Attached files
file | filename |
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EX-12 - EX-12 - EMMIS COMMUNICATIONS CORP | c53903exv12.htm |
EX-24 - EX-24 - EMMIS COMMUNICATIONS CORP | c53903exv24.htm |
EX-23 - EX-23 - EMMIS COMMUNICATIONS CORP | c53903exv23.htm |
EX-21 - EX-21 - EMMIS COMMUNICATIONS CORP | c53903exv21.htm |
EX-10.9 - EX-10.9 - EMMIS COMMUNICATIONS CORP | c53903exv10w9.htm |
EX-31.1 - EX-31.1 - EMMIS COMMUNICATIONS CORP | c53903exv31w1.htm |
EX-32.2 - EX-32.2 - EMMIS COMMUNICATIONS CORP | c53903exv32w2.htm |
EX-32.1 - EX-32.1 - EMMIS COMMUNICATIONS CORP | c53903exv32w1.htm |
EX-31.2 - EX-31.2 - EMMIS COMMUNICATIONS CORP | c53903exv31w2.htm |
EX-10.31 - EX-10.31 - EMMIS COMMUNICATIONS CORP | c53903exv10w31.htm |
EX-10.30 - EX-10.30 - EMMIS COMMUNICATIONS CORP | c53903exv10w30.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
Amendment
No. 1
(Mark One)
þ | Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
for the Fiscal Year Ended February 28, 2009
o | 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
(Exact name of registrant as specified in its charter)
INDIANA
(State of incorporation or organization)
(State of incorporation or organization)
0-23264
(Commission file number)
(Commission file number)
35-1542018
(I.R.S. Employer
Identification No.)
(I.R.S. Employer
Identification No.)
ONE EMMIS PLAZA
40 MONUMENT CIRCLE
SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)
40 MONUMENT CIRCLE
SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)
(317) 266-0100
(Registrants Telephone Number,
Including Area Code)
(Registrants 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 if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant, as of
August 31, 2008, the last business day of the Registrants most recently completed second fiscal
quarter, was approximately $66,730,000.
The number of shares outstanding of each of Emmis Communications Corporations classes of
common stock, as of October 5, 2009, was:
31,991,811 |
Class A Common Shares, $.01 par value | |
4,956,305 |
Class B Common Shares, $.01 par value | |
0 |
Class C Common Shares, $.01 par value |
Table of Contents
Explanatory Note
Overview
Emmis Communications Corporation
is filing this amendment to its Annual Report on Form 10-K for the
year ended February 28, 2009 (Original Report)
to amend and restate its financial statements and other financial information for the year then ended. In addition,
we are filing an amendment to our Quarterly Report on Form 10-Q for the period ended May 31, 2009 to
amend and restate financial statements for the quarter then ended. During the year ended February 28, 2009, we
recorded a valuation allowance on substantially all of our domestic deferred tax assets as it was more likely
than not that the domestic deferred tax assets would not be realized. In determining the valuation allowance of
our deferred tax assets, the Company netted deferred tax assets related to indefinite-lived intangible assets and
deferred tax liabilities related to indefinite-lived intangible assets. In accordance with generally accepted
accounting principles, deferred tax assets and deferred tax liabilities associated with indefinite-lived intangible
assets should not be netted because the timing of the reversal of the deferred tax liabilities is unknown. We have
recorded additional valuation allowance equal to the amount of deferred tax assets we had erroneously netted against
deferred tax liabilities. As a result of the foregoing, the Company overstated
the benefit for income taxes and understated deferred tax liabilities
by $25.3 million. In connection with this restatement, the Company
also increased the balance of a deferred
tax liability related to an indefinite-lived intangible asset
by $6.1 million, with a corresponding reduction to the beginning
balance of retained earnings as this matter related to a prior period. The restatements have no
effect on our cash flows in any period.
Amendment to this Form 10-K
The following sections of this Form 10-K have been revised to reflect the restatement: Part I -
Item 1A Risk Factors; Part 2 Item 6 Selected Financial Data; Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operation; Item 8 Financial Statements and
Supplementary Data and Item 9A Controls and Procedures.
The following tables set forth the effects of the restatement described above:
Restatement effects Consolidated Statements of Operations
For the year ended | ||||||||
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
BENEFIT FOR INCOME TAXES |
$ | (89,312 | ) | $ | (64,027 | ) | ||
LOSS FROM CONTINUING OPERATIONS |
(275,051 | ) | (300,336 | ) | ||||
NET LOSS |
(274,984 | ) | (300,269 | ) | ||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
(283,917 | ) | (309,202 | ) | ||||
BASIC NET LOSS AVAILABLE TO COMMON SHAREHOLDERS: |
||||||||
Continuing operations |
$ | (7.81 | ) | $ | (8.50 | ) | ||
Net loss available to common shareholders |
(7.81 | ) | (8.50 | ) | ||||
DILUTED NET LOSS AVAILABLE TO COMMON SHAREHOLDERS: |
||||||||
Continuing operations |
$ | (7.81 | ) | $ | (8.50 | ) | ||
Net loss available to common shareholders |
(7.81 | ) | (8.50 | ) |
Table of Contents
Restatement effects Consolidated Balance Sheets
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
DEFERRED INCOME TAXES |
$ | 76,294 | $ | 107,722 | ||||
TOTAL LIABILITIES |
627,324 | 658,752 | ||||||
ACCUMULATED DEFICIT |
(551,053 | ) | (582,481 | ) | ||||
TOTAL
SHAREHOLDERS DEFICIT |
(28,572 | ) | (60,000 | ) |
Restatement effects Consolidated Statements of Cash Flows
For the year ended | ||||||||
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (274,984 | ) | $ | (300,269 | ) | ||
Benefit for deferred income taxes |
(92,725 | ) | (67,440 | ) |
This
amendment to the Original Report does not alter any part of the
content of the Original Report, except for the
changes provided herein. This amendment continues to speak as of the
date of the Original Report. We have
not updated the disclosures contained in this amendment to reflect any events that occurred at a
date subsequent to the filing of the Original Report. The filing of this amendment is not a representation
that any statements contained in the Original Report or this amendment are true or complete as of any date
subsequent to the date of the Original Report. For the convenience of the reader, we have resubmitted the
Form 10-K for the year ended February 28, 2009 in its entirety.
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM
10-K/A
TABLE OF CONTENTS
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EX-10.31 | ||||||||
EX-12 | ||||||||
EX-21 | ||||||||
EX-23 | ||||||||
EX-24 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
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 will achieve these plans,
intentions or expectations. All statements 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 factors described in Part I, Item 1A, Risk Factors.
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.
3
Table of Contents
PART I
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company, principally focused on radio broadcasting. We operate the
8th largest publicly traded radio portfolio in the United States based on total
listeners. As of February 28, 2009, we own and operate seven FM radio stations serving the
nations top three markets New York, Los Angeles and Chicago. Additionally, we own and operate
fourteen FM and two AM radio stations with strong positions in St. Louis, Austin (we have a 50.1%
controlling interest in our radio stations located there), Indianapolis and Terre Haute, IN.
In addition to our domestic radio properties, we operate an international radio business and
publish several city and regional magazines. Internationally, we own and operate a network of
radio stations in the Flanders region of Belgium, a national radio network in Slovakia, three
national radio networks in Bulgaria and have a 59.5% interest in a national radio station in
Hungary. Our publishing operations consist of Texas Monthly, Los Angeles, Atlanta, Indianapolis
Monthly, Cincinnati, Orange Coast, and Country Sampler and related magazines. We also engage in
various businesses ancillary to our broadcasting business, such as website design and development,
consulting, broadcast tower leasing and operating a news information radio network in Indiana.
BUSINESS STRATEGY
We are committed to improving the operating results of our core assets while simultaneously
seeking future growth opportunities in related businesses. Our strategy is focused on the
following operating principles:
Develop unique and compelling content and strong local brands
Most of our established local media brands have achieved and sustained a leading position in
their respective market segments over many years. Knowledge of local markets and consistently
producing unique and compelling content that meets the needs of our target audiences are critical
to our success. As such, we make substantial investments in areas such as market research, data
analysis and creative talent to ensure that our content remains relevant, has a meaningful impact
on the communities we serve and reinforces the core brand image of each respective property.
Extend the reach and relevance of our local brands through digital platforms
In recent years, we have placed substantial emphasis on enhancing the distribution of our
content through digital platforms, such as the internet and mobile phones. We believe these
digital platforms offer excellent opportunities to further enhance the relationships we have with
our audiences by allowing them to consume and share our content in new ways and providing us with
new distribution channels for one-to-one communication with them.
Deliver results to advertisers
Competition for advertising revenue is intense and becoming more so. To remain competitive,
we focus on sustaining and growing our audiences, optimizing our pricing strategy and developing
innovative marketing programs for our clients that allow them to interact with our audiences in
more direct and measurable ways. These programs often include elements such as on-air
endorsements, events, contests, special promotions, internet advertising, email marketing, text
messaging and online video. Our ability to deploy multi-touchpoint marketing programs allows us to
deliver a stronger return-on-investment for our clients while simultaneously generating ancillary
revenue streams for our media properties.
Extend sales efforts into new market segments
Given the competitive pressures in many of our traditional advertising categories, we are
expanding our network of advertiser relationships into new and emerging advertising categories
where we believe our capabilities can address clients under-served needs. The early return on
these efforts has been encouraging and we plan to shift additional resources toward these efforts
over time.
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Table of Contents
Enhance the efficiency of our operations
We believe it is essential that we operate our businesses as efficiently as possible. In
recent years, we have undertaken a series of aggressive restructurings and cost cuts, and we
continue to seek additional opportunities to streamline our operations.
Establish additional platforms for long-term growth and value creation
While our primary focus is on near-term performance improvement, we also believe it is
important to make sensible investments in longer-term growth opportunities. For example, Emmis
Interactive Inc., one of our subsidiaries, was formed last year to market to other broadcasters and
publishers the leading-edge internet technology platform and digital media sales expertise that had
been developed in-house at Emmis Radio. To date, the company has signed up approximately 100
third-party media properties as clients and continues to grow rapidly. Our International Radio
division has also been a strong source of profitable growth for the company over the past few years
and we continue to search for opportunities to strengthen our existing clusters and expand the
geographic footprint of our operations.
5
Table of Contents
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 our stations among all radio markets in the United States.
Market revenue rankings are from BIAs Investing in Radio 2008 (4th Edition). Ranking
in Primary Demographic Target is the ranking of the station within its designated primary
demographic target among all radio stations in its market based on the Fall 2008 Arbitron Survey
or, in the case of our Los Angeles, New York and Chicago radio stations, based on the March 2009
Portable People MeterTM (PPMTM) results. A t indicates the station tied
with another station for the stated ranking. Station Audience Share represents a percentage
generally computed by dividing the average number of persons over age 12 listening to a particular
station during specified time periods by the average number of such persons for all stations in the
market area as determined by Arbitron.
RANKING IN | ||||||||||||||||||
MARKET | PRIMARY | PRIMARY | STATION | |||||||||||||||
STATION AND | RANK BY | DEMOGRAPHIC | DEMOGRAPHIC | AUDIENCE | ||||||||||||||
MARKET | REVENUE | FORMAT | TARGET AGES | TARGET | SHARE | |||||||||||||
Los Angeles, CA |
1 | |||||||||||||||||
KPWR-FM |
Hip-Hop | 18-34 | 2 | 3.4 | ||||||||||||||
KMVN-FM 1 |
Rhythmic/Pop Contemporary | 25-54 | 18 | 2.0 | ||||||||||||||
New York, NY |
2 | |||||||||||||||||
WRKS-FM |
Classic Soul/Todays R&B | 25-54 | 6 | t | 3.9 | |||||||||||||
WQHT-FM |
Hip-Hop | 18-34 | 2 | 3.1 | ||||||||||||||
WRXP-FM |
Adult Album Alternative | 25-54 | 17 | t | 1.3 | |||||||||||||
Chicago, IL |
3 | |||||||||||||||||
WLUP-FM |
Classic Rock | 25-54 | 8 | 2.4 | ||||||||||||||
WKQX-FM |
Alternative Rock | 18-34 | 16 | 1.5 | ||||||||||||||
St. Louis, MO |
22 | |||||||||||||||||
KPNT-FM |
Alternative Rock | 18-34 | 3 | 3.3 | ||||||||||||||
KSHE-FM |
Album Oriented Rock | 25-54 | 2 | 4.8 | ||||||||||||||
KIHT-FM |
Classic Hits | 25-54 | 7 | t | 3.4 | |||||||||||||
KFTK-FM |
Talk | 25-54 | 12 | 3.3 | ||||||||||||||
Austin, TX |
34 | |||||||||||||||||
KLBJ-AM |
News/Talk | 25-54 | 3 | 7.1 | ||||||||||||||
KDHT-FM |
Hip-Hop | 18-34 | 1 | 4.2 | ||||||||||||||
KBPA-FM |
Adult Hits | 25-54 | 1 | 5.1 | ||||||||||||||
KLBJ-FM |
Album Oriented Rock | 25-54 | 2 | 4.4 | ||||||||||||||
KGSR-FM |
Adult Album Alternative | 25-54 | 14 | 2.2 | ||||||||||||||
KROX-FM |
Alternative Rock | 18-34 | 7 | t | 2.6 | |||||||||||||
Indianapolis, IN |
36 | |||||||||||||||||
WFNI-AM |
Sports Talk | 25-54 | 18 | t | 1.2 | |||||||||||||
WYXB-FM |
Soft Adult Contemporary | 25-54 | 7 | 4.7 | ||||||||||||||
WLHK-FM |
Country | 25-54 | 10 | 3.5 | ||||||||||||||
WIBC-FM |
News/Talk | 35-64 | 4 | t | 8.0 | |||||||||||||
Terre Haute, IN |
226 | |||||||||||||||||
WTHI-FM |
Country | 25-54 | 1 | 24.2 | ||||||||||||||
WWVR-FM |
Classic Rock | 25-54 | 3 | 6.3 |
1 | On April 3, 2009, we entered into a Local Marketing and Programming Agreement and a Put and Call Agreement with Grupo Radio Centro, LA, LLC. The station now runs spanish language programming. |
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 own and operate a network of radio stations in the
Flanders region of Belgium, own national radio networks in Slovakia and Bulgaria and have a 59.5%
interest in a national
6
Table of Contents
radio station in Hungary. We also engage in various businesses ancillary to
our broadcasting business, such as consulting and broadcast tower leasing.
PUBLISHING OPERATIONS
We publish the following magazines:
Monthly | ||||
Paid & Verified | ||||
Circulation(a) | ||||
Regional Magazines: |
||||
Texas Monthly |
302,000 | |||
Los Angeles |
154,000 | |||
Atlanta |
69,000 | |||
Orange Coast |
46,000 | |||
Indianapolis Monthly |
43,000 | |||
Cincinnati |
43,000 | |||
Specialty Magazines (b): |
||||
Country Sampler |
347,000 | |||
Country Business |
25,000 |
(a) | Source: Publishers Statement subject to audit by the Audit Bureau of Circulations (as of December 31, 2008) | |
(b) | Our specialty magazines are circulated bimonthly |
INTERNET AND NEW TECHNOLOGIES
We believe that the growth of the Internet and other new technologies 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 and readers. The opportunity is to further
enhance the relationships we already have with our listeners and readers by expanding products and
services offered by our stations and magazines.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the communities we serve.
We see ourselves as community partners. To that end, each of our stations and magazines
participates in many community programs, fundraisers and activities that benefit a wide variety of
organizations. Charitable organizations that have been the beneficiaries of our contributions,
marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, Big
Brothers/Big Sisters, Coalition for the Homeless, Indiana Black Expo, the Childrens Wish Fund, the
National Multiple Sclerosis Foundation and Special Olympics. Several years ago, 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 the second
broadcaster to receive this prestigious honor, after the Hubbard family, for which the award is
named.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry organizations. Our senior
managers have served in various capacities with industry associations, including as directors of
the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures
Committee, the Arbitron Advisory Council, and as founding members of the Radio Operators Caucus and
Magazine Publishers of America. Our chief executive officer has been honored with the National
Association of Broadcasters National Radio Award and as Radio Inks Radio Executive of the
Year. Our management and on-air personalities have won numerous industry awards.
COMPETITION
Radio 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 marketing.
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Table of Contents
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 that are material to competitive position include the stations 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. We also seek to improve
our position through sales efforts designed to attract advertisers that have done little or no
radio advertising by emphasizing the effectiveness of radio advertising in increasing the
advertisers revenues. The policies and rules of the Federal Communications Commission (the FCC)
permit certain joint ownership and joint operation of local stations. All of our radio stations
take advantage of these joint arrangements in an effort to lower operating costs and 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 FCCs 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 or company.
ADVERTISING SALES
Our stations and magazines derive their advertising revenue from local and regional
advertising in the marketplaces in which they operate, as well as from the sale of national
advertising. Local and most regional sales are made by a stations or magazines 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 stations audience share position more rapidly than does the volume of local and
regional advertising revenue. During the year ended February 28, 2009, approximately 21% of our
total advertising revenues were derived from national sales, and 79% were derived from local and
regional sales. For the year ended February 28, 2009, our radio stations derived a higher
percentage of their advertising revenues from local and regional sales (82%) than our publishing
entities (64%).
EMPLOYEES
As of February 28, 2009, Emmis had approximately 1,015 full-time employees and approximately
355 part-time employees. Approximately 80 employees are represented by unions at our various radio
stations. We consider relations with our employees to be good.
INTERNET ADDRESS AND INTERNET ACCESS TO SEC REPORTS
Our Internet address is www.emmis.com. Through our Internet website, free of charge, you may
obtain 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 they are filed during the period covered by this report.
FEDERAL REGULATION OF BROADCASTING
Radio broadcasting in the United States is subject to the jurisdiction of the FCC under the
Communications Act of 1934 (the Communications Act), as amended in part by the Telecommunications
Act of 1996 (the 1996 Act). 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 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 radio broadcasting pursuant to rules, regulations and
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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 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 whether new or amended FCC regulations will be adopted or what
their effect would be on Emmis.
LICENSE RENEWAL. Radio 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. The following table sets forth our FCC license expiration dates in addition to the call
letters, license classification, antenna elevation above average terrain (for our FM stations
only), power and frequency of all owned stations as of February 28, 2009:
Height Above | ||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||
Expiration Date | Terrain (in | Power (in | ||||||||||||||||||||||||||
Radio Market | Stations | City of License | Frequency | of License1 | FCC Class | feet) | Kilowatts) | |||||||||||||||||||||
Los Angeles, CA |
KPWR-FM | Los Angeles, CA | 105.9 | December 2013 | B | 3035 | 25 | |||||||||||||||||||||
KMVN-FM | Los Angeles, CA | 93.9 | December 2013 | B | 3009 | 18.5 | ||||||||||||||||||||||
New York, NY |
WRXP-FM | New York, NY | 101.9 | June 2014 | B | 1355 | 6.2 | |||||||||||||||||||||
WQHT-FM | New York, NY | 97.1 | June 2014 | B | 1339 | 6.7 | ||||||||||||||||||||||
WRKS-FM | New York, NY | 98.7 | June 2014 | B | 1362 | 6 | ||||||||||||||||||||||
Chicago, IL |
WKQX-FM | Chicago, IL | 101.1 | December 2004 2 | B | 1394 | 5.7 | |||||||||||||||||||||
WLUP-FM | Chicago, IL | 97.9 | December 2012 | B | 1394 | 4 | ||||||||||||||||||||||
St. Louis, MO |
KFTK-FM | Florissant, MO | 97.1 | February 2013 | C1 | 561 | 100 | |||||||||||||||||||||
KIHT-FM | St. Louis, MO | 96.3 | February 2013 | C1 | 1027 | 80 | ||||||||||||||||||||||
KPNT-FM | St. Genevieve, MO | 105.7 | February 2005 2 | C | 1375 | 100 | ||||||||||||||||||||||
KSHE-FM | Crestwood, MO | 94.7 | February 2013 | C0 | 1027 | 100 | ||||||||||||||||||||||
Austin, TX |
KBPA-FM | San Marcos, TX | 103.5 | August 2013 | C0 | 1257 | 100 | |||||||||||||||||||||
KDHT-FM | Cedar Park, TX | 93.3 | August 2013 | C | 1926 | 100 | ||||||||||||||||||||||
KGSR-FM | Bastrop, TX | 107.1 | August 2013 | C2 | 499 | 49 | ||||||||||||||||||||||
KLBJ-AM | Austin, TX | 590 | August 2013 | B | N/A | 5 D / 1 N | ||||||||||||||||||||||
KLBJ-FM | Austin, TX | 93.7 | August 2013 | C | 1050 | 97 | ||||||||||||||||||||||
KROX-FM | Buda, TX | 101.5 | August 2013 | C2 | 843 | 12.5 | ||||||||||||||||||||||
Indianapolis, IN |
WFNI-AM | Indianapolis, IN | 1070 | August 2012 | B | N/A | 50 D / 10 N | |||||||||||||||||||||
WLHK-FM | Shelbyville, IN | 97.1 | August 2012 | B | 732 | 23 | ||||||||||||||||||||||
WIBC-FM | Indianapolis, IN | 93.1 | August 2004 2 | B | 991 | 13.5 | ||||||||||||||||||||||
WYXB-FM | Indianapolis, IN | 105.7 | August 2012 | B | 492 | 50 | ||||||||||||||||||||||
Terre Haute, IN |
WTHI-FM | Terre Haute, IN | 99.9 | August 2012 | B | 489 | 50 | |||||||||||||||||||||
WWVR-FM | West Terre Haute, IN | 105.5 | August 2012 | A | 295 | 3.3 |
1 | Under the Communications Act, a license expiration date is extended automatically pending action on the renewal application. | |
2 | Renewal application is pending. |
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
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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.
Petitions to deny have been filed against the renewal applications for WKQX and KPNT and
remain pending. An informal objection was filed against the renewal applications of the Companys
Indiana radio stations and was rejected by the FCC, and the licenses of all the Indiana radio
stations except WIBC were renewed. A petition was filed with the FCC seeking reconsideration of
grant of those license renewals, and was rejected. However, an application for review of the
decision denying reconsideration was subsequently filed, and remains pending. See PROGRAMMING AND
OPERATION.
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 subsequently adopted congressional
appropriations legislation, these reviews now must be conducted once every four years.
In June of 2003, the FCC modified several of its regulations governing the ownership of radio
stations in local markets. In June of 2004, however, the United States Court of Appeals for the
Third Circuit released a decision rejecting much of the FCCs 2003 decision. While affirming the
FCC in certain respects, the Third Circuit found fault with the proposed new limits on media
combinations, remanded them to the agency for further proceedings and extended a stay on the
implementation of the new rules that it had imposed in September 2003. In December of 2007, the
FCC adopted a decision pursuant to the remand ordered by the Court of Appeals. The FCC relaxed its
long-standing prohibition on common ownership of a television or radio station and daily newspaper
in the same market, allowing such ownership under limited circumstances. The FCC, however, largely
left intact its other pre-2003 ownership rules, including those limiting the number of radio
stations that may be commonly owned, or owned in combination with a television station, in a given
local market. The FCCs decision has been appealed by a number of broadcasters (not including the
Company) and by a number of public interest groups. The appeals have been consolidated in the
Third Circuit and remain pending. Several other public interest groups also jointly filed a
petition for reconsideration of the December 2007 decision with the FCC, and that petition
similarly remains pending. We cannot predict whether such appeals or the reconsideration
proceeding will result in modifications of the ownership rules or the impact (if any) that such
modifications would have on our business.
The discussion below reviews the pertinent ownership rules currently in effect and the changes
in the newspaper/broadcast rule adopted in the FCCs December 2007 decision.
Local Radio Ownership:
The local radio ownership rule limits the number of commercial radio stations that may be
owned by one entity in a given radio market based on the number of radio stations in that market:
| if the market has 45 or more 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 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 radio stations, one entity may own up to six stations, not more than four of which may be in the same service; and | |
| if the market has 14 or fewer radio stations, one entity may own up to five stations, not more than three of which may be in the same service, however one entity may not own more than 50% of the stations in the market. |
Each of the markets in which our radio stations are located has at least 15 commercial radio
stations.
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For purposes of applying these numerical limits, the FCC has also adopted rules with respect
to (i) so-called local marketing agreements, or LMAs, by which the licensee of one radio station
provides programming for another licensees radio station in the same market and sells all of the
advertising within that programming and (ii) so-called joint sale agreements, or JSAs, by which
the licensee of one station sells the advertising time on another station in the market. Under
these rules, an entity that owns one or more radio stations in a market and programs more than 15%
of the broadcast time, or sells more than 15% of the advertising time, on another radio station in
the same market pursuant to an LMA or JSA is generally required to count the station toward its
media ownership limits even though it does not own the station. As a result, in a market where we
own one or more radio stations, we generally cannot provide programming to another station under an
LMA, or sell advertising on another station pursuant to a JSA, if we could not acquire that station
under the
local radio ownership rule. On April 3, 2009, Emmis entered into an LMA for KMVN-FM in Los
Angeles with a subsidiary of Grupo Radio Centro, S.A.B. de C.V (GRC), a Mexican broadcasting
company. The LMA for KMVN-FM starts on April 15, 2009 and will continue for up to 7 years. The
LMA fee is $7 million per year. At any time during the LMA, GRC has the right to purchase the
station for $110 million. At the end of the term, Emmis has the right to require GRC to purchase
the station for the same amount. Under the LMA, Emmis continues to own and operate the station,
with GRC providing Emmis with programming for broadcast.
Although the FCCs June 2003 decision did not change the numerical caps under the local radio
rule, the FCC 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. The FCC grandfathered existing
station clusters not in compliance with the numerical caps as calculated pursuant to the new
market definition, but provided that they could be sold intact only to small businesses meeting
certain requirements. In December 2007, the FCC expanded this policy to allow an owner to sell a
grandfathered station cluster to any buyer, so long as the buyer commits to file, within 12 months,
an application with the FCC to transfer the excess station(s) to an eligible small business or to a
trust for ultimate sale to such an entity. The change in market definition appears to impact the
Austin, Texas market, such that we exceed the numerical cap for FM stations. If we chose to sell
our Austin cluster of stations, we would have to either sell the cluster to a buyer meeting the
requirements described above or spin off one FM station to a separate buyer.
Cross-Media Ownership:
The FCCs radio/television cross-ownership rule generally permits the common ownership of the
following combinations in the same market, to the extent permitted under the FCCs television
duopoly rule and local radio rules:
| 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 no more than one cable operator.
The FCC will consider permanent waivers of its revised radio/television cross-ownership rule only
if one of the stations is a failed station.
As noted above, the FCC rules formerly prohibited common ownership of a daily newspaper and a
radio or television station in the same local market. In its December 2007 decision, the FCC
adopted rules that contain a presumption in favor of allowing ownership of one television or radio
station in combination with one daily newspaper in the 20 largest media markets. In smaller
markets, there is a presumption against allowing such ownership. In the case of proposed
TV/newspaper combinations, the TV station may not be among the top four ranked stations in its
market, and there must be at least eight independently owned and operated TV stations in the market
post-transaction. It is unclear whether a stay earlier imposed by the Court of Appeals applies to
the liberalized newspaper crossownership rule.
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 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
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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. An LMA with a foreign owned
company is not prohibited as long as the non-foreign holder of the FCC license continues to control
and operate the station. 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 an FCC 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 FCCs 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 FCCs
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 direct/indirect parent(s); | |
| voting stock interests of at least 5% (or 20%, 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% 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% of the stations 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). In December of 2007, the FCC increased these limits under certain circumstances where the equity and/or debt interests are in a small business meeting certain requirements. |
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.
Under existing FCC policy, in the case of corporations having a single majority shareholder,
the interests of minority shareholders are generally not deemed attributable. Because Jeffrey H.
Smulyans voting interest in the Company currently exceeds 50%, this exemption appears to apply to
the Company. Elimination of the exemption is, however, under consideration by the FCC. If the
exemption is eliminated, or if Mr. Smulyans voting interest falls to or below 50%, then the
interests of any minority shareholders that meet or exceed the thresholds described above would
become attributable and would be combined with the Companys interests for purposes of determining
compliance with FCC ownership rules.
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 assignee or transferee and those persons holding attributable interests therein
and compliance with the Communications Acts 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. Beginning in the late 1970s, the FCC gradually relaxed or eliminated many of the more
formalized procedures it had developed to promote the
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broadcast of certain types of programming
responsive to the needs of a stations community of license. However, licensees continue to be
required to present programming that is responsive to community problems, needs and interests and
to maintain certain records demonstrating such responsiveness.
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 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 FCC has indicated that it may begin license revocation procedures for serious
violations of the indecency law. Furthermore, in June of 2006, Congress passed legislation that
increased the per-violation maximum fine tenfold, from $32,500 to $325,000.
In August of 2004, Emmis entered into a Consent Decree with the FCC, pursuant to which (i) the
Company adopted a compliance plan intended to avoid future indecency violations, (ii) the Company
admitted, solely for purposes of the Decree, that certain prior broadcasts were indecent, (iii)
the Company agreed to make a voluntary payment of $300,000 to the U.S. Treasury, (iv) the FCC
rescinded its prior enforcement actions against the Company based on allegedly indecent broadcasts,
and agreed not to use against the Company any indecency violations based on complaints within the
FCCs possession as of the date of the Decree or similar complaints based on pre-Decree
broadcasts, and (v) the FCC found that neither the alleged indecency violations nor the
circumstances surrounding a civil suit filed by a WKQX announcer raised any substantial and
material questions concerning the Companys qualifications to hold FCC licenses. The Consent
Decree was subsequently upheld by a federal court of appeals. Petitions have been filed against
the license renewal applications of stations WKQX and KPNT, and an informal objection was filed
against the license renewals of the Companys Indiana radio stations, in each case based primarily
on the matters covered by the Decree. The petitions against WKQX and KPNT remain pending. The
objections against the Indiana license renewals were rejected by the FCC, as was a petition for
reconsideration of the grant of those applications, but an application for review of that FCC
action is pending. Subsequent to the approval of the Consent Decree, the Company has received
letters of inquiry from the FCC alleging additional violations of indecency rules. The broadcasts
covered by these letters of inquiry are not covered by the Consent Decree and could result in the
imposition of liability.
