Emmis foreign subsidiaries report on a fiscal year
ending December 31, which Emmis consolidates into its fiscal year ending
February 28 (29). All significant intercompany balances and transactions have
been eliminated.  b.
    
    Organization Emmis Communications Corporation is a diversified media company with radio
broadcasting, television broadcasting and magazine publishing operations. We
own and operate six FM radio stations serving the nations top three markets 
New York, Los Angeles and Chicago. Additionally, we own and operate seventeen
FM and four AM radio stations with strong positions in Phoenix, St. Louis,
Austin (we have a 50.1% controlling interest in our radio stations located
there), Indianapolis and Terre Haute. The sixteen television stations Emmis
operates serve geographically diverse, mid-sized markets in the U.S., as well
as the large markets of Portland and Orlando, and have a variety of television
network affiliations: five with CBS, five with Fox, three with NBC, one with
ABC and two with WB. In addition to our domestic radio and TV broadcasting
properties, we operate a radio news network in Indiana, publish Texas Monthly,
Los Angeles, Atlanta, Indianapolis Monthly, Cincinnatiand Country Samplerand
related magazines. Internationally, we operate nine FM radio stations in the
Flanders region of Belgium and have a 59.5% interest in a national top-ranked
radio station in Hungary. Our 75% interest in one FM and one AM radio station
in Buenos Aires, Argentina is held for sale. We expect the transaction to close
in our fiscal quarter ended May 31, 2004. We also engage in various businesses
ancillary to our broadcasting business, such as consulting, broadcast tower
leasing and book publishing.  c.
    
    Reorganization On June 22, 2001, ECC transferred all of its assets and substantially all
of its liabilities, including its credit facility and its outstanding senior
subordinated notes, to EOC, a newly formed, wholly-owned subsidiary in exchange
for 1,000 shares of no par value common stock. As a result, effective June 22,
2001, EOC became the only direct subsidiary of ECC and ECC became a holding
company that conducts its business operations through EOC and its subsidiaries.
ECC remains the issuer of the Class A, Class B and Class C common stock and
the convertible preferred stock, and is the obligor of the senior discount
notes. However, EOC is the obligor of the senior subordinated notes and the
borrower under the credit facility. Under the terms of the senior subordinated
notes, EOC is required to file, pursuant to SEC rules and regulations, periodic
reports on Forms 10-Q, 10-K and 8-K. EOCs financial statements are presented
herein for all periods required as if EOC had existed at the beginning of the
earliest period presented because the corporate reorganization was accounted
for as a reorganization of entities under common control. Subsequent to the
balance sheet date, EOC refinanced the senior subordinated notes. The new
senior subordinated notes do not contain this separate reporting requirement
for EOC so long as ECC files consolidated financial statements. See Note 15
for more discussion. Substantially all of ECCs business is conducted through its subsidiaries.
The credit facility and senior subordinated notes indenture contain certain
provisions that may restrict the ability of ECCs subsidiaries to transfer
funds to ECC in the form of cash dividends, loans or advances. See the
accompanying financial statements of EOC and its subsidiaries for the net
assets of the restricted subsidiaries.  d.
    
    Revenue Recognition Broadcasting revenue is recognized as advertisements are aired.
Publication revenue is recognized in the month of delivery of the publication. 73




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e.
    
    Allowance for Doubtful Accounts A provision for doubtful accounts is recorded based on managements
judgement of the collectibility of receivables. When assessing the
collectibility of receivables, management considers, among other things,
historical loss activity and existing economic conditions. The activity in the
allowance for doubtful accounts during the years ended February 2002, 2003 and
2004 was as follows: Balance At
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    
    
    
    
    
    
    
    
    At EndOf Year
    
    Provision
    
    Write-Offs
    
    Of YearYear ended February 28, 2002
    
    $
    2,202
    
    
    
    4,005
    
    
    
    (3,407
    )
    
    $
    2,800Year ended February 28, 2003
    
    $
    2,800
    
    
    
    4,102
    
    
    
    (3,662
    )
    
    $
    3,240Year ended February 29, 2004
    
    $
    3,240
    
    
    
    3,290
    
    
    
    (3,077
    )
    
    $
    3,453
  f.
    
    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 sheets. The rights to program materials are reflected in the accompanying
consolidated balance sheets at the lower of unamortized cost or estimated net
realizable value. Estimated net realizable values are based upon managements
expectation of future advertising revenues, net of sales commissions, to be
generated by the program material. Amortization of program contract costs is
computed under either the straight-line method over the contract period or
based on usage, whichever yields the greater amortization for each program on a
monthly basis. Program contract costs that management expects to be amortized
in the succeeding year are classified as current assets. Program contract
liabilities are typically paid on a scheduled basis and are not affected by
adjustments for amortization or estimated net realizable value. Certain program
contracts provide for the exchange of advertising air time in lieu of cash
payments for the rights to such programming. These contracts are recorded as
the programs are aired at the estimated fair value of the advertising air time
given in exchange for the program rights.  g.
    
    Time Brokerage Fees The Company often enters into time brokerage agreements in connection with
acquisitions, pending regulatory approval of transfer of license assets. Under
the terms of these agreements, the Company makes specified periodic payments to
the owner-operator in exchange for the grant to the Company of the right to
program and sell advertising of a specified portion of the stations inventory
of broadcast time. The Company records revenues and expenses associated with
the portion of the stations inventory of broadcast time it manages.
Nevertheless, as the holder of the FCC license, the owner-operator retains
control and responsibility for the operation of the station, including
responsibility over all programming broadcast on the station. Included in the accompanying consolidated statements of operations for the
year ended February 2002 are time brokerage fees of $0.5 million.  h.
    
    Noncash Compensation Noncash compensation includes compensation expense associated with
restricted common stock issued under employment agreements, common stock issued
to employees in lieu of cash bonuses, Company matches in our 401(k) plans, and
common stock issued to employees in exchange for cash compensation pursuant to
our stock compensation program. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. In December 2001, Emmis instituted a 10% pay cut for substantially all of
its non-contract employees and also began a stock compensation program under
its 2001 Equity Incentive Plan. All Emmis employees who were affected by the
pay cut were automatically eligible to participate in the stock compensation
program and all other employees are eligible to participate in the program 74




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by taking a voluntary pay cut. Each participant in the program could elect to
receive the portion of their compensation that was cut in the form of payroll
stock that was issued every two weeks or in the form of restricted stock that
vested and was issued after the end of the award year in January 2003. The
payroll stock was awarded based on the fair market value of Emmis Class A
Common Stock on the date it was issued. The restricted stock was awarded based
on a discount off the initial value of Emmis Class A Common Stock. During the
years ended February 2002, 2003 and 2004, the stock compensation program
reduced cash compensation expense by approximately $3.1 million, $16.5 million,
and $16.7 million, respectively, but noncash compensation increased by the same
amount. We issued approximately 0.7 million shares of common stock during the
calendar 2002 award year and 0.8 million shares of common stock during the
calendar 2003 award year. Effective January 1, 2004, we curtailed our stock
compensation program by eliminating mandatory participation for employees
making less than $52,000 per year. For calendar 2004, this change will result
in an estimated $8 million decrease in the Companys non-cash compensation
expense and a corresponding increase in the Companys cash operating expense.
In all other respects, the 2004 stock compensation program remains comparable
to the stock compensation programs in effect for each of the last two calendar
years. No formal decisions have been made regarding its status beyond December
2004. Effective March 1, 2003, Emmis elected to double its 401(k) match to $2
per employee, with one-half of the contribution made in Emmis stock. The
increased 401(k) match was made instead of a contribution to the Companys
profit sharing plan. This resulted in approximately $1.5 million of additional
noncash compensation expense for the year ended February 29, 2004, as compared
to the prior year.  i.
    
    Restructuring Fees In fiscal 2002, Emmis incurred restructuring fees of $768. These
restructuring fees principally consist of severance and related costs
associated with centralizing certain technical functions of the television
division.  j.
    
    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.  k.
    
    Property and Equipment Property and equipment are recorded at cost. Depreciation is generally
computed by the straight-line method over the estimated useful lives of the
related assets which are 31.5 years for buildings, not more than 32 years or
the life of the lease, whichever is lower for leasehold improvements, and 5 to
7 years for broadcasting equipment, office equipment and automobiles.
Maintenance, repairs and minor renewals are expensed; improvements are
capitalized. On a continuing basis, the Company reviews the carrying value of
property and equipment for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. 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. Depreciation expense for the years ended February 2002, 2003, and
2004 was $34.3 million, $36.3 million, and $39.5 million respectively.  l.
    
    Intangible Assets Intangible assets are recorded at cost. The cost of the broadcast license
for Slager Radio is being amortized over the term of the license, which expires
in November 2009. The cost of the broadcast licenses in Belgium is being
amortized over the initial nine year term of the licenses. The cost of the
broadcast license for the two stations in Buenos Aires, Argentina was being
amortized over the twenty-three year term of the license. We have announced
the sale of these two stations and we expect the transaction to close in our
quarter ended May 31, 2004. Other definite-lived intangibles are amortized
using the straight-line method over varying periods, not in excess of 37 years.
Effective March 1, 2002, we ceased amortization of goodwill and FCC licenses
in connection with our adoption of SFAS No. 142, Goodwill and Other Intangible
Assets (See Note 8). FCC licenses are renewed every eight years for a nominal
amount and historically all of our FCC licenses have been renewed at the end of
their respective eight-year periods. Since we expect that all of our FCC
licenses will continue to be renewed in the future, we believe they have
indefinite lives. 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 in accordance with SFAS No. 142, Goodwill
and other Intangible Assets. In connection with our fiscal 2004 annual impairment review, we recognized
an impairment loss of $12.4 million, which related to 75




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our television division. This impairment charge is reflected in
impairment loss and other in the accompanying consolidated statements of
operations. In fiscal 2002, the Company adjusted the carrying value of KALC-FM to net
realizable value less cost of sale, which resulted in a $9.1 million impairment
charge. This impairment charge is reflected in impairment loss and other in
the accompanying consolidated statements of operations. This station was sold
in May 2002.  m.
    
    Discontinued operations and assets held for sale On December 23, 2003, Emmis agreed to sell all of its interest in
Votionis, S.A. (Votionis), which owns and operates two radio stations in
Buenos Aires, Argentina, to its minority partners for $7.3 million in cash.
The sale is subject to Argentine regulatory approvals and is expected to close
during our quarter ended May 31, 2004. Emmis acquired its interest in Votionis
in November 1999. In October 2003, we exercised our right to purchase the
equity interests of our minority partners. During negotiations with our
minority partners, we instead elected to sell our interest. In connection with
the pending sale, Emmis recorded a loss from discontinued operations of $10.0
million in fiscal 2004. This consisted of a $10.4 million loss on disposal in
the fourth quarter, net of $0.4 million of income recognized from the
operations of Votionis in fiscal 2004. The Argentine peso substantially
devalued relative to the U.S. dollar early in 2002. The loss is primarily
attributable to the devaluation of the peso. Revenues, operating expenses,
depreciation and amortization, and pre-tax income for Votionis were
approximately $4.7 million, $3.7 million, $0.4 million, and $0.9 million,
respectively, in fiscal 2004. As of February 29, 2004, the net carrying amount
of the assets held for sale was $7.4 million. Assets held for sale principally
consist of accounts receivable ($2.0 million), property and equipment ($1.1
million) and foreign broadcast licenses ($3.8 million). Votionis was
historically included in the radio reporting segment.  n.
    
    Advertising and Subscription Acquisition Costs Advertising and subscription acquisition costs are expensed the first time
the advertising takes place, except for certain direct-response advertising
related to the identification of new magazine subscribers, the primary purpose
of which is to elicit sales from customers who can be shown to have responded
specifically to the advertising and that results in probable future economic
benefits. These direct-response advertising costs are capitalized as assets
and amortized over the estimated period of future benefit, ranging from six
months to two years subsequent to the promotional event. As of February 28
(29), 2003 and 2004, we had approximately $1.6 million in direct-response
advertising costs capitalized as assets. On an interim basis, the Company
defers major advertising campaigns for which future benefits can be
demonstrated. These costs are amortized over the shorter of the period
benefited or the remainder of the fiscal year. Advertising expense for the
years ended February 2002, 2003 and 2004 was $15.0 million, $19.5 million, and
$19.7 million, respectively.  o
    
    . Investments Emmis has a 50% ownership interest (approximately $5,114 as of February 28
(29), 2003 and 2004) 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. Emmis has a 25% ownership interest (approximately $2,060 and
$1,957 as of February 28 (29), 2003 and 2004, respectively) in a company that
operates a tower site in Portland, Oregon. These investments are accounted for
using the equity method of accounting. Emmis has numerous other investments
that are accounted for using the equity method of accounting as Emmis does not
control these entities, but none had a balance exceeding $1.0 million as of
February 28 (29), 2003 or 2004. Collectively, these investments totaled $0.4
million and $1.8 million, respectively, as of February 28 (29), 2003 and 2004. Emmis has numerous investments accounted for using the cost method of
accounting. No cost method investment balance exceeded $1.0 million as of
February 28, (29), 2003 or 2004. Collectively, these investments totaled $1.6
million and $1.2 million, respectively, as of February 28 (29), 2003 and 2004.
In fiscal 2004, Emmis reduced the carrying value of one of its cost method
investments from approximately $1.0 million to zero as the decline in the value
of the investment, as determined by management, was deemed to be other than
temporary. This expense is reflected in other income (expense), net in the
accompanying consolidated statements of operations. In fiscal 2003, the Company and other partners in the local media internet
venture (LMIV) agreed to dissolve the joint venture. Consequently, in addition
to recording our share of LMIVs losses for the year, the Company recorded a
$2.1 million charge to write off our investment in LMIV. This charge is
reflected in loss from unconsolidated affiliates in the accompanying
consolidated statements of operations.  p.
    
    Deferred Revenue and Barter Transactions 76




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Deferred revenue includes deferred magazine subscription revenue and
deferred barter revenue. Magazine subscription revenue is recognized when the
publication is shipped. 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 or publication is
delivered. The appropriate expense or asset is recognized when merchandise or
services are used or received. Barter revenues for the years ended February
2002, 2003, and 2004 were $15.8 million, $15.3 million, and $18.7 million,
respectively, and barter expenses were $15.2 million, $16.1 million, and $18.4
million, respectively.  q.
    
    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 subsidiarys balance sheet date
(December 31). 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 ($754), $2,474,
and ($1,197) for the years ended February 2002, 2003, and 2004, respectively.
This adjustment is reflected in shareholders equity in the accompanying
consolidated balance sheets. The functional currency of the two stations in Argentina is the
Argentinean peso, which until January 2002 was tied to the U.S. dollar through
the Argentine governments convertibility plan. In January 2002, the Argentine
government allowed the peso to devalue and trade against the U.S. dollar
independently. These two stations balance sheets have been translated from
pesos to U.S. dollars using the exchange rate in effect at the subsidiarys
balance sheet date. The results of operations have been translated using an
average exchange rate for the period. The translation adjustment resulting
from the conversion of their financial statements was $7,057, $5,605, and
($12,662) for the years ended February 2002, 2003 and 2004, respectively. This
adjustment is reflected in shareholders equity in the accompanying
consolidated balance sheets. The 2004 adjustment relates primarily to the
reclassification to loss on discontinued operations of translation losses
previously reported in other comprehensive income.  r.
    
    Earnings Per ShareEmmis Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, requires dual presentation of basic and diluted earnings per share
(EPS) on the face of the income statement for all entities with complex
capital structures. Basic EPS is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period (47,334,038, 53,014,268 and 54,716,221 shares for the years
ended February 2002, 2003, and 2004, respectively). Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted. Potentially dilutive securities at
February 2002, 2003, and 2004 consisted of stock options and the 6.25% Series A
cumulative convertible preferred stock. The conversion of the preferred stock
is not included in the calculation of diluted net income per common share for
each of the three years ended February 29, 2004 as the effect of these
conversions would be antidilutive. Additionally, the conversion of stock
options is not included in the calculation of diluted net income per common
share for the years ended February 28, 2002 and 2003 as the effect of their
conversion would be antidilutive. Weighted average common equivalent shares
outstanding for the period for purposes of computing diluted EPS are
47,334,038, 53,014,268 and 55,065,669 for the years ended February 2002, 2003,
and 2004, respectively. Excluded from the calculation of diluted net income
per share are 3.7 million weighted average shares that would result from the
conversion of preferred shares for the years ended February 2002, 2003, and
2004, respectively. In the years ended February 28, 2002 and 2003,
approximately 0.5 million and 0.2 million options, respectively, were excluded
from the calculation of diluted net income per share as the effect of their
conversion would be antidilutive.  EOC Because EOC is a wholly-owned subsidiary of Emmis, disclosure of earnings per
share for EOC is not required.  s.
    
    Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses in the financial statements and in
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates.  t.
    
    Fair Value of Financial Instruments 77




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The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The company had $230.0 million notional amount of interest rate
swap agreements outstanding as of February 28, 2003 and none outstanding as of
February 29, 2004. The carrying amounts of interest rate swaps are recorded at
their fair value of $4.3 million, as of February 28, 2003, and are included in
other noncurrent liabilities in the accompanying consolidated balance sheets.
The cumulative amount of change in fair value of interest rate swaps at
February 28, 2003 was $2.4 million, net of tax, and is recorded in accumulated
other comprehensive income in the accompanying consolidated balance sheets.
Except for the senior subordinated notes and senior discount notes, the
carrying amounts of long-term debt approximate fair value due to the variable
interest rate on such debt. On February 28 (29), 2003 and 2004, the fair value
of the senior subordinated notes was approximately $308.8 million and
$312.0 million, respectively, and the fair value of the senior discount notes
was approximately $234.6 million and $267.7 million, respectively. Fair value
estimates are made at a specific point in time, based on relevant market
information about the financial instrument.  u.
    
    Derivative Financial Instruments On March 1, 2001, Emmis adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting
for Derivative Instruments and Hedging Activities. These statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts. These statements
require that every derivative instrument be recorded in the balance sheet as
either an asset or a liability measured at its fair value. Changes in the fair
value of derivatives are to be recorded each period in earnings or
comprehensive income, depending on whether the derivative is designated and
effective as part of a hedged transaction, and on the type of hedge
transaction. Gains or losses on derivative instruments reported in the other
comprehensive income must be reclassified as earnings in the period in which
earnings are affected by the underlying hedged item, and the ineffective
portion of all hedges must be recognized in earnings in the current period.
These standards result in additional volatility in reported assets,
liabilities, earnings and other comprehensive income. SFAS No. 133 further
requires that the fair value and effectiveness of each hedging instrument must
be measured quarterly. The result of each measurement could result in
fluctuations in reported assets, liabilities, other comprehensive income and
earnings as these changes in fair value and effectiveness are recorded to the
financial statements. SFAS No. 133 requires that as of the date of initial adoption the
difference between the fair value of the derivative instruments to be recorded
on the balance sheet and the previous carrying amount of those derivatives be
reported in net income or other comprehensive income, as appropriate, as the
cumulative effect of a change in accounting principle in accordance with APB 20
Accounting Changes. On March 1, 2001, Emmis recorded the effect of the
adoption of SFAS No. 133 which resulted in an immaterial impact to the results
of operations and the financial position of Emmis. See footnote 4 for
discussion of the interest rate swap agreements in effect during fiscal 2002,
2003, and 2004.  v.
    
    Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses financial accounting and reporting for business combinations
and supersedes Accounting Principle Board (APB) Opinion No. 16, Business
Combinations and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
SFAS No. 141 also changes the criteria to recognize intangible assets apart
from goodwill. The Company adopted this Statement on July 1, 2001. The
Company has historically used the purchase method to account for all business
combinations and the adoption of this Statement did not have a material impact
on the Companys financial position, cash flows or results of operations. In June 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets that requires companies to cease amortizing goodwill and certain other
indefinite-lived intangible assets, including broadcast licenses. Under SFAS
142, goodwill and certain indefinite-lived intangibles will not be amortized
into results of operations, but instead the recorded value of certain
indefinite-lived intangibles will be tested for impairment at least annually
with impairment being measured as the excess of the assets carrying amount
over its fair value. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives and measured for impairment in
accordance with SFAS 121. In connection with the adoption of SFAS 142
effective March 1, 2002, we recorded an impairment loss of $167.4 million, net
of tax, reflected as the cumulative effect of an accounting change in the
accompanying consolidated statements of operations. The adoption of this
accounting standard reduced our amortization of goodwill and intangibles by
approximately $61.0 million in the year ended February 28, 2003. However, our
future impairment reviews may result in additional periodic write-downs, such
as our $12.4 million impairment loss in fiscal 2004 (see Note 8). 78




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In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations that applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. The Company adopted this Statement on March 1, 2003 and it did not
have a material impact on the Companys financial position, cash flows or
results of operations. Effective March 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets that addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it removes
certain assets such as deferred tax assets, goodwill and intangible assets not
being amortized from its scope and retains the requirements of SFAS No. 121
regarding the recognition of impairment losses on other long-lived assets held
for use. SFAS No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring events and Transactions for the disposal of a segment
of a business. However, SFAS No. 144 retains the requirement in Opinion 30 to
report separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Adoption of
this statement did not have a material impact on the Companys financial
position, cash flows or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 supersedes Emerging
Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, not at the date of an entitys commitment to an exit or
disposal plan. The provisions of SFAS No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. The adoption of SFAS
No. 146 did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows. As of December 2002, we adopted SFAS No. 148, Accounting for Stock-Based
Compensation-Transaction and Disclosure, an Amendment of SFAS No. 123. SFAS
No. 148 revises the methods permitted by SFAS No. 123 of measuring compensation
expense for stock-based employee compensation plans. We use the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25, as
permitted under SFAS No. 123. Therefore, this change did not have a material
effect on our financial statements. SFAS No. 148 requires us to disclose pro
forma information related to stock-based compensation, in accordance with SFAS
No. 123, on a quarterly basis in addition to the current annual basis
disclosure. We reported the pro forma information on an interim basis
beginning with our May 31, 2003 Form 10-Q. On January 1, 2003, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). FIN 46 addresses consolidation of
business enterprises of variable interest entities. FIN 46 is effective
immediately for all variable interest entities created after January 31, 2003
and for the first fiscal year or interim period ending after March 15, 2004 for
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company has not acquired any
variable interest entities subsequent to January 31, 2003 and has no interests
in structures that are commonly referred to as special-purpose entities. The
Company will therefore adopt FIN 46 in its interim report for the quarter
ending May 31, 2004. The Company does not expect this pronouncement will have
a material impact on its future consolidated results of operations or financial
position. On March 1, 2003, the Company adopted Financial Accounting Standards Board
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45).
FIN 45 applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on changes
in an underlying obligation that is related to an asset, liability, or an
equity security of the guaranteed party. FIN 45s disclosure requirements were
effective for financial statements of interim or annual periods ending after
December 15, 2002. FIN 45s initial recognition and initial measurement
provisions were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantors fiscal
year-end. The Company adopted the disclosure requirements of FIN 45 for its
fiscal 2003 annual report. Adoption of the initial recognition and initial
measurement requirements of FIN 45 did not materially impact the Companys
financial position, results of operations or applicable disclosures. On March 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 145, Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No.
13, and Technical Corrections(SFAS No. 145). SFAS No. 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, and SFAS No. 64, Extinguishments of Debt Made 79




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to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No.
44, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
pronouncement requires gains and losses related to debt transactions to be
classified in income from continuing operations. Although we did not have any
gains or losses from debt transactions in the current year, ECC had recorded an
extraordinary loss of $11.1 million, net of tax, in the year ended February 28,
2003, and EOC had recorded an extraordinary loss of $2.9 million, net of tax,
in the year ended February 28, 2003, in connection with debt extinguishments.
Accordingly, we retroactively reclassified the losses of $13.5 million for ECC
and $4.4 million for EOC and the related income tax effects to include them in
income from continuing operations. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity(SFAS No.
150). SFAS No. 150 requires financial instruments within its scope to be
classified as a liability (or an asset in some circumstances). Many of these
instruments were previously classified as equity. The provisions of SFAS 150
regarding limited life subsidiaries have been deferred indefinitely. These
provisions applied to one of our subsidiaries. The settlement value of the
minority partners interest in our subsidiary was not material at February 29,
2004. Subsequent to the balance sheet date, we sold our interest in the
subsidiary.  w.
    
    Pro Forma Information Related To Stock-Based Compensation As permitted under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company measures compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Option No. 25, Accounting for Stock Issued to
Employees, and provides pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense. Had compensation cost for the Companys 2002, 2003 and 2004 grants for
stock-based compensation plans been determined consistent with SFAS No. 123,
the Companys net loss available to common shareholders for these years would
approximate the pro forma amounts below (in thousands, except per share data): Year Ended February 28 (29),2002
    
    2003
    
    2004Net Loss Available to Common Shareholders:As Reported
    
    $
    (73,092
    )
    
    $
    (173,452
    )
    
    $
    (6,728
    )Pro Forma
    
    $
    (85,760
    )
    
    $
    (179,695
    )
    
    $
    (16,543
    )Basic EPS:As Reported
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Pro Forma
    
    $
    (1.81
    )
    
    $
    (3.39
    )
    
    $
    (0.30
    )Diluted EPS:As Reported
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Pro Forma
    
    $
    (1.81
    )
    
    $
    (3.39
    )
    
    $
    (0.30
    )
 80




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Because the fair value method of accounting has not been applied to
options prior to March 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value
of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model utilizing the following weighted average
assumptions: Year Ended February 28 (29),2002
    
    2003
    
    2004Risk-Free Interest Rate:
    
    3.6% - 5.4%
    
    3.6% - 5.4%
    
    3.6% - 5.4%Expected Dividend Yield:
    
    0%
    
    0%
    
    0%Expected Life (Years):
    
    8.3 - 8.6
    
    8.3 - 8.6
    
    8.3 - 8.6Expected Volatility:
    
    57.7% - 58.4%
    
    57.7% - 58.4%
    
    57.7% - 58.4%
  x.
    
    Reclassifications Certain reclassifications have been made to the prior years financial
statements to be consistent with the February 29, 2004 presentation. The
reclassifications have no impact on net income (loss) previously reported.  2.
    
    COMMON STOCK ECC has authorized 170,000,000 shares of Class A common stock, par value
$.01 per share, 30,000,000 shares of Class B common stock, par value $.01 per
share, and 30,000,000 shares of Class C common stock, par value $.01 per share.
The rights of these three classes are essentially identical except that each
share of Class A common stock has one vote with respect to substantially all
matters, each share of Class B common stock has 10 votes with respect to
substantially all matters, and each share of Class C common stock has no voting
rights with respect to substantially all matters. Class B common stock is
owned by our Chairman, CEO and President, 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 Mr. Smulyan. At February 28 (29), 2003
and 2004, no shares of Class C common stock were issued or outstanding. The
financial statements presented reflect the issuance of Class A and Class B
common stock. In April 2002, ECC completed the sale of 4.6 million shares of its Class A
common stock at $26.80 per share resulting in total proceeds of $123.3 million.
The net proceeds of $120.2 million were contributed to EOC and 50% of the net
proceeds were used in April 2002 to repay outstanding obligations under our
credit facility. The remainder was invested, and in July 2002 distributed to
ECC and used to redeem approximately 22.6% of ECCs outstanding 12 1/2%
senior discount notes (see Note 4).  3.
    
    PREFERRED STOCK ECC 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. ECC has 2.875 million shares of 6.25% Series A cumulative convertible
preferred stock outstanding, which have a liquidation preference of $50 per
share and a par value of $.01 per share. Each preferred share is convertible
at the option of the holder into 1.28 shares of Class A common stock, subject
to certain events. Dividends are cumulative and payable quarterly in arrears
on January 15, April 15, July 15, and October 15 of each year at an annual rate
of $3.125 per preferred share. While Emmis had sufficient liquidity to declare
and pay the dividends as they become due, it was not permitted to do so for the
October 15, 2001, January 15, 2002, and April 15, 2002 payments because Emmis
leverage ratio under the senior discount notes indenture exceeded 8:1 and its
leverage ratio under the senior subordinated notes indenture exceeded 7:1.
ECCs board of directors set a record date for payments, but did not declare
the dividends. Instead, a wholly-owned, unrestricted subsidiary of EOC made a
payment of $.78125 per share to each preferred shareholder of record. This
subsidiary was permitted to make the payments to the preferred shareholders
under the senior discount notes and senior subordinated notes indentures.
Currently, Emmis meets its leverage ratio requirements under both the senior
discount notes indenture and the senior subordinated notes indenture. On July
2, 2002, ECCs board of directors declared the April 15, 2002, October 15, 2001
and January 15, 2002 dividend, and deemed the obligation to pay each dividend
to have been discharged by the subsidiarys prior payment. Commencing with the
July 15, 2002 dividend, all subsequent dividends have been timely declared and
paid by ECC. 81




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ECC may redeem the preferred stock for cash at the following redemption
premiums (which are expressed as a percentage of the liquidation preference per
share and which step down on October 15 of each subsequent year), plus in each
case accumulated and unpaid dividends, if any, whether or not declared to the
redemption date: Year
    
    Amount2004
    
    
    101.786
    %2005
    
    
    100.893
    %2006 and thereafter
    
    
    100.000
    %
  4.
    
    CREDIT FACILITY, SENIOR SUBORDINATED NOTES AND SENIOR DISCOUNT NOTES The credit facility, senior subordinated notes and senior discount notes
were comprised of the following at February 28 (29), 2003 and 2004: 2003
    
    2004Credit FacilityRevolver
    
    $
    2,112
    
    
    $
    45,000Term Note A
    
    
    204,786
    
    
    
    196,083Term Note B
    
    
    500,000
    
    
    
    498,7508 1/8% Senior Subordinated Notes Due 2009
    
    
    300,000
    
    
    
    300,0001,006,898
    
    
    
    1,039,833Less: Current Maturities
    
    
    9,953
    
    
    
    1,688EOC total
    
    
    996,945
    
    
    
    1,038,14512 1/2% Senior Discount Notes Due 2011
    
    
    197,844
    
    
    
    223,423Emmis total
    
    $
    1,194,789
    
    
    $
    1,261,568
 Subsequent to the balance sheet date, Emmis refinanced its credit
facility, senior subordinated notes and retired substantially all of its senior
discount notes. Current maturities have been determined based on the terms of
the new indebtedness. (see Note 15 for more discussion). CREDIT FACILITY On December 29, 2000 ECC entered into an amended and restated credit
facility for $1.4 billion (consisting of a $320.0 million revolver, a $480.0
million term note A and a $600.0 million term note B). Effective May 10, 2004,
EOC entered into a new credit facility (see Note 15 for more discussion). The
following describes the credit facility in existence as of the balance sheet
date and previous amendments thereto. In June 2001, upon completion of the
Companys reorganization (see Note 1c), the Company repaid $93.0 million of
term notes and transferred the credit facility to EOC. The repayment resulted
in the cancellation of a portion of the term notes and the Company recorded a
loss on debt extinguishment of approximately $1.7 million related to
unamortized deferred debt issuance costs for the year ended February 28, 2002.
During fiscal 2002, EOC repaid and cancelled an additional $35.0 million in
term notes. On November 30, 2001, EOC amended the financial covenants of its
credit facility through November 30, 2002, which, among other things, reduced
total availability under the revolver to $220.0 million and resulted in the
amortization of $1.4 million of deferred debt issuance costs into interest
expense during the year ended February 28, 2002. On June 21, 2002, EOC amended its credit facility to (1) issue a $500.0
million new term B loan which was used to repay amounts outstanding under the
existing $552.1 million term B loan, (2) reset financial covenants for the
remaining term of the credit facility, and (3) permit EOC to make a one time
cash distribution to ECC for the purpose of redeeming a portion of its 12
1/2% senior discount notes. In connection with the repayment of the existing
term B loan, the Company recorded a loss on debt extinguishment of $0.8 million
relating to the write off of deferred debt fees. 82




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In the first quarter of fiscal 2003, we repaid approximately $195.1
million of credit facility debt with the net proceeds from our Denver radio
station asset sales and 50% of the net proceeds from our April 2002 equity
offering. In connection with the repayment of existing term loans outstanding,
the Company recorded loss on debt extinguishment of $3.6 million relating to
the write off of deferred debt fees. On June 6, 2003, EOC amended its credit facility to allow for the
acquisition of the controlling interest in the Austin partnership (see Note 6).
Specifically, the amendment increased the amount of Investments (as defined in
the credit facility) that EOC could make to allow for the investment in the
partnership. In addition to permitting the Austin acquisition, previously
required decreases in senior leverage and total leverage ratios were delayed
from November 30, 2003 to June 1, 2004. The revolver and term note A mature February 28, 2009 and the term note B
matures August 31, 2009. Net deferred debt costs of approximately $15.8
million and $13.8 million, respectively, relating to the credit facility are
reflected in the accompanying consolidated balance sheets as of February 28
(29), 2003 and 2004, and are being amortized over the life of the credit
facility as a component of interest expense. The amended and restated credit facility provides for letters of credit to
be made available to EOC not to exceed $100.0 million. The aggregate amount of
outstanding letters of credit and amounts borrowed under the revolver cannot
exceed the revolver commitment. At February 28 (29), 2003 and 2004, $1.4
million and $2.5 million, respectively, in letters of credit were outstanding. All outstanding amounts under the credit facility bear interest, at the
option of EOC, 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 (ranging from 0% to 2.9%
and 0.5% to 2.5%, respectively), depending on Emmis ratio of debt to operating
cash flow, as defined in the agreement. The weighted-average interest rate on
borrowings outstanding under the credit facility, including the effects of
interest rate swaps was approximately 4.7% and 3.4% at February 28 (29), 2003
and 2004, 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 required EOC to have fixed interest rates for a two
year period on at least 50% of its total outstanding debt, as defined
(including the senior subordinated debt). After the first two years, this
ratio of fixed to floating rate debt must be maintained if EOCs total leverage
ratio, as defined, is greater than 6:1 at any quarter end. All interest rate
swap agreements in place during fiscal 2003 and 2004 have expired as of
February 29, 2004. As indicated in footnote 1u., Emmis accounts for interest rate swap
arrangements under SFAS No. 133 as amended by SFAS No. 138. The fair market
value of these swaps at February 28, 2003, was a liability of $4.3 million
which is reflected in the accompanying consolidated balance sheets, with an
associated income tax asset of $1.9 million. As Emmis has designated these
interest rate swap agreements as cash flow hedges and the swaps were highly
effective during the year ended February 29, 2004, the net liability was
recorded as a component of comprehensive income and the ineffectiveness was not
material. Interest paid under these swap arrangements was $3.6 million, $11.0
million, and $3.4 million for the years ended February 28 (29), 2002, 2003 and
2004, respectively. The Company had no swap arrangements as of February 29,
2004. The aggregate amount of term notes A and B began amortizing in December
2003. As previously mentioned, subsequent to the balance sheet date, the
Company refinanced its credit facility. See Note 15 for a scheduled
amortization table of the new credit facility. The annual amortization and
reduction schedule for debt outstanding as of February 29, 2004, is classified
based on the terms of the new credit facility: 83




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SCHEDULED AMORTIZATION/REDUCTION OF CREDIT FACILITY Term Loan A/Year Ended
    
    Revolver
    
    Term Loan B
    
    TotalFebruary 28 (29),
    
    Amortization
    
    Amortization
    
    Amortization2005
    
    $
    
    
    
    $
    1,688
    
    
    $
    1,6882006
    
    
    
    
    
    
    6,750
    
    
    
    6,7502007
    
    
    
    
    
    
    6,750
    
    
    
    6,7502008
    
    
    
    
    
    
    6,750
    
    
    
    6,7502009
    
    
    
    
    
    
    6,750
    
    
    
    6,7502010
    
    
    
    
    
    
    6,750
    
    
    
    6,7502011
    
    
    241,083
    
    
    
    463,312
    
    
    
    704,395Total
    
    $
    241,083
    
    
    $
    498,750
    
    
    $
    739,833
 Proceeds from raising additional equity, issuing additional subordinated
debt or from asset sales, as well as excess cash flow may be required to repay
amounts outstanding under the credit facility. These mandatory repayment
provisions may apply depending on EOCs total leverage ratio, as defined under
the credit facility. Additionally, EOC may reborrow amounts paid in accordance
with these provisions under certain circumstances. The credit facility contains various financial and operating covenants and
other restrictions with which EOC must comply, including, among others,
restrictions on additional indebtedness, incurrence of liens, engaging in
businesses other than its primary business, paying cash dividends on common
stock, redeeming or repurchasing capital stock of ECC, acquisitions and asset
sales, as well as requirements to maintain certain financial ratios. EOC was
in compliance with these covenants at February 29, 2004. The credit facility
provides that an event of default will occur if there is a change of control of
ECC, as defined. A change of control includes, but is not limited to, Jeffrey
H. Smulyan ceasing to own, directly or indirectly, at least 35% of the general
voting rights of the capital stock of ECC. Substantially all of Emmis assets,
including the stock of Emmis wholly-owned subsidiaries, are pledged to secure
the credit facility. SENIOR SUBORDINATED NOTES On February 12, 1999, ECC issued $300 million of 8 1/8% senior
subordinated notes. Approximately 98% of these notes were repurchased on May
10, 2004, and the remainder are to be redeemed shortly (see Note 15 for more
discussion). The following describes the senior subordinated notes outstanding
as of the balance sheet date. The senior subordinated notes were sold at 100%
of the face amount. In March 1999, ECC filed an Exchange Offer Registration
Statement with the SEC to exchange the senior subordinated notes for new series
B notes registered under the Securities Act. The terms of the series B notes
are identical to the terms of the senior subordinated notes. In June 2001, ECC
transferred the senior discount notes to EOC as part of the companys
reorganization (see Note 1c). On or after March 15, 2004 and until March 14, 2007, the notes may be
redeemed at the option of EOC 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 redeemed at 100% plus accrued and unpaid interest. Upon
a change of control (as defined), EOC is required to make an offer to purchase
the notes then outstanding at a purchase price equal to 101% plus accrued and
unpaid interest. Interest on the notes is payable semi-annually. The notes have
no sinking fund requirements and are due in full on March 15, 2009. The notes are guaranteed by certain subsidiaries of EOC and expressly
subordinated in right of payment to all existing and future senior indebtedness
(as defined) of EOC. The notes will rank pari passu with any future senior
subordinated indebtedness (as defined) and senior to all subordinated
indebtedness (as defined) of EOC. The indenture relating to the notes contains covenants with respect to EOC
which include limitations of indebtedness, restricted payments (including
preferred stock dividend payments, see Note 3), transactions with affiliates,
issuance and sale of capital stock of restricted subsidiaries, sale/leaseback
transactions and mergers, consolidations or sales of substantially all of EOCs
assets. EOC was in compliance with these covenants at February 29, 2004. 84