In 2006, the FCC commenced an industry-wide inquiry into possible violations of sponsorship
identification requirements and payola in the radio industry. Its initial inquiries were
directed to four radio groups, and in April 2007, those groups entered into Consent Decrees with
the FCC to resolve outstanding investigations and allegations. The Company has received similar
inquiries from the FCC and has submitted responses; additional responses may be submitted in the
future.
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, equal employment opportunities, contest and lottery advertisements, and technical
operations, including limits on radio frequency radiation.
Failure to observe FCC rules and policies can result in the imposition of various sanctions,
including monetary fines, the grant of short-term (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.
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The FCC has adopted rules implementing a new
low power FM (LPFM) service, and approximately 800 such stations are in operation. In November
of 2007, the FCC adopted rules that, among other things, enhance LPFMs interference protection
from subsequently-authorized full-service stations. In addition, the FCC has proposed to reduce
interference protection to FM stations from LPFM stations operating on certain adjacent
frequencies. We cannot predict whether any LPFM stations will interfere with the coverage of our
radio stations.
The FCC also has authorized the launch and operation of a satellite digital audio radio
service (SDARS) system. In July of 2008, the two original SDARS companiesSirius Satellite
Radio, Inc. and XM Satellite Radio Holdings, Inc.merged into a new company called Sirius XM, which
currently provides nationwide programming service. Sirius XM also offers channels that provide
local traffic and weather information for major cities. We cannot predict the impact of SDARS or
of the merger of Sirius and XM on our radio stations listenership.
In October of 2002, the FCC issued an order selecting a technical standard for terrestrial
digital audio broadcasting (DAB, also known as high definition radio or HD Radio). 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
March of 2005, the FCC announced that pending
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adoption of final rules, it would allow stations on
an interim basis to broadcast multiple digital channels. In March 2007, the FCC adopted service
rules for HD Radio. Significantly, the FCC decided to allow FM stations to broadcast digital
multicast streams without seeking prior FCC authority, to provide datacasting services, to lease
excess digital capacity to third parties, and to offer subscription services pursuant to requests
for experimental authority. Under the new rules, FM stations may operate in the extended hybrid
mode, which provides more flexibility for multicasting and datacasting services; and may use
separate analog and digital antennas without seeking prior FCC authority. FM translators, FM
boosters and low power FM stations may also broadcast digitally where feasible, and AM stations may
now operate digitally during nighttime hours. The new rules mandate that broadcasters offering
digital service provide at least one free over-the-air signal comparable in quality to their analog
signal and that they simulcast their analog programming on their main digital stream, and prohibit
broadcasters from operating exclusively in digital. The FCC declined either to set any mandatory
deadline for broadcasters to convert to digital operations or to impose additional public interest
obligations (beyond those that already apply to analog broadcasters) on digital broadcasters. The
FCC did, however, adopt a Further Notice of Proposed Rulemaking seeking
comment on (among other things) whether additional public interest obligations are necessary,
including consideration of a requirement that radio stations report their public service
programming in detail on a standardized form and post that form and all other contents of their
public inspection files on the stations website. (The FCC subsequently imposed such a requirement
on television stations in November of 2007, which is the subject of a pending appeal.) In
September of 2008, shortly after approving the Sirius-XM merger, the FCC sought comment on whether
it should mandate the inclusion of HD Radio features in satellite radio receivers. That proceeding
remains pending, and we cannot predict its outcome or the impact that a decision might have on our
business.
In May of 2007, the Copyright Royalty Board (CRB) published royalty rates and terms for
non-interactive Internet streaming of sound recordings for 2006-2010. The new rates apply to all
services that stream sound recordings on the Internet, including radio stations that simulcast
their broadcast programming over the Internet. The new rates represent a substantial increase from
the previous rates. The rates increase from 0.08 cents per-listener per-song in 2006 to 0.19 cents
per-listener per-song in 2010. Several parties, including certain commercial broadcasters,
appealed the CRB decision to the United States Court of Appeals for the D.C. Circuit. Oral
argument in the D.C. Circuit appeal was held on March 19, 2009, and the case remains pending. In
February of 2009, however, the National Association of Broadcasters and SoundExchange, the entity
that represents the recording industry and receives royalty payments from webcasters, negotiated a
settlement that resulted in the withdrawal of all commercial broadcasters from the D.C. Circuit
appeal. Under the settlement, a commercial broadcaster may elect the settlement rates in lieu of
the CRB rates. Emmis has elected to participate in the National Association of Broadcasters
settlement with SoundExchange. Among other things, the settlement sets rates for 2006-2015, with
rates increasing from 0.08 cents per-listener per-song in 2006 to 0.25 cents per-listener per-song
in 2015. Notwithstanding the settlement and the withdrawal of commercial broadcasters from the
D.C. Circuit appeal, it is possible that the courts decision could result in rates lower than
those set by the May 2007 CRB decision or the settlement. In that situation, a commercial
broadcaster that had opted to pay under the CRB rates (but, under the terms of the settlement, not
the settlement rates) might be able to obtain the benefit of the lower rates resulting from the
appeal. Further, legislation that could provide relief for many webcasters has been proposed in
Congress, although its prospects for passage are unclear.
Legislation has also been introduced that would require terrestrial radio broadcasters to pay
performance royalties to performers, ending a long-standing copyright law exception. Bills
introduced in both houses would direct the CRB to establish payment rates for the royalties, likely
based on a percentage of gross revenue of the broadcaster (with some very limited exceptions). The
prospects for passage of one of these measures are uncertain, although a hearing was held on the
House bill in March of 2009 and the sponsors of the bills have called for quick Congressional
action. The Obama Administration, however, has yet to take a formal position on either of the
measures.
In December of 2007, the FCC initiated a proceeding to consider imposing requirements intended
to promote broadcasters service to their local communities, including (i) requiring stations to
establish a community advisory board, (ii) reinstating a requirement that a stations main studio
be in its community of license and (iii) imposing local programming guidelines that, if not met,
would result in additional scrutiny of a stations license renewal application. While many
broadcasters have opposed these proposals, we cannot predict how the FCC will resolve the issue.
Congress and the FCC also have under consideration, and may in the future consider and adopt,
new laws, regulations and policies regarding a wide variety of additional 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; |
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| proposals to repeal or modify some or all of the FCCs 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, including use by AM 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 reallocate spectrum associated with TV channels 5 and 6 for FM radio broadcasting; | |
| proposals to limit the tax deductibility of advertising expenses by advertisers; and | |
| proposals to regulate violence in broadcasts. |
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.
REGULATION OF BROADCASTING IN OTHER COUNTRIES
Each of our broadcast properties outside the United States also operate pursuant to licenses
granted by a government regulator comparable to the FCC. The following table sets forth the
regulator, the city or country of license and the license expiration date for each of our
international radio properties:
Property | Country | Regulator | Expiration | |||||||||
Slager Radio |
Hungary | Hungarian National Radio and Television Board | November 2009 | |||||||||
Radio Expres |
Slovakia | Council for Broadcasting and Retransmission | February 2013 | |||||||||
BeOne |
Belgium | Flemish Regulator for Media | December 2012 | |||||||||
Radio FM+ |
Bulgaria | The Council for Electronic Media | February 2013 | |||||||||
Radio Fresh |
Bulgaria | The Council for Electronic Media | February 2013 | |||||||||
Star FM |
Bulgaria | The Council for Electronic Media | January 2013 |
Broadcast licenses in many foreign countries do not generally confer the same renewal
expectancy as U.S. radio stations broadcast licenses. For instance, Hungarian broadcast law is
silent as to the treatment of broadcast licenses after the expiration of the first license renewal
period. While we believe we have reasonable prospects for securing additional extensions of our
Hungarian broadcast licenses after the expiration of our first license renewal period in November
2009, we cannot assure that such extensions will be granted or that the terms and conditions of
such extensions will not have a material adverse effect on our Hungarian operations.
In addition, the broadcast licenses in these countries require our stations to comply with
various other regulatory requirements, including broadcast content requirements (e.g., a certain
amount of local news), limits on the amounts and types of advertising, and the like.
GEOGRAPHIC FINANCIAL INFORMATION
The Companys segments operate primarily in the United States with one national radio station
in Hungary, a network of radio stations in Belgium and national radio networks in Slovakia and
Bulgaria. The following tables summarize relevant financial information by geographic area. Net
revenues and noncurrent assets related to discontinued operations are excluded for all periods
presented.
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Year Ended Febraury 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(amounts in thousands) | ||||||||||||
Net Revenues: |
||||||||||||
Domestic |
$ | 324,395 | $ | 316,895 | $ | 285,878 | ||||||
International |
32,368 | 41,164 | 47,995 | |||||||||
Total |
$ | 356,763 | $ | 358,059 | $ | 333,873 | ||||||
As of February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(amounts in thousands) | ||||||||||||
Noncurrent Assets: |
||||||||||||
Domestic |
$ | 985,402 | $ | 953,025 | $ | 594,034 | ||||||
International |
27,261 | 31,079 | 15,831 | |||||||||
Total |
$ | 1,012,663 | $ | 984,104 | $ | 609,865 | ||||||
ITEM 1A. 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.
Risks Related to our Business
The global economic crisis has affected our business and we cannot predict its future impact.
Our revenues continue to be impacted by economic trends that have caused a general downturn in
the advertising sector. The capital and credit markets have been experiencing unprecedented
volatility and disruption. The markets have produced downward pressure on stock prices and credit
capacity for many companies, including us. If economic trends continue or worsen, there can be no
assurance that we will not experience a further adverse effect, which may be material to our
business, financial condition, results of operations and our ability to access capital. In
addition, our ability to access the capital markets may be severely restricted at a time when we
would like, or need, to do so, which could have an impact on our flexibility to react to changing
economic and business conditions.
We may lose audience share and advertising revenue to competing radio stations or other types of media.
We operate in highly competitive industries. Our radio stations compete for audiences and
advertising revenue with other radio stations and station groups, as well as with other media.
Shifts in population, demographics, audience tastes, consumer use of technology and forms of media
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 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 radio stations may not be able to maintain or increase their current audience ratings and
advertising revenue in the face of such competition.
We routinely conduct market research to review the competitive position of our stations in
their respective markets. If we determine that a station could improve its operating performance
by serving a different demographic within its market, we may change the format of that station.
Our competitors may respond to our actions by more aggressive promotions of their stations or by
replacing the format we vacate, limiting our options if we do not achieve expected results with our
new format.
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
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us. Any failure by us to respond, or to respond as quickly as our competitors, could
also have an adverse effect on our business and financial performance.
Arbitron Inc., the supplier of ratings data for United States radio markets, has developed
technology to passively collect data for its ratings service. The Portable People
MeterTM is a small, pager-sized device that does not require any active manipulation by
the end user and is capable of automatically measuring radio, television, Internet, satellite radio
and satellite television signals that are encoded for the service by the broadcaster. Our New
York, Los Angeles and Chicago market ratings are being measured by the PPMTM. In each
market, there has been a compression in the relative ratings of all stations in the market,
enhancing the competitive pressure within the market for advertising dollars. In addition, ratings
for certain stations when measured by the PPMTM as opposed to the traditional diary
methodology can be materially different. PPMTM based ratings are scheduled to be
introduced in all of our other markets, other than Terre Haute which will remain a diary ratings
market, by Spring 2010.
Because of the competitive factors we face and the introduction of the PPMTM, we
cannot assure investors that we will be able to maintain or increase our current audience ratings
and advertising revenue.
Our domestic radio operations are heavily concentrated in the New York and Los Angeles markets.
Our radio operations in New York and Los Angeles account for approximately 50% of our domestic
radio revenues. Our results from operations can be materially affected by a downturn in operations
in either one of these markets.
We must respond to the rapid changes in technology, services and standards that characterize our
industry in order to remain competitive.
The radio broadcasting industry is subject to rapid technological changes, evolving industry
standards and the emergence of competition from new technologies and services. We cannot assure
that we will have the resources to acquire new technologies or to introduce new services that could
compete with these new technologies. Various media technologies and services have been developed or
introduced in the recent years include:
- | satellite-delivered digital audio radio service, which has resulted in 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; | ||
- | personal digital audio devices (e.g., audio via Wi-Fi, mobile phones, iPods®, iPhones®, WiMAX, the Internet and MP3 players); | ||
- | in-band on-channel digital radio (i.e., HD digital radio), which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; and | ||
- | low-power FM radio, which could result in additional FM radio broadcast outlets. |
New media has resulted in fragmentation in the advertising market, but we cannot predict the
effect, if any, that additional competition arising from new technologies may have on the radio
broadcasting industry or on our financial condition and results of operations. We also cannot
ensure that our investments in HD digital radio and other technologies will produce the desired
returns.
Our business depends on maintaining our licenses with the FCC. We could be prevented from
operating a radio station if we fail to maintain its license.
The radio broadcasting industry is subject to extensive and changing regulation. The
Communications Act and FCC rules and policies require FCC approval for transfers of control and
assignments of FCC licenses. The filing of petitions or complaints against FCC licensees could
result in the FCC delaying the grant of, or refusing to grant, its consent to the assignment of
licenses to or from an FCC licensee or the transfer of control of an FCC licensee. In certain
circumstances, the Communications Act and FCC rules and policies will operate to impose limitations
on alien ownership and voting of our common stock. There can be no assurance that there will be no
changes in the current regulatory scheme, the imposition of additional regulations or the creation
of new regulatory agencies, which changes could restrict or curtail our ability to acquire, operate
and dispose of stations or, in general, to compete profitably with other operators of radio and
other media properties.
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Each of our radio stations operates pursuant to one or more licenses issued by the FCC. Under
FCC rules, radio licenses are granted for a term of eight years. Our licenses expire at various
times through June 2014. Although we will apply to renew these licenses, third parties may
challenge our renewal applications. While we are not aware of facts or circumstances that would
prevent us from having our current licenses renewed, there can be no assurance that the licenses
will be renewed or that renewals will not include conditions or qualifications that could adversely
affect our business and operations. Failure to obtain the renewal of any of our broadcast licenses
may have a material adverse effect on our business and operations. In addition, if we or any of our
officers, directors or significant stockholders materially violates the FCCs rules and regulations
or the Communications Act, is convicted of a felony or is found to have engaged in unlawful
anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a
petition from a third party or on its own initiative, in its discretion, commence a proceeding to
impose sanctions upon us which could involve the imposition of monetary fines, the revocation of
our broadcast licenses or other sanctions. If the FCC were to issue an order denying a license
renewal application or revoking a license, we would be required to cease operating the applicable
radio station only after we had exhausted all rights to administrative and judicial review without
success.
The FCC has begun more vigorous enforcement of its indecency rules against the broadcast industry,
which could have a material adverse effect on our business.
The FCCs rules prohibit the broadcast of obscene material at any time and indecent material
between the hours of 6 a.m. and 10 p.m. Broadcasters risk violating the prohibition on the
broadcast of indecent material because of the FCCs broad definition of such material, coupled with
the spontaneity of live programming.
Congress has dramatically increased the penalties for broadcasting obscene, indecent or
profane programming and broadcasters can potentially face license revocation, renewal or
qualification proceedings in the event that they broadcast indecent material. In addition, the
FCCs heightened focus on indecency, against the broadcast industry generally, may encourage third
parties to oppose our license renewal applications or applications for consent to acquire broadcast
stations. As a result of these developments, we have implemented certain measures that are designed
to reduce the risk of broadcasting indecent material in violation of the FCCs rules. These and
other future modifications to our programming in an effort to reduce the risk of indecency
violations could have an adverse effect on our competitive position.
Any changes in current FCC ownership regulations may negatively impact our ability to compete or
otherwise harm our business operations.
The FCC is required to review all of its broadcast ownership rules every four years and to
repeal or modify any of its rules that are no longer necessary in the public interest. We cannot
predict the impact of these reviews on our business or their 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 ownership regulations released after the date of our acquisition, 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 or to buyers that commit to selling any
excess stations to such entities within one year. Consequently, if we wish to sell our interest in
the Austin stations, we will have to either sell to an entity that meets those FCC requirements or
exclude at least one FM station from the transaction.
Changes in current Federal regulations could adversely affect our business operations.
Congress and the FCC have under consideration, and may in the future consider and adopt, new
laws, regulations and policies that could, directly or indirectly, affect the profitability of our
broadcast stations. In particular, Congress is considering a revocation of radios exemption from
paying royalties to performing artists for use of their recordings (radio already pays a royalty to
songwriters). A requirement to pay additional royalties could have an adverse effect on our
business operations and financial performance.
Our business strategy and our ability to operate profitably depend 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. Although our
executive officers are typically under employment agreements, their managerial,
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technical and other
services would be difficult to replace if we lose the services of one or more of them or other 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 stations employ or independently contract with several on-air personalities and
hosts of syndicated radio 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 stations and may not retain their audiences.
Recently, the Company reduced salaries of most employees in a cost reduction effort. Most of
our employees with employment agreements voluntarily participated in the salary reduction. These
salary reductions may make it more difficult to retain our key employees.
Future operation of our business may require significant additional capital.
The continued development, growth and operation of our businesses may require substantial
capital. In particular, additional acquisitions may require large amounts of capital. We intend to
fund our growth, including acquisitions, if any, with cash generated from operations, borrowings
under our Amended and Restated Revolving Credit and Term Loan Agreement, dated November 2, 2006, as
further amended on March 3, 2009 (the Credit Agreement) 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 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 operations in Hungary, Slovakia,
Belgium and Bulgaria. Therefore, we are exposed to risks inherent in international business
operations. The risks of doing business in foreign countries include the following:
- | changing regulatory or taxation policies, including changes in tax policies that have been proposed by the Obama Administration related to foreign earnings; | ||
- | 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. |
Broadcast licenses in many foreign countries do not generally confer the same renewal
expectancy as U.S. radio stations broadcast licenses. For instance, Hungarian broadcast law is
silent as to the treatment of broadcast licenses after the expiration of the first license renewal
period. While we believe we have reasonable prospects for securing additional extensions of our
Hungarian broadcast licenses after the expiration of our first license renewal period in November
2009, we cannot assure that such extensions will be granted or that the terms and conditions of
such extensions will not have a material adverse effect on our Hungarian operations.
Exchange rates may cause future losses in our international operations.
Because we own assets in foreign countries and derive revenue from our international
operations, we may incur currency translation losses due to changes in the values of foreign
currencies and in the value of the United States dollar. We cannot predict the effect of exchange
rate fluctuations upon future operating results.
We have incurred losses over the past two years and we may incur future losses.
We have reported net losses in our consolidated statement of operations over the past two
years as a result of recording non-cash write-downs of our FCC licenses and goodwill. In
fiscal 2009, we recorded impairments related to our FCC licenses and
goodwill of $362.8
million. As of February 28, 2009, our FCC licenses and goodwill
comprise 71% of our total
assets. If
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events occur or circumstances change that would reduce the fair value of the
FCC licenses and goodwill below the amount reflected on the balance sheet, we may be
required to recognize impairment charges, which may be material, in future periods.
Our failure to comply under the Sarbanes-Oxley Act of 2002 could cause a loss of confidence in the
reliability of our financial statements.
We have undergone a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act
of 2002. This effort included documenting and testing our internal controls. As of February 28,
2009, we did not identify any material weaknesses in our internal controls as defined by the Public
Company Accounting Oversight Board. In future years, there are no assurances that we will not have
material weaknesses that would be required to be reported or that we will be able to comply with
the reporting deadline requirements of Section 404. A reported material weakness or the failure to
meet the reporting deadline requirements of Section 404 could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of our financial statements. This
loss of confidence could cause a decline in the market price of our stock.
Our operating results have been and may again be adversely affected by acts of war, terrorism and
natural catastrophes.
Acts of war and terrorism against the United States, and the countrys 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, 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 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.
Similarly, hurricanes, floods, tornadoes, earthquakes, wild fires and other natural disasters
can have a material adverse effect on our operations in any given market. While we generally carry
property insurance covering such catastrophes, we cannot assure that the proceeds from such
insurance will be sufficient to offset the costs of rebuilding or repairing our property or the
lost income.
Risks Related to our Indebtedness:
Our substantial indebtedness could adversely affect our financial health.
We have a significant amount of indebtedness. At February 28, 2009, our total indebtedness was
$422.4 million, and our shareholders deficit was $60.0 million. Our substantial indebtedness
could have important consequences to investors. For example, it could:
- | make it more difficult for us to satisfy our obligations with respect to our indebtedness; | ||
- | increase our vulnerability to generally 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; |
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- | 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 Agreement, 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. |
A continued worsening of the economy could negatively impact our ability to meet our cash needs and
our ability to maintain compliance with our debt covenants.
Based on our most recent projections, we believe the Company can meet its liquidity needs
and maintain compliance through February 28, 2010 with financial covenants in our Credit Agreement,
including: (1) Consolidated Total Funded Debt to Consolidated Operating Cash Flow (each as defined
in our Credit Agreement) of 6 times; and (2) Consolidated Operating Cash Flow to Consolidated Fixed
Charges (each as defined in our Credit Agreement) of 1.25 times. However, if our revenues are
significantly less than planned due to difficult market conditions or for other reasons, our
ability to maintain compliance with the financial covenants in our Credit Agreement would become
increasingly difficult without remedial measures. Such measures may include further operating cost
and capital expenditure reductions and additional de-leveraging actions. If these measures are
unsuccessful, we would attempt to negotiate less restrictive covenants through an amendment or
waivers of covenant compliance with our lenders, which could result in higher
interest costs, additional fees and reduced borrowing capacity. If the Company cannot maintain
compliance with its debt covenants, there is no assurance we would be able to negotiate amendment
relief or waivers of covenant compliance with our lenders. Failure to comply with our debt
covenants and failure to negotiate a favorable amendment or waivers of covenant compliance could
result in the acceleration of the maturity of all our outstanding debt, which would have a material
adverse effect on the Company. The Consolidated Total Funded Debt to Consolidated Operating Cash
Flow ratio required by the Credit Agreement changes to 5.5 times on May 31, 2010, 5 times on
February 28, 2011, 4.5 times on November 30, 2011 and 4 times for all periods after May 31, 2012.
The Company has projected compliance through February 28, 2010. Projections beyond fiscal 2010 are
too speculative to assess future compliance for such years.
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 Agreement imposes 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
indebtedness on or before maturity. We cannot assure investors that we will be able to refinance
any of our indebtedness on commercially reasonable terms or at all.
Our corporate debt rating was recently downgraded, and we could suffer further downgrades.
On a continuing basis, credit rating agencies such as Standard & Poors (S&P) and Moodys
Investor Services (Moodys) evaluate our debt. On April 27, 2009 Moodys downgraded our corporate
family rating to Caa2 from Caa1 and reiterated its rating outlook as negative. The ratings
downgrade reflected concerns regarding continued internal operating challenges at our New York and
Los Angeles stations and belief that our credit metrics will likely deteriorate in the face of a
further slowdown in the economy. On April 14, 2009, S&P downgraded our corporate family rating to
CCC+ from B+ and said its rating outlook is negative. S&P cited
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concerns regarding our ability to
comply with financial covenants in our Credit Agreement in light of weak operating performance and
the potential for a covenant violation in fiscal 2010 if trends do not improve. Our Credit
Agreement does not require that we maintain a minimum credit rating, so actions such as these by
the credit rating agencies do not necessarily have an immediate impact on our cost of debt or
liquidity. However, a lower credit rating may translate to higher borrowing costs in the future if
we were to further amend or refinance our Credit Agreement.
Risks Related to our Common Stock:
One shareholder controls a majority of the voting power of our common stock, and his interest may
conflict with those of investors.
As of April 30, 2009, our Chairman of the Board of Directors, Chief Executive Officer and
President, Jeffrey H. Smulyan, beneficially owned shares representing approximately 70.5% of the
outstanding combined voting power of all classes of our common stock, as calculated pursuant to
Rule 13d-3 of the Exchange Act. He therefore is in a position to exercise substantial influence
over the outcome of most matters submitted to a vote of our shareholders, including the election of
directors.
Our common stock may cease to be listed on the National Association of Securities Dealers Automated
Quotation (NASDAQ) Global Select Market.
Our common stock is currently listed on the NASDAQ under the symbol EMMS. We may not be
able to meet the continued listing requirements of the NASDAQ, which require, among other things, a
minimum closing price of our common stock and a minimum market capitalization. The NASDAQ has
temporarily suspended the minimum closing price and minimum market capitalization requirements
through July 20, 2009. If we are unable to satisfy the requirements of the NASDAQ for continued
listing, our common stock would be subject to delisting. A delisting of our common stock from the
NASDAQ could negatively impact us by, among other things, reducing the liquidity and market price
of our common stock.
The difficulties associated with any attempt to gain control of our company could adversely affect
the price of our Class A common stock.
Jeffrey H. Smulyan has substantial influence over the decision as to whether a change in
control will occur for our Company. There are also provisions contained in our articles of
incorporation, by-laws and Indiana law that could make it more difficult for a third party to
acquire control of our Company. In addition, FCC approval for transfers of control of FCC licenses
and assignments of FCC licenses are required. These restrictions and limitations could adversely
affect the trading price of our Class A common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The types of properties required to support each of our radio stations include offices,
studios and transmitter/antenna sites. We typically lease our studio and office space, although we
do own some of our facilities. Most of our studio and office space leases contain lease terms with
expiration dates of five to fifteen years. A stations studios are generally housed with its
offices in downtown or business districts. We generally consider our facilities to be suitable and
of adequate size for our current and intended purposes. We own many of our main
transmitter/antenna sites and lease the remainder of our transmitter/antenna sites that contain
lease terms that generally range from five to twenty years. The transmitter/antenna site for each
station is generally located so as to provide maximum market coverage, consistent with the
stations FCC license. In general, we do not anticipate difficulties in renewing facility or
transmitter/antenna site leases or in leasing additional space or sites if required. We have
approximately $58.0 million in aggregate annual minimum rental commitments under real estate
leases. Many of these leases contain escalation clauses such as defined contractual increases or
cost-of-living adjustments.
Our principal executive offices are located at 40 Monument Circle, Suite 700, Indianapolis,
Indiana 46204, in approximately 91,500 square feet of owned office space which is shared by our
Indianapolis radio stations and our Indianapolis Monthly publication.
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We own substantially all of our other equipment, consisting principally of transmitting
antennae, transmitters, studio equipment and general office equipment. The towers, antennae and
other transmission equipment used by our stations are generally in good condition, although
opportunities to upgrade facilities are periodically reviewed.
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.
Certain individuals and groups have challenged applications for renewal of the FCC licenses of
certain of the Companys stations. The challenges to the license renewal applications are
currently pending before the Commission. Emmis does not expect the challenges to result in the
denial of any license renewals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth quarter ended February
28, 2009.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is certain information about the executive officers of Emmis or its affiliates
who are not directors or nominees to be directors.
AGE AT | YEAR FIRST | |||||||||
FEBRUARY 28, | ELECTED | |||||||||
NAME | POSITION | 2009 | OFFICER | |||||||
Richard F. Cummings |
Radio Division President | 59 | 1984 | |||||||
Michael Levitan |
Executive Vice President of Human Resources | 51 | 2002 | |||||||
Gary A. Thoe |
Publishing Division President | 52 | 1998 | |||||||
Paul W. Fiddick |
International Division President | 59 | 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.
Richard F. Cummings was the Program Director of our first radio station in Indianapolis from
1981 to March 1984, when he became the National Program Director and a Vice President of Emmis. He
became Executive Vice President of Programming in 1988 and became Radio Division President in
December 2001. Subsequent to the end of the Companys fiscal year, on March 1, 2009, Mr. Cummings
became President Radio Programming.
Michael Levitan was the Senior Vice President of Human Resources from September 2000 to March
2004 when he became the Executive Vice President of Human Resources. 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. Subsequent to the
end of the Companys fiscal year, on March 13, 2009, Mr. Levitan resigned from the Company.
Gary A. 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 W. 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.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
MARKET INFORMATION FOR OUR COMMON STOCK
Emmis Class A common stock is traded in the over-the-counter market and is quoted on the
NASDAQ under the symbol EMMS. There is no established public trading market for Emmis Class B
common stock or Class C common stock.
The following table sets forth the high and low bid prices of the Class A common stock for the
periods indicated.
QUARTER ENDED | HIGH | LOW | ||||||
May 2007 |
10.86 | 7.63 | ||||||
August 2007 |
10.27 | 5.28 | ||||||
November 2007 |
7.02 | 3.64 | ||||||
February 2008 |
4.64 | 2.02 | ||||||
May 2008 |
3.74 | 2.62 | ||||||
August 2008 |
3.24 | 1.49 | ||||||
November 2008 |
2.50 | 0.25 | ||||||
February 2009 |
0.65 | 0.27 |
HOLDERS
At May 1, 2009, there were 5,987 record holders of the Class A common stock, and there was one
record holder of the Class B common stock.
DIVIDENDS
On November 2, 2006, the Companys Board of Directors declared a special one-time dividend of
$4.00 per common share to shareholders of record as of November 12, 2006. The dividend was paid
November 22, 2006, which reduced shareholders equity by $150.2 million. Emmis currently intends
to retain future earnings for use in its business and has no plans to pay any dividends on shares
of its common stock in the foreseeable future.
SHARE REPURCHASES
During the three-month period ended February 28, 2009, there were no repurchases of our Class
A common stock or Preferred Stock pursuant to a previously announced share repurchase program by
the Companys Board of Directors. There were, however, elections by employees to withhold shares
of stock upon vesting of restricted stock units to cover withholding tax obligations. The
following table provides information on our repurchases related to elections by employees to
withhold shares of stock upon vesting of restricted stock during the three months ended February
28, 2009:
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(c) | (d) | |||||||||||||||
Total Number of | Maximum | |||||||||||||||
Shares | Approximate | |||||||||||||||
Purchased as | Dollar Value of | |||||||||||||||
(a) | (b) | Part of Publicly | Shares That May | |||||||||||||
Total Number | Average Price | Announced | Yet Be Purchased | |||||||||||||
of Shares | Paid Per | Plans or | Under the Plans | |||||||||||||
Period | Purchased | Share | Programs | or Programs | ||||||||||||
December 1, 2008 December 31, 2008 |
| $ | | | $ | 36,150,565 | ||||||||||
January 1, 2009 January 31, 2009 |
339 | $ | 0.35 | | $ | 36,150,565 | ||||||||||
February 1, 2009 February 28, 2009 |
| $ | | | $ | 36,150,565 | ||||||||||
339 | | |||||||||||||||
PERFORMANCE GRAPH
The following Performance Graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Form 10-K into any of our filings under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent
that we specifically incorporate this performance graph by reference, and shall not otherwise be
deemed filed under such Acts.