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SENIOR DISCOUNT NOTES On March 27, 2001, Emmis received $202.6 million of proceeds from the
issuance of senior discount notes due 2011, less approximately $12.0 million of
debt issuance costs. Substantially all of these notes were repurchased on May
10, 2004 (see Note 15 for more discussion). The notes, for which ECC is the
obligor, accrete interest at a rate of 12.5% per year, compounded semi-annually
to an aggregate principal amount of $286.3 million on March 15, 2006, after
considering the July 2002 redemption. Commencing on September 15, 2006,
interest is payable in cash on each March 15 and September 15, with the
aggregate principal amount of $286.3 million due on March 15, 2011. The notes
have no sinking fund requirement. A portion of the net proceeds was used to
fund the acquisition of three radio stations in Phoenix, Arizona and the
remaining net proceeds ($93.0 million) were placed in escrow. In June 2001,
upon completion of the Companys reorganization (see Note 1c), the proceeds
held in escrow were released and used to reduce outstanding borrowings under
the credit facility. On July 1, 2002, ECC redeemed approximately 22.6% of its senior discount
notes. Approximately $60.1 million of the proceeds from the Companys April
2002 equity offering were used to repay approximately $53.4 million of the
carrying value of the discount notes at July 1, 2002 and pay approximately $6.7
million for a redemption premium. The redemption premium and approximately
$2.4 million of deferred debt fees related to the discount notes were recorded
as loss on debt extinguishment in the year ended February 28, 2003. Prior to March 15, 2004, the Company may, at its option, use the net cash
proceeds of one or more Public Equity Offerings (as defined), to redeem up to
an additional 12.4% of the aggregate principal amount of the notes at a
redemption price equal to 112.5% plus accrued and unpaid interest, provided
that at least $240.5 million of the aggregate principal amount at maturity of
the notes originally issued remains outstanding after such redemption.
Additionally, any time prior to March 15, 2006, the Company may redeem all or
part of the notes at a redemption price equal to 100% of the accreted value (as
defined) of the notes plus the applicable premium (as defined) as of, and
liquidating damages (as defined), if any, to the date of redemption. On or
after March 15, 2006 and until March 14, 2009, the notes may be redeemed at the
option of the Company in whole or in part at prices ranging from 106.25% to
102.083% plus accrued and unpaid interest. On or after March 15, 2009, the
notes may be redeemed 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. Prior to March 15, 2006, the purchase price will
be 101% of the accreted value of the notes. On or after March 15, 2006, the
purchase price will be 101% of the outstanding principal amount of the notes
plus accrued and unpaid interest. In June 2001, ECC filed an Exchange Offer Registration Statement with the
SEC to exchange the senior discount notes for new senior discount notes
registered under the Securities Act. The terms of the new senior discount
notes are identical to the terms of the senior discount notes they replaced. The notes are unsecured obligations of ECC and will rank pari passu with
all future senior indebtedness (as defined) and senior in right of payment to
future subordinated indebtedness (as defined). The notes are subordinated to
all indebtedness and liabilities (as defined) of ECCs subsidiaries. The indenture relating to the notes contains covenants with respect to the
Company which include limitations of indebtedness, restricted payments
(including preferred stock dividend payments, see Note 3), transactions with
affiliates, issuance and sale of capital stock of restricted subsidiaries, and
mergers, consolidations or sales of substantially all of the Companys assets.
The Company was in compliance with these covenants at February 29, 2004. 85




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5.
    
    OTHER LONG-TERM DEBT Other long-term debt was comprised of the following at February 28 (29),
2003 and 2004: 2003
    
    2004Hungary:License Obligation
    
    $
    13,363
    
    
    $
    9,901Bonds Payable
    
    
    3,099
    
    
    
    Loans Payable
    
    
    1,277
    
    
    
    687Other
    
    
    307
    
    
    
    172Total Other Long-Term Debt
    
    
    18,046
    
    
    
    10,760Less: Current Maturities
    
    
    4,959
    
    
    
    4,851Other Long-Term Debt, Net of
Current Maturities
    
    $
    13,087
    
    
    $
    5,909
 Our 59.5% owned Hungarian subsidiary, Slager Radio Rt., has certain
obligations which are consolidated in our financial statements due to our
majority ownership interest. However, Emmis is not a guarantor of or required
to fund these obligations. In particular, subsequent to the license
restructuring completed in December 2002, Slager Radio must pay, in Hungarian
forints, the original obligation due in November 2004, and five additional
equal annual installments that will commence in November 2005 and end in
November 2009, for a radio broadcast license to the Hungarian government. The
original 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. The original license
obligation has been discounted at an imputed interest rate of approximately 3%
to reflect the obligation at its fair value. The additional obligation that
stems from the restructuring is also non-interest bearing and no cost of living
adjustment applies. The additional license obligation has been discounted at
an imputed interest rate of approximately 7% to reflect the additional
obligation at its fair value. The total license obligation of $9.9 million (in
U.S. dollars) as of February 29, 2004, is reflected net of an unamortized
discount of $1.3 million. In addition, Slager Radio is obligated to pay certain loans to its
shareholders. At February 29, 2004, loans payable to the minority shareholders
were (in U.S. dollars) approximately $0.7 million. The loans are due at
maturity in September 2009 and bear interest at LIBOR plus 4% (5% at February
29, 2004). Interest payments on the loans are made quarterly. During the quarter ended August 31, 2003, the partners in our Hungarian
subsidiary, including Emmis, agreed to forgive certain indebtedness and accrued
interest owed to the partners by the subsidiary. The activity relating to
Emmis eliminates in consolidation. The forgiveness of debt by our minority
partners was accounted for as a capital transaction. Since the accrued
interest was charged to expense by the Hungarian subsidiary, reversal of the
portion of accrued interest attributable to the minority partners of $1.3
million was credited to income and is reflected in other income (expense), net
in the accompanying consolidated statements of operations.  6.
    
    ACQUISITIONS, DISPOSITONS AND INVESTMENTS Sale of Radio Stations in Argentina On December 23, 2003, Emmis agreed to sell its interest in Votionis, S.A.
(Votionis), which owns and operates two radio stations in Buenos Aires,
Argentina, to its minority partners for $7.3 million in cash. The sale is
subject to Argentine regulatory approvals and is expected to close during our
quarter ended May 31, 2004. Emmis acquired its interest in Votionis in
November 1999. In October 2003, we exercised our right to purchase the equity
interests of our minority partners. During negotiations with our minority
partners, we instead elected to sell our controlling interest. In connection
with the sale, Emmis recorded a loss from discontinued operations of $10.0
million in fiscal 2004. The Argentine peso substantially devalued relative to
the U.S. dollar early in 2002. The loss is primarily attributable to the
devaluation of the peso. Votionis has historically been included in the radio
reporting segment. See Note 1m for further discussion. 86




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Belgium radio licenses On December 19, 2003, the Flemish Government awarded licenses to operate
nine FM radio stations in the Flanders region of Belgium to several
not-for-profit entities that have granted Emmis the exclusive right to provide
the programming and sell the advertising on the stations. Five of these
licenses are for the stations that Emmis began programming in August 2003 and
the remaining four related to new stations that Emmis began operating in
February 2004. The licenses are for an initial term of nine years and do not
require the payment of any license fees to the Flemish Government. Emmis
consolidates these stations for financial reporting purposes. Austin Radio Acquisition On July 1, 2003, Emmis effectively acquired a controlling interest of
50.1% in a partnership that owns six radio stations in the Austin, Texas
metropolitan area for a cash purchase price of approximately $106.5 million,
including transaction costs of $1.0 million. These six stations are KLBJ-AM,
KLBJ-FM, KDHT-FM (formerly KXMG-FM), KROX-FM, KGSR-FM and KEYI-FM. This
acquisition allowed Emmis to diversify its radio portfolio and participate in
another large, high-growth radio market. The acquisition was financed through
borrowings under the credit facility and was accounted for as a purchase. The
Company recorded $35.3 million of goodwill, all of which is deductible for
income tax purposes. In addition, Emmis has the option, but not the
obligation, to purchase its partners entire 49.9% interest in the partnership
after December 2007 based on an 18-multiple of trailing 12-month cash flow. For this transaction, the aggregate purchase price, including transaction
costs of $1.0 million, was allocated as follows based upon a preliminary
independent appraisal. Material changes to the purchase price allocation are
not expected. Asset Description
    
    Amount
    
    Asset LivesAccounts receivable
    
    $
    4,893
    
    
    Less than one yearOther current assets
    
    
    85
    
    
    Less than one yearLand and buildings
    
    
    757
    
    
    31.5 years for buildingsBroadcasting equipment
    
    
    4,031
    
    
    5 to 7 yearsOffice equipment
    
    
    568
    
    
    5 to 7 yearsVehicles
    
    
    117
    
    
    5 to 7 yearsOther
    
    
    176
    
    
    VariousTotal tangible assets
    
    
    5,649Customer list
    
    
    2,974
    
    
    1 yearTalent contract
    
    
    456
    
    
    3.5 yearsLease rights
    
    
    389
    
    
    5 to 9 yearsAffiliation agreement
    
    
    189
    
    
    15 yearsFCC license (Indefinite-lived intangible)
    
    
    103,291
    
    
    Non-amortizingGoodwill
    
    
    35,329
    
    
    Non-amortizingTotal intangible assets
    
    
    142,628Investment and other long-term assets
    
    
    1,612Less: minority interest
    
    
    (47,894
    )Less: current liabilities
    
    
    (495
    )Total purchase price
    
    $
    106,478
 Sale of Mira Mobile Effective June 5, 2003, Emmis sold its mobile television production
company, Mira Mobile Television, to Shooters Production Services, Inc. for $3.9
million in cash, plus payments for working capital. Emmis received $3.3
million of the purchase price at closing and received a promissory note due
October 31, 2005 for the remaining $0.6 million. Emmis had acquired this
business in connection with the Lee acquisition in October 2000. The book
value of the long-lived assets as of May 31, 2003 was $3.1 million and the
operating performance of Mira Mobile was not material to the Company. Emmis
recorded a gain on the sale of these assets of approximately $0.9 million in
the accompanying consolidated statements of operations. 87




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WBPG-TV Acquisition Effective March 1, 2003, the Company acquired substantially all of the
assets of television station WBPG-TV in Mobile, AL  Pensacola, FL from Pegasus
Communications Corporation for a cash purchase price of approximately $11.7
million, including transaction costs of $0.2 million. This acquisition will
allow the Company to achieve duopoly efficiencies in the market, such as lower
programming acquisition costs and consolidation of general and administrative
functions, since Emmis already owns the Fox-affiliated television station in
the market, WALA. The acquisition was financed through borrowings under the
credit facility and was accounted for as a purchase. The Company recorded $0.2
million of goodwill, all of which is deductible for income tax purposes. For this transaction, the aggregate purchase price, including transaction
costs of $0.2 million, was allocated as follows based upon an independent
appraisal. Asset Description
    
    Amount
    
    Asset LivesAccounts Receivable
    
    $
    154
    
    
    Less than one yearPrepaids
    
    
    35
    
    
    Less than one yearBroadcasting equipment
    
    
    2,458
    
    
    5 to 7 yearsOffice equipment
    
    
    97
    
    
    5 to 7 yearsVehicles
    
    
    42
    
    
    5 to 7 yearsTotal tangible assets
    
    
    2,597Customer list
    
    
    229
    
    
    1 yearAffiliation agreement
    
    
    559
    
    
    3.5 yearsFCC license (Indefinite-lived intangible)
    
    
    7,971
    
    
    Non-amortizingGoodwill
    
    
    150
    
    
    Non-amortizingTotal intangible assets
    
    
    8,909Programming acquired
    
    
    159Less: Programming liabilities assumed
    
    
    (198
    )Total purchase price
    
    $
    11,656
 Effective May 1, 2002 Emmis completed the sale of substantially all of the
assets of KALC-FM in Denver, Colorado to Entercom Communications Corporation
for $88.0 million. Emmis had purchased KALC-FM on January 17, 2001, from Salem
Communications Corporation for $98.8 million in cash plus a commitment fee of
$1.2 million and transaction related costs of $0.9 million. On February 12,
2002, Emmis entered into a definitive agreement to sell KALC-FM to Entercom and
Entercom began operating KALC-FM under a time brokerage agreement on March 16,
2002. Proceeds were used to repay amounts outstanding under our credit
facility. Since the agreed-upon sales price for this station was less than its
carrying amount as of February 28, 2002, we recognized an impairment loss of
$9.1 million in fiscal 2002. Additionally, in fiscal 2003 we recorded an
incremental $1.3 million loss in connection with the sale. Effective May 1, 2002 Emmis completed the sale of substantially all of the
assets of KXPK-FM in Denver, Colorado to Entravision Communications Corporation
for $47.5 million. Emmis had purchased KXPK-FM on August 24, 2000, from AMFM,
Inc. for an allocated purchase price of $35.0 million in cash plus liabilities
recorded of $1.2 million and transaction related costs of $0.4 million. Emmis
entered into a definitive agreement to sell KXPK-FM to Entravision on February
12, 2002. Proceeds were used to repay amounts outstanding under our credit
facility. In fiscal 2003 we recorded a gain on sale of assets of $10.2
million. On March 28, 2001, Emmis completed its acquisition of substantially all of
the assets of radio stations KTAR-AM, KMVP-AM and KKLT-FM in Phoenix, Arizona
from Hearst-Argyle Television, Inc. for $160.0 million in cash, plus
transaction related costs of $0.7 million. The Company financed the
acquisition through a $20.0 million advance payment borrowed under the credit
facility in June 2000 and the remainder with borrowings under the credit
facility and proceeds from ECCs March 2001 senior discount notes offering.
The acquisition was accounted for as a purchase. Emmis began programming and
selling advertising on the radio stations on August 1, 2000 under a time
brokerage agreement. The total purchase price was allocated to property and
equipment and broadcast licenses based on an appraisal. Broadcast licenses are
included in intangible assets in the accompanying consolidated balance sheets
and, effective March 1, 2002, are no longer amortized in the consolidated
statements of operations in accordance with SFAS No. 142. 88




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7.
    
    PRO FORMA FINANCIAL INFORMATIONEmmis Unaudited pro forma summary information is presented below for the years
ended February 28 (29), 2003 and 2004, assuming the acquisition (and related
borrowings) of (i) a controlling interest of 50.1% in a partnership that owns
six radio stations in the Austin, Texas metropolitan area in July 2003 and (ii)
WBPG-TV in March 2003 had occurred on the first day of the pro forma periods
presented below. Preparation of the pro forma summary information was based upon
assumptions deemed appropriate by the Companys management. The pro forma
summary information presented below is not necessarily indicative of the
results that actually would have occurred if the transactions indicated above
had been consummated at the beginning of the periods presented, and is not
intended to be a projection of future results. Pro Forma2003
    
    2004Net revenues
    
    $
    586,791
    
    
    $
    600,728Net income from continuing operations
    
    $
    2,851
    
    
    $
    13,050Net income available to common
shareholders from continuing operations
    
    $
    (6,133
    )
    
    $
    4,066Net income per share available to
common shareholders from continuing
operations:Basic
    
    $
    (0.12
    )
    
    $
    0.07Diluted
    
    $
    (0.12
    )
    
    $
    0.07Weighted average shares outstanding:Basic
    
    
    53,014
    
    
    
    54,716Diluted
    
    
    53,014
    
    
    
    55,066
 The pro forma results exclude approximately $0.9 million of costs recorded
by the seller directly attributable to their sale of the Austin radio stations
to us in the year ended February 29, 2004. EOC Unaudited pro forma summary information is presented below for the years
ended February 28 (29), 2003 and 2004, assuming the acquisition (and related
borrowings) of (i) a controlling interest of 50.1% in a partnership that owns
six radio stations in the Austin, Texas metropolitan area in July 2003 and (ii)
WBPG-TV in March 2003 had occurred on the first day of the pro forma periods
presented below. 89




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Preparation of the pro forma summary information was based upon
assumptions deemed appropriate by the Companys management. The pro forma
summary information presented below is not necessarily indicative of the
results that actually would have occurred if the transactions indicated above
had been consummated at the beginning of the periods presented, and is not
intended to be a projection of future results. Pro Forma2003
    
    2004Net revenues
    
    $
    586,791
    
    
    $
    600,728Net income from continuing operations
    
    $
    27,754
    
    
    $
    30,213
 The pro forma results exclude approximately $0.9 million of costs recorded
by the seller directly attributable to their sale of the Austin radio stations
to us in the year ended February 29, 2004.  8.
    
    INTANGIBLE ASSETS AND GOODWILL Effective March 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which requires the Company to cease amortizing
goodwill and certain intangibles. Instead, these assets will be reviewed at
least annually for impairment, and will be written down and charged to results
of operations in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. On February 28, 2002, prior to the
adoption of SFAS No. 142, the Company reflected unamortized goodwill and
unamortized FCC licenses in the amounts of $175.1 million and $1,743.2 million,
respectively. FCC licenses are renewed every eight years for a nominal amount
and historically all of our FCC licenses have been renewed at the end of their
respective eight-year periods. Since we expect that all of our FCC licenses
will continue to be renewed in the future, we believe they have indefinite
lives. The Company had previously amortized these assets over the maximum
period allowed of 40 years. Adoption of this accounting standard eliminated
the Companys amortization expense for goodwill and FCC licenses. For
comparison purposes, for the year ended February 28, 2002, the Company recorded
amortization expense for goodwill and FCC licenses of $58.2 million. The following unaudited pro forma summary presents the Companys estimate
of the effect of the adoption of SFAS No. 142 as of the beginning of the
periods presented. Reported income (loss) before extraordinary loss and
accounting change and reported net loss available to common shareholder are
adjusted to eliminate the amortization expense recognized in those periods
related to goodwill and FCC licenses as these assets are not amortized under
this new accounting standard. 90




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EMMIS Years ended February 28 (29),(Dollars in thousands,
except per share data)
    
    2002
    
    2003
    
    2004Reported income (loss) before discontinued operations
and accounting change
    
    $
    64,108
    
    
    $
    2,932
    
    
    $
    12,275Add back: amortization of goodwill, net of tax provision
of $2,343 for the year ended February 28, 2002
    
    
    5,348
    
    
    
    
    
    
    
    Add back: amortization of FCC licenses, net of tax
provision of $15,378 for the year ended February 28, 2002
    
    
    35,098
    
    
    
    
    
    
    
    Adjusted income (loss) before discontinued operations
and accounting change
    
    $
    104,554
    
    
    $
    2,932
    
    
    $
    12,275Reported net income (loss) available to common shareholders
    
    $
    (73,092
    )
    
    $
    (173,452
    )
    
    $
    (6,728
    )Add back: amortization of goodwill, net of tax provision
of $2,343 for the year ended February 28, 2002
    
    
    5,348
    
    
    
    
    
    
    
    Add back: amortization of FCC licenses, net of tax
provision of $15,378 for the year ended February 28, 2002
    
    
    35,098
    
    
    
    
    
    
    
    Adjusted net income (loss) available to common shareholders
    
    $
    (32,646
    )
    
    $
    (173,452
    )
    
    $
    (6,728
    )Basic net income (loss) available to common shareholders:Reported net income (loss) available to common shareholders
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Amortization of goodwill, net of taxes
    
    
    0.11
    
    
    
    
    
    
    
    Amortization of FCC licenses, net of taxes
    
    
    0.74
    
    
    
    
    
    
    
    Adjusted net income (loss) available to common shareholders
    
    $
    (0.69
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Diluted net income (loss) available to common shareholders:Reported net income (loss) available to common shareholders
    
    $
    (1.54
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Amortization of goodwill, net of taxes
    