The following line graph compares the yearly percentage change in the cumulative total
shareholder return on the Class A common stock with the cumulative total return of the Nasdaq Stock
Market Index, and the cumulative total return of an index of certain peer radio broadcasting
companies with which the Company competes from February 29, 2004, to the fiscal year ended
February 28, 2009. The peer group index is comprised of Cox Radio, Inc., Entercom Communications
Corp., and Radio One, Inc. The performance graph assumes that an investment of $100 was made in
the Class A common stock and in each index on February 29, 2004 and that all dividends were
reinvested.
Feb 2004 | Feb 2005 | Feb 2006 | Feb 2007 | Feb 2008 | Feb 2009 | |||||||||||||||||||||||||||
Emmis |
$ | 100 | $ | 74 | $ | 65 | $ | 49 | $ | 28 | $ | 1 | ||||||||||||||||||||
Nasdaq Stock Market (U.S.) |
$ | 100 | $ | 101 | $ | 112 | $ | 119 | $ | 112 | $ | 68 | ||||||||||||||||||||
Radio Peer Group |
$ | 100 | $ | 74 | $ | 58 | $ | 59 | $ | 29 | $ | 9 | ||||||||||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
Emmis Communications Corporation
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
YEAR ENDED FEBRUARY 28 (29) | ||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
2005 (Unaudited) |
2006 | 2007 | 2008 | 2009 (As Restated) |
||||||||||||||||
OPERATING DATA: |
||||||||||||||||||||
Net revenues |
$ | 344,008 | $ | 375,363 | $ | 356,763 | $ | 358,059 | $ | 333,873 | ||||||||||
Station operating expenses excluding depreciation
and amortization expense |
223,020 | 248,181 | 251,608 | 266,698 | 257,071 | |||||||||||||||
Corporate expenses excluding depreciation and
and amortization expense |
32,915 | 33,966 | 28,176 | 20,883 | 18,503 | |||||||||||||||
Depreciation and amortization |
15,585 | 17,025 | 13,267 | 14,389 | 14,338 | |||||||||||||||
Impairment losses (1) |
| 35,681 | | 21,225 | 373,408 | |||||||||||||||
Contract termination fee (2) |
| | | 15,252 | | |||||||||||||||
Restructuring charge |
| | | | 4,208 | |||||||||||||||
(Gain) loss on disposal of fixed assets |
795 | 94 | 4 | (104 | ) | 14 | ||||||||||||||
Operating income (loss) |
71,693 | 40,416 | 63,708 | 19,716 | (333,669 | ) | ||||||||||||||
Interest expense |
39,690 | 70,586 | 43,160 | 34,837 | 25,551 | |||||||||||||||
Loss on debt extinguishment (3) |
97,248 | 6,952 | 13,435 | | | |||||||||||||||
Other income (loss), net |
2,196 | 3,040 | (22 | ) | | 173 | ||||||||||||||
Income (loss) before income taxes, minority interest, discontinued
operations and cumulative effect of accounting change |
(63,049 | ) | (34,082 | ) | 7,091 | (15,121 | ) | (359,047 | ) | |||||||||||
Loss from continuing operations |
(66,015 | ) | (22,764 | ) | (1,126 | ) | (17,908 | ) | (300,336 | ) | ||||||||||
Discontinued operations (4) |
64,864 | 380,819 | 114,708 | 16,558 | 67 | |||||||||||||||
Net income (loss) (5) |
(304,151 | ) | 358,055 | 113,582 | (1,350 | ) | (300,269 | ) | ||||||||||||
Net income (loss) available to
common shareholders |
(313,135 | ) | 349,071 | 104,598 | (10,334 | ) | (309,202 | ) | ||||||||||||
Net income (loss) per share available
to common shareholders: |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Continuing operations |
$ | (1.34 | ) | $ | (0.74 | ) | $ | (0.27 | ) | $ | (0.74 | ) | $ | (8.50 | ) | |||||
Discontinued operations |
1.16 | 8.88 | 3.08 | 0.46 | | |||||||||||||||
Cumulative effect of accounting change |
(5.40 | ) | | | | | ||||||||||||||
Net income (loss) available to common
shareholders |
$ | (5.58 | ) | $ | 8.14 | $ | 2.81 | $ | (0.28 | ) | $ | (8.50 | ) | |||||||
Diluted: |
||||||||||||||||||||
Continuing operations |
$ | (1.34 | ) | $ | (0.74 | ) | $ | (0.27 | ) | $ | (0.74 | ) | $ | (8.50 | ) | |||||
Discontinued operations |
1.16 | 8.88 | 3.08 | 0.46 | | |||||||||||||||
Cumulative effect of accounting change |
(5.40 | ) | | | | | ||||||||||||||
Net income (loss) available to common
shareholders |
$ | (5.58 | ) | $ | 8.14 | $ | 2.81 | $ | (0.28 | ) | $ | (8.50 | ) | |||||||
Cash dividends declared per common share |
$ | | $ | | $ | 4.00 | $ | | $ | | ||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
56,129 | 42,876 | 37,265 | 36,551 | 36,374 | |||||||||||||||
Diluted |
56,129 | 42,876 | 37,265 | 36,551 | 36,374 |
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FEBRUARY 28 (29), | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
2005 (As Restated) |
2006 (As Restated) |
2007 (As Restated) |
2008 (As Restated) |
2009 (As Restated) |
||||||||||||||||
(Unaudited) | ||||||||||||||||||||
BALANCE SHEET DATA: |
||||||||||||||||||||
Cash (6) |
$ | 16,054 | $ | 140,822 | $ | 20,747 | $ | 19,498 | $ | 49,731 | ||||||||||
Working capital |
52,101 | 34,742 | 60,469 | 52,773 | 71,382 | |||||||||||||||
Net intangible assets (7) |
943,084 | 916,904 | 916,518 | 908,584 | 537,873 | |||||||||||||||
Total assets |
1,823,035 | 1,512,701 | 1,207,904 | 1,139,740 | 739,211 | |||||||||||||||
Long-term credit facility, senior subordinated debt, senior
discount notes and liquidation preference of preferred stock
until reclassification to mezzanine |
1,317,558 | 808,174 | 494,587 | 434,306 | 417,141 | |||||||||||||||
Shareholders equity (deficit) |
447,014 | 266,435 | 231,902 | 237,485 | (60,000 | ) |
YEAR ENDED FEBRUARY 28 (29), | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
OTHER DATA: |
||||||||||||||||||||
Cash flows provided by (used in): |
||||||||||||||||||||
Operating activities |
$ | 125,969 | $ | 75,798 | $ | 33,089 | $ | 51,714 | $ | 46,523 | ||||||||||
Investing activities |
54,542 | 859,843 | 309,224 | 33,606 | 17,701 | |||||||||||||||
Financing activities |
(185,131 | ) | (809,967 | ) | (463,815 | ) | (88,214 | ) | (33,277 | ) | ||||||||||
Capital expenditures |
10,069 | 12,020 | 5,258 | 6,743 | 20,627 | |||||||||||||||
Cash paid for taxes |
286 | 5,045 | 6,866 | 4,010 | 4,484 |
(1) | The impairment loss in the fiscal years ended February 28, 2006, February 29, 2008 and February 28, 2009 primarily resulted from either our interim and annual SFAS No. 142 reviews. | |
(2) | On October 1, 2007, Emmis terminated its existing national sales representation agreement with Interep National Radio Sales, Inc. and entered into a new agreement with Katz Communications, Inc. extending through March 2018. Emmis, Interep and Katz entered into a tri-party termination and mutual release agreement under which Interep agreed to release Emmis from its future contractual obligations in exchange for a one-time payment of $15.3 million, which was paid by Katz on behalf of Emmis as an inducement for Emmis to enter into the new long-term contract with Katz. | |
(3) | The loss on debt extinguishment in the fiscal years ended February 28, 2006 and 2007 relates to the write-off of deferred debt fees associated with early debt extinguishments. Loss on debt extinguishment in the fiscal year ended February 28, 2005 relates to the write-off of deferred debt fees and redemption premiums paid for the early retirement of outstanding debt obligations. | |
(4) | The gain from discontinued operations in the fiscal year ended February 28, 2005 principally relates to the gain on the exchange of three radio stations in Phoenix for a radio station in Chicago, which totaled $33.6 million, net of tax. The gain from discontinued operations in the fiscal year ended February 28, 2006 principally relates to the gain on sale on our television stations, which totaled $367.0 million, net of tax. The gain from discontinued operations in the fiscal year ended February 28, 2007 principally relates to the gains recorded on our sale of WKCF-TV, WBPG-TV, WRDA-FM and KKFR-FM, which totaled $110.0 million, net of tax. The gain from discontinued operations in the fiscal year ended February 29, 2008 principally relates to the gain recorded on our sale of KGMB-TV, which totaled $10.1 million, net of tax. | |
(5) | In addition to the items described above, the net loss in the fiscal year ended February 28, 2005 includes a charge of $303.0 million, net of tax, to reflect the cumulative effect of an accounting change in connection with our adoption of Emerging Issues Task Force (EITF) Topic D-108, Use of the Residual Method to Value Acquired Assets other than Goodwill. | |
(6) | The February 28, 2006 balance includes $121.4 million of cash received from television station asset sales used to redeem senior floating rate notes and senior discount notes in March 2006. | |
(7) | Excludes intangibles of a radio station in St. Louis sold in May 2006, a radio station in Phoenix sold in July 2006, our television division sold at various dates during the five years ended February 28, 2009, Emmis Books and Tu Ciudad Los Angeles, both of which ceased operations during the year ended February 28, 2009. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
GENERAL
The following discussion pertains to Emmis Communications Corporation and its subsidiaries
(collectively, Emmis or the Company).
We own and operate radio 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 80% 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. Arbitron Inc. generally measures radio station ratings weekly for markets measured by
the Portable People MeterTM and four times a year for markets measured by diaries.
Because audience ratings in a stations local market are critical to the stations financial
success, our strategy is to use market research, advertising and promotion to attract and retain
audiences in each stations 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.
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. These
barter transactions are recorded at the estimated fair value of the product or service received.
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 preempt
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.
All revenues generated by our international radio properties are included in the Local category.
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, political advertising and barter.
Year ended February 28 (29), | ||||||||||||||||||||||||
2007 | % of Total | 2008 | % of Total | 2009 | % of Total | |||||||||||||||||||
Net revenues: |
||||||||||||||||||||||||
Local |
$ | 232,509 | 65.2 | % | $ | 233,086 | 65.1 | % | $ | 210,076 | 62.9 | % | ||||||||||||
National |
64,943 | 18.2 | % | 62,083 | 17.3 | % | 57,753 | 17.3 | % | |||||||||||||||
Publication Sales |
13,340 | 3.7 | % | 14,220 | 4.0 | % | 14,006 | 4.2 | % | |||||||||||||||
Non Traditional |
22,191 | 6.2 | % | 21,591 | 6.0 | % | 18,973 | 5.7 | % | |||||||||||||||
Other |
23,780 | 6.7 | % | 27,079 | 7.6 | % | 33,065 | 9.9 | % | |||||||||||||||
Total net revenues |
$ | 356,763 | $ | 358,059 | $ | 333,873 | ||||||||||||||||||
A significant portion of our expenses varies in connection with changes in revenue. These
variable expenses primarily relate to 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, office expenses and 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.
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KNOWN TRENDS AND UNCERTAINTIES
Although the slowing global economy has negatively impacted advertising revenues for a wide
variety of media businesses, domestic radio revenue growth has been challenged for several years.
Management believes this is principally the result of four factors unrelated to the slowing
economy: (1) the emergence of new media, such as various media content distributed via the
Internet and cable interconnects, which are gaining advertising share against radio and other
traditional media, (2) the perception of investors and advertisers that satellite radio and
portable media players diminish the effectiveness of radio advertising, (3) advertisers lack of
confidence in the ratings of radio stations due to dated ratings-gathering methods, and (4) a lack
of inventory and pricing discipline by radio operators.
The radio industry has begun several initiatives to address these issues, most notable of
which is the rollout of HD Radio®. HD Radio offers listeners advantages over standard
analog broadcasts, including improved sound quality and additional digital channels. To make the
rollout of HD Radio more efficient, a consortium of broadcasters representing a majority of the
radio stations in nearly all of our markets have agreed to work together to coordinate the
programming on secondary channels in each radio market to ensure a more diverse consumer offering
and to accelerate the rollout of HD Radio receivers, particularly in automobiles. In addition to
offering secondary channels, the HD Radio spectrum allows broadcasters to transmit other forms of
data. We are participating in a joint venture with other broadcasters to provide the bandwidth
that a third party will use to transmit location-based data to hand-held and in-car navigation
devices. We currently utilize HD Radio digital technology on most of our FM stations. It is
unclear what impact HD Radio will have on the markets in which we operate.
Arbitron Inc., the supplier of ratings data for United States radio markets, has developed
technology to passively collect data for its ratings service. The Portable People
MeterTM is a small, pager-sized device that does not require any active manipulation by
the end user and is capable of automatically measuring radio, television, Internet, satellite radio
and satellite television signals that are encoded for the service by the broadcaster. The
PPMTM offers a number of advantages over the traditional diary ratings collection system
including ease of use, more reliable ratings data and shorter time periods between when advertising
runs and when audience listening or viewing habits can be reported. This service began in the New
York, Los Angeles and Chicago markets in October 2008 and is scheduled to begin for most of our
other radio markets by September 2010. In each market, there has been a compression in the
relative ratings of all stations in the market, enhancing the competitive pressure within the
market for advertising dollars. In addition, ratings for certain stations when measured by the
PPMTM as opposed to the traditional diary methodology can be materially different. The
Company continues to evaluate the impact PPMTM will have on our revenues in these
markets.
As discussed below, our reformatted stations in Los Angeles and New York have negatively
impacted their radio clusters performance in their respective markets. Our Los Angeles and New
York markets collectively account for approximately 50% of our domestic radio revenues.
Although our radio cluster in Los Angeles (consisting of two stations) exceeded the
performance of the overall Los Angeles radio market during the year ended February 28, 2009,
reformatted station KMVN-FM tempered our results. For the year ended February 28, 2009, our Los
Angeles radio stations gross revenues were down 14.8% versus the same period in the prior year,
whereas the independent accounting firm Miller, Kaplan, Arase & Co., LLP (Miller Kaplan) reported
that Los Angeles radio market total gross revenues were down 15.9%. KMVN-FM lagged the market and
its gross revenues were down 22.1% for the year. Subsequent to our fiscal year end, we entered
into a Local Programming and Marketing Agreement with a subsidiary of Grupo Radio Centro, S.A.B. de
C.V. (GRC), under which GRC will pay Emmis $7 million dollars per year (and reimburse certain
expenses) in exchange for the right to provide Emmis with programming for KMVN-FM for up to seven
years. At any time during the LMA, GRC has the right to purchase the station for $110 million. At
the end of the LMA, Emmis has the right to require GRC to purchase the station for the same amount.
Our radio cluster in New York trailed the performance of the overall New York radio market
during the year ended February 28, 2009. For the year ended February 28, 2009, our New York radio
stations gross revenues were down 18.9%, whereas the independent accounting firm Miller Kaplan
reported that New York radio market total gross revenues were down 11.5% versus the same period of
the prior year. The results of our New York radio stations were negatively impacted by our
reformatted station, WRXP-FM, whose gross revenues were down 60.4%. A radio station that was a
primary competitor to WRXP-FM recently changed its format and no longer competes directly with
WRXP. We are hopeful this development will help WRXP grow its audience and revenue share in fiscal
2010. Collectively, our other two stations in the New York radio market exceeded the performance
of the overall New York radio market during the year ended February 28, 2009.
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As part of our business strategy, we continually evaluate potential acquisitions of
international radio stations, publishing properties and other businesses that we believe hold
promise for long-term appreciation in value and leverage our strengths. We also regularly review
our portfolio of assets and may opportunistically dispose of assets when we believe it is
appropriate to do so.
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 (and when indicators of impairment are present, the interim
impairment tests) for goodwill and indefinite-lived intangibles under Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (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 have made acquisitions in the past for which a significant amount of the purchase price was
allocated to FCC licenses and goodwill assets. As of February 28, 2009, we have recorded
approximately $526.2 million in FCC licenses and goodwill, which represents 71% of our total
assets. In assessing the recoverability of these assets, we conduct impairment testing required by
SFAS No. 142 at least annually and charge to operations an impairment expense if the recorded value
of these assets is more than their fair value. In fiscal 2009, we recorded a noncash impairment
loss of $304.6 million related to radio FCC licenses and $58.3 million related to goodwill ($18.2
million related to domestic radio goodwill, $8.2 million related to international radio goodwill
and $31.9 related to publishing division goodwill). We believe our estimate of the value of our
radio broadcasting licenses and goodwill assets is a critical accounting estimate as the value is
significant in relation to our total assets, and our estimate of the value uses assumptions that
incorporate variables based on past experiences and judgments about future performance of our
stations. These variables include but are not limited to: (1) the forecasted growth rate of each
radio market, including population, household income, retail sales and other expenditures that
would influence advertising expenditures; (2) market share and profit margin of an average station
within a market; (3) estimated capital start-up costs and losses incurred during the early years;
(4) risk-adjusted discount rate; (5) the likely media competition within the market area; and
(6) terminal values. Changes in our estimates of the fair value of these assets could result in
material future period write-downs in the carrying value of our broadcasting licenses and goodwill
assets.
Deferred Taxes and Effective Tax Rates
We estimate the effective tax rates and associated liabilities or assets for each legal entity
in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS No. 109). These estimates are based upon our interpretation of United States and local tax
laws as they apply to our legal entities and our overall tax structure. Audits by local tax
jurisdictions, including the United States Government, could yield different interpretations from
our own and cause the Company to owe more taxes than originally recorded. We utilize experts in
the various tax jurisdictions to evaluate our position and to assist in our calculation of our tax
expense and related liabilities.
Insurance Claims and Loss Reserves
The Company is self-insured for most healthcare claims, subject to stop-loss limits. Claims
incurred but not reported are recorded based on historical experience and industry trends, and
accruals are adjusted when warranted by changes in facts and circumstances. The Company had $1.4
million and $0.9 million accrued for employee healthcare claims as of February 29, 2008 and
February 28, 2009, respectively. The Company also maintains large deductible programs (ranging
from $250 thousand to $500 thousand per occurrence) for workers compensation, employment liability,
automotive liability and media liability claims.
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Valuation of Stock Options
The Company determines the fair value of its employee stock options at the date of grant using
a Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed for use
in estimating the value of exchange-traded options that have no vesting restrictions and are fully
transferable. The Companys employee stock options have characteristics significantly different
than these traded options. In addition, option pricing models require the input of highly
subjective assumptions, including the expected stock price volatility and expected term of the
options granted. The Company relies heavily upon historical data for its stock price when
determining expected volatility, but each year the Company reassesses whether or not historical
data is representative of expected results.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
During the three-year period ended February 28, 2009, we acquired Orange Coast and two
Bulgarian radio networks for an aggregate cash purchase price of $16.7 million. We also disposed
of five television stations and two domestic radio stations, collectively receiving gross cash
proceeds of $409.0 million. A recap of the material transactions completed during the three years
ended February 28, 2009 is summarized hereafter. These transactions impact the comparability of
operating results year over year.
On July 18, 2008, Emmis completed the sale of its sole remaining television station, WVUE-TV
in New Orleans, LA, to Louisiana Media Company LLC for $41.0 million in cash. The Company
recognized a loss on the sale of WVUE-TV of $0.6 million, net of tax benefits of $0.4 million,
which is included in income from discontinued operations in the accompanying statements of
operations. In connection with the sale, the Company paid discretionary bonuses to the employees
of WVUE totaling $0.8 million, which is included in the calculation of the loss on sale. The sale
of WVUE-TV completes the sale of our television division which began on May 10, 2005, when Emmis
announced that it had engaged advisors to assist in evaluating strategic alternatives for its
television assets.
On December 17, 2007, Emmis completed its acquisition of 100% of the shares of Infopress &
Company OOD for $8.8 million in cash. Infopress & Company OOD operates Inforadio, a national radio
network broadcasting to 13 Bulgarian cities. Inforadio joins Emmis majority owned Bulgarian radio
networks Radio FM+ and Radio Fresh. Emmis believes the acquisition of Inforadio further
strengthens its footprint in Bulgaria. Consistent with our other foreign subsidiaries, Inforadio
reports on a fiscal year ending December 31, which Emmis consolidates into its fiscal year ending
February 28 (29). The operating results of Inforadio from December 17, 2007 through December 31,
2007 are included in the accompanying consolidated statements of operations.
On July 25, 2007, Emmis completed its acquisition of Orange Coast Kommunications, Inc.,
publisher of Orange Coast, for $6.9 million in cash including acquisition costs of $0.2 million.
Approximately $0.3 million of the purchase price was withheld at the original closing, but was
subsequently paid in April 2008. Orange Coast fits Emmis niche of publishing quality city and
regional magazines. Orange Coast serves the affluent area of Orange County, CA, and may also
provide synergies with our other magazine in southern California, Los Angeles. The operating
results of Orange Coast from July 25, 2007 are included in the accompanying consolidated statements
of operations.
On June 4, 2007, Emmis closed on its sale of KGMB-TV in Honolulu to HITV Operating Co, Inc.
for $40.0 million in cash. Emmis recorded a gain on sale of $10.1 million, net of tax, which is
included in discontinued operations in the accompanying consolidated statement of operations.
On March 27, 2007, Emmis closed on its sale of KMTV-TV in Omaha, NE to Journal Communications,
Inc. (Journal) and received $10.0 million in cash. Journal had been operating KMTV-TV under a
Local Programming and Marketing Agreement since December 5, 2005.
On October 31, 2006, Emmis sold land and the associated building formerly occupied by WKCF-TV
to Goodlife Broadcasting, Inc. for $3.0 million in cash. Emmis recorded a gain on sale of $0.3
million, net of tax, which is included in discontinued operations in the accompanying consolidated
statements of operations.
On August 31, 2006, Emmis closed on its sale of WKCF-TV in Orlando, FL to Hearst-Argyle
Television Inc. for $217.5 million in cash. Emmis recorded a gain on sale of $93.4 million, net of
tax, which is included in discontinued operations in the accompanying consolidated statements of
operations.
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On July 11, 2006, Emmis closed on its sale of KKFR-FM in Phoenix, AZ to Bonneville
International Corporation for $77.5 million in cash and also sold certain tangible assets to
Riviera Broadcast Group LLC for $0.1 million in cash. Emmis recorded a gain on sale of $11.3
million, net of tax, which is included in discontinued operations in the accompanying consolidated
statements of operations.
On July 7, 2006, Emmis closed on its sale of WBPG-TV in Mobile, AL / Pensacola, FL to LIN
Television Corporation for $3.0 million in cash. LIN Television Corporation had been operating
WBPG-TV under a Local Programming and Marketing Agreement since November 30, 2005. Emmis recorded
a gain on sale of $1.1 million, net of tax, which is included in discontinued operations in the
accompanying consolidated statements of operations.
On May 5, 2006, Emmis closed on its sale of WRDA-FM in St. Louis, MO to Radio One, Inc. for
$20.0 million in cash. Emmis recorded a gain on sale of $4.2 million, net of tax, which is
included in discontinued operations in the accompanying consolidated statements of operations.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2008 COMPARED TO YEAR ENDED FEBRUARY 28, 2009
Net revenue pro forma reconciliation:
Since March 1, 2007, we have acquired Orange Coast and a national radio network in Bulgaria.
The results of our television division, Tu Ciudad Los Angeles publication and Emmis Books have been
included in discontinued operations and are not included in reported results below. The following
table reconciles actual results to pro forma results.
Year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Reported net revenues |
||||||||||||||||
Radio |
$ | 266,120 | $ | 250,883 | $ | (15,237 | ) | -5.7 | % | |||||||
Publishing |
91,939 | 82,990 | (8,949 | ) | -9.7 | % | ||||||||||
Total |
358,059 | 333,873 | (24,186 | ) | -6.8 | % | ||||||||||
Plus: Net revenues from stations acquired |
||||||||||||||||
Radio |
604 | | ||||||||||||||
Publishing |
2,774 | | ||||||||||||||
Total |
3,378 | | ||||||||||||||
Pro forma net revenues |
||||||||||||||||
Radio |
266,724 | 250,883 | (15,841 | ) | -5.9 | % | ||||||||||
Publishing |
94,713 | 82,990 | (11,723 | ) | -12.4 | % | ||||||||||
Total |
$ | 361,437 | $ | 333,873 | $ | (27,564 | ) | -7.6 | % | |||||||
For further disclosure of segment results, see Note 16 to the accompanying consolidated
financial statements. For additional pro forma results, see Note 11 to the accompanying
consolidated financial statements. Consistent with managements review of the Company, the pro
forma results above include the impact of all material consummated acquisitions and dispositions
through February 28, 2009.
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Net revenues discussion:
Radio net revenues decreased principally as a result of weak advertising demand in all of our
domestic radio markets. On a pro forma basis (assuming the purchase of the radio network in
Bulgaria had occurred on the first day of the pro forma periods presented above), radio net
revenues for the year ended February 28, 2009 decreased $15.8 million, or 5.9%. We typically
monitor the performance of our domestic radio stations against the aggregate performance of the
markets in which we operate based on reports for the periods prepared by the independent accounting
firm Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenue basis and
exclude revenues from barter arrangements. For the year ended February 28, 2009, revenues of our
domestic radio stations were down 14.4%, whereas Miller Kaplan reported that revenues of our
domestic radio markets were down 11.6%. We underperformed the markets in which we operate
principally due to the continuing challenge of our reformatted stations in our Los Angeles and New
York markets. Excluding WRXP-FM in New York and KMVN-FM in Los Angeles, revenues for our domestic
radio markets would have been down 11.2%. Our New York and Los Angeles stations account for
approximately 50% of our domestic radio revenues.
Market weakness and our stations weakness has led us to discount our rates charged to
advertisers. In fiscal 2009, our average unit rate was down 14.7% and our number of units sold was
down 0.5%. The Companys national representation firm guaranteed a minimum amount of national
sales for the year ended February 28, 2009. Actual national sales, as defined by the
representation agreement, were approximately $10.2 million lower than the guaranteed minimum amount
of national sales and the national representation firm has paid the shortfall to Emmis. As such,
Emmis recognized $10.2 million of additional net revenues for the year ended February 28, 2009.
Emmis recognized $3.7 million of additional net revenues related to the national representation
firms shortfall during the year ended February 29, 2008. Our agreement with our national
representation firm does not contain guarantees for any period after the year ended February 28,
2009.
Revenue growth of our international radio stations has helped to partially offset weakness
domestically. On a pro forma basis for the year ended February 28, 2009, international net
revenues were up $6.2 million or 14.9%. The revenue growth internationally was mostly concentrated
at our Hungary and Slovakia radio stations.
Publishing net revenues decreased principally due to the slowing economy during the latter
half of calendar 2008 and the first two months of calendar 2009 that diminished demand for
advertising inventory at all of our city/regional publications.
On a consolidated basis, pro forma net revenues for the year ended February 28, 2009 decreased
$27.6 million, or 7.6%, due to the effect of the items described above.
Station operating expenses excluding depreciation and amortization expense pro forma reconciliation:
Since March 1, 2007, we have acquired Orange Coast and a national radio network in Bulgaria.
The results of our television division, Tu Ciudad Los Angeles publication and Emmis Books have been
included in discontinued operations and are not included in reported results below. The following
table reconciles actual results to pro forma results.
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Table of Contents
Year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Reported station operating expenses excluding
depreciation and amortization expense |
||||||||||||||||
Radio |
$ | 188,440 | $ | 180,749 | $ | (7,691 | ) | -4.1 | % | |||||||
Publishing |
78,258 | 76,322 | (1,936 | ) | -2.5 | % | ||||||||||
Total |
266,698 | 257,071 | (9,627 | ) | -3.6 | % | ||||||||||
Plus: Station operating expenses excluding
depreciation and amortization expense
from stations acquired: |
||||||||||||||||
Radio |
567 | | ||||||||||||||
Publishing |
2,894 | | ||||||||||||||
Total |
3,461 | | ||||||||||||||
Pro forma station operating expenses excluding
depreciation and amortization expense |
||||||||||||||||
Radio |
189,007 | 180,749 | (8,258 | ) | -4.4 | % | ||||||||||
Publishing |
81,152 | 76,322 | (4,830 | ) | -6.0 | % | ||||||||||
Total |
$ | 270,159 | $ | 257,071 | $ | (13,088 | ) | -4.8 | % | |||||||
For further disclosure of segment results, see Note 16 to the accompanying consolidated
financial statements. For additional pro forma results, see Note 11 to the accompanying
consolidated financial statements. Consistent with managements review of the Company, the pro
forma results above include the impact of all material consummated acquisitions and dispositions
through February 28, 2009.
Station operating expenses excluding depreciation and amortization expense discussion:
Radio station operating expenses, excluding depreciation and amortization expense decreased
principally due to lower expenses at KMVN-FM in Los Angeles. KMVN-FMs station operating expenses,
excluding depreciation and amortization expense decreased $6.3 million during the year ended
February 28, 2009, as the station was engaged in an extensive marketing campaign in the prior year,
which was not replicated in the current year. Radio operating expenses also decreased as variable
sales related costs were down in line with the decrease in revenues.
Publishing operating expenses decreased due to lower variable sales related costs coupled with
extensive cost reduction activities that were initiated during our quarter ended August 31, 2008.
On a consolidated basis, pro forma station operating expenses excluding depreciation and
amortization expense decreased $13.1 million, or 4.8%, due to the effect of the items described
above.
Corporate expenses excluding depreciation and amortization expense:
For the years ended February 28 (29), | ||||||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||||||
Corporate expenses excluding
depreciation and amortization expense |
$ | 20,883 | $ | 18,503 | $ | (2,380 | ) | (11.4 | )% |
34
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Corporate expenses decreased due to our continuing efforts to streamline our corporate
services coupled with lower health insurance costs as a result of favorable health claims
experience and general insurance costs as compared to the same period of the prior year. These
cost savings are partially offset by the resumption of regular salary payments to our CEO. Our CEO
voluntarily reduced his salary from $0.9 million to one dollar for the year ended February 29,
2008.