    
    0.11
    
    
    
    
    
    
    
    Amortization of FCC licenses, net of taxes
    
    
    0.74
    
    
    
    
    
    
    
    Adjusted net income (loss) available to common shareholders
    
    $
    (0.69
    )
    
    $
    (3.27
    )
    
    $
    (0.12
    )Basic Shares
    
    
    47,334
    
    
    
    53,014
    
    
    
    54,716Diluted Shares
    
    
    47,334
    
    
    
    53,014
    
    
    
    54,716
 91




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EOC Years Ended Feburary 28 (29),(Dollars in thousands)
    
    2002
    
    2003
    
    2004Reported income (loss) before discontinued operations
and accounting change
    
    $
    (47,886
    )
    
    $
    27,835
    
    
    $
    29,438Add back: amortization of goodwill, net of tax
provision of $2,343 for the year
ended February 28, 2002
    
    
    5,348
    
    
    
    
    
    
    
    Add back: amortization of FCC licenses, net of
tax provision of $15,378 for the
year ended February 28, 2002
    
    
    35,098
    
    
    
    
    
    
    
    Adjusted income (loss) before discontinued operations
and accounting change
    
    $
    (7,440
    )
    
    $
    27,835
    
    
    $
    29,438Reported net income (loss)
    
    $
    (47,886
    )
    
    $
    (139,565
    )
    
    $
    19,419Add back: amortization of goodwill, net of tax
provision of $2,343 for the year
ended February 28, 2002
    
    
    5,348
    
    
    
    
    
    
    
    Add back: amortization of FCC licenses, net of
tax provision of $15,378 for the
year ended February 28, 2002
    
    
    35,098
    
    
    
    
    
    
    
    Adjusted net income (loss)
    
    $
    (7,440
    )
    
    $
    (139,565
    )
    
    $
    19,419
 Because EOC is a wholly-owned subsidiary of Emmis, per share data is excluded. Indefinite-lived Intangibles Under the guidance in SFAS No. 142, the Companys FCC licenses are
considered indefinite-lived intangibles. These assets, which the Company
determined were its only indefinite-lived intangibles, are not subject to
amortization, but will be tested for impairment at least annually. As of
February 28 (29), 2003 and 2004, the carrying amounts of the Companys FCC
licenses were $1,638.2 million and $1,737.0 million, respectively. In accordance with SFAS No. 142, the Company tested these indefinite-lived
intangible assets for impairment as of March 1, 2002 by comparing their fair
value to their carrying value at that date. Prior to March 1, 2002, an
impairment adjustment was recorded if the carrying value of an intangible asset
exceeded its estimated undiscounted cash flows in accordance with SFAS No. 121.
Upon adoption of SFAS No. 142, the Company recognized impairment on its FCC
licenses of approximately $145.0 million, net of $88.8 million in tax
benefit, which is recorded as a component of the cumulative effect of
accounting change during the year ended February 28, 2003. Approximately $14.8
million of the charge, net of tax, related to our radio segment and $130.2
million of the charge, net of tax, related to our television segment. The fair
value of our FCC licenses used to calculate the impairment charge was
determined using an independent appraiser or by management, using an enterprise
valuation approach. Management determined enterprise value by applying an
estimated market multiple to the broadcast cash flow generated by each
reporting unit. Market multiples were determined based on information
available regarding publicly traded peer companies, recently completed or
contemplated transactions within the industry, and reporting units competitive
position in their respective markets. Appropriate allocation was then made to
the tangible assets and unrecognized intangible assets, including network
affiliation agreements and customer lists, with the residual amount
representing the implied fair value of our indefinite lived intangible assets.
To the extent the carrying amount of the indefinite-lived intangible exceeded
this implied fair value, the difference was recorded in the statement of
operations, as described above. For FCC licenses valued using the residual
method, the impairment test was based on a two-step approach, analogous to the
two-step goodwill impairment test. In the case of radio, the Company
determined the reporting unit to be all of our stations in a local market, and
in the case of television and publishing, the Company determined the reporting
unit to be each individual station or magazine. Throughout our fiscal 2002,
unfavorable economic conditions persisted in the industries in which the
Company engages. These conditions caused customers to reduce the amount of
advertising dollars spent on the Companys media inventory as compared to prior
periods, adversely
impacting the cash flow projections used to determine the fair value of
each reporting unit and public trading multiples of media stocks, resulting in
the write-off of a portion of the carrying amount of our FCC licenses. 92




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As of March 1, 2002, Emmis had two radio stations with a value for both
FCC license and goodwill recorded. The FCC license value was determined using
the residual method. The goodwill was recorded pursuant to book/tax basis
differences existing at the time of stock acquisitions. We have reclassified
the goodwill recorded at these stations to FCC licenses in the accompanying
balance sheets. Goodwill recorded at these stations was approximately $80.3
million and the reclassification to FCC licenses resulted in additional
goodwill and deferred taxes of approximately $49.0 million. This
reclassification had no impact on impairment results previously reported. Our annual impairment test for fiscal 2003 did not result in any further
write-downs. However, in connection with our fiscal 2004 annual impairment
review, we recognized an impairment loss of $12.4 million, which related to two
stations in our television division. Although our television division as a
whole performed very well in fiscal 2004, one of our television stations
underperformed its market and experienced a decline in its cash flows. We have
replaced certain management personnel at this station. Also, a recently
contemplated transaction in a market in which we operate led us to re-evaluate
the value we had assigned to our station. The annual required impairment tests
may result in future periodic write-downs. Goodwill SFAS No. 142 requires the Company to test goodwill for impairment at least
annually using a two-step process. The first step is a screen for potential
impairment, while the second step measures the amount of impairment. The
Company completed the initial two-step impairment test during the first quarter
of fiscal 2003. As a result of this test, the Company recognized impairment of
approximately $22.4 million, net of $13.8 million in tax benefit, as a
component of the cumulative effect of an accounting change during the year
ended February 28, 2003. Approximately $18.5 million of the charge, net of
tax, related to our television segment and $3.9 million of the charge, net of
tax, related to our publishing segment. Consistent with the Companys approach
to determining the fair value of our FCC licenses, the enterprise valuation
approach was used to determine the fair value of each of the Companys
reporting units, and a portion of the carrying value of our goodwill was
written-off due to reductions in cash flow and public trading multiples of
media stocks resulting from the unfavorable economic conditions that reduced
advertising expenditures throughout our fiscal 2002. As of March 1, 2002, Emmis had two radio stations with a value for both
FCC license and goodwill recorded. The goodwill was recorded pursuant to
book/tax basis differences existing at the time of stock acquisitions. We have
reclassified the goodwill recorded at these stations to FCC licenses in the
accompanying balance sheets. Goodwill recorded at these stations was
approximately $80.3 million and the reclassification to FCC licenses resulted
in additional goodwill and deferred taxes of approximately $49.0 million. As a
result of this reclassification, we have no goodwill recorded for any
broadcasting property for which the value of the propertys FCC license was
determined using the residual method. As of February 28 (29), 2003 and 2004
the carrying amount of the Companys goodwill was $58.7 million and $94.0
million, respectively. As of February 28, 2003, approximately $0.5 million of
our goodwill was attributable to our radio division and the remaining $58.2
million was attributable to our publishing division. As of February 29, 2004,
approximately $35.6 million, $0.2 million and $58.2 million was attributable to
our radio, television and publishing divisions, respectively. The required
impairment tests may result in future periodic write-downs, but the annual
impairment tests for fiscal 2003 and 2004, completed in the fourth quarter of
each year, did not result in any further write-downs. Definite-lived intangibles The Company has definite-lived intangible assets recorded that continue to
be amortized in accordance with SFAS No. 142. These assets consist primarily of
foreign broadcasting licenses, subscription lists, lease rights, customer lists
and non-compete agreements, all of which are amortized over the period of time
the assets are expected to contribute directly or indirectly to the Companys
future cash flows. In accordance with the transitional requirements of SFAS
No. 142, the Company reassessed the useful lives of these intangibles and
determined that no changes to their useful lives were necessary. The following
table presents the weighted-average remaining life, gross carrying amount and
accumulated amortization for each major class of definite-lived intangible
asset at February 28 (29), 2003 and 2004 (dollars in thousands): 93




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February 28, 2003
    
    February 29, 2004Weighted Average
    
    Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetUseful Life
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    Carrying(in years)
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountForeign Broadcasting Licenses
    
    
    7.3
    
    
    $
    23,178
    
    
    $
    10,993
    
    
    $
    12,185
    
    
    $
    23,308
    
    
    $
    11,879
    
    
    $
    11,429Subscription Lists
    
    
    3.0
    
    
    
    12,189
    
    
    
    12,176
    
    
    
    13
    
    
    
    12,189
    
    
    
    12,189
    
    
    
    Favorable Office Leases
    
    
    38.1
    
    
    
    11,502
    
    
    
    695
    
    
    
    10,807
    
    
    
    12,190
    
    
    
    1,054
    
    
    
    11,136Customer Lists
    
    
    1.0
    
    
    
    7,371
    
    
    
    4,336
    
    
    
    3,035
    
    
    
    10,574
    
    
    
    8,607
    
    
    
    1,967Non-Compete Agreements
    
    
    1.3
    
    
    
    5,738
    
    
    
    5,601
    
    
    
    137
    
    
    
    5,738
    
    
    
    5,641
    
    
    
    97Other
    
    
    12.4
    
    
    
    4,211
    
    
    
    1,527
    
    
    
    2,684
    
    
    
    5,549
    
    
    
    2,329
    
    
    
    3,220TOTAL
    
    
    
    
    
    $
    64,189
    
    
    $
    35,328
    
    
    $
    28,861
    
    
    $
    69,548
    
    
    $
    41,699
    
    
    $
    27,849
 Total amortization expense from definite-lived intangibles for the years
ended February 28 (29), 2002, 2003 and 2004 was $7.8 million, $7.1 million and
$7.2 million, respectively. The following table presents the Companys
estimate of amortization expense for each of the five succeeding fiscal years
for definite-lived intangibles recorded on our books as of February 29, 2004
(dollars in thousands): FISCAL YEAR ENDED FEBRUARY,2005
    
    $
    4,9212006
    
    
    2,9432007
    
    
    2,8372008
    
    
    2,6612008
    
    
    2,495
 9. EMPLOYEE BENEFIT PLANS a. 1994 Equity Incentive Plan At the 1994 annual meeting, the shareholders of Emmis approved the 1994
Equity Incentive Plan. Under this Plan, awards equivalent to 2,000,000 shares
of common stock may be granted. The awards, which have certain restrictions,
may be for incentive stock options, nonqualified stock options, shares of
restricted stock, stock appreciation rights, 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 a purchase price at amounts greater
than or equal to the par value of the underlying stock. No more than 1,000,000
shares of Class B common stock are available for grant and issuance under this
Plan. The stock options under this Plan are generally not exercisable for one
year after the date of grant and expire not more than 10 years from the date of
grant. Under this Plan, awards equivalent to approximately 11,000 shares of
common stock are available for grant at February 29, 2004, but the Plan
terminated on March 1, 2004, so no further grants will be made from this Plan.
Certain stock options awarded remained outstanding as of February 28 (29), 2003
and 2004. b. 1995 Equity Incentive Plan At the 1995 annual meeting, the shareholders of Emmis approved the 1995
Equity Incentive Plan. Under this Plan, awards equivalent to approximately
1,300,000 shares of common stock may be granted pursuant to employment
agreements. Under the Plan, no further awards were available for grant at
February 29, 2004. Certain stock options awarded remained outstanding as of
February 28 (29), 2003 and 2004. c. Non-Employee Director Stock Option Plan At the 1995 annual meeting, the shareholders of Emmis approved a
Non-Employee Director Stock Option Plan. Under this Plan, each non-employee
director, as of January 24, 1995, was granted an option to acquire 10,000
shares of the Companys Class A common stock. Thereafter, upon election or
appointment of any non-employee director or upon a continuing director becoming
a non-employee director, such individual will also become eligible to receive a
comparable option. In addition, an equivalent option will be automatically
granted on an annual basis to each non-employee director. All awards are
granted with an exercise price equal to the fair market value of the
stock on the date of grant. Under this Plan, awards equivalent to
approximately 50,000 shares of Class A common stock are available for grant at
February 29, 2004. ECC no longer makes awards under this Plan. However,
certain previously awarded stock options remained outstanding as of February 28
(29), 2003 and 2004. 94




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##### Table of Contents



d. 1997 Equity Incentive Plan At the 1997 annual meeting, the shareholders of Emmis approved the 1997
Equity Incentive Plan. Under this plan, awards equivalent to 2,000,000 shares
of common stock may be granted. The awards, which have certain restrictions,
may be for incentive stock options, nonqualified stock options, shares of
restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market
value of the stock except for shares of restricted stock which may be granted
with an exercise price at amounts greater than or equal to the par value of the
underlying stock. No more than 1,000,000 shares of Class B common stock are
available for grant and issuance under this Plan. The stock options under this
Plan are generally not exercisable for one year after the date of grant and
expire not more than 10 years from the date of grant. Under this Plan, awards
equivalent to approximately 12,000 shares of common stock were available for
grant at February 29, 2004. Certain stock options and restricted stock awarded
remained outstanding as of February 28 (29), 2003 and 2004. e. 1999 Equity Incentive Plan At the 1999 annual meeting, the shareholders of Emmis approved the 1999
Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares
of common stock may be granted. The awards, which have certain restrictions,
may be for incentive stock options, nonqualified stock options, shares of
restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market
value of the stock except for shares of restricted stock which may be granted
with an exercise price at amounts greater than or equal to the par value of the
underlying stock. No more than 1,000,000 shares of Class B common stock are
available for grant and issuance under this Plan. The stock options under this
Plan are generally not exercisable for one year after the date of grant and
expire not more than 10 years from the date of grant. Under this Plan, awards
equivalent to approximately 332,000 shares of common stock were available for
grant at February 29, 2004. Certain stock options and restricted stock awarded
remained outstanding as of February 28 (29), 2003 and 2004. f. 2001 Equity Incentive Plan At the 2001 annual meeting, the shareholders of Emmis approved the 2001
Equity Incentive Plan. Under this plan, awards equivalent to 3,000,000 shares
of common stock may be granted. The awards, which have certain restrictions,
may be for incentive stock options, nonqualified stock options, shares of
restricted stock, stock appreciation rights or performance units. Under this
Plan, all awards are granted with a purchase price equal to the fair market
value of the stock except for shares of restricted stock which may be granted
with an exercise price, if any, at amounts greater than or equal to the par
value of the underlying stock. No more than 1,000,000 shares of Class B common
stock are available for grant and issuance under this Plan. The stock options
under this Plan generally expire not more than 10 years from the date of grant.
Under this Plan, awards equivalent to approximately 595,000 shares of common
stock were available for grant at February 29, 2004. Certain stock awards
remained outstanding as of February 28 (29), 2003 and 2004. g. 2002 Equity Compensation Plan At the 2002 annual meeting, the shareholders of Emmis approved the 2002
Equity Compensation Plan. Under this plan, awards equivalent to 3,000,000
shares of common stock may be granted. The awards, which have certain
restrictions, may be for incentive stock options, nonqualified stock options,
shares of restricted stock, stock appreciation rights or performance units.
Under this Plan, all awards are granted with a purchase price equal to the fair
market value of the stock except for shares of restricted stock which may be
granted with an exercise price, if any, at amounts greater than or equal to the
par value of the underlying stock. No more than 1,000,000 shares of Class B
common stock are available for grant and issuance under this Plan. The stock
options under this Plan generally expire not more than 10 years from the date
of grant. Under this Plan, awards equivalent to approximately 1,726,000 shares
of common stock were available for grant at February 29, 2004. On March 1,
2004, options were granted to employees under the 2002 Equity Compensation Plan
to purchase an additional 1,391,645 shares of Emmis Communications Corporation
common stock at $25.53 per share. Certain stock awards remained outstanding as
of February 28 (29), 2003 and 2004. h. Other Disclosures Related to Stock Option and Equity Incentive Plans A summary of the status of options and restricted stock at February 2002,
2003, and 2004 and the related activity for the year is as follows: 95




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##### Table of Contents



2002
    
    2003
    
    2004Number of
    
    Weighted
    
    Number of
    
    Weighted
    
    Number of
    
    WeightedOptions/
    
    Average
    
    Options/
    
    Average
    
    Options/
    
    AverageRestricted
    
    Exercise
    
    Restricted
    
    Exercise
    
    Restricted
    
    ExerciseStock
    
    Price
    
    Stock
    
    Price
    
    Stock
    
    PriceOutstanding at Beginning of Year
    
    
    4,144,793
    
    
    
    23.14
    
    
    
    4,753,513
    
    
    
    25.39
    
    
    
    5,259,479
    
    
    
    26.53Granted
    
    
    1,089,369
    
    
    
    29.01
    
    
    
    1,926,228
    
    
    
    14.96
    
    
    
    2,289,915
    
    
    
    8.11Exercised
    
    
    (250,420
    )
    
    
    17.56
    
    
    
    (311,234
    )
    
    
    17.90
    
    
    
    (657,857
    )
    
    
    15.74Lapsing of restrictions on stock awards
    
    
    (190,162
    )
    
    
    
    
    
    
    (920,571
    )
    
    
    
    
    
    
    (1,180,706
    )
    
    
    Expired and other
    
    
    (40,067
    )
    
    
    23.68
    
    
    
    (188,457
    )
    
    
    25.75
    
    
    
    (420,929
    )
    
    
    22.69Outstanding at End of Year
    
    
    4,753,513
    
    
    
    25.39
    
    
    
    5,259,479
    
    
    
    26.53
    
    
    
    5,289,902
    
    
    
    25.77Exercisable at End of Year
    
    
    2,464,827
    
    
    
    21.10
    
    
    
    2,602,475
    
    
    
    23.90
    
    
    
    2,754,389
    
    
    
    27.78Total Available for Grant
    
    
    3,333,000
    
    
    
    
    
    
    
    4,595,000
    
    
    
    
    
    
    
    2,726,000
 During the years ended February 2002, 2003 and 2004, all options were
granted with an exercise price equal to the fair market value of the stock on
the date of grant. During the years ended February 2002, 2003 and 2004, the
Company entered into employment agreements providing for grants of 26,190,
22,500, and 87,500 shares, respectively, at a weighted average fair value of
$27.57, $27.16 and $17.29, respectively. The following information relates to options outstanding and exercisable
at February 29, 2004: Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number of
    
    Exercise
    
    Remaining
    
    Number of
    
    ExercisePrices
    
    Options
    
    Price
    
    Contract Life
    
    Options
    
    Price$3.80-$7.60
    
    
    1,200
    
    
    $
    6.63
    
    
    0.2 years
    
    
    1,200
    
    
    $
    6.637.60-11.40
    
    
    0
    
    
    
    0
    
    
    0.0 years
    
    
    0
    
    
    
    011.40-15.20
    
    
    0
    
    
    
    0
    
    
    0.0 years
    
    
    0
    
    
    
    015.20-19.00
    
    
    1,123,670
    
    
    
    16.43
    
    
    8.3 years
    
    
    116,245
    
    
    
    16.5819.00-22.80
    
    
    706,430
    
    
    
    21.06
    
    
    3.2 years
    
    
    613,100
    
    
    
    20.9722.80-26.60
    
    
    81,200
    
    
    
    24.63
    
    
    1.2 years
    
    
    81,200
    
    
    
    24.6326.60-30.40
    
    
    2,788,051
    
    
    
    28.74
    
    
    6.5 years
    
    
    1,358,293
    
    
    
    28.7530.40-34.20
    
    
    0
    
    
    
    0
    
    
    0.0 years
    
    
    0
    
    
    
    034.20-38.00
    
    
    589,351
    
    
    
    35.40
    
    
    5.5 years
    
    
    584,351
    
    
    
    35.38
 In addition to the benefit plans noted above, Emmis has the following
employee benefit plans: i. Profit Sharing Plan In December 1986, Emmis adopted a profit sharing plan that covers all
nonunion employees with six months of service. Contributions to the plan are at
the discretion of the Emmis Board of Directors and can be made in the form of
newly issued Emmis common stock or cash. Historically, all contributions to the
plan have been in the form of Emmis common stock. No contributions were made
to the profit sharing plan in the three years ended February 29, 2004. j. 401(k) Retirement Savings Plan Emmis sponsors two Section 401(k) retirement savings plans. One is
available to substantially all nonunion employees age 18 years and older who
have at least six months of service and the other is available to substantially
all union employees that meet the same qualifications. 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 cash or
shares of the Companys Class A common stock. Effective March 1, 2003, Emmis
elected to double its 401(k) match to $2 per employee, with one-half of the
contribution made in Emmis stock. The increased 401(k) match was made instead
of making a
contribution to the companys profit sharing plan. Emmis contributions
to the plans totaled $1,684, $1,503 and $3,037 for the years ended February
2002, 2003 and 2004, respectively. k. Defined Contribution Health and Retirement Plan 96




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##### Table of Contents



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 $465,
$414, and $503 for the years ended February 2002, 2003 and 2004, respectively. l. Employee Stock Purchase Plan The Company has in place an employee stock purchase plan that allows
employees to purchase shares of the Companys Class A common stock at the
lesser of 90% of the fair value of such shares at the beginning or end of each
semi-annual offering period. Purchases are subject to a maximum limitation of
$22.5 annually per employee. The Company does not record compensation expense
pursuant to this plan as it is designed to meet the requirements of Section
423(b) of the Internal Revenue Code. 10. OTHER COMMITMENTS AND CONTINGENCIES a. TV Program Rights Payable The Company has obligations to various program syndicators and
distributors in accordance with current contracts for the rights to broadcast
programs. Future payments scheduled under contracts for programs available as
of February 29, 2004, are as follows: Fiscal year ended February 28 (29),2005
    
    $
    27,5022006
    
    
    13,3312007
    
    
    6,5842008
    
    
    4,0662009
    
    
    1,662Thereafter
    
    
    62353,768Less: Current Portion
    
    
    27,502TV Program Rights Payable, Net of Current Portion
    
    $
    26,266
 In addition, the Company has entered into commitments for future program
rights (programs not available as of February 29, 2004). Future payments
scheduled under these commitments are summarized as follows: Year ended
February 2005  $9,315, 2006  $19,276, 2007  $18,708, 2008  $15,054, 2009 -
$11,735 and thereafter  $15,454. b. Radio Broadcast Agreements The Company has entered into agreements to broadcast certain syndicated
programs and sporting events. Future payments scheduled under these agreements
are summarized as follows: Year ended February 2005  $1,769, 2006  $1,299,
2007  $1,095, 2008  $1,022, 2009  $80 and thereafter  $0. Expense related
to these broadcast rights totaled $2,522, $1,771, and $1,993 for the years
ended February 2002, 2003, and 2004, respectively. c. Operating Leases The Company leases certain office space, tower space, equipment, an
airplane and automobiles under operating leases expiring at various dates
through August 2019. 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. Maintenance costs are recorded using the
accrual method. Future minimum rental payments (exclusive of future escalation costs)
required by non-cancelable operating leases, with an initial
term of one year or more as of February 29, 2004, are as follows: 97




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##### Table of Contents



Fiscal year ended February 28(29),2005
    
    $
    8,9512006
    
    
    8,1732007
    
    
    7,5692008
    
    
    6,6702009
    
    
    6,469Thereafter
    
    
    29,186$
    67,018
 Rent expense totaled $7,995, $9,798, and $8,764 for the years ended
February 2002, 2003, and 2004, respectively. Rent expense for the years ended
February 2002, 2003, and 2004 is net of sublease income of approximately $0 ,
$34, and $32, respectively. d. Employment Agreements The Company regularly enters into employment agreements with various
officers and employees. These agreements generally specify base salary, along
with bonuses and grants of stock and/or stock options based on certain
criteria. Future minimum cash payments scheduled under terms of these
agreements are summarized as follows: Year ended February 2005  $27,224, 2006
- $17,380, 2007  $7,255, 2008  $2,339, 2009  $1,859 and thereafter  $398. In addition to future cash payments, at February 29, 2004, 7,500 shares of
common stock and options to purchase 417,000 shares of common stock have been
granted in connection with current employment agreements. Additionally, up to
116,325 shares, and options to purchase up to 537,000 shares of common stock
may be granted (or have been granted subject to forfeiture) under the
agreements in the next two years. e. Litigation The
Company is a party to various legal and regulatory proceedings arising in the
ordinary course of business. In the opinion of management of the Company,
there are no legal or regulatory proceedings pending against the Company that are likely to
have a material adverse effect on the Company. 11. INCOME TAXES The provision (benefit) for income taxes for the years ended February
2002, 2003, and 2004, consisted of the following: EMMIS: 2002
    
    2003
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    (25,853
    )
    
    
    10,057
    
    
    
    11,708State
    
    
    (434
    )
    
    
    819
    
    
    
    742(26,287
    )
    
    
    10,876
    
    
    
    12,450Provision (benefit) for
income taxes
    
    
    (26,287
    )
    
    
    10,876
    
    
    
    12,450Tax benefit of discontinued operations
    
    
    
    
    
    
    
    
    
    
    Tax benefit of accounting change
    
    
    
    
    
    
    (102,600
    )
    
    
    Net provision (benefit) for income taxes
    
    $
    (26,287
    )
    
    $
    (91,724
    )
    
    $
    12,450
 98




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##### Table of Contents



EOC: 2002
    
    2003
    
    2004Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    (18,063
    )
    
    
    19,218
    
    
    
    20,275State
    
    
    (434
    )
    
    
    1,593
    
    
    
    1,537(18,497
    )
    
    
    20,811
    
    
    
    21,812Provision (benefit) for
income taxes
    
    
    (18,497
    )
    
    
    20,811
    
    
    
    21,812Tax benefit of discontinued operations
    
    
    
    
    
    
    
    
    
    
    Tax benefit of accounting change
    
    
    
    
    
    
    (102,600
    )
    
    
    Net provision (benefit) for income taxes
    
    $
    (18,497
    )
    
    $
    (81,789
    )
    
    $
    21,812
 The provision (benefit) for income taxes for the years ended February
2002, 2003, and 2004, differs from that computed at the Federal statutory
corporate tax rate as follows: EMMIS: 2002
    
    2003
    
    2004Computed income taxes at 35%
    
    
    (31,638
    )
    
    
    4,833
    
    
    
    8,654State income tax
    
    
    (334
    )
    
    
    819
    
    
    
    742Nondeductible foreign losses
    
    
    1,084
    
    
    
    1,061
    
    
    
    (54
    )Nondeductible goodwill
    
    
    2,637
    
    
    
    
    
    
    
    Nondeductible interest
    
    
    616
    
    
    
    3,033
    
    
    
    716Other
    
    
    1,348
    
    
    
    1,130
    
    
    
    2,392Provision (benefit) for income taxes
    
    
    (26,287
    )
    
    
    10,876
    
    
    
    12,450
 EOC: 2002
    
    2003
    
    2004Computed income taxes at 35%
    
    $
    (23,232
    )
    
    $
    17,027
    
    
    $
    17,937State income tax
    
    
    (334
    )
    
    
    1,593
    
    
    
    1,537Nondeductible foreign losses
    
    
    1,084
    
    
    
    1,061
    
    
    
    (54
    )Nondeductible goodwill
    
    
    2,637
    
    
    
    
    
    
    
    Nondeductible interest
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,348
    
    
    
    1,130
    
    
    
    2,392Provision (benefit) for income taxes
    
    $
    (18,497
    )
    
    $
    20,811
    
    
    $
    21,812
 99




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##### Table of Contents



The components of deferred tax assets and deferred tax liabilities at
February 28 (29), 2003 and 2004 are as follows: EMMIS: 2003
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    61,929
    
    
    $
    78,970Compensation relating to stock options
    
    
    6,660
    
    
    
    4,152Noncash interest expense
    
    
    14,250
    
    
    
    23,254Impairment loss
    
    
    
    
    
    
    Other
    
    
    6,452
    
    
    
    5,511Valuation allowance
    
    
    (5,031
    )
    
    
    (4,948
    )Total deferred tax assets
    
    
    84,260
    
    
    
    106,939Deferred tax liabilitiesIntangible assets
    
    
    (152,700
    )
    
    
    (185,724
    )Other
    
    
    (2,905
    )
    
    
    (3,209
    )Total deferred tax liabilities
    
    
    (155,605
    )
    
    
    (188,933
    )Net deferred tax liabilities
    
    $
    (71,345
    )
    
    $
    (81,994
    )
 EOC: 2003
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    58,454
    
    
    $
    75,137Compensation relating to stock options
    
    
    6,660
    
    
    
    4,152Noncash interest expense
    
    
    
    
    
    
    Impairment loss
    
    
    
    
    
    
    Other
    
    
    6,452
    
    
    
    5,511Valuation allowance
    
    
    (5,031
    )
    
    
    (4,948
    )Total deferred tax assets
    
    
    66,535
    
    
    
    79,852Deferred tax liabilitiesIntangible assets
    
    
    (152,700
    )
    
    
    (185,724
    )Other
    
    
    (2,905
    )
    
    
    (3,209
    )Total deferred tax liabilities
    
    
    (155,605
    )
    
    
    (188,933
    )Net deferred tax liabilities
    
    $
    (89,070
    )
    
    $
    (109,081
    )
 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 the net operating loss carryforwards related to
the Companys foreign subsidiaries since these subsidiaries have not yet
generated taxable income against which the net operating losses could be
utilized. Additionally a valuation allowance has been provided for the net
operating loss carryforwards related to certain state net operating losses as
it is more likely than not that a portion of the state net operating losses
will expire unutilized. With respect to Emmis, net operating loss
carryforwards, excluding those at the Companys Hungarian and Belgium
subsidiaries which do not expire, of approximatey $186,398 begin to expire in
2022. With respect to EOC, net operating loss carryforwards, excluding those
at the Companys Hungarian and Belgium subsidiaries which do not expire, of
approximatey $176,311 begin to expire in 2022. The net operating loss
carryforwards primarily result from the amortization of indefinite-lived
intangibles for tax purposes. 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.
Corporate represents expense not allocated to reportable segments. Amounts
included in Interactive in fiscal 2002 have been reclassified into the Radio
segment. Noncash
compensation expense for fiscal 2002 attributable to our stations,
previously included in Corporate, has been reclassified to the appropriate
business segment. 100




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##### Table of Contents



The Companys segments operate primarily in the United States with one
radio station located in Hungary, nine radio stations in Belgium (acquired in
fiscal 2004) and two radio stations located in Argentina. We have agreed to
sell our controlling interest in the two radio stations in Argentina. Results
from operations for these two stations have been classified as discontinued
operations in fiscal 2004 and their assets and liabilities have been classified
as held for sale as of February 29, 2004. Total revenues of the radio station
in Hungary for the years ended February 28 (29) 2002, 2003, and 2004 were $7.2
million, $9.2 million, and $11.6 million, respectively. This stations long
lived assets as of February 28 (29), 2003 and 2004 were $9.9 million and $8.9
million, respectively. Total revenues of the radio stations in Belgium
beginning February 2004 were not significant for the year ended February 29,
2004 and total assets as of February 29, 2004 were $3.3 million. Total
revenues of the radio stations in Argentina for the years ended February 28,
2002 and 2003 were $9.5 million and $2.6 million, respectively. Long lived
assets for these stations as of February 28, 2003 were $4.7 million. YEAR ENDED FEBRUARY 29, 2004
    
    Radio
    
    Television
    
    Publishing
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    279,822
    
    
    $
    235,938
    
    
    $
    76,108
    
    
    $
    
    
    
    $
    591,868Station operating expenses,
excluding noncash compensation
    
    
    155,129
    
    
    
    150,485
    
    
    
    65,809
    
    
    
    
    
    
    
    371,423Corporate expenses, excluding
noncash compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,105
    
    
    
    24,105Depreciation and amortization
    
    
    9,331
    
    
    
    30,174
    
    
    
    873
    
    
    
    6,090
    
    
    
    46,468Noncash compensation
    
    
    7,682
    
    
    
    7,715
    
    
    
    2,780
    
    
    
    5,273
    
    
    
    23,450Impairment loss and other
    
    
    
    
    
    
    12,400
    
    
    
    
    
    
    
    
    
    
    
    12,400Operating income (loss)
    
    $
    107,680
    
    
    $
    35,164
    
    
    $
    6,646
    
    
    $
    (35,468
    )
    
    $
    114,022Total assets
    
    $
    1,096,893
    
    
    $
    1,042,754
    
    
    $
    82,984
    
    
    $
    77,938
    
    
    $
    2,300,569
 With respect to EOC, the above information would be identical, except corporate total assets would be
$71,355 and consolidated total assets would be $2,293,986. YEAR ENDED FEBRUARY 28, 2003
    
    Radio
    
    Television
    
    Publishing
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    254,818
    
    
    $
    234,752
    
    
    $
    72,793
    
    
    $
    
    
    
    $
    562,363Station operating expenses,
excluding noncash compensation
    
    
    138,385
    
    
    
    148,041
    
    
    
    62,825
    
    
    
    
    
    
    
    349,251Corporate expenses, excluding
noncash compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,359
    
    
    
    21,359Depreciation and amortization
    
    
    8,133
    
    
    
    28,453
    
    
    
    1,917
    
    
    
    4,867
    
    
    
    43,370Noncash compensation
    
    
    10,151
    
    
    
    6,528
    
    
    
    2,358
    
    
    
    3,491
    
    
    
    22,528Operating income (loss)
    
    $
    98,149
    
    
    $
    51,730
    
    
    $
    5,693
    
    
    $
    (29,717
    )
    
    $
    125,855Total assets
    
    $
    947,010
    
    
    $
    1,050,486
    
    
    $
    81,073
    
    
    $
    86,844
    
    
    $
    2,165,413
 With respect to EOC, the above information would be identical, except corporate total assets would be
$79,315 and consolidated total assets would be $2,157,884. YEAR ENDED FEBRUARY 28, 2002
    
    Radio
    
    Television
    
    Publishing
    
    Corporate
    
    ConsolidatedNet revenues
    
    $
    262,077
    
    
    $
    206,529
    
    
    $
    71,216
    
    
    $
    
    
    
    $
    539,822Station operating expenses,
excluding noncash compensation
    
    
    149,059
    
    
    
    140,325
    
    
    
    64,773
    
    
    
    
    
    
    
    354,157Corporate expenses, excluding
noncash compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,283
    
    
    
    20,283Depreciation and amortization
    
    
    33,516
    
    
    
    53,513
    
    
    
    8,477
    
    
    
    4,752
    
    
    
    100,258Time brokerage fees
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479Noncash compensation
    
    
    5,505
    
    
    
    2,345
    
    
    
    428
    
    
    
    817
    
    
    
    9,095Impairment loss and other
    
    
    9,063
    
    
    
    1,609
    
    
    
    
    
    
    
    
    
    
    
    10,672Restructuring fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768
    
    
    
    768Operating income (loss)
    
    $
    64,455
    
    
    $
    8,737
    
    
    $
    (2,462
    )
    
    $
    (26,620
    )
    
    $
    44,110
 13. RELATED PARTY TRANSACTIONS No loans were made to directors, officers or employees during periods
covered by these financial statements. However, one loan to Jeffrey H. Smulyan
remains outstanding. The approximate amount of such loan at February 28 (29),
2003 and 2004 was $1,158 and
$1,185, respectively. This loan bears interest at the Companys average
borrowing rate, which was approximately 4.7% and 3.6% as of February 28 (29),
2003 and 2004, respectively. During the year ended February 29, 2004, the Company made payments of
approximately $6 to a company owned by Mr. Smulyan 101




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##### Table of Contents



for use of an airplane to
transport employees to various trade shows and meetings. Subsequently, Emmis
leased a plane of its own and entered into a timeshare agreement with Mr.
Smulyan. Under the timeshare agreement, whenever Mr. Smulayn uses the plane
for non-business purposes, he pays Emmis for the total direct cost of operating
the plane up to the maximum amount permitted by Federal Aviation Authority
regulations (which maximum generally approximates the total direct cost). In
addition, under Internal Revenue Service regulations, to the extent Mr. Smulyan
allows non-business guests to travel on the plane on a business trip or takes
the plane on a non-business detour as part of a business trip, additional
compensation is attributed to Mr. Smulyan. Generally, these trips on which
compensation is assessed pursuant to IRS regulations do not result in any
material additional cost or expense to Emmis. With respect to the last fiscal
year, Mr. Smulyan paid $149 under the timeshare arrangement. The Company
believes that the terms of these transactions were no less favorable to the
Company than terms available from independent third parties. A significant amount of business is conducted between EOC and its parent
company, ECC. This activity includes equity financing and certain debt
financing arrangements as well as reimbursement by EOC to ECC for corporate
overhead expenses. Corporate overhead expenses are third party costs incurred
in the ordinary course of conducting business as a parent holding company and
include, but are not limited to, SEC filing fees and expenses, and legal,
accounting, trustee and outside director fees. 14. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND SUBSIDIARY NON-GUARANTORS Emmis conducts a significant portion of its business through subsidiaries.
The 8 1/8% senior subordinated notes of EOC are fully and unconditionally
guaranteed, jointly and severally, by certain direct and indirect subsidiaries
of EOC (the Subsidiary Guarantors). As of February 29, 2004, subsidiaries
holding EOCs interest in its radio stations in Austin, Texas, Hungary, Belgium
and Argentina, as well as certain other subsidiaries (such as those conducting
joint ventures with third parties), did not guarantee the senior subordinated
notes (the Subsidiary Non-Guarantors). The claims of creditors of Subsidiary
Non-Guarantors have priority over the rights of EOC to receive dividends or
distributions from such subsidiaries. Presented below is condensed consolidating financial information for the
EOC Parent Company Only, the Subsidiary Guarantors and the Subsidiary
Non-Guarantors as of February 28 (29), 2003 and 2004 and for each of the three
years in the period ended February 29, 2004. Emmis uses the equity method with respect to investments in subsidiaries
when preparing the financial information for subsidiary guarantors and
subsidiary non-guarantors. 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. 102




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##### Table of Contents



Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 29, 2004 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,424
    
    
    $
    9,032
    
    
    $
    3,514
    
    
    $
    
    
    
    $
    19,970Accounts receivable, net
    
    
    
    
    
    
    98,391
    
    
    
    6,834
    
    
    
    
    
    
    
    105,225Prepaid expenses
    
    
    747
    
    
    
    14,399
    
    
    
    127
    
    
    
    
    
    
    
    15,273Other
    
    
    3,203
    
    
    
    20,299
    
    
    
    1,505
    
    
    
    (1,444
    )
    
    
    23,563Assets held for sale
    
    
    
    
    
    
    
    
    
    
    7,988
    
    
    
    
    
    
    
    7,988Total current assets
    
    
    11,374
    
    
    
    142,121
    
    
    
    19,968
    
    
    
    (1,444
    )
    
    
    172,019Property and equipment, net
    
    
    34,551
    
    
    
    176,326
    
    
    