Depreciation and amortization:
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Depreciation and amortization: |
||||||||||||||||
Radio |
$ | 10,947 | $ | 10,955 | $ | 8 | 0.1 | % | ||||||||
Publishing |
971 | 1,231 | 260 | 26.8 | % | |||||||||||
Corporate |
2,471 | 2,152 | (319 | ) | (12.9 | )% | ||||||||||
Total depreciation and amortization |
$ | 14,389 | $ | 14,338 | $ | (51 | ) | (0.4 | )% | |||||||
The increase in publishing depreciation and amortization mostly relates to our acquisition of
Orange Coast in July 2007. The decrease in corporate depreciation and amortization mostly relates
to assets that are fully depreciated but have not yet been replaced.
Impairment loss:
For the year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Impairment loss |
$ | 21,225 | $ | 373,408 | $ | 352,183 | 1,659.3 | % |
In connection with our fiscal 2008 annual impairment review, we recognized a noncash
impairment loss of $21.2 million ($18.0 million related to our FCC licenses in St. Louis and Terre
Haute and $3.2 million related to our international broadcasting licenses in Belgium). In
connection with our fiscal 2009 annual and interim impairment reviews, we recognized a noncash
impairment loss of $373.4 million ($322.7 million related to domestic radio indefinite-lived
intangibles, $8.2 million related to international radio goodwill, $2.8 million related to other
foreign long-lived assets, $31.9 million related to publishing division goodwill, $0.5 million
related to publishing division definite-lived intangibles and $7.3 million related to our corporate
aircraft).
Restructuring charge:
For the year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Restructuring charge |
$ | | $ | 4,208 | $ | 4,208 | N/A |
In response to the deteriorating economic environment and the decline in domestic advertising
revenues previously discussed, the Company announced a plan on March 5, 2009 to reduce payroll
costs by $10 million annually. In connection with the plan, approximately 100 employees were
terminated. The terminated employees received severance of $4.2 million under the Companys
standard severance plan which was recognized as of February 28, 2009 as the terminations were
probable and the amount was
35
Table of Contents
reasonably estimable. Employees terminated also received one-time
enhanced severance of $3.4 million that will be recognized in the fiscal year ended February 28,
2010 as the enhanced plan was not finalized and communicated until March 5, 2009.
Contract termination fee:
For the year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Contract termination fee |
$ | 15,252 | $ | | $ | (15,252 | ) | (100.0 | )% |
On October 1, 2007, Emmis terminated its existing national sales representation agreement with
Interep National Radio Sales, Inc. and entered into a new agreement with Katz Communications, Inc.
extending through March 2018. Emmis, Interep and Katz entered into a tri-party termination and
mutual release agreement under which Interep released Emmis from its future contractual obligations
in exchange for a one-time payment of $15.3 million, which was paid by Katz on behalf of Emmis as
an inducement for Emmis to enter into the new long-term contract with Katz.
Operating income (loss):
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Operating income (loss): |
||||||||||||||||
Radio |
$ | 30,360 | $ | (276,102) | $(306,462) | (1,009.4 | )% | |||||||||
Publishing |
12,710 | (27,585) | (40,295) | (317.0 | )% | |||||||||||
Corporate |
(23,354 | ) | (29,982) | (6,628) | 28.4 | % | ||||||||||
Total operating income |
$ | 19,716 | $ | (333,669 | ) | $ | (353,385 | ) | (1,792.4 | )% | ||||||
Radio operating income decreased principally due to the $333.7 million noncash impairment loss
attributable to the radio division recognized during the year ended February 28, 2009 as compared
to the $21.2 million noncash impairment charge recognized during the prior year. Also, operating
expense reductions mostly related to lower operating expenses, excluding depreciation and
amortization, of KMVN-FM and the absence of the $15.3 million contract termination fee in fiscal
2008 were partially offset by revenue declines of $15.2 million. As discussed above, the net
revenue growth of our domestic stations trailed the revenue growth of the markets in which we
operate.
Publishing operating income decreased mostly due to the $32.4 million noncash impairment loss
($31.9 million related to goodwill and $0.5 million related to other definite-lived intangibles)
and a decrease in net revenues of $8.9 million, both of which are partially offset by lower
operating expenses of $1.9 million mostly related to lower variable sales-related expenses.
On a consolidated basis, excluding the noncash impairment charge in both years, the noncash
contract termination fee in the prior year and the restructuring charge in the current year,
operating income decreased $12.2 million, or 21.8%, principally due to the decrease in radio and
publishing revenues, as discussed above. Weak demand for radio and print advertising will
continue to present challenges for the Company in fiscal 2010.
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Interest expense:
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Interest expense |
$ | 34,837 | $ | 25,551 | $ | (9,286 | ) | (26.7 | )% |
The decrease in interest expense is principally due to lower interest rates on our Credit
Agreement. The weighted average borrowing rate under our Credit Agreement, including our interest
rate exchange agreements, at February 29, 2008 and February 28, 2009 was 6.8% and 4.8%,
respectively.
Loss before income taxes, minority interest and discontinued operations:
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Loss before income taxes, minority interest and
discontinued operations |
$ | (15,121 | ) | $ | (359,047 | ) | $ | (343,926 | ) | 2,274.5 | % |
Loss before income taxes, minority interest and discontinued operations decreased by $344.0
million principally due to the items discussed above, most notably the $373.4 million noncash
impairment loss.
Minority interest expense, net of tax:
For the year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Minority interest expense, net of tax |
$ | 5,230 | $ | 5,316 | $ | 86 | 1.6 | % |
Our minority interest expense principally relates to our partnership in Austin (we own 50.1%)
and our radio station in Hungary (we own 59.5%).
Income from discontinued operations, net of tax:
For the year ended February 28 (29), | ||||||||||||||||
2008 | 2009 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Income from discontinued operations,
net of tax |
$ | 16,558 | $ | 67 | $ | (16,491 | ) | (99.6 | )% |
Our television division, Tu Ciudad Los Angeles and Emmis Books have been classified as
discontinued operations in the accompanying consolidated financial statements. The financial
results of these stations and related discussions are fully described in Note 1k to the
accompanying consolidated financial statements. Below is a summary of the components of
discontinued operations.
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Table of Contents
Year ended February 28 (29), | ||||||||
2008 | 2009 | |||||||
Income (loss) from operations: |
||||||||
Television |
$ | 13,300 | $ | 5,007 | ||||
Tu Ciudad Los Angeles |
(2,137 | ) | (1,890 | ) | ||||
Emmis Books |
(15 | ) | (103 | ) | ||||
Total |
11,148 | 3,014 | ||||||
Less: Provision for income taxes |
4,680 | 2,367 | ||||||
Income from operations, net of tax |
6,468 | 647 | ||||||
Gain (loss) on sale of discontinued operations: |
||||||||
Television |
18,237 | (1,017 | ) | |||||
Less: Provision (benefit) for income taxes |
8,147 | (437 | ) | |||||
Gain (loss) on sale of discontinued
operations, net of tax |
10,090 | (580 | ) | |||||
Income from discontinued operations, net of tax |
$ | 16,558 | $ | 67 | ||||
For a description of properties sold, see the discussion under Acquisitions, Dispositions and
Investments.
In August 2005, our television station in New Orleans, WVUE-TV, was significantly affected by
Hurricane Katrina and the subsequent flooding. The Company received $3.6 million of business
interruption proceeds during the year ended February 29, 2008. The Company received $3.1 million
as final settlement of all Katrina-related insurance claims during the year ended February 28,
2009. The insurance proceeds are classified as income from discontinued operations in the
accompanying statements of operations.
Benefit for income taxes:
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 (As Restated) (See Note 1z) |
$ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Benefit for income taxes |
$ | (2,443 | ) | $ | (64,027 | ) | $ | (61,584 | ) | 2,520.8 | % |
The increase in the benefit for income taxes was primarily due to the increase in pre-tax
losses for the year ended February 28, 2009, mostly attributable to indefinite-lived asset
impairment charges recorded during the year. Our benefit for income taxes for the year ended
February 28, 2009 was partially offset by the recording of a full valuation allowance for most of
the Companys deferred tax assets, including its net operating loss carryforwards. The current
year tax benefit and offsetting valuation allowances resulted in an effective tax rate for the
years February 29, 2008 and February 28, 2009 of 16.2% and
17.8%, respectively.
Net loss:
For the years ended February 28 (29), | ||||||||||||||||
2008 | 2009 (As Restated) (See Note 1z) |
$ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Net loss |
$ | (1,350 | ) | $ | (300,269 | ) | $ | (298,919 | ) | 22,142.1 | % |
The increase in net loss for the year ended February 28, 2009 is primarily attributable to the
noncash impairment loss recorded during the year ended February 28, 2009, partially offset by
additional tax benefits recorded in connection with the impairment loss.
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Table of Contents
YEAR ENDED FEBRUARY 28, 2007 COMPARED TO YEAR ENDED FEBRUARY 29, 2008
Net revenue pro forma reconciliation:
Since March 1, 2006, we have acquired Orange Coast, a national radio network in Bulgaria and a
controlling interest in another national radio network in Bulgaria. The results of our television
division, radio station sold in Phoenix, Tu Ciudad Los Angeles and Emmis Books been included in
discontinued operations and are not included in reported results below. The following table
reconciles actual results to pro forma results.
Year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Reported net revenues |
||||||||||||||||
Radio |
$ | 271,929 | $ | 266,120 | $ | (5,809 | ) | -2.1 | % | |||||||
Publishing |
84,834 | 91,939 | 7,105 | 8.4 | % | |||||||||||
Total |
356,763 | 358,059 | 1,296 | 0.4 | % | |||||||||||
Plus: Net revenues from stations acquired |
||||||||||||||||
Radio |
1,806 | 604 | ||||||||||||||
Publishing |
5,540 | 2,774 | ||||||||||||||
Total |
7,346 | 3,378 | ||||||||||||||
Pro forma net revenues |
||||||||||||||||
Radio |
273,735 | 266,724 | (7,011 | ) | -2.6 | % | ||||||||||
Publishing |
90,374 | 94,713 | 4,339 | 4.8 | % | |||||||||||
Total |
$ | 364,109 | $ | 361,437 | $ | (2,672 | ) | -0.7 | % | |||||||
For further disclosure of segment results, see Note 16 to the accompanying consolidated
financial statements. For additional pro forma results, see Note 11 to the accompanying
consolidated financial statements. Consistent with managements review of the Company, the pro
forma results above include the impact of all material consummated acquisitions and dispositions
through February 29, 2008.
Net revenues discussion:
Radio net revenues decreased principally as a result of declining revenues in our New York and
Los Angeles markets. On a pro forma basis (assuming the purchase of the radio network in Bulgaria
had occurred on the first day of the pro forma periods presented above), radio net revenues for the
year ended February 29, 2008 would have decreased $7.0 million, or 2.6%. We typically monitor the
performance of our domestic radio stations against the aggregate performance of the markets in
which we operate based on reports for the periods prepared by the independent accounting firm
Miller Kaplan. For the year ended February 29, 2008, on a pro forma basis, net revenues of our
domestic radio stations were down 6.1%, whereas Miller Kaplan reported that net revenues of our
domestic radio markets were down 4.3%. As previously discussed, we underperformed the markets in
which we operate principally due to continuing challenges in our Los Angeles and New York markets.
We have had significant ratings and revenue declines at our New York and Los Angeles stations,
although ratings in recent months for certain stations in those markets have improved. KMVN-FM,
the Los Angeles station we reformatted in August 2006, continues to underperform its peers. In
February 2008, we reformatted WRXP-FM in New York (formerly WQCD-FM). The Company does not expect
the negative revenue impact of the format change in New York to be as long or as pronounced as the
negative revenue impact from our Los Angeles format change. Market weakness and our stations
weakness has led us to discount our rates charged to advertisers. In fiscal 2008, our average unit
rate was down 11.8% and our number of units sold was up 4.6%. Our New York and Los Angeles
stations account for approximately 50% of our domestic radio revenues. The Companys national
representation firm guaranteed a minimum amount of national sales for the year ended February 29,
2008. Actual national sales, as defined by the representation agreement, were approximately $3.7
million lower than the guaranteed minimum
39
Table of Contents
amount of national
sales and Katz has paid the shortfall to Emmis. As such, Emmis recognized $3.7 million of
additional net revenues for the year ended February 29, 2008, which partially offsets our weakness
in the New York and Los Angeles markets.
Publishing net revenues increased mostly due to the introduction of two new wedding guides by
Atlanta. Also, Los Angeles advertising sales performance contributed to the divisions net revenue
growth, with the apparel, home furnishings, real estate and travel categories fueling growth during
the year.
On a consolidated basis, pro forma net revenues for the year ended February 29, 2008 decreased
$2.7 million, or 0.7%, due to the effect of the items described above.
Station operating expenses excluding depreciation and amortization expense pro forma reconciliation:
Since March 1, 2006, we have acquired Orange Coast and a national radio network in Bulgaria
and a controlling interest in another national radio network in Bulgaria. The results of our
television division, radio station sold in Phoenix, Tu Ciudad Los Angeles and Emmis Books have been
included in discontinued operations and are not included in reported results below. The following
table reconciles actual results to pro forma results.
Year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(amounts in thousands) | ||||||||||||||||
Reported station operating expenses excluding
depreciation and amortization expense |
||||||||||||||||
Radio |
$ | 178,940 | $ | 188,440 | $ | 9,500 | 5.3 | % | ||||||||
Publishing |
72,668 | 78,258 | 5,590 | 7.7 | % | |||||||||||
Total |
251,608 | 266,698 | 15,090 | 6.0 | % | |||||||||||
Plus: Station operating expenses excluding
depreciation and amortization expense
from stations acquired: |
||||||||||||||||
Radio |
1,081 | 567 | ||||||||||||||
Publishing |
5,467 | 2,894 | ||||||||||||||
Total |
6,548 | 3,461 | ||||||||||||||
Pro forma station operating expenses excluding
depreciation and amortization expense |
||||||||||||||||
Radio |
180,021 | 189,007 | 8,986 | 5.0 | % | |||||||||||
Publishing |
78,135 | 81,152 | 3,017 | 3.9 | % | |||||||||||
Total |
$ | 258,156 | $ | 270,159 | $ | 12,003 | 4.6 | % | ||||||||
For further disclosure of segment results, see Note 16 to the accompanying consolidated
financial statements. For additional pro forma results, see Note 11 to the accompanying
consolidated financial statements. Consistent with managements review of the Company, the pro
forma results above include the impact of all material consummated acquisitions and dispositions
through February 29, 2008.
40
Table of Contents
Station operating expenses excluding depreciation and amortization expense discussion:
Radio station operating expenses excluding depreciation and amortization expense increased
principally due to continued expansion of Emmis Interactive, which consisted mostly of headcount
increases, additional promotional expenses related to KMVN-FM, our reformatted Los Angeles station,
and additional station operating costs of our growing international radio stations. Emmis
Interactive expenses were up approximately $3.5 million, KMVN-FM promotional expenses were up
approximately $1.1 million, and international expenses were up approximately $4.8 million on a pro
forma basis. A portion of the international operating expense increase relates to currency
fluctuations as the US dollar devalued versus the functional currencies of our international
operations during the year. The additional operating expenses are partially offset by lower
sales-related costs due to the decline in revenues as discussed above.
Publishing operating expenses increased modestly due to higher sales-related costs associated
with the increase in revenues as discussed above.
On a consolidated basis, pro forma station operating expenses excluding depreciation and
amortization expense increased $12.0 million, or 4.6%, due to the effect of the items described
above.
Corporate expenses excluding depreciation and amortization expense:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Corporate expenses excluding
depreciation and amortization expense |
$ | 28,176 | $ | 20,883 | $ | (7,293 | ) | (25.9 | )% |
In the year ended February 28, 2007, the Company incurred $2.5 million of costs related to our
evaluation of the CEOs bid to take the Company private and approximately $1.9 million of costs in
connection with a special dividend paid on November 22, 2006. During the year ended February 29,
2008, our Chief Executive Officer elected to reduce his salary from $0.9 million to $1 for the
fiscal year. The remaining decrease is principally due to our ongoing commitment to improve the
efficiency of our corporate services.
Depreciation and amortization:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Depreciation and amortization: |
||||||||||||||||
Radio |
$ | 9,988 | $ | 10,947 | $ | 959 | 9.6 | % | ||||||||
Publishing |
626 | 971 | 345 | 55.1 | % | |||||||||||
Corporate |
2,653 | 2,471 | (182 | ) | (6.9 | )% | ||||||||||
Total depreciation and amortization |
$ | 13,267 | $ | 14,389 | $ | 1,122 | 8.5 | % | ||||||||
The increase in radio depreciation and amortization expense relates mostly to the addition of
HD Radio equipment at certain stations during fiscal 2008. The increase in publishing depreciation
and amortization mostly relates to our acquisition of Orange Coast in July 2007.
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Impairment loss:
For the year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Impairment loss |
$ | | $ | 21,225 | $ | 21,225 | N/A |
In connection with our fiscal 2008 annual impairment review, we recognized a noncash
impairment loss of $21.2 million ($18.0 million related to our FCC licenses in St. Louis and Terre
Haute and $3.2 million related to our international broadcasting licenses in Belgium). No
impairment was recorded in connection with our fiscal 2007 annual impairment review.
Contract termination fee:
For the year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Contract termination fee |
$ | | $ | 15,252 | $15,252 | N/A |
On October 1, 2007, Emmis terminated its existing national sales representation agreement with
Interep National Radio Sales, Inc. and entered into a new agreement with Katz Communications, Inc.
extending through March 2018. Emmis, Interep and Katz entered into a tri-party termination and
mutual release agreement under which Interep released Emmis from its future contractual obligations
in exchange for a one-time payment of $15.3 million, which was paid by Katz on behalf of Emmis as
an inducement for Emmis to enter into the new long-term contract with Katz.
Operating income (loss):
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Operating income (loss): |
||||||||||||||||
Radio |
$ | 82,997 | $ | 30,360 | $ | (52,637 | ) | (63.4 | )% | |||||||
Publishing |
11,540 | 12,710 | 1,170 | 10.1 | % | |||||||||||
Corporate |
(30,829 | ) | (23,354 | ) | 7,475 | (24.2 | )% | |||||||||
Total operating income |
$ | 63,708 | $ | 19,716 | $ | (43,992 | ) | (69.1 | )% | |||||||
Radio operating income decreased principally due to the $21.2 million noncash impairment
charge coupled with the $15.3 million noncash contract termination fee. Excluding the noncash
impairment charge and noncash contract termination fee, radio operating income would have decreased
by $16.2 million due to lower revenues at our New York and Los Angeles stations and higher radio
station operating expenses excluding depreciation and amortization expense as discussed above. As
discussed above, the net revenue growth of our domestic stations trailed the revenue growth of the
markets in which we operate.
Publishing operating income increased mostly due to higher net revenues at our Los Angeles and
Atlanta publications as discussed above, partially offset by higher sales-related costs.
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On a consolidated basis, excluding the noncash impairment charge and the noncash contract
termination fee, operating income decreased $5.7 million, or 9.5%, principally due to the decrease
in radio operating income, as discussed above.
Interest expense:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Interest expense |
$ | 43,160 | $ | 34,837 | $ | (8,323 | ) | (19.3 | )% |
The decrease in interest expense is due to reduced levels of borrowings under the Companys
Credit Agreement as a result of the application of proceeds from the sale of assets, coupled with
lower interest rates. No interest expense was allocated to discontinued operations in fiscal 2007
or fiscal 2008.
Loss on debt extinguishment:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Loss on debt extinguishment |
$ | (13,435 | ) | $ | | $ | (13,435 | ) | (100.0 | )% |
The loss on debt extinguishment for the year ended February 28, 2007 includes losses
recognized in the following transactions: (i) the redemption at 106.25% of par of the remaining
$1.4 million outstanding of 12.5% senior discount notes, (ii) the redemption of the remaining
$120.0 million of senior floating rate notes, (iii) repayments on the former credit facility that
permanently reduced availability under the facility, (iv) the redemption of the $375.0 million 6
7/8% Senior Subordinated Notes at par plus accrued and unpaid interest and (v) the amendment and
restatement of the Credit Agreement. No loss on debt extinguishment was recorded for the year
ended February 29, 2008.
Income (loss) before income taxes, minority interest and discontinued operations:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Income (loss) before income taxes,
minority interest and |
$ | 7,091 | $ | (15,121) | $(22,212) | (313.2 | )% | |||||||||
discontinued operations |
Income (loss) before income taxes, minority interest and discontinued operations decreased by
$22.2 million principally due to the items discussed above, partially offset by a $3.1 million loss
in unconsolidated affiliates, the majority of which relates to a write-down in the carrying value
of an equity-method investment during our year ended February 28, 2007.
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Minority interest expense, net of tax:
For the year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Minority interest expense, net of tax |
$ | 4,571 | $ | 5,230 | $ | 659 | 14.4 | % |
Our minority interest expense principally relates to our partnership in Austin (we own 50.1%)
and our radio station in Hungary (we own 59.5%). The increase during the year ended February 29,
2008 is due to improved operating performance at each of these partnerships.
Income from discontinued operations, net of tax:
For the year ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Income from discontinued operations,
net of tax |
$ | 114,708 | $ | 16,558 | $ | (98,150 | ) | (85.6 | )% |
Our television division, WRDA-FM and KKFR-FM have been classified as discontinued operations
in the accompanying consolidated financial statements. The financial results of these stations and
related discussions are fully described in Note 1k to the accompanying consolidated financial
statements. Below is a summary of the components of discontinued operations.
Year ended February 28 (29), | ||||||||
2007 | 2008 | |||||||
Income (loss) from operations: |
||||||||
Television |
$ | 10,161 | $ | 13,300 | ||||
KKFR-FM |
453 | | ||||||
Tu Ciudad Los Angeles |
(2,387 | ) | (2,137 | ) | ||||
Emmis Books |
(1,583 | ) | (15 | ) | ||||
Total |
6,644 | 11,148 | ||||||
Less: Provision for income taxes |
1,985 | 4,680 | ||||||
Income from operations, net of tax |
4,659 | 6,468 | ||||||
Gain on sale of discontinued operations: |
||||||||
Television |
160,760 | 18,237 | ||||||
WRDA-FM |
7,052 | | ||||||
KKFR-FM |
18,870 | | ||||||
Total |
186,682 | 18,237 | ||||||
Less: Provision for income taxes |
76,633 | 8,147 | ||||||
Gain on sale of discontinued
operations, net of tax |
110,049 | 10,090 | ||||||
Income from discontinued operations, net of tax |
$ | 114,708 | $ | 16,558 | ||||
For a description of properties sold, see the discussion under Acquisitions, Dispositions and
Investments.
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In August 2005, our television station in New Orleans, WVUE-TV, was significantly affected by
Hurricane Katrina and the subsequent flooding. The Company recognized $5.4 million and $3.6
million of business interruption proceeds as a reduction of station operating expenses excluding
depreciation and amortization expense during the years ended February 28, 2007, and February 29,
2008, respectively.
In the year ended February 28, 2007, the Company determined that the long-lived assets of
WVUE-TV were impaired. Included in discontinued operations in the accompanying consolidated
statements of operations is a $14.1 million noncash impairment charge. This charge is reflected in
television income from operations in the discontinued operations summary above.
Provision (benefit) for income taxes:
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Provision (benefit) for income taxes |
$ | 3,646 | $ | (2,443 | ) | $ | (6,089 | ) | (167.0 | )% |
The Companys effective tax rate for the years ending February 28, 2007 and February 29, 2008
was approximately 51.4% and 16.2%, respectively. The effective tax rate differed from our combined
Federal and state statutory rate of 41% in both periods primarily as a result of non-deductible
expenses. The effective rates differ in the two periods as the income (loss) before income taxes
differed greatly between the two periods.
Net income (loss):
For the years ended February 28 (29), | ||||||||||||||||
2007 | 2008 | $ Change | % Change | |||||||||||||
(As reported, amounts in thousands) | ||||||||||||||||
Net income (loss) |
$ | 113,582 | $ | (1,350 | ) | $ | (114,932 | ) | (101.2 | %) |
The decrease in net income for the year ended February 29, 2008 is primarily attributable to
the gain on the sale of television properties in fiscal 2007 as discussed above coupled with the
noncash impairment loss and noncash contract termination fee recognized in fiscal 2008. These are
partially offset by reduced interest expense as discussed above.
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 28,
2009, and employment contracts for key employees, all of which are discussed in Note 14 to the
consolidated financial statements, the Company does not have any material 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 28,
2009:
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PAYMENTS DUE BY PERIOD | ||||||||||||||||||||
(AMOUNTS IN THOUSANDS) | ||||||||||||||||||||
Less than | 1 to 3 | 4 to 5 | After 5 | |||||||||||||||||
Contractual Cash Obligations: | Total | 1 Year | Years | Years | Years | |||||||||||||||
Long-term debt (1) |
513,945 | $ | 25,239 | $ | 47,793 | $ | 440,913 | $ | | |||||||||||
Operating leases |
58,048 | 10,339 | 15,637 | 11,145 | 20,927 | |||||||||||||||
Radio broadcast agreements |
2,220 | 1,697 | 523 | | | |||||||||||||||
Purchase obligations (2) |
45,958 | 20,232 | 19,036 | 5,852 | 838 | |||||||||||||||
Employment agreements |
29,146 | 19,592 | 9,324 | 230 | | |||||||||||||||
Total Contractual Cash Obligations |
$ | 649,317 | $ | 77,099 | $ | 92,313 | $ | 458,140 | $ | 21,765 | ||||||||||
(1) | Includes an estimate of interest expense on amounts outstanding related to our Credit Agreement as of February 28, 2009 using our weighted average interest rate as of the same date. See Note 6 to the accompanying consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for more discussion or our long-term debt. | |
(2) | Includes contractual commitments to purchase goods and services, including audience measurement information and music license fees. |
In addition to the obligations described above, the Company has preferred stock outstanding
and the annual dividend on such preferred stock is $8.8 million. Emmis has not declared the
January 15, 2009 or April 15, 2009 preferred stock dividends. Failure to pay the dividend is not a
default under the terms of the Preferred Stock. However, if dividends remain unpaid for more than
six quarters, the holders of the Preferred Stock are entitled to elect two persons to our Board of
Directors. Payment of future preferred stock dividends are at the discretion of the Companys
Board of Directors and we do not know when or whether we will resume paying such dividends.
Dividends in arrears as of February 28, 2009 totaled $2.2 million. The table above excludes the
liability related to our net uncertain tax positions of $1.5 million.
We expect to fund these obligations primarily with cash flows from operations, but we may also
issue additional debt or equity or sell certain assets.
CREDIT FACILITY
On November 2, 2006, Emmis Operating Company (EOC), a wholly-owned subsidiary of Emmis
Communications Corporation (ECC), amended and restated its Revolving Credit and Term Loan Agreement
(the Credit Agreement) to provide for total borrowings of up to $600 million, including (i) a
$455 million term loan and (ii) a $145 million revolver, of which $50 million may be used for
letters of credit. The $145 million revolver was reduced to $75 million on March 3, 2009 under the
First Amendment that is described below. At February 28, 2009, $1.8 million in letters of credit
were outstanding. The Credit Agreement also provides for the ability to have incremental
facilities of up to $450 million, a portion of which may be allocated to a revolver. Emmis 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 Agreement.
All outstanding amounts under the Credit Agreement 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 Agreement)
plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies under the
revolver (ranging from 0% to 2.25%), depending on Emmis ratio of debt to consolidated operating
cash flow, as defined in the agreement. The margins over the Eurodollar Rate and the alternative
base rate are 2.00% and 1.00%, 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 six months after closing, the Credit Agreement required Emmis to
maintain fixed interest rates, for at least a three year period, on a minimum of 30% of its total
outstanding debt, as defined. Emmis fulfilled this requirement through interest rate swap
agreements. See Interest Rates under Item 7A Quantitative and Qualitative Disclosures about
Market Risk for further discussion.
The term loan and revolver mature on November 1, 2013 and November 2, 2012, respectively.
Beginning on August 31, 2007, the borrowings under the term loan are payable in equal quarterly
installments equal to 0.25% of the term loan, with the remaining balance
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payable November 1, 2013.
The annual amortization and reduction schedule for the Credit Agreement, based upon amounts
outstanding at February 28, 2009, is as follows:
Year Ended | Revolver | Term Loan B | Total | |||||||||
February 28 (29), | Amortization | Amortization | Amortization | |||||||||
2010 |
| 4,214 | 4,214 | |||||||||
2011 |
| 4,214 | 4,214 | |||||||||
2012 |
| 4,214 | 4,214 | |||||||||
2013 |
| 4,214 | 4,214 | |||||||||
2014 |
| 404,499 | 404,499 | |||||||||
Total |
$ | | $ | 421,355 | $ | 421,355 | ||||||
Proceeds from raising additional equity, issuing additional subordinated debt or from asset
sales, as well as excess cash flow, may be required to be used to repay amounts outstanding under
the Credit Agreement. Whether these mandatory repayment provisions apply depends, in certain
instances, on Emmis total leverage ratio, as defined under the Credit Agreement.
On March 3, 2009, Emmis and EOC, entered into the First Amendment and Consent to Amended and
Restated Revolving Credit and Term Loan Agreement (the First Amendment). Among other things, the
First Amendment amended the Credit Agreement to (i) permit Emmis to purchase a portion of the
Tranche B Term Loan (as defined in the Credit Agreement) for an aggregate purchase price not to
exceed $50 million, (ii) reduce the Total Revolving Credit Commitment (as defined in the Credit
Agreement) from $145 million to $75 million, (iii) exclude from Consolidated Operating Cash Flow
(as defined in the Credit Agreement) up to $10 million in cash severance and contract termination
expenses incurred for the period commencing March 1, 2008 and ending February 28, 2010, and (iv)
makes Revolving Credit Loans (as defined in the Credit Agreement) subject to a pro forma incurrence
test and (v) restrict the ability of Emmis to perform certain activities, including restricting the
amount that can be used to fund our TV Proceeds Quarterly Bonus Program (discussed below), and
transactions with affiliates. In April 2009, Emmis commenced a series of Dutch auction tenders to
purchase term loans of EOC under the Credit Agreement as amended. The Company purchased $78.5
million in par value of EOCs outstanding term loans for $44.7 million in cash. The $78.5 million
of par value term loans was simultaneously cancelled and forgiven.
The annual amortization schedule for the Credit Agreement after execution of the First
Amendment, the completion of the Dutch auction tenders, and revolver borrowing (as discussed
below), is as follows:
Year Ended | Revolver | Term Loan B | Total | |||||||||
February 28 (29), | Amortization | Amortization | Amortization | |||||||||
2010 |
| 3,428 | 3,428 | |||||||||
2011 |
| 3,428 | 3,428 | |||||||||
2012 |
| 3,428 | 3,428 | |||||||||
2013 |
73,235 | 3,428 | 76,663 | |||||||||
2014 |
| 329,104 | 329,104 | |||||||||
Total |
$ | 73,235 | $ | 342,816 | $ | 416,051 | ||||||
Borrowings under the Credit Agreement depends upon our continued compliance with certain
operating covenants and financial ratios, including: (1) Consolidated Total Funded Debt to
Consolidated Operating Cash Flow (each as defined in our Credit Agreement) of 6 times; and
(2) Consolidated Operating Cash Flow to Consolidated Fixed Charges (each as defined in our Credit
Agreement) of 1.25
times. The Consolidated Total Funded Debt to Consolidated Operating Cash Flow ratio required
by the Credit Agreement changes to 5.5 times on May 31, 2010, 5 times on February 28, 2011, 4.5
times on November 30, 2011 and 4 times for all periods after May 31, 2012. The operating covenants
and other restrictions with which we must comply include, among others, restrictions on additional
indebtedness, incurrence of liens, engaging in businesses other than our primary business, paying
certain dividends, redeeming or repurchasing capital stock of Emmis, acquisitions and asset sales.
No default or event of default has occurred or is continuing. The Credit Agreement provides that an
event of default will occur if there is a change of control of Emmis, as defined. The payment of
principal, premium and interest under the Credit Agreement is fully and unconditionally guaranteed,
jointly and severally, by ECC and
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most of its existing wholly-owned domestic subsidiaries.
Substantially all of Emmis assets, including the stock of most of Emmis wholly-owned, domestic
subsidiaries, are pledged to secure the Credit Agreement.
SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash provided by operations and cash available through
revolving loan borrowings under our Credit Agreement. Our primary uses of capital have
historically been, and are expected to continue to be, capital expenditures, working capital and
debt service. We have also historically used cash to meet preferred stock dividend requirements,
but we did not declare the preferred stock dividend in January 2009 or April 2009. Payment of
future preferred stock dividends is at the discretion of the Companys Board of Directors and we do
not know when or whether we will resume paying such dividends. Dividends in arrears as of February
28, 2009 totaled $2.2 million. We also have used capital to repurchase our common stock and may
use capital to repurchase a portion of our outstanding Credit Agreement. 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 28, 2009, we had cash and cash equivalents of $49.7 million and net working
capital of $71.4 million. At February 29, 2008, we had cash and cash equivalents of $19.5 million
and net working capital of $52.8 million. Approximately $23.3 million and $14.5 million of our
cash and cash equivalents were held at European banking institutions as of February 28, 2009 and
February 29, 2008, respectively. The Company has not historically repatriated these funds to date
due to the taxes that would be due upon repatriation. However, since the First Amendment permits
us to use cash held at our foreign entities to repurchase our Credit Agreement debt, we have begun
to repatriate foreign cash and may continue to do so over the next twelve months. The increase in
net working capital principally relates to additional cash on hand due to the sale of WVUE-TV
during the year ended February 28, 2009, additional cash generated internationally and additional
amounts due from our national representation firm in relation to national sales performance
guarantees, all of which are partially offset by lower trade accounts receivable balances at our
domestic properties in connection with the decline in their operating performance and lower working
capital related to our discontinued operations mainly due to the sale of WVUE-TV.
During the year ended February 28, 2009, Emmis completed the sale of WVUE-TV for $41.0 million
in cash. The proceeds from the sale of WVUE-TV were not required to be used to repay amounts
outstanding under our Credit Agreement. Emmis has held the cash as additional liquidity and used a
portion of the proceeds to fund our TV proceeds Quarterly Bonus Program (see discussion below).
On December 1, 2008, Emmis exercised its early purchase option on its leased corporate jet.
Emmis paid $10.2 million in cash, net of a refundable deposit of $4.2 million, to AVN Air, LLC, the
lessor of the aircraft. Emmis sold the corporate jet on April 14, 2009 for $9.1 million in cash.
To enhance its liquidity position, on April 10, 2009, Emmis borrowed the remainder of its
available Credit Agreement revolver. The total amount of the Credit Agreement revolver outstanding
after the April 10, 2009 drawdown is $73.2 million, which is the total revolver of $75 million less
$1.8 million of outstanding letters of credit.
Emmis has engaged Blackstone Advisory Services L.P. to provide financial advisory services as
the Company explores a possible further amendment to the Credit Agreement or a possible
restructuring of certain of its liabilities.
Emmis has instituted a TV Proceeds Quarterly Bonus Program (the Program) under which the
Company pays quarterly bonuses to certain employees to offset salary reductions by EOC, and certain
of its subsidiaries (collectively, OpCo). All of our executive officers are participating in the
Program. Effective September 1, 2008, OpCo reduced to approximately $15,000 the salaries of
certain of its most highly compensated employees in order to increase defined consolidated
operating cash flow under the Credit Agreement. Under the Program, the Company pays the employees
affected by the salary reduction quarterly bonuses in amounts equivalent to the forgone salary.
The bonus is paid at the beginning of each fiscal quarter either (i) in cash out of the net
proceeds from the sale of WVUE-TV if certain performance targets from a prior quarter are met, or
(ii) in shares of the Companys Class A Common Stock under the Companys
2004 Equity Compensation Plan if the performance targets are not met. During the year ended
February 28, 2009, we paid approximately $8.8 million of bonuses under the Program in cash out of
the net proceeds from the sale of WVUE-TV. An equivalent amount of salary was forgone by employees
during the year ended February 28, 2009. Our March 3, 2009 amendment to the Credit Agreement
limited the amount that could be paid under the Program subsequent to February 1, 2009 to $20.0
million, reduced by the amount of future Credit Agreement term loan purchases that the Company
consummates. Subsequent to our $4.1 million of payments made under the Program in March 2009 and
our Dutch Auction tenders discussed below, no amounts remain available under
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the Program. The
Program is distinct from the previously disclosed discretionary television sale bonuses to
executive officers and certain other employees that the Compensation Committee may address in the
future, now that all of sixteen of our television stations have been sold. A determination of
discretionary television sale bonuses, if any, has been deferred in light of the current economic
situation and its impact on the Company.
In April 2009, Emmis commenced a series of Dutch auction tenders to purchase term loans of EOC
under the Credit Agreement as amended. The cumulative effect of all of the debt tenders resulted
in the purchase of $78.5 million in face amount of EOCs outstanding term loans for $44.7 million
in cash. The Credit Agreement as amended permitted the Company to pay up to $50 million (less
amounts paid after February 1, 2009 under our previously discussed TV Proceeds Quarterly Bonus
Program) to purchase EOCs outstanding term loans through tender offers and required a minimum
offer of $5 million per tender. Since the Company paid $44.7 million in debt tenders and paid $4.1
million under the TV Bonus Program in March 2009, we are not permitted to effect further tenders
under the Credit Agreement.
Operating Activities
Net cash flows provided by operating activities were $46.5 million for the year ended February
28, 2009, compared to $51.7 million for the same period of the prior year. The decrease in cash
flows provided by operating activities is principally due to the decrease in operating income
(excluding the noncash impairment loss and noncash contract termination fee). 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 provided by investing activities were $17.7 million for the year ended February 28,
2009, compared to $33.6 million in the same period of the prior year. Cash flows provided by
investing activities decreased for the year ended February 28, 2009 as we generated $17.3 million
less cash from discontinued operations, mostly related to the sale of both KMTV-TV and KGMB-TV in
the prior year compared to the sale of one station, WVUE-TV in the current year. Offsetting this
decrease, in the prior year we spent $15.3 million of cash on the acquisitions of Orange Coast and
an additional radio network in Bulgaria. Investing activities include capital expenditures and
business acquisitions and dispositions.
In the years ended February 2007, 2008 and 2009, we had capital expenditures of $5.3 million,
$6.7 million and $20.6 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 HD Radio technology. Our capital
expenditures for the year ended February 28, 2009 include the $14.4 million purchase of our
corporate jet, which was previously leased. We exercised our early buyout option on the jet and
immediately began marketing it for sale. We closed on the sale of the corporate jet on April 14,
2009 and received $9.1 million in cash. We recognized a $7.3 million impairment loss on the
corporate jet as its carrying value, which included $2.0 million of previously capitalized major
maintenance costs, exceeded its fair value as of February 28, 2009. We expect that future
requirements for capital expenditures will include capital expenditures incurred during the
ordinary course of business. We expect to fund such capital expenditures with cash generated from
operating activities and borrowings under our Credit Agreement.
Financing Activities
Cash flows used in financing activities were $33.3 million for the year ended February 28,
2009 compared to $88.2 million for the same period of the prior year. The decrease is primarily
attributable to (i) lower net debt repayments for the year ended February 28, 2009 as the Company
had closed on KGMB-TV and KMTV-TV in the prior year and used substantially all of the proceeds to
make debt principal repayments while the proceeds from the fiscal 2009 sale of WVUE-TV were not
used to make debt principal repayments and (ii) open market Class A common share repurchases
totaling $13.9 million during the year ended February 29, 2008 that were not replicated during the
year ended February 28, 2009.
Our debt service requirements over the next 12-month period (excluding interest under our
Credit Agreement) are expected to be $5.3 million. This amount is comprised of $4.2 million for
repayment of term notes under our Credit Agreement and $1.1 million related to foreign broadcast
license obligations. Although interest will be paid under the Credit Agreement at least every
three months, the amount of interest is not presently determinable given that the Credit Agreement
bears interest at variable rates.
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The terms of Emmis Preferred Stock provide for a quarterly dividend payment of $.78125 per
share on each January 15, April 15, July 15 and October 15. Emmis made its October 15, 2008
preferred stock dividend payment, but did not declare its January 15, 2009 or April 15, 2009
preferred stock dividend. Failure to pay the dividend is not a default under the terms of the
Preferred Stock. However, if dividends remain unpaid for more than six quarters, the holders of
the Preferred Stock are entitled to elect two persons to our board of directors. Payment of future
preferred stock dividends are at the discretion of the Companys Board of Directors and we do not
know when or whether we will resume paying such dividends. Dividends in arrears as of February 28,
2009 totaled $2.2 million.
At May 1, 2009, we had no additional availability under our Credit Agreement. As previously
discussed, on April 10, 2009 we borrowed the remainder of our Credit Agreement revolver to enhance
our liquidity position. The Company expects to continue to use its cash flows from operations to
primarily repay outstanding debt obligations. Emmis has the option, but not the obligation, to
purchase our 49.9% partners entire interest in the Austin radio partnership based on an
18-multiple of trailing 12-month cash flow. The option, which does not expire, has not been
exercised and we have no current plan to exercise the option.
INTANGIBLES
As of February 28, 2009, approximately 73% 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 domestic
radio 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 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. Our foreign broadcasting
licenses expire during periods ranging from November 2009 to February 2013. We will need to submit
applications to extend our foreign licenses upon their expiration to continue our broadcast
operations in these countries.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2008, the FASB ratified Emerging Issue Task Force Issue No. 07-5, Determining Whether
an Instrument (or an Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5
provides that an entity should use a two step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions. EITF 07-5 is effective for us as of
March 1, 2009. While we do not believe that the adoption of EITF 07-5 will have an effect on our
financial position, results of operations or cash flows, we are still currently assessing the
pronouncement.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in the computation of
earnings per share under the two-class method as described in FASB Statement of Financial
Accounting Standards No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for us as of March
1, 2009 and earlier adoption is prohibited. While we do not believe that the adoption of FSP EITF
03-6-1 will have an effect on our financial position, results of operations or cash flows, we are
still currently assessing the pronouncement.
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133 (SFAS No. 161), which requires additional disclosures about the
objectives of the derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the
effects of such instruments and related hedged items on our financial position, results of
operations, and cash flows. SFAS No. 161 was adopted by the Company on December 1, 2008 and
changed the disclosure requirements related to the Companys derivative instruments and hedging
activities (See Note 8). The adoption of SFAS No. 161 had no impact on the Companys financial
position, results of operations or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No.
160). SFAS No. 160 will change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160
requires retroactive adoption of the presentation and disclosure requirements for existing minority
interests, with all other requirements applied prospectively. SFAS No. 160 is effective for us as
of March 1, 2009. As of February 29, 2008 and February 28, 2009, minority interests characterized
as liabilities in the accompanying consolidated balance sheets were $53,758 and $53,021,
50
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respectively. These amounts will be recharacterized as noncontrolling interests as a component of
equity when SFAS No. 160 is adopted on March 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (as
revised), Business Combinations (SFAS No. 141R), that will significantly change how business
combinations are accounted for through the use of fair values in financial reporting and will
impact financial statements both on the acquisition date and in subsequent periods. Some of the
changes, such as the accounting for contingent consideration, will introduce more volatility into
earnings, and could impact our acquisition strategy. SFAS No. 141R, which is effective for us as
of March 1, 2009, will apply to all business combinations that close on or after March 1, 2009.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on accounting for
income tax benefits of dividends on share-based payment awards. Certain stock-based compensation
arrangements contain provisions that entitle an employee to receive dividends or dividend
equivalents on the unvested portion of the awards. Under the provisions of SFAS No. 123R, such
dividend features are factored into the value of the award at the grant date, and to the extent
that an award is expected to vest, the dividends are charged to retained earnings. For income tax
purposes, however, such dividend payments are generally considered additional compensation expense
when they are paid to employees and, therefore, are generally deductible by the employer on a
current basis for tax purposes. Under EITF No. 06-11, a realized tax benefit from dividends or
dividend equivalents that is charged to retained earnings and paid to employees for
equity-classified nonvested equity shares, nonvested equity share units, and outstanding share
options should be recognized as an increase to additional paid-in-capital. Those tax benefits are
considered windfall tax benefits under SFAS No. 123R. EITF No. 06-11 was adopted by the Company on
March 1, 2008 and did not have any effect on the Companys financial position, results of
operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits
companies to choose to measure certain financial instruments and other items at fair value that are
not currently required to be measured at fair value. SFAS No. 159 was adopted by the Company on
March 1, 2008. We have not elected to measure any financial assets or financial liabilities at
fair value which were not previously required to be measured at fair value. The adoption of SFAS
No. 159 did not have any effect on the Companys financial position, results of operations or cash
flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157), which provides guidance for using fair value to measure assets
and liabilities. The standard also responds to investors requests for more information about: (1)
the extent to which companies measure assets and liabilities at fair value; (2) the information
used to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS
No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value to any new
circumstances. SFAS No. 157 was adopted by the Company on March 1, 2008, though FASB Staff Position
No. 157-2, Effective Date of SFAS No. 157, defers the effective date of SFAS No. 157 for most
nonfinancial assets and nonfinancial liabilities to the Companys fiscal year beginning March 1,
2009. The adoption of SFAS No. 157 did not have any effect on the Companys financial position,
results of operations or cash flows.
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 segments during the months of October and November, which are part of
our third quarter, in anticipation of the holiday season.
INFLATION
The impact of inflation on 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
operating results, particularly since a significant portion of our senior bank debt is
comprised of variable-rate debt.
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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.
INTEREST RATES
The Credit Agreement requires Emmis to maintain fixed interest rates, for at least a
three-year period beginning in May 2007, on a minimum of 30% of Emmis total outstanding debt, as
defined by the Credit Agreement. In March 2007, Emmis entered into an interest rate swap agreement
that fixed the underlying three-month LIBOR at 4.8%. The notional amount of the interest rate swap
agreement totaled $165.0 million, and the agreement expires on March 27, 2010. In March 2008,
Emmis entered into a second interest rate swap agreement that fixed the underlying three-month
LIBOR at 3.0%. The notional amount of the second interest rate swap agreement totaled $100.0
million, and the agreement expires on March 27, 2011. In January 2009, Emmis entered into a third
interest rate swap agreement effective as of March 28, 2009 that fixed the underlying three-month
LIBOR at 1.8%. The notional amount of the third interest rate swap agreement totaled $75.0
million, and the agreement expires on March 27, 2011. The counterparties to these agreements are
global financial institutions, and we believe the risk of credit loss resulting from nonperformance
by these counterparties is low.
Based on amounts outstanding at February 28, 2009, if the interest rate on our variable debt
were to increase by 1.0%, our annual interest expense would increase by approximately $1.6 million.
Based on amounts outstanding at May 7, 2009, which includes our April 10, 2009 Credit Agreement
revolver borrowing, the cancellation of debt as a result of the Dutch tender auctions, and the
third interest rate swap agreement, a 1.0% interest rate increase would result in $0.8 million of
increased interest expense.
FOREIGN CURRENCY
Emmis has subsidiaries in Hungary, Belgium, Slovakia and Bulgaria which are consolidated in
the accompanying financial statements. These subsidiaries operations are measured in local
currencies (forint, euro, koruna and leva, respectively). Emmis has a natural hedge against
currency fluctuations between these currencies and the U.S. dollar since most of the subsidiaries
long-term obligations are denominated in the respective local currency. Emmis management cannot
predict the most likely average or end-of-period forint to dollar, Euro to dollar, koruna to
dollar, or leva to dollar exchange rates for calendar 2009. A devaluation of these foreign
currencies could have a material effect on our financial statements taken as a whole.
At February 28, 2009, approximately $8.4 million of cash held at our foreign entities was
denominated in U.S. dollars. At February 28, 2009, our foreign entities also held approximately
$7.1 million of cash denominated in euros. The remainder of our cash balances held at our foreign
entities is denominated in their respective local currencies. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Emmis Communications Corporations management is responsible for establishing and maintaining
adequate internal control over financial reporting. Pursuant to the rules and regulations of the
Securities and Exchange Commission, internal control over financial reporting is a process designed
by, or under the supervision of, Emmis Communications Corporations principal executive and
principal financial officers and effected by Emmis Communications Corporations board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Emmis Communications Corporation; | ||
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Emmis Communications Corporation are being made only in accordance with authorizations of management and directors of Emmis Communications Corporation; and | ||
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Emmis Communications Corporations assets that could have a material effect on the financial statements. |
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. In our Annual Report on Form 10-K for the year ended February 28, 2009,
filed on May 14, 2009, management concluded that our internal control over financial reporting was
effective as of February 28, 2009. However, in connection with the restatement discussed in the
Explanatory Note of this Form 10-K/A and Note 1z, located in Part 1 Item 8, Financial Statements
and Supplementary Data, in this Form 10-K/A, our management has revised its assessment of the
effectiveness of our internal control over financial reporting due to a material weakness that was
subsequently identified as a failure to maintain effective controls over financial reporting with
respect to deferred taxes. Specifically, we did not have adequately designed procedures to
identify deferred tax assets for which a valuation allowance should have been provided.
Management has evaluated the effectiveness of its internal control over financial reporting as
of February 28, 2009, based on the control criteria established in a report entitled Internal
ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Because of the material weakness described in the preceding paragraph, management
believes that as of February 28, 2009, the Companys internal control over financial reporting was
not effective based on those criteria.
The Companys independent registered public accounting firm, Ernst & Young, LLP, has issued an
attestation report on the effectiveness of Emmis Communications Corporations internal control over
financial reporting as of February 28, 2009, which report is included herein.
/s/ Jeffrey H. Smulyan
|
/s/ Patrick M. Walsh | |||||
Jeffrey H. Smulyan
|
Patrick M. Walsh | |||||
Chairman, President and Chief Executive Officer
|
Executive Vice President, Chief Operating Officer and Chief Financial Officer |
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Emmis Communications Corporation and Subsidiaries
Emmis Communications Corporation and Subsidiaries
We have audited Emmis Communications Corporation and Subsidiaries internal control over financial
reporting as of February 28, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Emmis Communications Corporation and Subsidiaries management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our report dated May 11, 2009, we expressed an unqualified opinion that the
Company maintained, in all material respects, effective internal control over
financial reporting as of February 28, 2009, based upon the COSO criteria.
Management has subsequently determined that a deficiency in controls relating to
the Companys accounting for income taxes existed as of the previous
assessment date, and has further concluded that such deficiency represented a
material weakness as of February 28, 2009. As a result, management revised its
assessment, as presented in the accompanying Managements Report on Internal
Control over Financial Reporting (Restated), to conclude that the Companys
internal control over financial reporting was not effective as of February 28, 2009.
Accordingly, our present opinion on the effectiveness of the Companys internal
control over financial reporting as of February 28, 2009, as expressed herein, is
different from that expressed in our previous report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the companys annual or interim financial statements will not be prevented or detected on a timely
basis. Management has identified a material weakness in controls related to the Companys
accounting for income taxes. The material weakness resulted in the restatement of the Companys consolidated financial statements as described in Note 1z. This material weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the February 28, 2009 financial statements and this
report does not affect our report dated May 11, 2009, except for Notes 1z and 15
as to which the date is October 8, 2009, on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement
of the objectives of the control criteria, Emmis Communications Corporation and Subsidiaries has
not maintained effective internal control over financial reporting as of February 28, 2009, based
on the COSO criteria.
/s/ Ernst & Young LLP
Indianapolis, Indiana
May 11, 2009, except for the effects of the material weakness described in the sixth paragraph above, as to which the date is October 8, 2009.
Indianapolis, Indiana
May 11, 2009, except for the effects of the material weakness described in the sixth paragraph above, as to which the date is October 8, 2009.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Emmis Communications Corporation and Subsidiaries
Emmis Communications Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Emmis Communications Corporation
and Subsidiaries as of February 29, 2008 and February 28, 2009 and the related consolidated
statements of operations, changes in shareholders equity (deficit), and cash flows for each of the
three years in the period ended February 28, 2009. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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, 2008 and February 28, 2009, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended February 28, 2009, in conformity
with U.S. generally accepted accounting principles.
As
discussed in Note 1z, the Company has restated its previously issued consolidated financial
statements to correct errors in the accounting for
income taxes.
As discussed in Notes 1 and 15, to the consolidated financial statements, effective March 1, 2007,
the Company adopted FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance
Activities and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
respectively.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Emmis Communications Corporation and Subsidiaries internal control over
financial reporting as of February 28, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated May 11, 2009, except for the
effects of the material weakness identified in the sixth paragraph of
that report, as to which the date is October 8, 2009, expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Indianapolis, Indiana
May 11, 2009, except for Notes 1z and 15, as to which the date is October 8, 2009.