    6,425
    
    
    
    
    
    
    
    217,302Intangible assets, net
    
    
    434
    
    
    
    1,705,892
    
    
    
    152,609
    
    
    
    (78
    )
    
    
    1,858,857Investment in affiliates
    
    
    2,038,929
    
    
    
    
    
    
    
    
    
    
    
    (2,038,929
    )
    
    
    Other assets, net
    
    
    39,536
    
    
    
    15,116
    
    
    
    1,386
    
    
    
    (10,230
    )
    
    
    45,808Total assets
    
    $
    2,124,824
    
    
    $
    2,039,455
    
    
    $
    180,388
    
    
    $
    (2,050,681
    )
    
    $
    2,293,986CURRENT LIABILITIES:Accounts payable
    
    $
    10,676
    
    
    $
    19,652
    
    
    $
    7,257
    
    
    $
    (1,794
    )
    
    $
    35,791Current maturities of long-term debt
    
    
    1,688
    
    
    
    
    
    
    
    5,210
    
    
    
    (359
    )
    
    
    6,539Current portion of TV program rights payable
    
    
    
    
    
    
    27,502
    
    
    
    
    
    
    
    
    
    
    
    27,502Accrued salaries and commissions
    
    
    3,782
    
    
    
    10,385
    
    
    
    352
    
    
    
    
    
    
    
    14,519Accrued interest
    
    
    11,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,697Deferred revenue
    
    
    
    
    
    
    14,393
    
    
    
    
    
    
    
    
    
    
    
    14,393Other
    
    
    2,229
    
    
    
    4,157
    
    
    
    304
    
    
    
    
    
    
    
    6,690Liabilities associated with assets held for sale
    
    
    
    
    
    
    
    
    
    
    638
    
    
    
    
    
    
    
    638Total current liabilities
    
    
    30,072
    
    
    
    76,089
    
    
    
    13,761
    
    
    
    (2,153
    )
    
    
    117,769Long-term debt, net of current maturities
    
    
    1,038,145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,038,145Other long-term debt, net of current maturities
    
    
    41
    
    
    
    130
    
    
    
    15,337
    
    
    
    (9,599
    )
    
    
    5,909TV program rights payable, net of current portion
    
    
    
    
    
    
    26,266
    
    
    
    
    
    
    
    
    
    
    
    26,266Other noncurrent liabilities
    
    
    7,663
    
    
    
    1,648
    
    
    
    11
    
    
    
    
    
    
    
    9,322Minority Interest
    
    
    
    
    
    
    
    
    
    
    47,672
    
    
    
    
    
    
    
    47,672Deferred income taxes
    
    
    109,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,081Total liabilities
    
    
    1,185,002
    
    
    
    104,133
    
    
    
    76,781
    
    
    
    (11,752
    )
    
    
    1,354,164SHAREHOLDERS EQUITY:Common stock
    
    
    1,027,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,027,221Additional paid-in capital
    
    
    130,313
    
    
    
    
    
    
    
    4,393
    
    
    
    (4,393
    )
    
    
    130,313Subsidiary investment
    
    
    
    
    
    
    1,521,507
    
    
    
    131,070
    
    
    
    (1,652,577
    )
    
    
    Retained earnings/(accumulated deficit)
    
    
    (216,591
    )
    
    
    413,815
    
    
    
    (28,521
    )
    
    
    (385,294
    )
    
    
    (216,591
    )Accumulated other comprehensive loss
    
    
    (1,121
    )
    
    
    
    
    
    
    (3,335
    )
    
    
    3,335
    
    
    
    (1,121
    )Total shareholders equity
    
    
    939,822
    
    
    
    1,935,322
    
    
    
    103,607
    
    
    
    (2,038,929
    )
    
    
    939,822Total liabilities and shareholders equity
    
    $
    2,124,824
    
    
    $
    2,039,455
    
    
    $
    180,388
    
    
    $
    (2,050,681
    )
    
    $
    2,293,986
 103




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##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 29, 2004 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedNet revenues
    
    $
    946
    
    
    $
    562,493
    
    
    $
    28,429
    
    
    $
    
    
    
    $
    591,868Operating expenses:Station operating expenses,
excluding noncash compensation
    
    
    670
    
    
    
    351,672
    
    
    
    19,081
    
    
    
    
    
    
    
    371,423Corporate expenses, excluding
noncash compensation
    
    
    24,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,105Time brokerage fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    6,090
    
    
    
    36,589
    
    
    
    3,789
    
    
    
    
    
    
    
    46,468Noncash compensation
    
    
    5,273
    
    
    
    18,177
    
    
    
    
    
    
    
    
    
    
    
    23,450Restructuring fees and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss and other
    
    
    
    
    
    
    12,400
    
    
    
    
    
    
    
    
    
    
    
    12,400Total operating expenses
    
    
    36,138
    
    
    
    418,838
    
    
    
    22,870
    
    
    
    
    
    
    
    477,846Operating income (loss)
    
    
    (35,192
    )
    
    
    143,655
    
    
    
    5,559
    
    
    
    
    
    
    
    114,022Other income (expense):Interest expense
    
    
    (58,719
    )
    
    
    (144
    )
    
    
    (1,484
    )
    
    
    913
    
    
    
    (59,434
    )Gain on sale of assets
    
    
    
    
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    1,130Loss in unconsolidated affiliates
    
    
    (375
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (375
    )Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interest expense
    
    
    
    
    
    
    
    
    
    
    (3,029
    )
    
    
    
    
    
    
    (3,029
    )Other income (expense), net
    
    
    (642
    )
    
    
    36
    
    
    
    1,006
    
    
    
    (1,464
    )
    
    
    (1,064
    )Total other income (expense)
    
    
    (59,736
    )
    
    
    1,022
    
    
    
    (3,507
    )
    
    
    (551
    )
    
    
    (62,772
    )Income (loss) before income taxes,
discontinued operations and
accounting change
    
    
    (94,928
    )
    
    
    144,677
    
    
    
    2,052
    
    
    
    (551
    )
    
    
    51,250Provision (benefit) for income taxes
    
    
    (33,680
    )
    
    
    54,977
    
    
    
    515
    
    
    
    
    
    
    
    21,812Income (loss) from continuing operations
    
    
    (61,248
    )
    
    
    89,700
    
    
    
    1,537
    
    
    
    (551
    )
    
    
    29,438Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (10,019
    )
    
    
    
    
    
    
    (10,019
    )Income (loss) before accounting change
    
    
    (61,248
    )
    
    
    89,700
    
    
    
    (8,482
    )
    
    
    (551
    )
    
    
    19,419Equity in earnings (loss) of subsidiaries
    
    
    80,667
    
    
    
    
    
    
    
    
    
    
    
    (80,667
    )
    
    
    Net income (loss)
    
    $
    19,419
    
    
    $
    89,700
    
    
    $
    (8,482
    )
    
    $
    (81,218
    )
    
    $
    19,419
 104




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##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 29, 2004 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedOPERATING ACTIVITIES:Net income (loss)
    
    $
    19,419
    
    
    $
    89,700
    
    
    $
    (8,482
    )
    
    $
    (81,218
    )
    
    $
    19,419Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    8,615
    
    
    
    
    
    
    
    8,615Impairment loss
    
    
    
    
    
    
    12,400
    
    
    
    
    
    
    
    
    
    
    
    12,400Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    9,782
    
    
    
    60,968
    
    
    
    4,161
    
    
    
    
    
    
    
    74,911Provision for bad debts
    
    
    
    
    
    
    3,290
    
    
    
    
    
    
    
    
    
    
    
    3,290Provision (benefit) for deferred income taxes
    
    
    (33,680
    )
    
    
    54,977
    
    
    
    515
    
    
    
    
    
    
    
    21,812Noncash compensation
    
    
    5,273
    
    
    
    18,177
    
    
    
    
    
    
    
    
    
    
    
    23,450Equity in earnings of subsidiaries
    
    
    (80,667
    )
    
    
    
    
    
    
    
    
    
    
    80,667
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    (1,130
    )
    
    
    
    
    
    
    
    
    
    
    (1,130
    )Other
    
    
    
    
    
    
    
    
    
    
    3,089
    
    
    
    551
    
    
    
    3,640Changes in assets and liabilities -Accounts receivable
    
    
    
    
    
    
    (3,775
    )
    
    
    (357
    )
    
    
    
    
    
    
    (4,132
    )Prepaid expenses and other current assets
    
    
    (1,712
    )
    
    
    4,829
    
    
    
    (2,758
    )
    
    
    
    
    
    
    359Other assets
    
    
    13,190
    
    
    
    (16,792
    )
    
    
    841
    
    
    
    
    
    
    
    (2,761
    )Accounts payable and accrued liabilities
    
    
    (2,248
    )
    
    
    (2,253
    )
    
    
    2,187
    
    
    
    
    
    
    
    (2,314
    )Deferred liabilities
    
    
    
    
    
    
    (1,412
    )
    
    
    (46
    )
    
    
    
    
    
    
    (1,458
    )Payments of TV program rights payable and other
    
    
    1,712
    
    
    
    (35,517
    )
    
    
    (6,906
    )
    
    
    
    
    
    
    (40,711
    )Net cash provided by (used in) operating activities
    
    
    (68,931
    )
    
    
    183,462
    
    
    
    859
    
    
    
    
    
    
    
    115,390INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (4,767
    )
    
    
    (25,539
    )
    
    
    115
    
    
    
    
    
    
    
    (30,191
    )Disposals of property and equipment
    
    
    
    
    
    
    2,106
    
    
    
    
    
    
    
    
    
    
    
    2,106Cash paid for acquisitions
    
    
    
    
    
    
    (11,656
    )
    
    
    (109,470
    )
    
    
    
    
    
    
    (121,126
    )Proceeds from sale of stations, net
    
    
    
    
    
    
    3,650
    
    
    
    
    
    
    
    
    
    
    
    3,650Deposits on acquisitions and other
    
    
    (798
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (798
    )Net cash used in investing activities
    
    
    (5,565
    )
    
    
    (31,439
    )
    
    
    (109,355
    )
    
    
    
    
    
    
    (146,359
    )FINANCING ACTIVITIES:Payments on long-term debt
    
    
    (105,066
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,066
    )Proceeds from long-term debt
    
    
    138,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,000Intercompany, net
    
    
    45,747
    
    
    
    (148,835
    )
    
    
    105,660
    
    
    
    
    
    
    
    2,572Payments for debt related costs
    
    
    (646
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (646
    )Net cash provided by (used in) financing activities
    
    
    78,035
    
    
    
    (148,835
    )
    
    
    105,660
    
    
    
    
    
    
    
    34,860INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    3,539
    
    
    
    3,188
    
    
    
    (2,836
    )
    
    
    
    
    
    
    3,891CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    3,885
    
    
    
    5,844
    
    
    
    6,350
    
    
    
    
    
    
    
    16,079End of period
    
    $
    7,424
    
    
    $
    9,032
    
    
    $
    3,514
    
    
    $
    
    
    
    $
    19,970
 105




---



##### Table of Contents



Emmis Operating Company
Condensed Consolidating Balance Sheet
As of February 28, 2003 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,885
    
    
    $
    5,844
    
    
    $
    6,350
    
    
    $
    
    
    
    $
    16,079Accounts receivable, net
    
    
    
    
    
    
    98,799
    
    
    
    3,546
    
    
    
    
    
    
    
    102,345Prepaid expenses
    
    
    2,016
    
    
    
    13,462
    
    
    
    118
    
    
    
    
    
    
    
    15,596Other
    
    
    222
    
    
    
    23,249
    
    
    
    2,190
    
    
    
    
    
    
    
    25,661Assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current assets
    
    
    6,123
    
    
    
    141,354
    
    
    
    12,204
    
    
    
    
    
    
    
    159,681Property and equipment, net
    
    
    35,874
    
    
    
    186,004
    
    
    
    1,552
    
    
    
    
    
    
    
    223,430Intangible assets, net
    
    
    3,035
    
    
    
    1,710,513
    
    
    
    12,185
    
    
    
    
    
    
    
    1,725,733Investment in affiliates
    
    
    1,923,882
    
    
    
    
    
    
    
    
    
    
    
    (1,923,882
    )
    
    
    Other assets, net
    
    
    52,373
    
    
    
    13,916
    
    
    
    926
    
    
    
    (18,175
    )
    
    
    49,040Total assets
    
    $
    2,021,287
    
    
    $
    2,051,787
    
    
    $
    26,867
    
    
    $
    (1,942,057
    )
    
    $
    2,157,884CURRENT LIABILITIES:Accounts payable
    
    $
    13,161
    
    
    $
    18,530
    
    
    $
    7,835
    
    
    $
    
    
    
    $
    39,526Current maturities of long-term debt
    
    
    9,976
    
    
    
    
    
    
    
    7,151
    
    
    
    (2,215
    )
    
    
    14,912Current portion of TV program rights payable
    
    
    
    
    
    
    27,424
    
    
    
    
    
    
    
    
    
    
    
    27,424Accrued salaries and commissions
    
    
    3,326
    
    
    
    10,746
    
    
    
    175
    
    
    
    
    
    
    
    14,247Accrued interest
    
    
    13,844
    
    
    
    
    
    
    
    
    
    
    
    (2,203
    )
    
    
    11,641Deferred revenue
    
    
    
    
    
    
    15,805
    
    
    
    
    
    
    
    
    
    
    
    15,805Other
    
    
    3,339
    
    
    
    3,640
    
    
    
    
    
    
    
    
    
    
    
    6,979Liabilities associated with assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    43,646
    
    
    
    76,145
    
    
    
    15,161
    
    
    
    (4,418
    )
    
    
    130,534Long-term debt, net of current maturities
    
    
    996,945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    996,945Other long-term debt, net of current maturities
    
    
    41
    
    
    
    2,412
    
    
    
    24,391
    
    
    
    (13,757
    )
    
    
    13,087TV program rights payable, net of current portion
    
    
    
    
    
    
    32,044
    
    
    
    
    
    
    
    
    
    
    
    32,044Other noncurrent liabilities
    
    
    13,167
    
    
    
    3,898
    
    
    
    721
    
    
    
    
    
    
    
    17,786Deferred income taxes
    
    
    89,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,070Total liabilities
    
    
    1,142,869
    
    
    
    114,499
    
    
    
    40,273
    
    
    
    (18,175
    )
    
    
    1,279,466SHAREHOLDERS EQUITY:Common stock
    
    
    1,027,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,027,221Additional paid-in capital
    
    
    95,582
    
    
    
    
    
    
    
    4,393
    
    
    
    (4,393
    )
    
    
    95,582Subsidiary investment
    
    
    
    
    
    
    1,613,173
    
    
    
    20,249
    
    
    
    (1,633,422
    )
    
    
    Retained earnings/(accumulated deficit)
    
    
    (227,026
    )
    
    
    324,115
    
    
    
    (23,068
    )
    
    
    (301,047
    )
    
    
    (227,026
    )Accumulated other comprehensive loss
    
    
    (17,359
    )
    
    
    
    
    
    
    (14,980
    )
    
    
    14,980
    
    
    
    (17,359
    )Total shareholders equity
    
    
    878,418
    
    
    
    1,937,288
    
    
    
    (13,406
    )
    
    
    (1,923,882
    )
    
    
    878,418Total liabilities and shareholders equity
    
    $
    2,021,287
    
    
    $
    2,051,787
    
    
    $
    26,867
    
    
    $
    (1,942,057
    )
    
    $
    2,157,884
 106




---



##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 2003 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedNet revenues
    
    $
    923
    
    
    $
    549,630
    
    
    $
    11,810
    
    
    $
    
    
    
    $
    562,363Operating expenses:Station operating expenses,
excluding noncash compensation
    
    
    702
    
    
    
    339,176
    
    
    
    9,373
    
    
    
    
    
    
    
    349,251Corporate expenses, excluding
noncash compensation
    
    
    21,359
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,359Time brokerage fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    4,867
    
    
    
    35,519
    
    
    
    2,984
    
    
    
    
    
    
    
    43,370Noncash compensation
    
    
    3,491
    
    
    
    19,037
    
    
    
    
    
    
    
    
    
    
    
    22,528Restructuring fees and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    30,419
    
    
    
    393,732
    
    
    
    12,357
    
    
    
    
    
    
    
    436,508Operating income (loss)
    
    
    (29,496
    )
    
    
    155,898
    
    
    
    (547
    )
    
    
    
    
    
    
    125,855Other income (expense):Interest expense
    
    
    (77,050
    )
    
    
    (771
    )
    
    
    (912
    )
    
    
    675
    
    
    
    (78,058
    )Gain on sale of assets
    
    
    
    
    
    
    9,313
    
    
    
    
    
    
    
    
    
    
    
    9,313Loss in unconsolidated affiliates
    
    
    (4,544
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,544
    )Loss on debt extinguishment
    
    
    (4,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,444
    )Minority interest income (expense)
    
    
    
    
    
    
    
    
    
    
    (428
    )
    
    
    
    
    
    
    (428
    )Other income (expense), net
    
    
    983
    
    
    
    873
    
    
    
    (229
    )
    
    
    (675
    )
    
    
    952Total other income (expense)
    
    
    (85,055
    )
    
    
    9,415
    
    
    
    (1,569
    )
    
    
    
    
    
    
    (77,209
    )Income (loss) before income taxes
and accounting change
    
    
    (114,551
    )
    
    
    165,313
    
    
    
    (2,116
    )
    
    
    
    
    
    
    48,646Provision (benefit) for income taxes
    
    
    (42,008
    )
    
    
    62,819
    
    
    
    
    
    
    
    
    
    
    
    20,811Income (loss) before accounting change
    
    
    (72,543
    )
    
    
    102,494
    
    
    
    (2,116
    )
    
    
    
    
    
    
    27,835Cumulative effect of accounting change,
net of tax
    
    
    (167,400
    )
    
    
    (167,400
    )
    
    
    
    
    
    
    167,400
    
    
    
    (167,400
    )Equity in earnings (loss) of subsidiaries
    
    
    100,378
    
    
    
    
    
    
    
    
    
    
    
    (100,378
    )
    
    
    Net income (loss)
    
    $
    (139,565
    )
    
    $
    (64,906
    )
    
    $
    (2,116
    )
    
    $
    67,022
    
    
    $
    (139,565
    )
 107




---



##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 28, 2003 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedOPERATING ACTIVITIES:Net income (loss)
    
    $
    (139,565
    )
    
    $
    (64,906
    )
    
    $
    (2,116
    )
    
    $
    67,022
    
    
    $
    (139,565
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on debt extinguishment
    
    
    4,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,444Cumulative effect of accounting change
    
    
    167,400
    
    
    
    167,400
    
    
    
    
    
    
    
    (167,400
    )
    
    
    167,400Depreciation and amortization
    
    
    8,806
    
    
    
    56,403
    
    
    
    2,984
    
    
    
    
    
    
    
    68,193Provision for bad debts
    
    
    
    
    
    
    4,102
    
    
    
    
    
    
    
    
    
    
    
    4,102Provision (benefit) for deferred income taxes
    
    
    20,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,811Noncash compensation
    
    
    3,491
    
    
    
    19,037
    
    
    
    
    
    
    
    
    
    
    
    22,528Equity in earnings of subsidiaries
    
    
    (100,378
    )
    
    
    
    
    
    
    
    
    
    
    100,378
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    (9,313
    )
    
    
    
    
    
    
    
    
    
    
    (9,313
    )Other
    
    
    (428
    )
    
    
    
    
    
    
    (7,651
    )
    
    
    
    
    
    
    (8,079
    )Changes in assets and liabilities -Accounts receivable
    
    
    