Indianapolis, Indiana
May 11, 2009, except for Notes 1z and 15, as to which the date is October 8, 2009.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||||||
2009 | ||||||||||||
2007 | 2008 | (As
Restated) (See Note 1z) |
||||||||||
NET REVENUES |
$ | 356,763 | $ | 358,059 | $ | 333,873 | ||||||
OPERATING EXPENSES: |
||||||||||||
Station operating expenses excluding depreciation and amortization
expense of $10,614, $11,918 and $12,186, respectively |
251,608 | 266,698 | 257,071 | |||||||||
Corporate expenses excluding depreciation and amortization
expense of $2,653, $2,471 and $2,152, respectively |
28,176 | 20,883 | 18,503 | |||||||||
Depreciation and amortization |
13,267 | 14,389 | 14,338 | |||||||||
Impairment losses |
| 21,225 | 373,408 | |||||||||
Restructuring charge |
| | 4,208 | |||||||||
Contract termination fee |
| 15,252 | | |||||||||
(Gain) loss on disposal of fixed assets |
4 | (104 | ) | 14 | ||||||||
Total operating expenses |
293,055 | 338,343 | 667,542 | |||||||||
OPERATING INCOME (LOSS) |
63,708 | 19,716 | (333,669 | ) | ||||||||
OTHER INCOME (EXPENSE): |
||||||||||||
Interest expense |
(43,160 | ) | (34,837 | ) | (25,551 | ) | ||||||
Interest income |
2,731 | 1,099 | 996 | |||||||||
Loss in unconsolidated affiliates |
(3,141 | ) | (129 | ) | (659 | ) | ||||||
Loss on debt extinguishment |
(13,435 | ) | | | ||||||||
Other income (expense), net |
388 | (970 | ) | (164 | ) | |||||||
Total other expense |
(56,617 | ) | (34,837 | ) | (25,378 | ) | ||||||
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST,
AND DISCONTINUED OPERATIONS |
7,091 | (15,121 | ) | (359,047 | ) | |||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
3,646 | (2,443 | ) | (64,027 | ) | |||||||
MINORITY INTEREST EXPENSE, NET OF TAX |
4,571 | 5,230 | 5,316 | |||||||||
LOSS FROM CONTINUING OPERATIONS |
(1,126 | ) | (17,908 | ) | (300,336 | ) | ||||||
INCOME FROM DISCONTINUED OPERATIONS, NET
OF TAX |
114,708 | 16,558 | 67 | |||||||||
NET INCOME (LOSS) |
113,582 | (1,350 | ) | (300,269 | ) | |||||||
PREFERRED STOCK DIVIDENDS |
8,984 | 8,984 | 8,933 | |||||||||
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS |
$ | 104,598 | $ | (10,334 | ) | $ | (309,202 | ) | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||||||
2009 | ||||||||||||
2007 | 2008 | (As
Restated) (See Note 1z) |
||||||||||
BASIC NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS: |
||||||||||||
Continuing operations |
$ | (0.27 | ) | $ | (0.74 | ) | $ | (8.50 | ) | |||
Discontinued operations |
3.08 | 0.46 | | |||||||||
Net income (loss) available to common
shareholders |
$ | 2.81 | $ | (0.28 | ) | $ | (8.50 | ) | ||||
DILUTED NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS: |
||||||||||||
Continuing operations |
$ | (0.27 | ) | $ | (0.74 | ) | $ | (8.50 | ) | |||
Discontinued operations |
3.08 | 0.46 | | |||||||||
Net income (loss) available to common
shareholders |
$ | 2.81 | $ | (0.28 | ) | $ | (8.50 | ) | ||||
Cash dividends declared per common share |
$ | 4.00 | $ | | $ | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29), | ||||||||
2008 (As Restated) (See Note 1z) |
2009 (As Restated) (See Note 1z) |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 19,498 | $ | 49,731 | ||||
Accounts receivable, net of allowance for doubtful
accounts of $2,304 and $2,853, respectively |
61,867 | 46,794 | ||||||
Prepaid expenses |
16,919 | 18,251 | ||||||
Other |
8,976 | 14,515 | ||||||
Current assets discontinued operations |
7,280 | 50 | ||||||
Total current assets |
114,540 | 129,341 | ||||||
PROPERTY AND EQUIPMENT: |
||||||||
Land and buildings |
28,737 | 29,409 | ||||||
Leasehold improvements |
19,229 | 19,607 | ||||||
Broadcasting equipment |
58,544 | 60,206 | ||||||
Office equipment and automobiles |
39,410 | 41,906 | ||||||
Construction in progress |
1,210 | 212 | ||||||
147,130 | 151,340 | |||||||
Less-accumulated depreciation and amortization |
88,206 | 96,297 | ||||||
Total property and equipment, net |
58,924 | 55,043 | ||||||
INTANGIBLE ASSETS: |
||||||||
Indefinite lived intangibles |
801,270 | 496,711 | ||||||
Goodwill |
81,304 | 29,442 | ||||||
Other intangibles |
49,324 | 39,227 | ||||||
931,898 | 565,380 | |||||||
Less-accumulated amortization |
23,314 | 27,507 | ||||||
Total intangible assets, net |
908,584 | 537,873 | ||||||
OTHER ASSETS: |
||||||||
Deferred debt issuance costs, net of accumulated
amortization of $1,132 and $1,763, respectively |
3,200 | 2,734 | ||||||
Investments |
4,834 | 3,155 | ||||||
Deposits and other |
8,562 | 2,160 | ||||||
Total other assets, net |
16,596 | 8,049 | ||||||
Noncurrent assets held for sale |
| 8,900 | ||||||
Noncurrent assets discontinued operations |
41,096 | 5 | ||||||
Total assets |
$ | 1,139,740 | $ | 739,211 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 28 (29), | ||||||||
2008 (As Restated) (See Note 1z) |
2009 (As Restated) (See Note 1z) |
|||||||
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable and accrued expenses |
$ | 14,162 | $ | 15,907 | ||||
Current maturities of long-term debt |
5,628 | 5,263 | ||||||
Accrued salaries and commissions |
8,582 | 7,767 | ||||||
Accrued interest |
5,478 | 2,895 | ||||||
Deferred revenue |
17,610 | 18,885 | ||||||
Other |
6,849 | 6,899 | ||||||
Current liabilities discontinued operations |
3,458 | 343 | ||||||
Total current liabilities |
61,767 | 57,959 | ||||||
CREDIT FACILITY DEBT, NET OF CURRENT PORTION |
434,306 | 417,141 | ||||||
OTHER LONG-TERM DEBT, NET OF CURRENT PORTION |
1,896 | 8 | ||||||
OTHER NONCURRENT LIABILITIES |
26,219 | 22,901 | ||||||
MINORITY INTEREST |
53,758 | 53,021 | ||||||
DEFERRED INCOME TAXES |
179,398 | 107,722 | ||||||
NONCURRENT LIABILITIES DISCONTINUED OPERATIONS |
1,161 | | ||||||
Total liabilities |
758,505 | 658,752 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 14) |
||||||||
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 AND
2,809,170 SHARES IN 2008 AND 2009, RESPECTIVELY |
143,750 | 140,459 | ||||||
SHAREHOLDERS EQUITY (DEFICIT): |
||||||||
Class A common stock, $0.01 par value; authorized
170,000,000 shares; issued and outstanding 30,607,644
shares and 31,912,656 shares in 2008 and 2009,
respectively |
306 | 319 | ||||||
Class B common stock, $0.01 par value; authorized 30,000,000
shares; issued and outstanding 4,956,305 shares in 2008 and
2009, respectively |
50 | 50 | ||||||
Class C common stock, $0.01 par value; authorized 30,000,000
shares; none issued |
| | ||||||
Additional paid-in capital |
515,341 | 524,776 | ||||||
Accumulated deficit |
(276,597 | ) | (582,481 | ) | ||||
Accumulated other comprehensive loss |
(1,615 | ) | (2,664 | ) | ||||
Total shareholders equity (deficit) |
237,485 | (60,000 | ) | |||||
Total liabilities and shareholders equity (deficit) |
$ | 1,139,740 | $ | 739,211 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED FEBRUARY 28, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED FEBRUARY 28, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Class A | Class B | |||||||||||||||
Common Stock | Common Stock | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
BALANCE,
FEBRUARY 28, 2006 (As
Restated) (See Note 1z) |
32,164,397 | $ | 322 | 4,879,774 | $ | 49 | ||||||||||
Exercise of stock options and related
income tax benefits |
2,859 | | | | ||||||||||||
Issuance of Common Stock to employees and
officers and related income tax benefits |
321,607 | 3 | 50,493 | | ||||||||||||
Tax benefit
of dividend on unvested restricted shares |
| | | | ||||||||||||
Special $4 per common share dividend |
| | | | ||||||||||||
Preferred stock dividends |
| | | | ||||||||||||
Comprehensive Income: |
||||||||||||||||
Net income |
| | | | ||||||||||||
Cumulative translation adjustment |
| | | | ||||||||||||
Total comprehensive income |
| | | | ||||||||||||
BALANCE,
FEBRUARY 28, 2007 (As
Restated) (See Note 1z) |
32,488,863 | $ | 325 | 4,930,267 | $ | 49 | ||||||||||
Exercise of stock options and related
income tax benefits |
| | | | ||||||||||||
Issuance of Common Stock to employees and
officers and related income tax benefits |
343,893 | 3 | 26,038 | 1 | ||||||||||||
Purchases of common stock |
(2,225,092 | ) | (22 | ) | | | ||||||||||
Preferred stock dividends |
| | | | ||||||||||||
Cumulative impact of adoption of FIN 48 |
| | | | ||||||||||||
Comprehensive Loss: |
||||||||||||||||
Net loss |
| | | | ||||||||||||
Change in value of derivative instrument |
| | | | ||||||||||||
Cumulative translation adjustment |
| | | | ||||||||||||
Total comprehensive loss |
| | | | ||||||||||||
BALANCE,
FEBRUARY 29, 2008 (As
Restated) (See Note 1z) |
30,607,664 | $ | 306 | 4,956,305 | $ | 50 | ||||||||||
Issuance of Common Stock to employees and
officers and related income tax benefits |
1,144,367 | 11 | | | ||||||||||||
Preferred stock dividends |
| | | | ||||||||||||
Tax benefit on stock based compensation |
| | | | ||||||||||||
Conversion of preferred stock to common stock |
160,625 | 2 | | | ||||||||||||
Comprehensive Loss: |
||||||||||||||||
Net loss (As Restated) (See Note 1z) |
| | | | ||||||||||||
Change in value of derivative instrument |
| | | | ||||||||||||
Cumulative translation adjustment |
| | | | ||||||||||||
Total comprehensive loss |
| | | | ||||||||||||
BALANCE,
FEBRUARY 28, 2009 (As Restated) (See Note 1z) |
31,912,656 | $ | 319 | 4,956,305 | $ | 50 | ||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT) (CONTINUED)
FOR THE THREE YEARS ENDED FEBRUARY 28, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT) (CONTINUED)
FOR THE THREE YEARS ENDED FEBRUARY 28, 2009
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated | ||||||||||||||||
Additional | Other | Total | ||||||||||||||
Paid-in | Accumulated | Comprehensive | Shareholders | |||||||||||||
Capital | Deficit | Income (Loss) | Equity (Deficit) | |||||||||||||
BALANCE,
FEBRUARY 28, 2006 (As Restated) (See Note 1z) |
$ | 513,879 | $ | (245,861 | ) | $ | (1,954 | ) | $ | 266,435 | ||||||
Exercise of stock options and related income tax benefits |
45 | | | 45 | ||||||||||||
Issuance of Common Stock to employees and officers and
related income tax benefits |
8,134 | | | 8,137 | ||||||||||||
Tax benefit of dividend on unvested restricted shares |
597 | | | 597 | ||||||||||||
Special $4 per common share dividend |
| (150,180 | ) | | (150,180 | ) | ||||||||||
Preferred stock dividends |
| (8,984 | ) | | (8,984 | ) | ||||||||||
Comprehensive Income: |
||||||||||||||||
Net income |
| 113,582 | | |||||||||||||
Cumulative translation adjustment |
| | 2,270 | |||||||||||||
Total comprehensive income |
| | | 115,852 | ||||||||||||
BALANCE,
FEBRUARY 28, 2007 (As Restated) (See Note 1z) |
$ | 522,655 | $ | (291,443 | ) | $ | 316 | $ | 231,902 | |||||||
Exercise of stock options and related income tax benefits |
(460 | ) | | | (460 | ) | ||||||||||
Issuance of Common Stock to employees and officers and
related income tax benefits |
6,992 | | | 6,996 | ||||||||||||
Purchases of common stock |
(13,846 | ) | | | (13,868 | ) | ||||||||||
Preferred stock dividends |
| (8,984 | ) | | (8,984 | ) | ||||||||||
Cumulative impact of adoption of FIN 48 |
| 25,180 | | 25,180 | ||||||||||||
Comprehensive Income: |
||||||||||||||||
Net loss |
| (1,350 | ) | | ||||||||||||
Cumulative translation adjustment |
| | 2,541 | |||||||||||||
Change in fair value of derivative instrument |
| | (4,472 | ) | ||||||||||||
Total comprehensive loss |
| | | (3,281 | ) | |||||||||||
BALANCE,
FEBRUARY 29, 2008 (As Restated) (See Note 1z) |
$ | 515,341 | $ | (276,597 | ) | $ | (1,615 | ) | $ | 237,485 | ||||||
Issuance of Common Stock to employees and officers and
related income tax benefits |
6,282 | | | 6,293 | ||||||||||||
Preferred stock dividends |
| (5,615 | ) | | (5,615 | ) | ||||||||||
Tax benefit on stock based compensation |
(138 | ) | | | (138 | ) | ||||||||||
Conversion of preferred stock to common stock |
3,291 | | | 3,293 | ||||||||||||
Comprehensive Income: |
||||||||||||||||
Net loss (As Restated) (See Note 1z) |
| (300,269 | ) | | ||||||||||||
Cumulative translation adjustment |
| | (1,523 | ) | ||||||||||||
Change in fair value of derivative instrument |
| | 474 | |||||||||||||
Total comprehensive loss |
| | | (301,318 | ) | |||||||||||
BALANCE,
FEBRUARY 28, 2009 (As Restated) (See Note 1z) |
$ | 524,776 | $ | (582,481 | ) | $ | (2,664 | ) | $ | (60,000 | ) | |||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||||||
2007 | 2008 | 2009 (As Restated) (See Note 1z) |
||||||||||
OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 113,582 | $ | (1,350 | ) | $ | (300,269 | ) | ||||
Adjustments to reconcile net income (loss)
to net cash provided by operating activities - |
||||||||||||
Discontinued operations |
(114,708 | ) | (16,558 | ) | (67 | ) | ||||||
Impairment losses |
| 21,225 | 373,408 | |||||||||
Loss on debt extinguishment |
13,435 | | | |||||||||
Depreciation and amortization |
14,452 | 15,020 | 14,969 | |||||||||
Accretion of interest on senior discount notes,
including amortization of related debt costs |
8 | | | |||||||||
Minority interest expense, net |
4,571 | 5,230 | 5,316 | |||||||||
Provision for bad debts |
1,954 | 2,045 | 3,504 | |||||||||
Provision (benefit) for deferred income taxes |
2,625 | (4,504 | ) | (67,440 | ) | |||||||
Noncash compensation |
7,724 | 7,200 | 5,822 | |||||||||
Contract termination fee |
| 15,252 | | |||||||||
(Gain) loss on disposal of fixed assets |
4 | (104 | ) | 14 | ||||||||
Other |
(124 | ) | (357 | ) | | |||||||
Changes in assets and liabilities -
|
||||||||||||
Accounts receivable |
1,835 | (727 | ) | 11,409 | ||||||||
Prepaid expenses and other current assets |
1,203 | (5,766 | ) | (8,697 | ) | |||||||
Other assets |
88 | 3,427 | 6,444 | |||||||||
Accounts payable and accrued liabilities |
(17,656 | ) | (422 | ) | (293 | ) | ||||||
Deferred revenue |
1,278 | 2,637 | 1,275 | |||||||||
Income taxes |
(1,092 | ) | 2,337 | 1,168 | ||||||||
Other liabilities |
(8,973 | ) | 1,242 | (4,825 | ) | |||||||
Net cash provided by operating activities discontinued operations |
12,883 | 5,887 | 4,785 | |||||||||
Net cash provided by operating activities |
33,089 | 51,714 | 46,523 | |||||||||
INVESTING ACTIVITIES: |
||||||||||||
Purchases of property and equipment |
(5,258 | ) | (6,743 | ) | (20,627 | ) | ||||||
Cash paid for acquisitions |
(1,098 | ) | (15,309 | ) | (335 | ) | ||||||
Deposits on acquisitions and other |
(421 | ) | (568 | ) | (221 | ) | ||||||
Net cash provided by investing activities discontinued operations |
316,001 | 56,226 | 38,884 | |||||||||
Net cash provided by investing activities |
309,224 | 33,606 | 17,701 | |||||||||
The accompanying notes to consolidated financial statements are an integral part of
these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||||||
2007 | 2008 | 2009 (As Restated) (See Note 1z) |
||||||||||
FINANCING ACTIVITIES: |
||||||||||||
Payments on long-term debt |
(1,014,133 | ) | (100,307 | ) | (23,338 | ) | ||||||
Proceeds from long-term debt |
719,500 | 41,000 | 6,000 | |||||||||
Settlement of tax withholding obligations |
(945 | ) | (612 | ) | (547 | ) | ||||||
Tax benefit of dividend on unvested restricted stock |
597 | | | |||||||||
Special cash dividend paid |
(150,180 | ) | | | ||||||||
Dividends and distributions paid to minority interest shareholders |
(5,207 | ) | (5,044 | ) | (8,516 | ) | ||||||
Purchases of the Companys Class A Common Stock,
including transaction costs |
23 | (13,868 | ) | | ||||||||
Proceeds from exercise of stock options
and employee stock purchases |
223 | 61 | | |||||||||
Premiums paid to redeem outstanding obligations |
(88 | ) | | | ||||||||
Payments for debt related costs |
(4,621 | ) | | | ||||||||
Adjusted tax benefit on stock-based compensation |
| (460 | ) | (138 | ) | |||||||
Preferred stock dividends |
(8,984 | ) | (8,984 | ) | (6,738 | ) | ||||||
Net cash used in financing activities |
(463,815 | ) | (88,214 | ) | (33,277 | ) | ||||||
Effect of exchange rate on cash and cash equivalents |
1,427 | 1,645 | (714 | ) | ||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(120,075 | ) | (1,249 | ) | 30,233 | |||||||
CASH AND CASH EQUIVALENTS: |
||||||||||||
Beginning of period |
140,822 | 20,747 | 19,498 | |||||||||
End of period |
$ | 20,747 | $ | 19,498 | $ | 49,731 | ||||||
SUPPLEMENTAL DISCLOSURES: |
||||||||||||
Cash paid for- |
||||||||||||
Interest |
$ | 51,259 | $ | 29,008 | $ | 27,488 | ||||||
Income taxes, net of refunds |
6,866 | 4,010 | 4,484 | |||||||||
Non-cash financing transactions- |
||||||||||||
Value of stock issued to employees under stock compensation
program and to satisfy accrued incentives |
8,674 | 7,087 | 10,120 | |||||||||
ACQUISITION OF RADIO NETWORK IN BULGARIA |
||||||||||||
Fair value of assets acquired |
$ | 2,453 | ||||||||||
Cash paid |
(1,098 | ) | ||||||||||
Liabilities recorded |
$ | 1,355 | ||||||||||
ACQUISITION OF ORANGE COAST |
||||||||||||
Fair value of assets acquired |
$ | 7,911 | $ | | ||||||||
Purchase price withheld (see Note 10) |
(335 | ) | 335 | |||||||||
Cash paid |
(6,522 | ) | (335 | ) | ||||||||
Liabilities recorded |
$ | 1,054 | $ | | ||||||||
ACQUISITION OF RADIO NETWORK IN BULGARIA |
||||||||||||
Fair value of assets acquired |
$ | 9,212 | ||||||||||
Cash paid |
(8,787 | ) | ||||||||||
Liabilities recorded |
$ | 425 | ||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
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EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
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). 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
ECC is a diversified media company with radio broadcasting and magazine publishing operations.
As of February 28, 2009, we own and operate seven FM radio stations serving the nations top three
markets New York, Los Angeles and Chicago. Additionally, we own and operate fourteen FM and two
AM radio stations with strong positions in St. Louis, Austin (we have a 50.1% controlling interest
in our radio stations located there), Indianapolis and Terre Haute. In addition to our domestic
radio, we operate a radio news network in Indiana, publish Texas Monthly, Los Angeles, Atlanta,
Indianapolis Monthly, Cincinnati, Orange Coast, and Country Sampler and related magazines.
Internationally, we own and operate a network of radio stations in the Flanders region of Belgium,
national radio networks in Slovakia and Bulgaria, and have a 59.5% interest in a national radio
station in Hungary. We also engage in various businesses ancillary to our business, such as
website design and development, consulting and broadcast tower leasing.
Substantially all of ECCs business is conducted through its subsidiaries. Our Amended and
Restated Revolving Credit and Term Loan Agreement, dated November 2, 2006, as further amended on
March 3, 2009 (the Credit Agreement), contains certain provisions that may restrict the ability
of ECCs subsidiaries to transfer funds to ECC in the form of cash dividends, loans or advances.
c. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is
recognized in the month of delivery of the publication. Revenues presented in the financial
statements are reflected on a net basis, after the deduction of advertising agency fees, usually at
a rate of 15% of gross revenues. Revenue associated with guaranteed minimum national sales is
recognized when shortfalls in national sales become probable as further discussed in Note 1v.
d. Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded based on managements judgment of the
collectibility of receivables. When assessing the collectibility of receivables, management
considers, among other things, historical loss experience and existing economic conditions. The
activity in the allowance for doubtful accounts for the three years ended February 28, 2009 was as
follows:
Balance At | Balance | |||||||||||||||
Beginning | At End | |||||||||||||||
Of Year | Provision | Write-Offs | Of Year | |||||||||||||
Year ended February 28, 2007 |
$ | 1,861 | $ | 1,954 | $ | (1,865 | ) | $ | 1,950 | |||||||
Year ended February 29, 2008 |
1,950 | 2,045 | (1,691 | ) | 2,304 | |||||||||||
Year ended February 28, 2009 |
2,304 | 3,504 | (2,955 | ) | 2,853 |
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e. Local Programming and Marketing Agreement Fees
The Company from time to time enters into local programming and marketing agreements (LMAs) in
connection with acquisitions of radio stations, pending regulatory approval of transfer of the FCC
licenses. Under the terms of these agreements, the Company makes specified periodic payments to
the owner-operator in exchange for the right to program and sell advertising for a specified
portion of the stations inventory of broadcast time. The Company records revenues and expenses
associated with the portion of the stations 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.
The Company also enters into LMAs in connection with dispositions of radio and television stations.
In such cases the Company may receive periodic payments in exchange for allowing the buyer to
program and sell advertising for a portion of the stations inventory of broadcast time. As of
February 28, 2009, no LMAs were in effect. However, subsequent to February 28, 2009, we entered
into an LMA with Grupo Radio Centro for KMVN-FM in Los Angeles. See Note 18 for more discussion.
f. Share-based Compensation
The Company accounts for share-based compensation in accordance with SFAS No. 123R,
Share-Based Payment, which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee stock options and
employee stock purchase plan purchases based on estimated fair values. See Note 5 for more
discussion of noncash compensation expense.
g. Cash and Cash Equivalents
Emmis considers time deposits, money market fund shares and all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents. At times, such deposits
may be in excess of FDIC insurance limits.
h. Property and Equipment
Property and equipment are recorded at cost. Depreciation is generally computed using the
straight-line method over the estimated useful lives of the related assets, which are 39 years for
buildings, the shorter of economic life or expected lease term for leasehold improvements, and five
to seven years for broadcasting equipment, office equipment and automobiles. Maintenance, repairs
and minor renewals are expensed as incurred; 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 (SFAS No. 144). 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. See Note
1r for more discussion of SFAS No. 144 impairment losses. Depreciation expense for the years ended
February 2007, 2008 and 2009 was $9.4 million, $10.0 million and $10.0 million, respectively.
i. Major Maintenance Activities
On March 1, 2007, the Company adopted FASB Staff Position No. AUG AIR-1, Accounting for
Planned Major Maintenance Activities and began using the deferral method to account for major
maintenance activities related to its airplane. Under this method, actual costs of the major
maintenance activities are capitalized as incurred and amortized to corporate expenses until the
next overhaul date. See Note 1k for more discussion of the airplane.
j. Intangible Assets and Goodwill
Intangible assets are recorded at cost. 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 asset may not be
recoverable in accordance with SFAS No. 142, Goodwill and other Intangible Assets (SFAS No. 142).
Indefinite-lived Intangibles
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
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believe they have indefinite lives. These assets, which the Company determined were its only
indefinite-lived intangibles, are not subject to amortization, but are tested for impairment at
least annually.
The Company uses a direct-method valuation approach known as the greenfield income valuation
method when it performs its annual impairment tests. Under this method, the Company projects the
cash flows that would be generated by each of its units of accounting if the unit of accounting
were commencing operations in each of its markets at the beginning of the valuation period. This
cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the
competitive situation that exists in each market remains unchanged, with the exception that its
unit of accounting was just beginning operations. In doing so, the Company extracts the value of
going concern and any other assets acquired, and strictly values the FCC license. Major
assumptions involved in this analysis include market revenue, market revenue growth rates, unit of
accounting audience share, unit of accounting revenue share and discount rate. For its radio
stations, the Company has determined the unit of accounting to be all of its stations in a local
market, except that the Company concluded in December 2008 that each station in the Los Angeles
market should be considered its own unit of accounting due to the decision to dispose of KMVN-FM as
discussed in Note 18.
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 conducted the two-step annual impairment test as of
December 1, 2006, 2007 and 2008, as well as an interim impairment test as of October 1, 2008. When
assessing its goodwill for impairment, the Company uses an enterprise valuation approach to
determine the fair value of each of the Companys reporting units (radio stations grouped by
market, and magazines on an individual basis). Management determines enterprise value for each of
its reporting units by multiplying the two-year average station operating income generated by each
reporting unit (current year based on actual results and the next year based on budgeted results)
by an estimated market multiple. The Company uses a blended station operating income trading
multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio
reporting units. The multiple applied to each reporting unit is then adjusted up or down from this
benchmark based upon characteristics of the reporting units specific market, such as market size,
market growth rate, and recently completed or announced transactions within the market. There are
no publicly traded publishing companies that are focused predominantly on city and regional
magazines as is our publishing segment. The market multiple used as a benchmark for our publishing
reporting units is based on recently completed transactions within the city and regional magazine
industry.
This enterprise valuation is compared to the carrying value of the reporting unit for the
first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company
proceeds to the second step of the goodwill impairment test. For its step-two testing, the
enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC
licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such
as customer lists, with the residual amount representing the implied fair value of the goodwill.
To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill,
the difference is recorded as an impairment loss in the statements of operations.
Definite-lived Intangibles
The Company has definite-lived intangible assets recorded that are amortized in accordance
with SFAS No. 142. These assets consist primarily of foreign broadcasting licenses, trademarks,
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 Companys future cash flows. The
cost of the broadcast license for Slager Radio is being amortized over the five-year 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, which expire in December 2012. The cost
of the broadcast licenses in Slovakia is being amortized over the varying terms of the licenses,
which expire in January 2013 and February 2013. The cost of the broadcast licenses in Bulgaria is
being amortized over the varying terms of the licenses, all of which expire in December 2012.
k. Discontinued operations and assets held for sale
In accordance with SFAS No. 144, the results of operations and related disposal costs, gains
and losses for business units that the Company has sold or expects to sell are classified in
discontinued operations for all periods presented.
A summary of the income from discontinued operations is presented below:
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Year ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Income (loss) from operations: |
||||||||||||
Television |
$ | 10,161 | $ | 13,300 | $ | 5,007 | ||||||
KKFR-FM |
453 | | | |||||||||
Tu Ciudad |
(2,387 | ) | (2,137 | ) | (1,890 | ) | ||||||
Emmis Books |
(1,583 | ) | (15 | ) | (103 | ) | ||||||
Total |
6,644 | 11,148 | 3,014 | |||||||||
Provision for income taxes |
1,985 | 4,680 | 2,367 | |||||||||
Income from operations, net of tax |
4,659 | 6,468 | 647 | |||||||||
Gain (loss) on sale of discontinued operations: |
||||||||||||
Television |
160,760 | 18,237 | (1,017 | ) | ||||||||
KKFR-FM |
18,870 | | | |||||||||
WRDA-FM |
7,052 | | | |||||||||
Total |
186,682 | 18,237 | (1,017 | ) | ||||||||
Provision (benefit) for income taxes |
76,633 | 8,147 | (437 | ) | ||||||||
Gain (loss) on sale of
discontinued operations, net of
tax |
110,049 | 10,090 | (580 | ) | ||||||||
Income from discontinued operations, net of tax |
$ | 114,708 | $ | 16,558 | $ | 67 | ||||||
KKFR-FM
On July 11, 2006, Emmis completed its sale of radio station KKFR-FM in Phoenix, AZ to
Bonneville International Corporation for $77.5 million in cash and also sold certain tangible
assets to Riviera Broadcast Group LLC for $0.1 million in cash. KKFR-FM had historically been
included in the radio segment. The following table summarizes certain operating results for
KKFR-FM for all periods presented:
Year Ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Net revenues |
$ | 3,746 | $ | | $ | | ||||||
Station operating expenses excluding
depreciation and amortization expense |
3,129 | | | |||||||||
Depreciation and amortization |
42 | | | |||||||||
Income before taxes |
453 | | | |||||||||
Provision for income taxes |
185 | | | |||||||||
Gain on sale of station, net of tax |
11,322 | | |
Television Division
On July 18, 2008, Emmis completed the sale of its sole remaining television station, WVUE-TV
in New Orleans, LA, to Louisiana Media Company LLC for $41.0 million in cash and recorded a loss on
sale of $0.6 million, net of tax. The sale of WVUE-TV completes the sale of our television
division which began on May 10, 2005, when Emmis announced that it had engaged advisors to assist
in evaluating strategic alternatives for its television assets. In connection with the sale, the
Company paid discretionary bonuses to the employees of WVUE totaling $0.8 million, which is
included in the calculation of the loss on sale. As previously disclosed, the Compensation
Committee of the Board of Directors may evaluate a discretionary bonus to executive officers and
certain other employees integral to the sale of the television division now that all sixteen of the
Companys television stations have been sold. A determination of discretionary television sale
bonuses, if any, has been deferred in light of the current economic situation and its impact on the
Company.
On June 4, 2007, the Company closed on its sale of KGMB-TV in Honolulu to HITV Operating Co.,
Inc. for $40.0 million in cash and recorded a gain on sale of $10.1 million, net of tax of $8.1
million.
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On August 31, 2006, Emmis closed on its sale of WKCF-TV in Orlando, FL to Hearst-Argyle
Television Inc. for $217.5 million in cash and recorded a gain on sale of $93.4 million, net of
tax.
On July 7, 2006, Emmis closed on its sale of WBPG-TV in Mobile, AL / Pensacola, FL to LIN
Television Corporation for $3.0 million in cash and recorded a gain on sale of $1.1 million, net of
tax. LIN Television Corporation had been operating WBPG-TV under a Local Programming and Marketing
Agreement since November 30, 2005.
The decision to explore strategic alternatives for the Companys television assets stemmed
from the Companys desire to reduce its debt, coupled with the Companys view that its television
stations needed to be aligned with a company with more significant financial resources and a
singular focus on the challenges of American television, including the growth of digital video
recorders and the industrys relationship with cable and satellite providers. The Company
concluded its television assets were held for sale in accordance with SFAS No. 144 and the results
of operations of the television division have been classified as discontinued operations in the
accompanying condensed consolidated financial statements for all periods presented. The television
division had historically been presented as a separate reporting segment of Emmis.
In August 2005, our television station in New Orleans, WVUE-TV, was significantly affected by
Hurricane Katrina and the subsequent flooding. The Company received $3.6 million of business
interruption proceeds during the year ended February 29, 2008. The Company received $3.1 million
as final settlement of all Katrina-related insurance claims during the year ended February 28,
2009. The insurance proceeds are classified as income from discontinued operations in the
accompanying statements of operations.
The following table summarizes certain operating results for the television division for all
periods presented:
Year ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Net revenues |
$ | 48,339 | $ | 22,929 | $ | 7,364 | ||||||
Station operating expenses excluding
depreciation and amortization expense |
30,730 | 14,114 | 2,365 | |||||||||
Impairment loss |
14,100 | | | |||||||||
Income before taxes |
10,161 | 13,300 | 5,007 | |||||||||
Provision for income taxes |
3,430 | 5,561 | 3,181 | |||||||||
Gain (loss) on sale of stations, net of tax |
94,567 | 10,090 | (580 | ) |
Assets and liabilities related to our television division are classified as discontinued
operations in the accompanying balance sheets as follows:
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February 29, 2008 | February 28, 2009 | |||||||
Current assets: |
||||||||
Accounts receivable, net |
$ | 4,579 | $ | | ||||
Current portion of TV program rights |
1,551 | | ||||||
Prepaid expenses |
239 | | ||||||
Other |
173 | 5 | ||||||
Total current assets |
6,542 | 5 | ||||||
Noncurrent assets: |
||||||||
Property and equipment, net |
20,447 | | ||||||
Intangibles, net |
19,544 | | ||||||
Other noncurrent assets |
894 | | ||||||
Total noncurrent assets |
40,885 | | ||||||
Total assets |
$ | 47,427 | $ | 5 | ||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 487 | $ | 303 | ||||
Current portion of TV program rights |
2,196 | | ||||||
Accrued salaries and commissions |
397 | | ||||||
Deferred revenue |
14 | | ||||||
Other |
113 | | ||||||
Total current liabilities |
3,207 | 303 | ||||||
Noncurrent liabilities: |
||||||||
TV program rights payable, net of current portion |
912 | | ||||||
Other noncurrent liabilities |
222 | | ||||||
Total noncurrent liabilities |
1,134 | | ||||||
Total liabilities |
$ | 4,341 | $ | 303 | ||||
In accordance with Emerging Issues Task Force Issue 87-24 Allocation of Interest to
Discontinued Operations, as modified, the Company did not allocate any interest expense for the
periods presented to the television division, as no debt was required to be repaid as a result of
the disposition of the Companys remaining television asset.
In the year ended February 28, 2007, the Company determined that the long-lived assets of
WVUE-TV were impaired in accordance with the provisions of SFAS No. 144. Included in discontinued
operations in the accompanying statements of operations for the year ended February 28, 2007 is a
$14.1 million noncash impairment charge. This charge is reflected in income from discontinued
operations in the accompanying consolidated statements of operations above.
WRDA-FM
On May 5, 2006, Emmis closed on its sale of WRDA-FM in St. Louis to Radio One, Inc. for $20
million in cash and recorded a gain on sale of $4.2 million. Radio One, Inc. began operating this
station pursuant to a LMA effective October 1, 2005. Radio One, Inc. made no monthly payments to
Emmis, but reimbursed Emmis for substantially all of Emmis costs to operate the station. WRDA-FM
had historically been included in the radio segment.
Tu Ciudad Los Angeles
On July 10, 2008, Emmis announced that it had indefinitely suspended publication of Tu Ciudad
Los Angeles because the magazines financial performance did not meet the Companys expectations.