    
    
    
    (11,657
    )
    
    
    450
    
    
    
    
    
    
    
    (11,207
    )Prepaid expenses and other current assets
    
    
    (1,355
    )
    
    
    11
    
    
    
    (2,048
    )
    
    
    
    
    
    
    (3,392
    )Other assets
    
    
    (10,398
    )
    
    
    6,615
    
    
    
    (399
    )
    
    
    
    
    
    
    (4,182
    )Accounts payable and accrued liabilities
    
    
    (2,899
    )
    
    
    965
    
    
    
    2,738
    
    
    
    
    
    
    
    804Deferred liabilities
    
    
    
    
    
    
    (587
    )
    
    
    
    
    
    
    
    
    
    
    (587
    )Payments of TV program rights payable and other
    
    
    1,483
    
    
    
    (34,604
    )
    
    
    15,353
    
    
    
    
    
    
    
    (17,768
    )Net cash provided by (used in) operating activities
    
    
    (48,588
    )
    
    
    133,466
    
    
    
    9,311
    
    
    
    
    
    
    
    94,189INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (5,354
    )
    
    
    (25,195
    )
    
    
    
    
    
    
    
    
    
    
    (30,549
    )Disposals of property and equipment
    
    
    
    
    
    
    1,752
    
    
    
    602
    
    
    
    
    
    
    
    2,354Cash paid for acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of assets
    
    
    
    
    
    
    135,500
    
    
    
    
    
    
    
    
    
    
    
    135,500Deposits on acquisitions and other
    
    
    (1,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,004
    )Net cash provided by (used in) investing activities
    
    
    (6,358
    )
    
    
    112,057
    
    
    
    602
    
    
    
    
    
    
    
    106,301FINANCING ACTIVITIES:Payments on long-term debt
    
    
    (260,101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (260,101
    )Proceeds from long-term debt
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Intercompany, net
    
    
    306,686
    
    
    
    (244,649
    )
    
    
    (4,955
    )
    
    
    
    
    
    
    57,082Payments for debt related costs
    
    
    (2,754
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,754
    )Net cash provided by (used in) financing activities
    
    
    58,831
    
    
    
    (244,649
    )
    
    
    (4,955
    )
    
    
    
    
    
    
    (190,773
    )INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    3,885
    
    
    
    874
    
    
    
    4,958
    
    
    
    
    
    
    
    9,717CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    
    
    
    
    4,970
    
    
    
    1,392
    
    
    
    
    
    
    
    6,362End of period
    
    $
    3,885
    
    
    $
    5,844
    
    
    $
    6,350
    
    
    $
    
    
    
    $
    16,079
 108




---



##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Operations
For the Year Ended February 28, 2002 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedNet revenues
    
    $
    1,695
    
    
    $
    521,429
    
    
    $
    16,698
    
    
    $
    
    
    
    $
    539,822Operating expenses:Station operating expenses,
excluding noncash compensation
    
    
    1,204
    
    
    
    338,353
    
    
    
    14,600
    
    
    
    
    
    
    
    354,157Corporate expenses, excluding
noncash compensation
    
    
    20,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,283Time brokerage fees
    
    
    
    
    
    
    479
    
    
    
    
    
    
    
    
    
    
    
    479Depreciation and amortization
    
    
    4,752
    
    
    
    91,979
    
    
    
    3,527
    
    
    
    
    
    
    
    100,258Noncash compensation
    
    
    817
    
    
    
    8,278
    
    
    
    
    
    
    
    
    
    
    
    9,095Restructuring fees and other
    
    
    768
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768Impairment loss and other
    
    
    
    
    
    
    10,672
    
    
    
    
    
    
    
    
    
    
    
    10,672Total operating expenses
    
    
    27,824
    
    
    
    449,761
    
    
    
    18,127
    
    
    
    
    
    
    
    495,712Operating income (loss)
    
    
    (26,129
    )
    
    
    71,668
    
    
    
    (1,429
    )
    
    
    
    
    
    
    44,110Other income (expense):Interest expense
    
    
    (102,109
    )
    
    
    (285
    )
    
    
    (2,324
    )
    
    
    616
    
    
    
    (104,102
    )Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss in unconsolidated affiliates
    
    
    (4,232
    )
    
    
    (771
    )
    
    
    
    
    
    
    
    
    
    
    (5,003
    )Loss on debt extinguishment
    
    
    (1,748
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,748
    )Minority interest income (expense)
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    59Other income (expense), net
    
    
    1,403
    
    
    
    (466
    )
    
    
    (756
    )
    
    
    120
    
    
    
    301Total other income (expense)
    
    
    (106,686
    )
    
    
    (1,522
    )
    
    
    (3,021
    )
    
    
    736
    
    
    
    (110,493
    )Income (loss) before income taxes
and accounting change
    
    
    (132,815
    )
    
    
    70,146
    
    
    
    (4,450
    )
    
    
    736
    
    
    
    (66,383
    )Provision (benefit) for income taxes
    
    
    (45,152
    )
    
    
    26,655
    
    
    
    
    
    
    
    
    
    
    
    (18,497
    )Income (loss) before accounting change
    
    
    (87,663
    )
    
    
    43,491
    
    
    
    (4,450
    )
    
    
    736
    
    
    
    (47,886
    )Equity in earnings (loss) of subsidiaries
    
    
    39,777
    
    
    
    
    
    
    
    
    
    
    
    (39,777
    )
    
    
    Net income (loss)
    
    $
    (47,886
    )
    
    $
    43,491
    
    
    $
    (4,450
    )
    
    $
    (39,041
    )
    
    $
    (47,886
    )
 109




---



##### Table of Contents



Emmis Operating Company
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 28, 2002 EliminationsParent
    
    
    
    
    
    Subsidiary
    
    andCompany
    
    Subsidiary
    
    Non-
    
    ConsolidatingOnly
    
    Guarantors
    
    Guarantors
    
    Entries
    
    ConsolidatedOPERATING ACTIVITIES:Net income (loss)
    
    $
    (47,886
    )
    
    $
    43,491
    
    
    $
    (4,450
    )
    
    $
    (39,041
    )
    
    $
    (47,886
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss
    
    
    
    
    
    
    9,063
    
    
    
    
    
    
    
    
    
    
    
    9,063Loss on debt extinguishment
    
    
    1,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,748Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    10,226
    
    
    
    110,582
    
    
    
    3,527
    
    
    
    
    
    
    
    124,335Provision for bad debts
    
    
    
    
    
    
    4,005
    
    
    
    
    
    
    
    
    
    
    
    4,005Provision (benefit) for deferred income taxes
    
    
    (18,497
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,497
    )Noncash compensation
    
    
    817
    
    
    
    8,278
    
    
    
    
    
    
    
    
    
    
    
    9,095Equity in earnings of subsidiaries
    
    
    (39,777
    )
    
    
    
    
    
    
    
    
    
    
    39,777
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    795
    
    
    
    375
    
    
    
    (6,362
    )
    
    
    (736
    )
    
    
    (5,928
    )Changes in assets and liabilities -Accounts receivable
    
    
    
    
    
    
    (3,649
    )
    
    
    1,531
    
    
    
    
    
    
    
    (2,118
    )Prepaid expenses and other current assets
    
    
    3,082
    
    
    
    1,202
    
    
    
    843
    
    
    
    
    
    
    
    5,127Other assets
    
    
    2,057
    
    
    
    (9,364
    )
    
    
    1,355
    
    
    
    
    
    
    
    (5,952
    )Accounts payable and accrued liabilities
    
    
    5,035
    
    
    
    (6,965
    )
    
    
    (779
    )
    
    
    
    
    
    
    (2,709
    )Deferred liabilities
    
    
    
    
    
    
    (963
    )
    
    
    
    
    
    
    
    
    
    
    (963
    )Payments of TV program rights payable and other
    
    
    24,482
    
    
    
    (15,553
    )
    
    
    (10,856
    )
    
    
    
    
    
    
    (1,927
    )Net cash provided by (used in) operating activities
    
    
    (57,918
    )
    
    
    140,502
    
    
    
    (15,191
    )
    
    
    
    
    
    
    67,393INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,252
    )
    
    
    (29,018
    )
    
    
    1,135
    
    
    
    
    
    
    
    (30,135
    )Disposals of property and equipment
    
    
    
    
    
    
    1,719
    
    
    
    
    
    
    
    
    
    
    
    1,719Cash paid for acquisitions
    
    
    
    
    
    
    (140,746
    )
    
    
    
    
    
    
    
    
    
    
    (140,746
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposits on acquisitions and other
    
    
    (5,943
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,943
    )Net cash provided by (used in) investing activities
    
    
    (8,195
    )
    
    
    (168,045
    )
    
    
    1,135
    
    
    
    
    
    
    
    (175,105
    )FINANCING ACTIVITIES:Payments on long-term debt
    
    
    (133,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133,000
    )Proceeds from long-term debt
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Intercompany, net
    
    
    143,532
    
    
    
    28,495
    
    
    
    14,742
    
    
    
    
    
    
    
    186,769Payments for debt related costs
    
    
    (4,594
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,594
    )Net cash provided by (used in) financing activities
    
    
    10,938
    
    
    
    28,495
    
    
    
    14,742
    
    
    
    
    
    
    
    54,175INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (55,175
    )
    
    
    952
    
    
    
    686
    
    
    
    
    
    
    
    (53,537
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    55,175
    
    
    
    4,018
    
    
    
    706
    
    
    
    
    
    
    
    59,899End of period
    
    $
    
    
    
    $
    4,970
    
    
    $
    1,392
    
    
    $
    
    
    
    $
    6,362
 110




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15. SUBSEQUENT EVENTS On May 10, 2004, we refinanced substantially all of our long-term debt.
EOC received $368.4 million in proceeds from the issuance of its 67/8% senior
subordinated notes due 2012 in the principal amount of $375 million, net of the
initial purchasers discount of $6.6 million, and EOC borrowed $978.5 million
under a new $1.025 billion senior credit facility. The gross proceeds from
these transactions and $2.8 million of cash on hand were used to (i) repay the
remaining principal indebtedness under EOCs former credit facility of
approximately $744.3 million, (ii) repurchase $295.1 million aggregate
principal amount of EOCs 81/8% senior subordinated notes due 2009, (iii)
repurchase $227.7 million aggregate accreted value of our 121/2% senior
discount notes due 2011, (iv) pay $4.6 million in accrued interest, (v) pay an
estimated $12.6 million in transaction fees and (vi) pay $72.0 million in
prepayment and redemption fees. In connection with the transactions, we
incurred an estimated loss of $97.1 million, consisting of (i) $72.0 million
for the prepayment and redemption fees, (ii) $24.3 million for the write-off of
deferred debt costs associated with the retired debt, and (iii) an estimated
$0.8 million in expenses related to the repurchase of indebtedness existing at
February 29, 2004. On May 10, 2004, EOC gave notice to redeem the remaining $4.9 million of
principal amount of its 8 1/8% senior subordinated notes due 2009. These notes
will be redeemed at 104.063% plus accrued and unpaid interest and will be
financed with additional borrowings on our new credit facility. The
transaction is expected to close on June 10, 2004 and will result in an
additional loss of $0.3 million. The new senior credit facility provides for total borrowings of up to
$1.025 billion, including (i) a $675 million term loan and (ii) a $350 million
revolver, of which $100.0 million may be used for letters of credit. The new
senior credit facility also provides for the ability to have incremental
facilities of up to $675.0 million, of which up to $350.0 million may be
allocated to a revolver. EOC may access the incremental facility on one or
more occasions, subject to certain provisions, including a potential market
adjustment to pricing of the entire credit facility. All outstanding amounts
under the new credit facility bear interest, at the option of EOC, at a rate
equal to the Eurodollar Rate or an alternative base rate (as defined in the new
credit facility) plus a margin. The margin over the Eurodollar Rate or the
alternative base rate varies under the revolver (ranging from 0% to 2.5%),
depending on EOCs ratio of debt to operating cash flow, as defined in the
agreement. The margins over the Eurodollar Rate or the alternative base rate
are 1.75% and 0.75%, respectively, for the term loan facility. Interest is due
on a calendar quarter basis under the alternative base rate and at least every
three months under the Eurodollar Rate. Beginning one year after closing, the
new credit facility requires EOC to fix interest rates for a two year period on
at least 30% of its total outstanding debt, as defined (including the senior
subordinated debt). After the first two years, this ratio of fixed to floating
rate debt must be maintained if EOCs total leverage ratio, as defined, is
greater than 6:1 at any quarter end. Both the term loan and revolver mature on
November 10, 2011. The borrowings due under the term loan are payable in equal
quarterly installments in an annual amount equal to 1% of the term loan during
each of the first six and one quarter years of the loan (beginning on February
28, 2005), with the remaining balance payable November 10, 2011. The annual
amortization and reduction schedule for the new credit facility is as follows: SCHEDULED AMORTIZATION/REDUCTION OF NEW CREDIT FACILITY Year Ended
    
    Revolver
    
    Term Loan B
    
    TotalFebruary 28 (29),
    
    Amortization
    
    Amortization
    
    Amortization2005
    
    $
    
    
    
    $
    1,688
    
    
    $
    1,6882006
    
    
    
    
    
    
    6,750
    
    
    
    6,7502007
    
    
    
    
    
    
    6,750
    
    
    
    6,7502008
    
    
    
    
    
    
    6,750
    
    
    
    6,7502009
    
    
    
    
    
    
    6,750
    
    
    
    6,7502010
    
    
    
    
    
    
    6,750
    
    
    
    6,7502011
    
    
    350,000
    
    
    
    639,562
    
    
    
    989,562Total
    
    $
    350,000
    
    
    $
    675,000
    
    
    $
    1,025,000
 Proceeds from raising additional equity, issuing additional subordinated
debt or from asset sales, as well as excess cash flow may be required to repay
amounts outstanding under the new credit facility. These mandatory repayment
provisions may apply depending on EOCs total leverage ratio, as defined under
the new credit facility. 111




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##### Table of Contents



Availability under the new senior credit facility depends upon our
continued compliance with certain operating covenants and financial ratios
including leverage, interest coverage and fixed charge coverage as specifically
defined. The operating covenants and other restrictions with which EOC must
comply, include, among others, restrictions on additional indebtedness,
incurrence of liens, engaging in businesses other than its primary business,
paying cash dividends on common stock, redeeming or repurchasing capital stock
of ECC, acquisitions and asset sales, as well as requirements to maintain
certain financial ratios. The new credit facility provides that an event of
default will occur if there is a change of control of ECC, as defined. The
payment of principal, premium and interest on the loans is fully and
unconditionally guaranteed, jointly and severally, by ECC and most of its
existing wholly-owned domestic subsidiaries that guarantee the new credit
facility. Substantially all of Emmis assets, including the stock of Emmis
wholly-owned, domestic subsidiaries, are pledged to secure the new credit
facility. EOC issued $375.0 million aggregate principal amount of its 67/8% senior
subordinated notes. On or within 90 days from closing, EOC will file an
Exchange Offer Registration Statement with the SEC to exchange the senior
subordinated notes for a new series of notes registered under the Securities
Act. The terms of the new series of notes will be identical to the terms of
the senior subordinated notes. The notes have no sinking fund requirement and
are due in full on May 15, 2012. Interest is payable semi-annually on May 15
and November 15 of each year. Prior to May 15, 2008, EOC may redeem the notes,
in whole or in part, at a price of 100% of the principal amount thereof plus
the payment of a make-whole premium. After May 15, 2008, EOC can choose to
redeem some or all of the notes at specified redemption prices ranging from
101.719% to 103.438% plus accrued and unpaid interest. On or after May 15,
2010, the notes maybe redeemed at 100% plus accrued and unpaid interest. Upon
a change of control (as defined), EOC is required to make an offer to purchase
the notes then outstanding at a purchase price equal to 101% plus accrued and
unpaid interest. The indenture governing the notes contains covenants limiting
EOCs ability, among other things, to (1) incur additional indebtedness, (2)
pay dividends or make other distributions to stockholders, (3) purchase or
redeem capital stock or subordinated indebtedness, (4) make certain
investments, (5) create restrictions on the ability of our subsidiaries to pay
dividends or make payments to EOC, (6) engage in certain transactions with
affiliates, and (7) sell all or substantially all of the assets of EOC and its
subsidiaries, or consolidate or merge with or into other companies. The
payment of principal, premium and interest on the notes is fully and
unconditionally guaranteed, jointly and severally, by ECC and most of EOCs
existing wholly-owned domestic subsidiaries that guarantee the new credit
facility. 16. QUARTERLY FINANCIAL DATA (UNAUDITED) EMMIS Quarter Ended
    
    FullMay 31
    
    Aug. 31
    
    Nov. 30
    
    Feb. 28 (29)
    
    YearYear ended February 29, 2004Net revenues
    
    $
    141,548
    
    
    $
    154,618
    
    
    $
    158,762
    
    
    $
    136,940
    
    
    $
    591,868Operating income
    
    
    28,553
    
    
    
    37,035
    
    
    
    41,703
    
    
    
    6,731
    
    
    
    114,022Net income (loss) before accounting change
    
    
    2,602
    
    
    
    9,754
    
    
    
    11,316
    
    
    
    (21,416
    )
    
    
    2,256Net income (loss) available to common shareholders
    
    
    356
    
    
    
    7,508
    
    
    
    9,070
    
    
    
    (23,662
    )
    
    
    (6,728
    )Basic earnings (loss) per common share:Before accounting change
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    (0.43
    )
    
    $
    (0.12
    )Net income (loss) available to common shareholders
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    (0.43
    )
    
    $
    (0.12
    )Diluted earnings (loss) per common share:Before accounting change
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.16
    
    
    $
    (0.43
    )
    
    $
    (0.12
    )Net income (loss) available to common shareholders
    
    $
    0.01
    
    
    $
    0.14
    
    
    $
    0.16
    
    
    $
    (0.43
    )
    
    $
    (0.12
    )Year ended February 28, 2003Net revenues
    
    $
    136,806
    
    
    $
    143,222
    
    
    $
    155,544
    
    
    $
    126,791
    
    
    $
    562,363Operating income
    
    
    29,229
    
    
    
    35,843
    
    
    
    44,984
    
    
    
    15,799
    
    
    
    125,855Net income (loss) before accounting change
    
    
    1,826
    
    
    
    (4,556
    )
    
    
    10,814
    
    
    
    (5,152
    )
    
    
    2,932Net income (loss) available to common shareholders
    
    
    (167,820
    )
    
    
    (6,802
    )
    
    
    8,568
    
    
    
    (7,398
    )
    
    
    (173,452
    )Basic earnings (loss) per common share:Before accounting change
    
    $
    (0.01
    )
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    (0.14
    )
    
    $
    (0.11
    )Net income (loss) available to common shareholders
    
    $
    (3.28
    )
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    (0.14
    )
    
    $
    (3.27
    )Diluted earnings (loss) per common share:Before accounting change
    
    $
    (0.01
    )
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    (0.14
    )
    
    $
    (0.11
    )Net income (loss) available to common shareholders
    
    $
    (3.28
    )
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    (0.14
    )
    
    $
    (3.27
    )
 112




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EOC Quarter Ended
    
    FullMay 31
    
    Aug. 31
    
    Nov. 30
    
    Feb. 28 (29)
    
    YearYear ended February 29, 2004Net revenues
    
    $
    141,548
    
    
    $
    154,618
    
    
    $
    158,762
    
    
    $
    136,940
    
    
    $
    591,868Operating income
    
    
    28,553
    
    
    
    37,035
    
    
    
    41,703
    
    
    
    6,731
    
    
    
    114,022Net income (loss) before accounting change
    
    
    6,831
    
    
    
    13,969
    
    
    
    15,613
    
    
    
    (16,994
    )
    
    
    19,419Net income (loss)
    
    
    6,831
    
    
    
    13,969
    
    
    
    15,613
    
    
    
    (16,994
    )
    
    
    19,419Year ended February 28, 2003Net revenues
    
    $
    136,806
    
    
    $
    143,222
    
    
    $
    155,544
    
    
    $
    126,791
    
    
    $
    562,363Operating income
    
    
    29,229
    
    
    
    35,843
    
    
    
    44,984
    
    
    
    15,799
    
    
    
    125,855Net income (loss) before accounting change
    
    
    6,891
    
    
    
    7,986
    
    
    
    14,772
    
    
    
    (1,814
    )
    
    
    27,835Net income (loss)
    
    
    (160,509
    )
    
    
    7,986
    
    
    
    14,772
    
    
    
    (1,814
    )
    
    
    (139,565
    )
 Our results of operations are usually subject to seasonal fluctuations,
which result in higher second and third quarter revenues and operating income.
Net loss available to common shareholders in the quarter ended February 29,
2004 includes a $12.4 million impairment loss resulting from the companys
annual SFAS No. 142 review and a $10.4 million loss from discontinued
operations. Operating results for the first nine months of fiscal 2004 have
been reclassified to reflect the discontinued operations. Net loss available
to common shareholders in the quarter ended May 31, 2002 includes a loss from
the cumulative effect of an accounting change of $167.4 million, net of tax,
related to our adoption of SFAS No. 142. 113




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS 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 and Subsidiaries as of February 29, 2004 and
February 28, 2003, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for the years then ended. We
have also audited the accompanying consolidated balance sheets of Emmis
Operating Company (a wholly owned subsidiary of Emmis Communications
Corporation) and Subsidiaries as of February 29, 2004 and February 28, 2003 and
the related consolidated statements of operations, changes in shareholders
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Companies management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of Emmis Communications Corporation and Subsidiaries and
Emmis Operating Company and Subsidiaries for the year ended February 28, 2002
were audited by other auditors who have ceased operations and whose report
dated May 2, 2002, expressed an unqualified opinion on those statements and
included an explanatory paragraph that disclosed the adoption of SFAS No. 133
as discussed in Note 1 to the consolidated financial statements. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Emmis
Communications Corporation and Subsidiaries at February 29, 2004 and February
28, 2003, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States and the consolidated financial position of Emmis
Operating Company and Subsidiaries at February 29, 2004 and February 28, 2003
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States. As discussed in Note 8 to the consolidated financial statements, effective
March 1, 2002, the Companies changed the manner in which they account for
goodwill and indefinite lived intangible assets upon the adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. As discussed above, the financial statements of Emmis Communications
Corporation and Subsidiaries and Emmis Operating Company and Subsidiaries for
the year ended February 28, 2002 were audited by other auditors who have ceased
operations. As described in Note 8, these consolidated financial statements
have been revised to include the transitional disclosures required by Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Our audit procedures with respect to the disclosures in
Note 8 with respect to fiscal 2002 included (a) agreeing the previously
reported net income (loss) to the previously issued financial statements, (b)
agreeing the amortization expense and associated tax benefit recognized in
those periods related to goodwill and other intangible assets that are no
longer being amortized as a result of applying SFAS No. 142 to the Companies
underlying records obtained from management and (c) testing the mathematical
accuracy of the reconciliation of adjusted net income (loss) to reported net
income (loss), and the related earnings-per-share amounts. In our opinion, the
disclosures for fiscal 2002 in Note 8 are appropriate. However, we were not
engaged to audit, review, or apply any procedures to the fiscal 2002 financial
statements of the Companies other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on the
2002 financial statements taken as a whole. /s/ ERNST & YOUNG LLP Indianapolis, Indiana,
April 14, 2004
except for Note 15, as to which the date is
May 10, 2004 114




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THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. 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, 2002 and 2001, 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, 2002. We have also audited the
accompanying consolidated balance sheets of EMMIS OPERATING COMPANY (an Indiana
corporation and wholly owned subsidiary of Emmis Communications Corporation)
and Subsidiaries as of February 28, 2002 and 2001, 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, 2002. These financial
statements are the responsibility of the Companies management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended February 28, 2002 in conformity with accounting principles
generally accepted in the United States and the financial position of Emmis
Operating Company and Subsidiaries as of February 28, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 2002 in conformity with accounting principles
generally accepted in the United States. As discussed in Note 1v. of the notes to consolidated financial
statements, effective March 1, 2001, the Company changed its accounting for
derivative instruments and hedging activities pursuant to the provisions of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Hedging Activities. /s/ ARTHUR ANDERSEN LLPARTHUR ANDERSEN LLPIndianapolis, Indiana,May 2, 2002.
 115




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ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this annual report, the Company
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (Disclosure Controls). This
evaluation (the Controls Evaluation) was performed under the supervision and
with the participation of management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Based upon the Controls Evaluation, our CEO and CFO concluded that our
Disclosure Controls are effective to provide reasonable assurance that
information relating to Emmis Communications Corporation and Subsidiaries that
is required to be disclosed by us in the reports that we file or submit, is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms, and is accumulated and communicated to our
management, including our principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting During the last fiscal quarter covered by this annual report, there were
no changes in the Companys internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. It should be noted that any control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control systems objectives will be met. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to directors or
nominees to be directors of Emmis is incorporated by reference from the
sections entitled Proposal No. 1: Election of Directors, Corporate
Governance  Certain Committees of the Board of Directors, Corporate
Governance  Code of Ethics and Compliance with Section 16(a) of the
Securities Exchange Act of 1934 in the Emmis 2004 Proxy Statement. All
directors of ECC are also directors of EOC. Listed below is certain information about the executive officers of Emmis
or its affiliates who are not directors or nominees to be directors. All such
persons are executive officers of both ECC and EOC. AGE AT
    
    YEAR FIRSTFEBRUARY 29,
    
    ELECTEDNAME
    
    POSITION
    
    2004
    
    OFFICERRandall D. Bongarten
    
    Television Division President
    
    
    53
    
    
    
    2000Richard F. Cummings
    
    Radio Division President
    
    
    51
    
    
    
    1984Michael Levitan
    
    Senior Vice President  Human Resources
    
    
    46
    
    
    
    2002Gary Thoe
    
    Publishing Division President
    
    
    47
    
    
    
    1998Paul W. Fiddick
    
    International Division President
    
    
    53
    
    
    
    2002
 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. 116




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##### Table of Contents



Randall D. Bongarten has been employed as President of Emmis Television
since October 2000. He served as President of Emmis International from June
1998 to September 2002. Prior to June 1998, Mr. Bongarten had served as
President of GAF Broadcasting and as Executive Vice President of Operations for
Emmis Radio Division. 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 and became
Radio Division President in December 2001. Michael Levitan has been employed as Senior Vice President  Human
Resources since September 2002, but he has served as a human resources
consultant to Emmis since 2000. Prior to joining Emmis, Mr. Levitan served as
Director of Human Resources for Apple Computer and as Executive Director of
Organizational Effectiveness and Assistant to the President of Cummins Engine. Gary Thoe has been employed as President of Emmis Publishing since
February 1998. Prior to February 1998, Mr. Thoe served as President and part
owner of Mayhill Publications, Inc. Paul Fiddick has been employed as President of Emmis International since
September 2002. Prior to joining Emmis, Mr. Fiddick served as Assistant
Secretary for Administration of the U.S. Department of Agriculture from
November 1999 until May 2001. 
 ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from
the sections entitled Corporate Governance  Compensation of Directors,
Compensation Committee Interlocks and Insider Participation, Employment and
Change in Control Agreements and Compensation Tables in the Emmis 2004 Proxy
Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item with respect to ECC is incorporated by
reference from the section entitled Voting Securities and Beneficial Owners
in the Emmis 2004 Proxy Statement. ECC is the only holder of the common stock
of EOC. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the
sections entitled Corporate Governance  Certain Transactions and Equity
Compensation Plan Information in the Emmis 2004 Proxy Statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this item is incorporated by reference from the
section entitled Matters Relating to Independent Auditors in the Emmis 2004
Proxy Statement. 
 PART IV 
 ITEM 15. EXHIBITS, FIANANCIAL 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 No financial statement schedules are required to be filed with this
report. 117




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Reports on Form 8-K On December 15, 2003, the company filed a Form 8-K, reporting an Item 12
Regulation FD Disclosure regarding comments made by the companys CEO and CFO
at a media conference. On January 8, 2004, the company included on Form 8-K its press release
announcing its financial results for the three and nine months ended November
30, 2002 and 2003. On January 8, 2004, the company filed a Form 8-K/A to correct the press
release contained in the Form 8-K filed earlier the same day. Exhibits The following exhibits are filed or incorporated by reference as a part of this
report: 3.1
    
    Second Amended and Restated Articles of Incorporation of Emmis
Communications Corporation, incorporated by reference from Exhibit 3.1 to
the Companys Form 10-K/A for the fiscal year ended February 29, 2000, and
an amendment thereto relating to certain 12 1/2% Senior Preferred Stock
incorporated by reference from Exhibit 3.1 to the Companys current report
on Form 8-K filed December 13, 2001.3.2
    
    Amended and Restated Bylaws of Emmis Communications Corporation,
incorporated by reference from Exhibit 3.2 to the Companys Form 10-Q for
the quarter ended November 30, 2002.3.3

    
    Articles of Incorporation of Emmis Operating Company, incorporated by
reference from Exhibit 3.4 to the Companys Form S-3/A (File No.
333-62172) filed on June 21, 2001.3.4
    
    Bylaws of Emmis Operating Company, incorporated by reference from Exhibit
3.5 to the Companys Form S-3/A (File No. 333-62172) filed on June 21,
2001.4.1
    
    Indenture dated February 12, 1999 (the 8 1/8% Subordinated Notes
Indenture) 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
    
    Indenture dated March 27, 2001 (the 12 1/2% Senior Discount Notes
Indenture) among Emmis Communications Corporation and The Bank of Nova
Scotia Trust Company of New York, 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. 333-621604, as amended
(the 2001 Registration Statement).4.3
    
    Form of stock certificate for Class A common stock, incorporated by
reference from Exhibit 3.5 to the 1994 Emmis Registration Statement on
Form S-1, File No. 33-73218, the 1994 Registration Statement.4.4
    
    Supplemental Indenture dated April 26, 2004 to the 8 1/8% Subordinated
Notes Indenture.*4.5
    
    Supplemental Indenture dated April 26, 2004 to the 12 1/2% Senior
Discount Notes Indenture.*4.6
    
    Indenture dated May 10, 2004 (the 6 7/8% Subordinated Notes Indenture)
among Emmis Operating Company and The Bank of Nova Scotia Trust Company of
New York, as trustee, including as an exhibit thereto the form of note.*10.1
    
    Revolving Credit and Term Loan Agreement dated May 10, 2004.*10.2
    
    Emmis Operating Company Profit Sharing Plan, as amended, effective March
1, 1997 incorporated by reference from Exhibit 10.1 to Emmis Annual
Report on Form 10-K for the fiscal year ended February 28, 2003 (the 2003
10-K).++10.3
    
    Emmis Communications Corporation 1994 Equity Incentive Plan, incorporated
by reference from Exhibit 10.5 to the 1994 Registration Statement.++
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10.4
    
    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).++10.5
    
    The Emmis Communications Corporation 1995 Equity Incentive Plan
incorporated by reference from Exhibit 10.16 to the 1995 10-K.++10.6
    
    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).++10.7
    
    Emmis Communications Corporation 1999 Equity Incentive Plan, incorporated
by reference from the Companys proxy statement dated May 26, 1999.++10.8
    
    Emmis Communications Corporation 2001 Equity Incentive Plan, incorporated
by reference from the Companys proxy statement dated May 25, 2001.++10.9
    
    Emmis Communications Corporation 2002 Equity Compensation Plan,
incorporated by reference from the Companys proxy statement dated May 30,
2002.++10.10
    
    Employment Agreement dated as of March 1, 1994, by and between Emmis
Broadcasting Corporation and Jeffrey H. Smulyan, incorporated by reference
from Exhibit 10.13 to Emmis Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 and amendment to Employment Agreement,
effective March 1, 1999, between the Company and Jeffrey H. Smulyan,
incorporated by reference from Exhibit 10.2 to Emmis Quarterly Report on
Form 10-Q for the quarter ended November 30, 1999.++10.11
    
    Employment Agreement dated as of March 1, 2002, by and between Emmis
Operating Company and Richard Cummings, incorporated by reference from
Exhibit 10.21 to the 2003 10-K. ++10.12
    
    Employment Agreement dated as of September 9, 2002, by and between Emmis
Operating Company and Michael Levitan, incorporated by reference from
Exhibit 10.22 to the 2003 10-K. ++10.13
    
    Employment Agreement dated as of March 1, 2003, by and between Emmis
Operating Company and Gary A. Thoe, incorporated by reference from Exhibit
10.23 to the 2003 10-K. ++10.14
    
    Employment Agreement dated as of March 1, 2002, by and between Emmis
Operating Company and Walter Z. Berger, incorporated by reference from
Exhibit 10.24 to the 2003 10-K. ++10.15
    
    Employment Agreement, dated as of March 1, 2003, by and between Emmis
Operating Company and Randall D. Bongarten, incorporated by reference from
Exhibit 10.4 to the Companys Form 10-Q for the quarter ended May 31,
2003. ++10.16
    
    Employment agreement effective as of March 1, 2003, by and between Emmis
Operating Company and Gary L. Kaseff, incorporated by reference from
Exhibit 10.1 to the Companys Form 10-Q for the quarter ended August 31,
2003. ++10.17
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Walter Z. Berger,
incorporated by reference from Exhibit 10.2 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++10.18
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Gary L. Kaseff,
incorporated by reference from Exhibit 10.3 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++10.19
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Randall D. Bongarten,
incorporated by reference from Exhibit 10.4 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++
 119




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10.20
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Richard F. Cummings,
incorporated by reference from Exhibit 10.5 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++10.21
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Michael Levitan,
incorporated by reference from Exhibit 10.6 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++10.22
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Paul Fiddick,
incorporated by reference from Exhibit 10.7 to the Companys Form 10-Q for
the quarter ended August 31, 2003. ++10.23
    
    Change in Control Severance Agreement, dated as of August 11, 2003, by
and between Emmis Communications Corporation and Gary Thoe, incorporated
by reference from Exhibit 10.8 to the Companys Form 10-Q for the quarter
ended August 31, 2003. ++10.24
    
    Agreement for Purchase of Limited Partner and Member Interests, dated as
of March 3, 2003, by and between Emmis Operating Company and Sinclair
Telecable, Inc., incorporated by reference from Exhibit 10.2 to the
Companys Form 10-Q for the quarter ended May 31, 2003.10.25
    
    Fourth Amended and Restated Revolving Credit and Term Loan Agreement,
and First Amendment to Fourth Amended and Restated Revolving Credit and
Term Loan Agreement, incorporated by reference from Exhibits 10.1 and
10.2, respectively, to Emmis Form 8-K filed on April 12, 2001.10.26
    
    Second Amendment to Fourth Amended and Restated Revolving Credit and
Term Loan Agreement, incorporated by reference from Exhibit 10.10 to
Emmis Annual Report on Form 10-K for the fiscal year ended February 28,
2001.10.27
    
    Third Amendment to Fourth Amended and Restated Revolving Credit and Term
Loan Agreement, incorporated by reference from Exhibit 10.1 to Emmis
Quarterly Report on Form 10-Q for the quarter ended November 30, 2001.10.28
    
    Fourth Amendment to Fourth Amended and Restated Revolving Credit and
Term Loan Agreement, incorporated by reference from Exhibit 10.1 to the
Companys Form 10-Q for the quarter ended May 31, 2002.10.29
    
    Fifth Amendment to Fourth Amended and Restated Revolving Credit and Term
Loan Agreement, incorporated by reference from Exhibit 10.1 to the
Companys Form 10-Q for the quarter ended May 31, 2003.10.30
    
    Registration rights agreement dated May 10, 2004 by and between Emmis
Operating Company and Goldman, Sachs & Co..*10.31
    
    Aircraft Time Sharing Agreement dated January 22, 2003, by and between
Emmis Operating Company and Jeffrey H. Smulyan. *10.32
    
    Tax Sharing Agreement dated May 10, 2004, by and between Emmis
Communications Corporation and Emmis Operating Company. *16.10
    
    Arthur Andersen LLP letter to the SEC dated June 20, 2002, incorporated
by reference to the Companys Current Report on Form 8-K/A filed June 20,
2002.21
    
    Subsidiaries of Emmis.*23
    
    Consent of Accountants.*24
    
    Powers of Attorney.*31.1
    
    Certification of Principal Executive Officer of Emmis Communications
Corporation pursuant to Rule 13a-14(a) under the Exchange Act.*
 120




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31.2
    
    Certification of Principal Financial Officer of Emmis Communications
Corporation pursuant to Rule 13a-14(a) under the Exchange Act.*31.3
    
    Certification of Principal Executive Officer of Emmis Operating Company
pursuant to Rule 13a-14(a) under the Exchange Act.*31.4
    
    Certification of Principal Financial Officer of Emmis Operating Company
pursuant to Rule 13a-14(a) under the Exchange Act.*32.1
    
    Certification of Principal Executive Officer of Emmis Communications
Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Principal Financial Officer of Emmis Communications
Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*32.3
    
    Certification of Principal Executive Officer of Emmis Operating Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*32.3
    
    Certification of Principal Financial Officer of Emmis Operating Company
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed with this report.++
    
    Management contract or compensatory plan or arrangement. 121




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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 CORPORATIONDate: May 14, 2004
    
    By:
    
    /s/
    
    Jeffrey H. SmulyanJeffrey H. SmulyanChairman of the Board
 122




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##### Table of Contents



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 OPERATING COMPANYDate: May 14, 2004
    
    By:
    
    /s/
    
    Jeffrey H. SmulyanJeffrey H. SmulyanChairman of the Board
 123




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##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, these
reports have been signed below by the following persons on behalf of the
registrants and on the dates indicated. SIGNATURE
    
    TITLEDate:
    
    May 14, 2004
    
    /s/ Jeffrey H. Smulyan
Jeffrey H. Smulyan
    
    President, Chairman of the Board and
Director (Principal Executive Officer)Date:
    
    May 14, 2004
    
    /s/ Walter Z. Berger
Walter Z. Berger
    
    Executive Vice President, Treasurer,
Chief Financial Officer and Director
(Principal Accounting Officer)Date:
    
    May 14, 2004
    
    Susan B. Bayh*
Susan B. Bayh
    
    DirectorDate:
    
    May 14, 2004
    
    Gary L. Kaseff*
Gary L. Kaseff
    
    Executive Vice President, General
Counsel and DirectorDate:
    
    May 14, 2004
    
    Richard A. Leventhal*
Richard A. Leventhal
    
    DirectorDate:
    
    May 14, 2004
    
    Peter A. Lund*
Peter A. Lund
    
    DirectorDate:
    
    May 14, 2004
    
    Greg A. Nathanson*
Greg A. Nathanson
    
    DirectorDate:
    
    May 14, 2004
    
    Frank V. Sica*
Frank V. Sica
    
    DirectorDate:
    
    May 14, 2004
    
    Lawrence B. Sorrel*
Lawrence B. Sorrel
    
    Director
 *By:
    
    /s/ J. Scott EnrightJ. Scott EnrightAttorney-in-Fact
 124