Operating expenses for the year ended February 28, 2009 include all shut-down related costs and are
included in income from discontinued operations in the accompanying statements of operations. Tu
Ciudad Los Angeles had historically been included in the publishing division. The following table
summarizes certain operating results for Tu Ciudad Los Angeles for all periods presented:
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Year ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Net revenues |
$ | 2,407 | $ | 3,004 | $ | 818 | ||||||
Station operating expenses, excluding
depreciation and amortization
expense |
4,753 | 5,093 | 2,596 | |||||||||
Depreciation and amortization |
35 | 48 | 22 | |||||||||
Loss before taxes |
2,387 | 2,137 | 1,890 | |||||||||
Benefit for income taxes |
980 | 875 | 772 |
Assets and liabilities related to Tu Ciudad Los Angeles are classified as discontinued
operations in the accompanying balance sheets as follows:
February 29, 2008 | February 28, 2009 | |||||||
Current assets: |
||||||||
Accounts receivable, net |
$ | 414 | $ | | ||||
Prepaid expenses |
205 | | ||||||
Other |
8 | | ||||||
Total current assets |
627 | | ||||||
Noncurrent assets: |
||||||||
Property and equipment, net |
169 | | ||||||
Other noncurrent assets |
18 | 5 | ||||||
Total noncurrent assets |
187 | 5 | ||||||
Total assets |
$ | 814 | $ | 5 | ||||
Current liabilities: |
||||||||
Accounts payable and accrued
expenses |
$ | 88 | $ | 10 | ||||
Accrued salaries and commissions |
41 | | ||||||
Deferred revenue |
87 | | ||||||
Other |
18 | 3 | ||||||
Total current liabilities |
234 | 13 | ||||||
Noncurrent liabilities: |
||||||||
Other noncurrent liabilities |
27 | | ||||||
Total noncurrent liabilities |
27 | | ||||||
Total liabilities |
$ | 261 | $ | 13 | ||||
Emmis Books
In February 2009, Emmis discontinued the operations of Emmis Books, which was engaged in
regional book publication, as Emmis Books financial performance did not meet the Companys
expectations. Emmis had ceased new book publication in March 2006, but continued to sell existing
book inventory until the February 2009 decision to totally cease operations. Emmis Books had
historically been included in the publishing division. The following table summarizes certain
operating results for Emmis Books for all periods presented:
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Year ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Net revenues |
$ | 365 | $ | 149 | $ | 57 | ||||||
Station operating expenses, excluding
depreciation and amortization
expense |
1,912 | 150 | 146 | |||||||||
Depreciation and amortization |
36 | 14 | 5 | |||||||||
Loss before taxes |
1,583 | 15 | 103 | |||||||||
Benefit for income taxes |
650 | 6 | 42 |
Assets and liabilities related to Emmis Books are classified as discontinued operations in the
accompanying balance sheets as follows:
February 29, 2008 | February 28, 2009 | |||||||
Current assets: |
||||||||
Accounts receivable, net |
$ | 20 | $ | 45 | ||||
Prepaid expenses |
91 | | ||||||
Total current assets |
111 | 45 | ||||||
Noncurrent assets: |
||||||||
Property and equipment, net |
21 | | ||||||
Other noncurrent assets |
3 | | ||||||
Total noncurrent assets |
24 | | ||||||
Total assets |
$ | 135 | $ | 45 | ||||
Current liabilities: |
||||||||
Accounts payable and accrued
expenses |
$ | 17 | $ | 27 | ||||
Total current liabilities |
17 | 27 | ||||||
Airplane
On December 1, 2008, Emmis exercised its early purchase option on its leased Gulfstream
airplane. Emmis paid $10.2 million in cash, net of a refundable deposit of $4.2 million, to AVN
Air, LLC, the lessor of the aircraft. Emmis immediately began marketing the airplane for sale
prior to year-end, and in February 2009, entered into an agreement to sell the aircraft for $9.1
million in cash. We recognized a $7.3 million impairment loss on the corporate airplane as its
carrying value, which included $2.0 million of previously capitalized major maintenance costs,
exceeded its fair value less estimated costs to sell, which we estimated at $8.9 million as of
February 28, 2009. We closed on the sale of the airplane on April 14, 2009.
l. 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 29, 2008 and February 28, 2009, we had approximately $1.8
million and $1.4 million in direct-response advertising costs capitalized as assets. On an
interim basis, the Company defers non direct-response advertising costs for 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 2007, 2008 and 2009 was $12.9 million, $13.3 million and $9.0 million,
respectively.
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m. Investments
Equity method investments
Emmis has various investments accounted for under the equity method of accounting, the
carrying values of which are summarized in the following table:
February 29, 2008 | February 28, 2009 | |||||||
Broadcast tower site investment New Jersey |
$ | 1,650 | $ | 1,150 | ||||
Broadcast tower site investment Texas |
1,309 | 1,337 | ||||||
Other continuing operations |
341 | 215 | ||||||
Total equity method investments |
$ | 3,300 | $ | 2,702 | ||||
Emmis has a 50% ownership interest in a partnership in which the sole asset is land in New
Jersey on which a transmission tower is located. The other owner has voting control of the
partnership. In the years ended February 28, 2007 and February 28, 2009, Emmis recorded
write-downs to the carrying value of its 50% ownership interest in the partnership of $3.2 million
and $0.5 million, respectively, as it determined the investments fair value had declined. Emmis,
through its investment in six radio stations in Austin, has a 25% ownership interest in a company
that operates a tower site in Austin, Texas. Emmis also has other investments related to
continuing operations that are accounted for using the equity method of accounting, as Emmis does
not control these entities, but none had a balance exceeding $0.3 million as of February 29, 2008
or February 28, 2009.
Cost method investments
During the year ended February 29, 2008, Emmis determined that the value of one of its cost
method investments was impaired. Emmis recorded a noncash impairment charge of $0.3 million,
recorded in other expense in the accompanying consolidated statements of operations, as the
impairment was deemed to be other than temporary. The carrying value of this investment at
February 29, 2008 was $0.1 million. Emmis recorded an additional noncash impairment charge of $0.1
million in other expense during the year ended February 28, 2009 as it deemed that the cost method
investment was fully impaired and the impairment was other than temporary.
Available for sale investments
During the years ended February 29, 2008 and February 28, 2009, Emmis made investments of $1.0
million and $0.3 million, respectively, in a company that specializes in the development and
distribution of mobile and on-line games. During the year ended February 28, 2009, Emmis recorded
a noncash impairment charge of $1.3 million, recorded in other expense in the accompanying
consolidated statements of operations, as it deemed the investment was fully impaired and the
impairment was other than temporary.
Emmis has made investments totaling $0.5 million in a company that specializes in digital
radio transmission technology. This investment is carried at fair value, which totaled $0.5
million as of February 29, 2008 and February 28, 2009. Although no unrealized or realized gains or
losses have been recognized on this investment, unrealized gains and losses would be reported in
other comprehensive income until realized, at which point they would be recognized in the statement
of operations. If the Company determines that the value of the investment is other than
temporarily impaired, the Company will recognize, through the statement of operations, a loss on
the investment.
n. Acquisition-Related Deferred Costs
Emmis historically deferred third-party costs associated with acquisition-related activities
when the Company believed it was probable the services would result in Emmis acquiring the target.
No acquisition-related costs were deferred as of February 29, 2008 or February 28, 2009. Upon the
adoption of SFAS No. 141R, Business Combination, on March 1, 2009, all third-party costs associated
with acquisition-related activities will be expensed as incurred.
o. Deferred Revenue and Barter Transactions
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
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received. Broadcast revenue from
barter transactions is recognized when commercials are broadcast or a 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 2007, 2008 and 2009 were $9.7 million, $11.4 million
and $13.0 million, respectively, and barter expenses were $8.9 million, $11.5 million, and $12.8
million, respectively.
p. Foreign Currency Translation
The functional currencies of our international radio entities are shown in the following
table. The balance sheets of these entities have been translated from their functional currencies
to the U.S. dollar using the current exchange rate in effect at the subsidiaries balance sheet
date (December 31 for our international radio entities). The results of operations for our
international radio entities have been translated using an average exchange rate for the period.
The translation adjustments reflected in shareholders equity (deficit) in the accompanying
consolidated balance sheets were as follows:
Functional | For the Years Ended February 28 (29), | |||||||||||||||
Currency | 2007 | 2008 | 2009 | |||||||||||||
Hungary |
Forint | $ | 298 | $ | 703 | $ | (759 | ) | ||||||||
Belgium |
Euro | 330 | 338 | 47 | ||||||||||||
Slovakia |
Koruna 1 | 1,505 | 1,871 | 1,680 | ||||||||||||
Bulgaria |
Leva | 137 | (371 | ) | (2,491 | ) | ||||||||||
$ | 2,270 | $ | 2,541 | $ | (1,523 | ) | ||||||||||
1 | In Slovakia, the Euro became the official currency on January 1, 2009 |
q. Earnings Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share, requires dual
presentation of basic and diluted income (loss) 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 (loss) available to common shareholders by the weighted-average number of common shares
outstanding for the period (37,265,456, 36,551,378 and 36,374,120 shares for the years ended
February 2007, 2008 and 2009, 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 2007, 2008 and 2009 consisted of stock options and the
6.25% Series A cumulative convertible preferred stock. The conversion of stock options and the
preferred stock is not included in the calculation of diluted net income (loss) per common share
for each of the three years ended February 28, 2009 as the effect of these conversions would be
antidilutive to the net loss available to common shareholders from continuing operations. Thus,
the weighted average common equivalent shares used for purposes of computing diluted EPS are the
same as those used to compute basic EPS for all periods presented. Excluded from the calculation
of diluted net loss per share for all periods presented are 7.0 million, 7.0 million and 6.9
million weighted average shares that would result from the conversion of preferred shares, and
approximately 0.1 million, 0.3 million and 0.3 million weighted average shares that would result
form the exercise of stock options for the years ended February 2007, 2008 and 2009, respectively.
r. Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequence of
events that have been recognized in the Companys financial statements or income tax returns.
Income taxes are recognized during the year in which the underlying transactions are reflected in
the consolidated statements of operations. Deferred taxes are provided for temporary differences
between amounts of assets and liabilities as recorded for financial reporting purposes and amounts
recorded for income tax purposes. After determining the total amount of deferred tax assets, the
Company determines whether it is more likely than not that some portion of the deferred tax assets
will not be realized. If the Company determines that a deferred tax asset is not likely to be
realized, a valuation allowance will be established against that asset to record it at its expected
realizable value.
s. Long-Lived Tangible Assets
The Company periodically considers whether indicators of impairment of long-lived tangible
assets are present. If such indicators
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are present, the Company determines whether the sum of the
estimated undiscounted cash flows attributable to the assets in question are less than their
carrying value. If less, the Company recognizes an impairment loss based on the excess of the
carrying amount of the assets over their respective fair values. Fair value is determined by
discounted future cash flows, appraisals and other methods. If the assets determined to be
impaired are to be held and used, the Company recognizes an impairment charge to the extent the
assets carrying value is greater than the fair value. The fair value of the asset then becomes
the assets new carrying value, which, if applicable, the Company depreciates or amortizes over the
remaining estimated useful life of the asset.
In the year ended February 28, 2007, the Company determined that the long-lived assets of
WVUE-TV were impaired in accordance with the provisions of SFAS No. 144. The Company recorded a
$14.1 million noncash impairment charge, which is reflected in discontinued operations in the
accompanying statements of operations. In the year ended February 28, 2009, the Company determined
that the long-lived assets related to its corporate jet and Belgium radio operations were impaired
in accordance with the provisions of SFAS No. 144. The Company recorded a $7.3 and $0.3 million
noncash impairment charge related to the corporate jet and Belgium radio operation long-lived
assets, respectively, which is reflected in impairment losses in the accompanying statements of
operations. The Company also recorded impairment charges for its Bulgarian foreign broadcast
licenses and Orange Coast advertising base definite-lived intangible assets during the year ended
February 28, 2009. See Note 12 for more discussion.
t. 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.
u. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable
and other current assets and liabilities approximate fair value because of the short maturity of
these financial instruments. The fair value of our interest rate swap agreements is an estimate of
the amount that the Company would pay at the reporting date if the contracts were transferred to
another party or cancelled by either party. The Company estimates the fair value of the contracts
as of February 29, 2008 and February 28, 2009 was a liability of $7.6 million and $6.8 million,
respectively. Historically, the carrying amount of our Credit Agreement debt approximates fair
value due to the variable interest rate on such debt. However, due to turmoil in the credit
markets beginning in July 2007, our Credit Agreement debt began to trade at a significant discount
to its carrying value. The fair value of our Credit Agreement debt as of February 29, 2008 and
February 28, 2009 was $364.1 million and $183.3 million, respectively, and its carrying value was
$438.7 million and $421.4 million, respectively. The fair value of our 6.25% Series A cumulative
convertible preferred stock, based on quoted market prices as of February 29, 2008 and February 28,
2009, was $76.8 million and $5.6 million, respectively, and its carrying value was $143.8 million
and $140.5 million, respectively.
v. National Representation Agreement
On October 1, 2007, Emmis terminated its existing national sales representation agreement with
Interep National Radio Sales, Inc. (Interep) and entered into a new agreement with Katz
Communications, Inc. (Katz) extending through March 2018. Emmis existing contract with Interep
extended through September 2011. Emmis, Interep and Katz entered into a tri-party termination and
mutual release agreement under which Interep agreed to release Emmis from its future contractual
obligations in exchange for a one-time payment of $15.3 million, which was paid by Katz on behalf
of Emmis as an inducement for Emmis to enter into the new long-term contract with Katz. Emmis
measured and recognized the charge associated with terminating the Interep contract as of the
effective termination date, which is reflected as a noncash contract termination fee in the
accompanying consolidated statement of operations. The liability established as a result of the
termination represents an incentive received from Katz that will be recognized as a reduction of
our national agency commission expense over the term of the agreement with Katz. The current
portion of this liability is included in other current liabilities and the long-term portion of
this liability is included in other noncurrent liabilities in the accompanying consolidated balance
sheets at February 29, 2008 and February 28, 2009.
As part of the representation agreement, Katz guaranteed a minimum amount of national sales
for Emmis fiscal years ended February 2008 and 2009. For the years ended February 29, 2008 and
February 28, 2009, actual national sales as defined by the representation agreement were
approximately $3.7 million and $10.2 million lower, respectively, than the guaranteed minimum
amount of national sales. As such, Emmis recognized $3.7 million and $10.2 million of additional
net revenues for the years ended February
29, 2008 and February 28, 2009, respectively. The performance guarantees of $3.7 million and
$10.2 million are included in other
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current assets in the accompanying consolidated balance sheets
and were collected in May 2008 and April 2009, respectively. The performance guarantees do not
extend past February 28, 2009.
w. Liquidity
The Company continually projects its anticipated cash needs, which include its operating
needs, capital needs, principal and interest payments on its indebtedness and preferred stock
dividends. Managements most recent operating income and cash flow projections considered the
current economic crisis, which has reduced advertising demand in general, as well as the limited
credit environment. As of the filing of this Form 10-K, management believes the Company can meet
its liquidity needs through the end of fiscal year 2010 with cash and cash equivalents on hand,
projected cash flows from operations and, to the extent necessary, through its borrowing capacity
under the Credit Agreement, which was approximately $143.2 million at February 28, 2009, but $73.2
million after giving effect to the First Amendment (see Note 18). Based on these projections and
certain planned expense reductions, management also believes the Company will be in compliance with
its debt covenants through the end of fiscal year 2010. However, a continued worsening economy, or
other unforeseen circumstances, such as those described in Item 1A Risk Factors, may negatively
impact the Companys operations beyond those assumed in its projections. Management considered the
risks that the current economic conditions may have on its liquidity projections, as well as the
Companys ability to meet its debt covenant requirements. If economic conditions deteriorate to an
extent that we could not meet our liquidity needs or it appears that noncompliance with debt
covenants is likely to result, the Company would implement several remedial measures, which could
include further operating cost and capital expenditure reductions, and further de-leveraging
actions, which may include the sale of assets. If these measures are not successful in maintaining
compliance with our debt covenants, the Company would attempt to negotiate for relief through an
amendment with its lenders or waivers of covenant noncompliance, which could result in higher
interest costs, additional fees and reduced borrowing limits. There is no assurance that the
Company would be successful in obtaining relief from its debt covenant requirements in these
circumstances. Failure to comply with our debt covenants and a corresponding failure to negotiate
a favorable amendment or waivers with the Companys lenders could result in the acceleration of the
maturity of all the Companys outstanding debt, which would have a material adverse effect on the
Companys business and financial position.
x. Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (FASB) ratified Emerging Issue Task
Force Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instruments contingent exercise and settlement provisions.
EITF 07-5 is effective for us as of March 1, 2009. While we do not believe that the adoption of
EITF 07-5 will have an effect on our financial position, results of operations or cash flows, we
are still currently assessing the pronouncement.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore need to be included in the computation of
earnings per share under the two-class method as described in FASB Statement of Financial
Accounting Standards No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for us as of March
1, 2009 and earlier adoption is prohibited. While we do not believe that the adoption of FSP EITF
03-6-1will have an effect on our financial position, results of operations or cash flows, we are
still currently assessing the pronouncement.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (SFAS No. 161), which requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such instruments under SFAS No.
133 and its related interpretations, and a tabular disclosure of the effects of such instruments
and related hedged items on our financial position, results of operations, and cash flows. SFAS
No. 161 was adopted by the Company on December 1, 2008 and changed the disclosure requirements
related to the Companys derivative instruments and hedging activities (See Note 8). The adoption
of SFAS No. 161 had no impact on the Companys financial position, results of operations or cash
flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No.
160). SFAS No. 160 will change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. SFAS
No. 160 requires retroactive adoption of the presentation and disclosure requirements for
existing minority interests, with all other
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requirements applied prospectively. SFAS No. 160 is
effective for us as of March 1, 2009. As of February 29, 2008 and February 28, 2009, minority
interests characterized as liabilities in the accompanying consolidated balance sheets were $53,758
and $53,021, respectively. These amounts will be recharacterized as noncontrolling interests as a
component of shareholders equity (deficit) when SFAS No. 160 is adopted on March 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (as
revised), Business Combinations (SFAS No. 141R), that will significantly change how business
combinations are accounted for through the use of fair values in financial reporting and will
impact financial statements both on the acquisition date and in subsequent periods. Some of the
changes, such as the accounting for contingent consideration, will introduce more volatility into
earnings, and could impact our acquisition strategy. SFAS No. 141R, which is effective for us as
of March 1, 2009, will apply to all business combinations that close on or after March 1, 2009.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on accounting for
income tax benefits of dividends on share-based payment awards. Certain stock-based compensation
arrangements contain provisions that entitle an employee to receive dividends or dividend
equivalents on the unvested portion of the awards. Under the provisions of SFAS No. 123R, such
dividend features are factored into the value of the award at the grant date, and to the extent
that an award is expected to vest, the dividends are charged to retained earnings. For income tax
purposes, however, such dividend payments are generally considered additional compensation expense
when they are paid to employees and, therefore, are generally deductible by the employer on a
current basis for tax purposes. Under EITF No. 06-11, a realized tax benefit from dividends or
dividend equivalents that is charged to retained earnings and paid to employees for
equity-classified nonvested equity shares, nonvested equity share units, and outstanding share
options should be recognized as an increase to additional paid-in-capital. Those tax benefits are
considered windfall tax benefits under SFAS No. 123R. EITF No. 06-11 was adopted by the Company on
March 1, 2008 and did not have any effect on the Companys financial position, results of
operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits
companies to choose to measure certain financial instruments and other items at fair value that are
not currently required to be measured at fair value. SFAS No. 159 was adopted by the Company on
March 1, 2008. We have not elected to measure any financial assets or financial liabilities at
fair value which were not previously required to be measured at fair value. The adoption of SFAS
No. 159 did not have any effect on the Companys financial position, results of operations or cash
flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157), which provides guidance for using fair value to measure assets
and liabilities. The standard also responds to investors requests for more information about: (1)
the extent to which companies measure assets and liabilities at fair value; (2) the information
used to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS
No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value to any new
circumstances. SFAS No. 157 was adopted by the Company on March 1, 2008, though FASB Staff Position
No. 157-2, Effective Date of SFAS No. 157, defers the effective date of SFAS No. 157 for most
nonfinancial assets and nonfinancial liabilities to the Companys fiscal year beginning March 1,
2009. The adoption of SFAS No. 157 did not have any effect on the Companys financial position,
results of operations or cash flows.
y. Reclassifications
Certain reclassifications have been made to the prior years financial statements to be
consistent with the February 28, 2009 presentation. The reclassifications have no impact on net
income (loss) previously reported.
z. Restatement
Overview
Emmis Communications
Corporation is filing this amendment to its Annual Report on Form 10-K for the year ended
February 28, 2009 to amend and restate its financial statements and other financial information
for the year then ended. During the year ended February 28, 2009, we recorded a valuation
allowance on substantially all of our domestic deferred tax assets as it was more likely than
not that the domestic deferred tax assets would not be realized. In determining the valuation
allowance of our deferred tax assets, the Company netted deferred tax assets related to indefinite-lived
intangible assets and deferred tax liabilities related to indefinite-lived intangible assets.
In accordance with generally accepted accounting principles, deferred tax assets and deferred
tax liabilities associated with indefinite-lived intangible assets should not be netted because
the timing of the reversal of the deferred tax liabilities is unknown. We have recorded additional
valuation allowance equal to the amount of deferred tax assets we had erroneously netted against
deferred tax liabilities. As a result of the foregoing,
the Company overstated the benefit for income taxes and understated
deferred tax liabilities by $25.3 million. In connection with this
restatement, the Company also increased the balance of a deferred tax liability related to an indefinite-lived intangible
asset by $6.1 million, with a corresponding reduction to the beginning
balance of retained earnings as this matter related to a prior period. The restatements have no effect on our cash flows in any period.
Summary of changes to financial statements
The following tables set forth the effects of the restatement described above:
Restatement effects Consolidated Statements of Operations
For the year ended | ||||||||
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
BENEFIT FOR INCOME TAXES |
$ | (89,312 | ) | $ | (64,027 | ) | ||
LOSS FROM CONTINUING OPERATIONS |
(275,051 | ) | (300,336 | ) | ||||
NET LOSS |
(274,984 | ) | (300,269 | ) | ||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
(283,917 | ) | (309,202 | ) | ||||
BASIC NET LOSS AVAILABLE TO COMMON SHAREHOLDERS: |
||||||||
Continuing operations |
$ | (7.81 | ) | $ | (8.50 | ) | ||
Net loss available to common shareholders |
(7.81 | ) | (8.50 | ) | ||||
DILUTED NET LOSS AVAILABLE TO COMMON SHAREHOLDERS: |
||||||||
Continuing operations |
$ | (7.81 | ) | $ | (8.50 | ) | ||
Net loss available to common shareholders |
(7.81 | ) | (8.50 | ) |
Restatement effects Consolidated Balance Sheets
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
DEFERRED INCOME TAXES |
$ | 76,294 | $ | 107,722 | ||||
TOTAL LIABILITIES |
627,324 | 658,752 | ||||||
ACCUMULATED DEFICIT |
(551,053 | ) | (582,481 | ) | ||||
TOTAL SHAREHOLDERS DEFICIT |
(28,572 | ) | (60,000 | ) |
Restatement effects Consolidated Statements of Cash Flows
For the year ended | ||||||||
February 28, 2009 | ||||||||
As originally filed | Revised | |||||||
on Form 10-K | on Form 10-K/A | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (274,984 | ) | $ | (300,269 | ) | ||
Benefit for deferred income taxes |
(92,725 | ) | (67,440 | ) |
2. COMMON STOCK
Emmis has authorized Class A common stock, Class B common stock, and Class C common stock.
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 29, 2008 and February 28, 2009, no shares of Class C common stock were issued
or outstanding.
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On August 8, 2007, Emmis Board of Directors authorized a share repurchase program pursuant to
which Emmis is authorized to purchase up to an aggregate value of $50 million of its outstanding
Class A common stock within the parameters of SEC Rule 10b-18. Common stock repurchase
transactions may occur from time to time at our discretion, either on the open market or in
privately negotiated purchases, subject to prevailing market conditions and other considerations.
During the year ended February 29, 2008, the Company repurchased 2.2 million shares for $13.9
million (average price of $6.23 per share). No common stock repurchases pursuant to this program
were made during the year ended February 28, 2009.
3. REDEEMABLE PREFERRED STOCK
Each share of redeemable preferred stock is convertible into a number of shares of common
stock, which is determined by dividing the liquidation preference of the share of preferred stock
($50.00 per share) by the conversion price. The conversion price is $20.495, which results in a
conversion ratio of 2.44 shares of common stock per share of preferred stock. 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. Emmis may redeem the preferred stock
for cash at 100% of the liquidation preference per share, plus in each case accumulated and unpaid
dividends, if any, whether or not declared to the redemption date. During the quarter ended
February 28, 2009, 65,830 shares of preferred stock were converted into 160,625 shares of common
stock.
Emmis last paid its quarterly dividend on October 15, 2008. As of February 28, 2009,
dividends in arrears totaled $2.2 million. Failure to pay the dividend is not a default under the
terms of the Preferred Stock. However, if dividends remain unpaid for more than six quarters, the
holders of Preferred Stock are entitled to elect two persons to our board of directors. Payment of
future dividends on the Preferred Stock will be determined by the Companys Board of Directors. We
do not know when or whether we will resume paying such dividends.
4. SHAREHOLDERS EQUITY (DEFICIT)
On November 2, 2006, the Companys Board of Directors declared a special one-time dividend of
$4.00 per common share to shareholders of record as of November 12, 2006. The dividend was paid
November 22, 2006, and reduced shareholders equity by $150.2 million.
All of the Companys outstanding stock option awards contained anti-dilution provisions that
required an equitable adjustment to reflect the change in the share price on the November 24, 2006
ex-dividend date. The equitable adjustment approved by the Compensation Committee of the Companys
Board of Directors was consistent with the requirements of the Internal Revenue Code and resulted
in no incremental noncash compensation expense under SFAS No. 123R.
5. SHARE-BASED PAYMENTS
The Company adopted the fair value recognition provisions of SFAS No. 123R on March 1, 2006,
using the modified-prospective-transition method. The amounts recorded as share-based compensation
expense under SFAS No. 123R primarily relate to restricted common stock issued under employment
agreements, common stock issued to employees in lieu of cash bonuses, Company matches of common
stock in our 401(k) plans, and annual stock option and restricted stock grants. Nonvested options
do not share in dividends.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the
Company under various stock option plans at no less than the fair market value of the underlying
stock on the date of grant. These options are granted for a term not exceeding 10 years and are
forfeited, except in certain circumstances, in the event the employee or director terminates his or
her employment or relationship with the Company. These options generally vest annually over three
years (one-third each year for three years). The Company issues new shares upon the exercise of
stock options.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes
option-pricing model and expensed on a straight-line basis over the vesting period. Expected
volatilities are based on the historical volatility of the Companys stock. The Company
uses historical data to estimate option exercises and employee terminations within the
valuation model. The Company
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includes estimated forfeitures in its compensation cost and updates
the estimated forfeiture rate through the final vesting date of awards. The Company uses the
simplified method to estimate the expected term for all options granted. Although the Company has
granted options for many years, the historical exercise activity of our options was impacted by the
way the Company processed the equitable adjustment of our November 2006 special dividend (see Note
4). Consequently, the Company believes that reliable data regarding exercise behavior only exists
for the period subsequent to November 2006, which is insufficient experience upon which to estimate
expected term. The risk-free interest rate for periods within the life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used
to calculate the fair value of the Companys options on the date of grant during the years ended
February 2007, 2008 and 2009:
Year Ended February 28 (29), | ||||||
2007 | 2008 | 2009 | ||||
Risk-Free Interest Rate: |
4.7% - 4.8% | 4.4% - 4.9% | 1.7% - 3.5% | |||
Expected Dividend Yield: |
0% | 0% | 0% | |||
Expected Life (Years): |
6.0 | 6.0 | 6.0 - 6.5 | |||
Expected Volatility: |
48.2% - 58.3% | 46.1% - 47.5% | 48.6% - 70.1% |
The following table presents a summary of the Companys stock options outstanding at February
28, 2009, and stock option activity during the year ended February 28, 2009 (Price reflects the
weighted average exercise price per share):
Weighted Average | Aggregate | |||||||||||||||
Remaining | Intrinsic | |||||||||||||||
Options | Price | Contractual Term | Value | |||||||||||||
Outstanding, beginning of year |
7,600,063 | $ | 16.08 | |||||||||||||
Granted |
907,839 | 2.20 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
30,392 | 5.48 | ||||||||||||||
Expired |
126,708 | 16.83 | ||||||||||||||
Outstanding, end of year |
8,350,802 | 14.60 | 4.4 | $ | | |||||||||||
Exercisable, end of year |
6,814,708 | 16.74 | 3.4 | $ | |
The Company received less than $0.1 million of cash from option exercises in the year ended
February 2007, and did not receive any cash from option exercises in the years ended February 2008
and 2009. The Company did not record an income tax benefit related to option exercises in the
years ended February 2007, 2008 and 2009.
The weighted average grant date fair value of options granted during the years ended February
2007, 2008 and 2009 was $6.44, $4.24 and $1.10, respectively. The total intrinsic value of options
exercised during the years ended February 2007, 2008 and 2009 was $0.2 million, $0 million and $0
million, respectively.
A summary of the Companys nonvested options at February 28, 2009, and changes during the year
ended February 28, 2009, is presented below:
Weighted Average | ||||||||
Grant Date | ||||||||
Options | Fair Value | |||||||
Nonvested, beginning of year |
1,114,164 | $ | 5.16 | |||||
Granted |
907,839 | 1.10 | ||||||
Vested |
455,517 | 5.36 | ||||||
Forfeited |
30,392 | 2.84 | ||||||
Nonvested, end of year |
1,536,094 | 2.73 | ||||||
There were 2.2 million shares available for future grants under the various option plans at
February 28, 2009. The vesting dates of outstanding options range from March 2009 to September
2011, and expiration dates range from October 2009 to December 2018.
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Restricted Stock Awards
The Company began granting restricted stock awards to employees and directors of the Company
in lieu of stock option grants in 2005. These awards generally vest at the end of the second or
third year after grant and are forfeited, except in certain circumstances, in the event the
employee terminates his or her employment or relationship with the Company prior to vesting. The
restricted stock awards were granted out of the Companys 2004 Equity Incentive Plan. The Company
also awards, out of the Companys 2004 Equity Compensation Plan, stock to settle certain bonuses
and other compensation that otherwise would be paid in cash. Any restrictions on these shares are
immediately lapsed on the grant date.
The following table presents a summary of the Companys restricted stock grants outstanding at
February 28, 2009, and restricted stock activity during the year ended February 28, 2009 (Price
reflects the weighted average share price at the date of grant):
Awards | Price | |||||||
Grants outstanding, beginning of year |
626,049 | $ | 12.62 | |||||
Granted |
1,244,808 | 2.26 | ||||||
Vested (restriction lapsed) |
1,182,383 | 4.99 | ||||||
Forfeited |
44,390 | 5.75 | ||||||
Grants outstanding, end of year |
644,084 | 7.08 | ||||||
The total grant date fair value of shares vested during the years ended February 2007, 2008
and 2009 was $4.2 million, $3.5 million and $5.9 million, respectively.
Recognized Noncash Compensation Expense
The following table summarizes stock-based compensation expense and related tax benefits
recognized by the Company in the three years ended February 28, 2009:
Year Ended February 28 (29), | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Station operating expenses excluding depreciation and amortization expense |
$ | 3,259 | $ | 2,874 | $ | 2,539 | ||||||
Corporate expenses |
4,465 | 4,326 | 3,283 | |||||||||
Stock-based compensation expense included in operating expenses |
7,724 | 7,200 | 5,822 | |||||||||
Tax benefit |
(3,167 | ) | (2,952 | ) | (2,387 | ) | ||||||
Recognized stock-based compensation expense, net of tax |
$ | 4,557 | $ | 4,248 | $ | 3,435 | ||||||
As of February 28, 2009, there was $2.6 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements. The cost is expected to be recognized over a
weighted average period of approximately 1.3 years.
6. CREDIT AGREEMENT AND RELATED DEFERRED DEBT ISSUANCE COSTS
The Credit Agreement was comprised of the following at February 29, 2008 and February 28,
2009:
2008 | 2009 | |||||||
Revolver |
$ | | $ | | ||||
Term Loan B |
438,693 | 421,355 | ||||||
438,693 | 421,355 | |||||||
Less: current maturities |
(4,387 | ) | (4,214 | ) | ||||
$ | 434,306 | $ | 417,141 | |||||
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On November 2, 2006, EOC amended and restated its Credit Agreement to provide for total
borrowings of up to $600 million, including (i) a $455 million term loan and (ii) a $145 million
revolver, of which $50 million may be used for letters of credit. At February 29, 2008 and
February 28, 2009, $2.2 million and $1.8 million, respectively, in letters of credit were
outstanding. The Credit Agreement also provided, at February 28, 2009, for the ability to have
incremental facilities of up to $450 million, a portion of which may be allocated to a revolver. A
portion of the revolver access was reduced pursuant to an amendment to the Credit Agreement in
March 2009 (See Note 18). Emmis may access the incremental facility on one or more occasions,
subject to certain provisions, including a potential market adjustment to the pricing of the entire
Credit Agreement.
All outstanding amounts under the Credit Agreement 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 Agreement)
plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies under the
revolver (ranging from 0% to 2.25%), depending on Emmis ratio of debt to consolidated operating
cash flow, as defined in the Credit Agreement. The margins over the Eurodollar Rate and the
alternative base rate are 2.00% and 1.00%, 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 six months after closing, the Credit Agreement required Emmis
to maintain fixed interest rates, for at least a three year period, on a minimum of 30% of its
total outstanding debt, as defined. Emmis fulfilled this requirement through interest rate swap
agreements. See Note 8 for further discussion.
The term loan and revolver mature on November 1, 2013 and November 2, 2012, respectively.
Beginning on August 31, 2007, the borrowings under the term loan are payable in equal quarterly
installments equal to 0.25% of the term loan, with the remaining balance payable November 1, 2013.
The annual amortization schedule for the Credit Agreement, based upon amounts outstanding at
February 28, 2009, is as follows:
Year Ended | Revolver | Term Loan B | Total | |||||||||
February 28 (29), | Amortization | Amortization | Amortization | |||||||||
2010 |
| 4,214 | 4,214 | |||||||||
2011 |
| 4,214 | 4,214 | |||||||||
2012 |
| 4,214 | 4,214 | |||||||||
2013 |
| 4,214 | 4,214 | |||||||||
2014 |
| 404,499 | 404,499 | |||||||||
Total |
$ | | $ | 421,355 | $ | 421,355 | ||||||
Proceeds from raising additional equity, issuing additional subordinated debt or from asset
sales, as well as excess cash flow, may be required to be used to repay amounts outstanding under
the Credit Agreement. Whether these mandatory repayment provisions apply depends, in certain
instances, on Emmis total leverage ratio, as defined under the Credit Agreement.
Borrowings under the Credit Agreement depends upon our continued compliance with certain
operating covenants and financial ratios, including: (1) Consolidated Total Funded Debt to
Consolidated Operating Cash Flow (each as defined in our Credit Agreement) of 6 times; and (2)
Consolidated Operating Cash Flow to Consolidated Fixed Charges (each as defined in our Credit
Agreement) of 1.25 times. The Consolidated Total Funded Debt to Consolidated Operating Cash Flow
ratio required by the Credit Agreement changes to 5.5 times on May 31, 2010, 5 times on February
28, 2011, 4.5 times on November 30, 2011 and 4 times for all periods after May 31, 2012. The
operating covenants and other restrictions with which we must comply include, among others,
restrictions on additional indebtedness, incurrence of liens, engaging in businesses other than our
primary business, paying certain dividends, redeeming or repurchasing capital stock of Emmis,
acquisitions and asset sales. No default or event of default has occurred or is continuing. See
Note 1w for further discussion. The Credit Agreement provides that an event of default will occur
if there is a change of control of Emmis, as defined. The payment of principal, premium and
interest under the Credit Agreement is fully and unconditionally guaranteed, jointly and severally,
by ECC and most of its existing wholly-owned domestic subsidiaries. Substantially all of Emmis
assets, including the stock of most of Emmis wholly-owned, domestic subsidiaries are pledged to
secure the Credit Agreement.
In connection with various fiscal 2007 debt restructuring and financing activities, the
Company expensed substantially all deferred debt issuance costs existing as of February 28, 2006.
These expenses are reflected as loss on debt extinguishment in the accompanying consolidated
statement of operation for the year ended February 28, 2007. The deferred debt issuance costs of
$3.2 million and $2.7 million, net, as of February 29, 2008 and February 28, 2009, respectively,
primarily relates to costs incurred when we entered into our Credit Agreement in November 2006.
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On March 3, 2009, the Company amended certain provisions of its Credit Agreement. See Note 18
for more discussion.
7. OTHER LONG-TERM DEBT
Other long-term debt was comprised of the following at February 29, 2008 and February 28,
2009:
2008 | 2009 | |||||||
Hungary license obligation |
$ | 3,030 | $ | 1,003 | ||||
Other |
107 | 54 | ||||||
Total other long-term debt |
3,137 | 1,057 | ||||||
Less: current maturities |
(1,241 | ) | (1,049 | ) | ||||
$ | 1,896 | $ | 8 | |||||
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 nor are we required to fund these obligations. Subsequent to the license
restructuring completed in December 2002, Slager Radio must pay, in Hungarian forints, five equal
annual installments that commenced in November 2005 and end in November 2009, for a radio broadcast
license to the Hungarian government. The obligation is non-interest bearing. The license
obligation has been discounted at an imputed interest rate of approximately 7% to reflect the
obligation at its fair value. The license obligation of $1.0 million (in U.S. dollars) as of
February 28, 2009, is reflected net of an unamortized discount of $0.1 million.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and the use of derivative financial instruments.
Specifically, the Company enters into derivative financial instruments to manage interest rate
exposure with the following objectives:
| manage current and forecasted interest rate risk while maintaining optimal financial flexibility and solvency |
| proactively manage the Companys cost of capital to ensure the Company can effectively manage operations and execute its business strategy, thereby maintaining a competitive advantage and enhancing shareholder value |
| comply with covenant requirements in the Companys Credit Agreement |
Cash Flow Hedges of Interest Rate Risk
The Companys objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish this objective, the
Company primarily uses interest rate swaps as part of its interest rate risk management strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts
from a counterparty in exchange for the Company making fixed-rate payments over the life of the
agreements without exchange of the underlying notional amount. Under the terms of its Credit
Agreement, the Company is required to fix or cap the interest rate on at least 30% of its debt
outstanding (as defined in the Credit Agreement) for a period of at least three years.
The effective portion of changes in the fair value of derivatives designated and that qualify
as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. During fiscal 2009, such derivatives were used to hedge the variable cash flows
associated with existing
variable-rate debt. The ineffective portion of the change in fair value of the derivatives is
recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings
during the fiscal years ended February 2007, 2008 and 2009.
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Amounts reported in accumulated other comprehensive income (loss) related to derivatives will
be reclassified to interest expense as interest payments are made on the Companys variable-rate
debt. During fiscal 2010, the Company estimates that an additional $7.6 million will be
reclassified as an increase to interest expense.
As of February 28, 2009, the Company had the following outstanding interest rate derivatives
that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative | Number of Instruments | Notional | ||||||
Interest Rate Swaps |
3 | $340,000 |
In March 2007, the Company entered into a three-year interest rate exchange agreement (a
Swap), whereby the Company pays a fixed rate of 4.795% on $165 million of notional principal to
Bank of America, and Bank of America pays to the Company a variable rate on the same amount of
notional principal based on the three-month London Interbank Offered Rate (LIBOR). In March
2008, the Company entered into an additional three-year Swap, whereby the Company pays a fixed rate
of 2.964% on $100 million of notional principal to Deutsche Bank, and Deutsche Bank pays to the
Company a variable rate on the same amount of notional principal based on the three-month LIBOR.
In January 2009, the Company entered into an additional two-year Swap effective as of March 28,
2009, whereby the Company pays a fixed rate of 1.771% on $75 million of notional principal to
Deutsche Bank, and Deutsche Bank pays to the Company a variable rate on the same amount of notional
principal based on the three-month LIBOR.
The Company does not use derivatives for trading or speculative purposes and currently does
not have any derivatives that are not designated as hedges.
The table below presents the fair value of the Companys derivative financial instruments as
well as their classification on the balance sheet as of February 29, 2008 and February 28, 2009.
The fair values of the derivative instruments are estimated by obtaining quotations from the
financial institutions that are counterparties to the instruments. The fair value is an estimate
of the net amount that the Company would have been required to pay on February 29, 2008 and
February 28, 2009, if the agreements were transferred to other parties or cancelled by the Company,
and in the case of the February 28, 2009 derivative instrument, as further adjusted by a SFAS No.
157 credit adjustment.
Tabular Disclosure of Fair Values of Derivative Instruments | ||||||||||||||||||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||||||||||
As of February 29, 2008 | As of February 28, 2009 | As of February 29, 2008 | As of February 28, 2009 | |||||||||||||||||||||||||||||
Balance Sheet | Balance Sheet | Balance Sheet | Balance Sheet | |||||||||||||||||||||||||||||
Location | Fair Value | Location | Fair Value | Location | Fair Value | Location | Fair Value | |||||||||||||||||||||||||
Derivatives designated as hedging instruments
under SFAS 133 |
||||||||||||||||||||||||||||||||
Interest Rate Swap Agreements |
N/A | $ | | N/A | $ | | Other Noncurrent Liabilities | $ | 7,580 | Other Noncurrent Liabilities | $ | 6,777 | ||||||||||||||||||||
Total derivatives designated as hedging
instruments under SFAS 133 |
$ | | $ | | $ | 7,580 | $ | 6,777 | ||||||||||||||||||||||||
The tables below presents the effect of the Companys derivative financial instruments on the
consolidated statements of operations as of February 2007, 2008 and 2009.
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Location of Gain or (Loss) | ||||||||||||||||||||||||||||||||||||||||||||
Location of Gain or | Recognized in Income on | |||||||||||||||||||||||||||||||||||||||||||
(Loss) Reclassified | Amount of Gain or (Loss) Reclassified from | Derivative (Ineffective | Amount of Gain or (Loss) Recognized in | |||||||||||||||||||||||||||||||||||||||||
Derivatives in SFAS 133 | Amount of Gain or (Loss) Recognized in OCI on | from Accumulated | Accumulated OCI into Income (Effective | Portion and Amount | Income on Derivative (Ineffective Portion and | |||||||||||||||||||||||||||||||||||||||
Cash Flow Hedging | Derivative (Effective Portion) | OCI into Income | Portion) | Excluded from | Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||||||||||||||||||
Relationships | 2007 | 2008 | 2009 | (Effective Portion) | 2007 | 2008 | 2009 | Effectiveness Testing) | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
Interest Rate Swap
Agreements |
$ | | $ | (5,126 | ) | $ | (2,793 | ) | Interest expense | $ | | $ | 654 | $ | (3,267 | ) | N/A | $ | | $ | | $ | | |||||||||||||||||||||
Total |
$ | | $ | (5,126 | ) | $ | (2,793 | ) | $ | | $ | 654 | $ | (3,267 | ) | $ | | $ | | $ | | |||||||||||||||||||||||
Credit-risk-related Contingent Features
The Company manages its counterparty risk by entering into derivative instruments with global
financial institutions where it believes the risk of credit loss resulting from nonperformance by
the counterparty is low. As discussed above, the Companys existing counterparties on its interest
rate swaps are Bank of America and Deutsche Bank.
In accordance with SFAS No. 157, the Company makes Credit Value Adjustments (CVAs) to adjust
the valuation of derivatives to account for our own credit risk with respect to all derivative
liability positions. The CVA is accounted for as a decrease to the derivative position with the
corresponding increase or decrease reflected in other comprehensive income for derivatives
designated as cash flow hedges. The CVA also accounts for nonperformance risk of our
counterparties in the fair value measurement of all derivative asset positions, when appropriate.
As of February 28, 2009, the fair value of our derivative instruments was net of $2.0 million in
CVA.
The Companys interest rate swap agreements with Bank of America and Deutsche Bank incorporate
the loan covenant provisions of the Companys Credit Agreement. Both Bank of America and Deutsche
Bank are lenders under the Companys Credit Agreement. Failure to comply with the loan covenant
provisions of the Credit Agreement could result in the Company being in default of its obligations
under the interest rate swap agreements.
As of February 28, 2009, the Company has not posted any collateral related to the interest
rate swap agreements.
9. FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157 and in February 2007, issued SFAS No. 159.
Both standards address aspects of the expanding application of fair value accounting. Effective
March 1, 2008, we adopted SFAS No. 157 and SFAS No. 159. Pursuant to the provisions of FASB Staff
Position No. FAS 157-2, we have decided to defer adoption of SFAS No. 157 for one year for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis. There was no adjustment to accumulated deficit
as a result of our adoption of SFAS No. 157. SFAS No. 159 permits an entity to measure certain
financial assets and financial liabilities at fair value that were not previously required to be
measured at fair value. We have not elected to measure any financial assets or financial
liabilities at fair value that were not previously required to be measured at fair value.
SFAS No. 157 provides for the following:
- | Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value; | ||
- | Establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date; | ||
- | Requires consideration of our nonperformance risk when valuing liabilities; and | ||
- | Expands disclosures about instruments measured at fair value. |
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SFAS No. 157 also establishes a three-level valuation hierarchy for fair value measurements.
These valuation techniques are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect our market
assumptions. These two types of inputs create the following fair value hierarchy:
- | Level 1 Quoted prices for identical instruments in active markets; | ||
- | Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and | ||
- | Level 3 Instruments whose significant inputs are unobservable. |
The following table sets forth by level within the fair value hierarchy the Companys
financial assets and liabilities that were accounted for at fair value on a recurring basis as of
February 28, 2009. The financial assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels.
As of February 28, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | ||||||||||||||
or Liabilities | Inputs | Inputs | Total | |||||||||||||
Cash equivalents |
$ | | $ | 24,415 | $ | | $ | 24,415 | ||||||||
Available for sale securities |
| | 452 | 452 | ||||||||||||
Total assets measured at fair value on a recurring basis |
$ | | $ | 24,415 | $ | 452 | $ | 24,867 | ||||||||
Interest rate cash flow hedge |
| 6,777 | 6,777 | |||||||||||||
Total liabilities measured at fair value on a recurring basis |
$ | | $ | | $ | 6,777 | $ | 6,777 | ||||||||
Cash Equivalents A majority of Emmis domestic cash equivalents are invested in an institutional
money market fund. The fund is not publicly traded, but third-party quotes for the fund are
available and are therefore considered a Level 2 input.
Available for sale securities Emmis available for sale security is an investment in preferred
stock of a company that specializes in digital radio transmission technology that is not traded in
active markets. The investment is recorded at fair value, which is materially consistent with the
Companys cost basis. This is considered a Level 3 input.
Derivative Instruments Emmis derivative financial instruments consist solely of interest rate
cash flow hedges in which the Company pays a fixed rate and receives a variable interest rate that
is observable based upon a forward interest rate curve, as adjusted for the CVA discussed in Note
8. Because a more than insignificant portion of the valuation is based upon unobservable inputs,
these interest rate swaps are considered a Level 3 input.
The following table shows a reconciliation of the beginning and ending balances for fair value
measurements using significant unobservable inputs:
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For the Year Ending | ||||||||
February 28, 2009 | ||||||||
Available | ||||||||
For Sale | Derivative | |||||||
Securities | Instruments | |||||||
Balance as of February 29, 2008 |
$ | 1,452 | $ | | ||||
Purchases |
250 | | ||||||
Transfers in |
| 8,823 | ||||||
Unrealized losses in other comprehensive income |
| (2,046 | ) | |||||
Other than temporary impairment loss |
(1,250 | ) | | |||||
Balance as of February 28, 2009 |
$ | 452 | $ | 6,777 | ||||
During the year ended February 28, 2009, Emmis determined that the entire amount of one of its
available for sale securities consisting of preferred stock and warrants of a company that
specializes in the development and distribution of mobile and on-line games was impaired and the
impairment was other-than-temporary. As such, Emmis recorded an impairment loss of $1.3 million,
which is included in other expenses in the accompanying consolidated statements of operations for
the year ended February 28, 2009.
10. ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
Sale of WVUE-TV to Louisiana Media Company
On July 18, 2008, Emmis completed the sale of its sole remaining television station, WVUE-TV
in New Orleans, LA, to Louisiana Media Company LLC for $41.0 million in cash. The Company
recognized a loss on the sale of WVUE-TV of $0.6 million, net of tax benefits of $0.4 million,
which is included in income from discontinued operations in the accompanying statements of
operations. In connection with the sale, the Company paid discretionary bonuses to the employees
of WVUE totaling $0.8 million, which is included in the calculation of the loss on sale. The sale
of WVUE-TV completes the sale of our television division which began on May 10, 2005, when Emmis
announced that it had engaged advisors to assist in evaluating strategic alternatives for its
television assets.
Purchase of Infopress & Company OOD
On December 17, 2007, Emmis acquired 100% of the shares of Infopress & Company OOD for $8.8
million. Infopress & Company OOD operated Inforadio, a national radio network broadcasting to 13
Bulgarian cities. Inforadio joins Emmis majority owned Bulgarian radio networks Radio FM+ and
Radio Fresh. Emmis believes the acquisition of Inforadio further strengthens its footprint in
Bulgaria. The acquisition was financed with cash on hand. The Company recorded $7.3 million of
goodwill, none of which is deductible for income tax purposes. The operating results from December
17, 2007 through December 31, 2008 are included in the accompanying consolidated financial
statements. Consistent with the Companys other foreign subsidiaries, Inforadio reports on a
fiscal year ending December 31, which Emmis consolidates into its fiscal year ending February 28
(29). The purchase price allocation was as follows:
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Asset Description | Amount | Asset Lives | ||||
Accounts receivable |
$ | 24 | Less than one year | |||
Other current assets |
58 | Less than one year | ||||
Broadcasting equipment |
324 | 5 years | ||||
International broadcast license |
1,471 | 60 months | ||||
Goodwill |
7,335 | Indefinite | ||||
Accounts payable and accrued expenses |
(385 | ) | ||||
Other current liabilities |
(40 | ) | ||||
Total purchase price |
$ | 8,787 | ||||
Subsequent to the December 2008 calendar year-end, we completed a series of transactions that
gave the Company 100% control over all Bulgarian radio networks for a combined cash purchase price
of $4.4 million. These transactions were funded with international cash on hand.
Purchase of Orange Coast Kommunications, Inc.
On July 25, 2007, Emmis acquired Orange Coast Kommunications, Inc., publisher of Orange Coast,
for $6.9 million in cash including acquisition costs of $0.2 million. Approximately $0.3 million
of the purchase price was withheld at the original closing, but was paid in April 2008. As of
February 29, 2008, this $0.3 million was classified as accounts payable in the accompanying
consolidated balance sheets. Orange Coast fits Emmis niche of publishing quality city and
regional magazines. Orange Coast serves the affluent area of Orange County, CA, and also provides
synergies with our other California-based publication, Los Angeles. The acquisition was financed
through borrowings under the Credit Agreement. The Company has recorded $2.9 million of goodwill,
none of which is deductible for income tax purposes. The operating results of Orange Coast from
July 25, 2007, through February 28, 2009, are included in the accompanying consolidated statements
of operations. The purchase price allocation was as follows:
Asset Description | Amount | Asset Lives | ||||
Accounts receivable |
$ | 570 | Less than one year | |||
Other current assets |
73 | Less than one year | ||||
Furniture and fixtures |
20 | 5 years | ||||
Goodwill |
2,852 | Indefinite | ||||
Trademark |
2,922 | 15 years | ||||
Advertiser list |
1,162 | 4 years | ||||
Other definite lived intangibles |
312 | 3 years | ||||
Other current liabilities |
(564 | ) | ||||
Deferred income taxes |
(490 | ) | ||||
Total purchase price |
$ | 6,857 | ||||
Sale of KGMB-TV to HITV Operating Company, Inc.
On June 4, 2007, Emmis closed on its sale of KGMB-TV in Honolulu to HITV Operating Co, Inc.
for $40.0 million in cash. Emmis recorded a gain on sale of $10.1 million, net of tax, which is
included in discontinued operations in the accompanying consolidated statements of operations.
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Sale of KMTV-TV to Journal Communications, Inc.
On March 27, 2007, Emmis closed on its sale of KMTV-TV in Omaha, NE to Journal Communications,
Inc. (Journal) and received $10.0 million in cash. Journal had been operating KMTV-TV under a
Local Programming and Marketing Agreement since December 5, 2005.
Sale of land and building formerly occupied by WKCF-TV to Goodlife Broadcasting Inc.
On October 31, 2006, Emmis sold land and the associated building formerly occupied by WKCF-TV
to Goodlife Broadcasting, Inc. for $3.0 million in cash. Emmis recorded a gain on sale of $0.3
million, net of tax, which is included in discontinued operations in the accompanying consolidated
statements of operations.
Sale of WKCF-TV to Hearst-Argyle Television, Inc.
On August 31, 2006, Emmis closed on its sale of WKCF-TV in Orlando, FL to Hearst-Argyle
Television Inc. for $217.5 million in cash. Emmis recorded a gain on sale of $93.4 million, net of
tax, which is included in discontinued operations in the accompanying consolidated statements of
operations.
Sale of KKFR-FM to Bonneville International Corporation
On July 11, 2006, Emmis closed on its sale of KKFR-FM in Phoenix, AZ to Bonneville
International Corporation for $77.5 million in cash and also sold certain tangible assets to
Riviera Broadcast Group LLC for $0.1 million in cash. Emmis recorded a gain on sale of $11.3
million, net of tax, which is included in discontinued operations in the accompanying consolidated
statements of operations.
Sale of WBPG-TV to LIN Television Corporation
On July 7, 2006, Emmis closed on its sale of WBPG-TV in Mobile, AL / Pensacola, FL to LIN
Television Corporation for $3.0 million in cash. LIN Television Corporation had been operating
WBPG-TV under a Local Programming and Marketing Agreement since November 30, 2005. Emmis recorded
a gain on sale of $1.1 million, net of tax, which is included in discontinued operations in the
accompanying consolidated statements of operations.
Sale of WRDA-FM to Radio One, Inc.
On May 5, 2006, Emmis closed on its sale of WRDA-FM in St. Louis, MO to Radio One, Inc. for
$20.0 million in cash. Emmis recorded a gain on sale of $4.2 million, net of tax, which is
included in discontinued operations in the accompanying consolidated statements of operations.
11. PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma summary information is presented below for the year ended February 29,
2008 assuming the acquisition (and related net borrowings) of Orange Coast Kommunications, Inc.
(publisher of Orange Coast), and the acquisition of Infopress & Company OOD (operator of Inforadio,
a Bulgarian national radio network) had occurred on March 1, 2007. Both of these acquisitions are
fully reflected in the Companys results of operations for the year ended February 28, 2009.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate
by the Companys 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 it is not intended to be a
projection of future results.
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For the year ended | ||||
February 29, 2008 | ||||
Pro Forma | ||||
Net revenues |
$ | 361,437 | ||
Loss from continuing operations |
$ | (20,293 | ) | |
Loss available to common
shareholders |
$ | (29,277 | ) | |
Net loss per share available to
common shareholders: |
||||
Basic |
$ | (0.80 | ) | |
Diluted |
$ | (0.80 | ) | |
12. INTANGIBLE ASSETS AND GOODWILL
In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the
Company reviews goodwill and certain intangibles at least annually for impairment. The intangibles
will be written down and charged to results of operations in periods in which the recorded value of
goodwill and certain intangibles is greater than its fair value. 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.
Indefinite-lived Intangibles
As of February 29, 2008 and February 28, 2009, the carrying amounts of the Companys FCC
licenses were $801.3 and $496.7 million, respectively. These amounts are entirely attributable to
our radio division.
The Company generally performs its annual impairment review of indefinite-lived intangibles as
of December 1 each year, but given economic conditions and continued revenue declines in the
domestic radio broadcasting industry, the Company performed an interim impairment review as of
October 1. In connection with our interim impairment review, we recognized a noncash impairment
loss of $187.6 million that reduced the carrying value of our FCC licenses in each of our domestic
radio markets. In connection with our fiscal 2009 annual impairment review performed on December
1, 2008, we recognized an additional noncash impairment loss of $117.0. The impairment losses
associated with our interim and annual reviews during fiscal 2009 mostly relate to lower than
expected market revenues and expectations for slower future revenue growth in all of our domestic
radio markets. In connection with our fiscal 2008 annual impairment review, we recognized a
noncash impairment loss of $18.0 million related to radio stations in St. Louis and Terre Haute.
This impairment loss principally related to lower than expected market growth in St. Louis and
Terre Haute in fiscal 2008, which led us to reduce our growth estimates for these markets in future
years. No impairment was recorded in connection with our fiscal 2007 annual impairment review.
The annual required impairment tests may result in future periodic write-downs.
Goodwill
As of February 29, 2008 and February 28, 2009, the carrying amount of the Companys goodwill
was $81.3 million and $29.4 million, respectively. As of February 29, 2008, approximately $26.2
million and $55.1 million of our goodwill was attributable to our radio and publishing divisions,
respectively. As of February 28, 2009, approximately $6.3 million and $23.1 million of our
goodwill was attributable to our radio and publishing divisions, respectively.
In connection with our interim and annual impairment reviews in fiscal 2009, we recognized
noncash impairment losses of $22.6 million and $35.7 million, respectively, that reduced the
carrying value of our goodwill recorded at our Chicago, Austin and Bulgaria
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radio markets and our
Orange Coast, Los Angeles and Texas Monthly publications. No impairment was recorded as a result
of fiscal 2008 and 2007 impairment tests. The annual required impairment tests may result in
future periodic write-downs.
Definite-lived intangibles
The following table presents the weighted-average life at February 28, 2009 and gross carrying
amount and accumulated amortization for each major class of definite-lived intangible asset at
February 29, 2008 and February 28, 2009:
February 29, 2008 | February 28, 2009 | |||||||||||||||||||||||||||
Weighted Average | Gross | Net | Gross | Net | ||||||||||||||||||||||||
Useful Life | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||||
(in years) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||||
Foreign broadcasting licenses |
6.9 | $ | 43,475 | $ | 22,052 | $ | 21,423 | $ | 33,848 | $ | 25,524 | $ | 8,324 | |||||||||||||||
Favorable office leases |
6.4 | 688 | 501 | 187 | 688 | 605 | 83 | |||||||||||||||||||||
Trademarks |
19.6 | 3,687 | 531 | 3,156 | 3,687 | 754 | 2,933 | |||||||||||||||||||||
Customer list |
4.0 | 1,162 | 169 | 993 | 692 | 460 | 232 | |||||||||||||||||||||
Noncompete and other |
3.0 | 312 | 61 | 251 | 312 | 164 | 148 | |||||||||||||||||||||
TOTAL |
$ | 49,324 | $ | 23,314 | $ | 26,010 | $ | 39,227 | $ | 27,507 | $ | 11,720 | ||||||||||||||||
During the year ended February 28, 2009, we determined that the carrying values of our
Bulgarian networks foreign broadcasting licenses and the advertising base intangible asset related
to our Orange Coast publication exceeded their fair value. As such, we recognized a noncash
impairment loss of $2.6 million and $0.5 million related to the Bulgarian and Orange Coast
definite-lived intangibles, respectively. During our year ended February 29, 2008, we determined
that the carrying value of our foreign broadcast licenses in Belgium were not recoverable. As
such, the Company recognized a noncash impairment loss of $3.2 million. Total amortization expense
from definite-lived intangibles for the years ended February, 2007, 2008 and 2009 was $3.9 million,
$4.3 million and $4.4 million, respectively. The following table presents the Companys estimate
of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles
recorded as of February 28, 2009:
YEAR ENDED FEBRUARY 28 (29), | ||||
2010 |
$ | 3,601 | ||
2011 |
2,075 | |||
2012 |
1,971 | |||
2013 |
1,916 | |||
2014 |
306 |
13. EMPLOYEE BENEFIT PLANS
a. Equity Incentive Plans
The Company has stock options, restricted stock and restricted stock unit grants outstanding
that were issued to employees or non-employee directors under one or more of the following plans:
1999 Equity Incentive Plan, 2001 Equity Incentive Plan and 2002 Equity Incentive Plan. These
outstanding grants continue to be governed by the terms of the applicable plan. However, all
unissued awards under the 1999 Equity Incentive Plan, the 2001 Equity Incentive Plan and the 2002
Equity Incentive Plan were transferred in June 2004 to the Companys 2004 Equity Compensation Plan
(discussed below) and no further awards will be issued from these plans. Furthermore, cancelled
and expired shares from the 1999 Equity Incentive Plan, 2001 Equity Incentive Plan and 2002 Equity
Incentive Plan are transferred to the 2004 Equity Incentive Plan.
2004 Equity Incentive Plan
At the 2004 annual meeting, the shareholders of Emmis approved the 2004 Equity Compensation
Plan (the Plan). Under this plan, awards equivalent to 4.0 million shares of common stock may be
granted. Furthermore, any unissued awards from the 1999 Equity Incentive Plan, the 2001 Equity
Incentive Plan and the 2002 Equity Compensation Plan (or shares subject to outstanding awards that
would again become available for awards under these plans) increase the number of shares of common
stock available for grant under the Plan. The awards, which have certain restrictions, may be for
incentive stock options, nonqualified stock options, shares of restricted stock, restricted stock
units, stock appreciation rights or performance units. Under this Plan, all awards are granted
with a
purchase price equal to at least the fair market value of the stock except for shares of
restricted stock and restricted stock units, which may be granted with any purchase price
(including zero). No more than 1.0 million shares of Class B common stock are available for
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grant
and issuance from the 4.0 million additional shares of stock originally authorized for delivery
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 1.9 million shares of
common stock were available for grant at February 28, 2009. Certain stock awards remained
outstanding as of February 28, 2009. Subsequent to February 28, 2009, options were granted to
employees to purchase an additional 1.4 million shares of Emmis Communications Corporation common
stock at a range of $0.295 per share to $0.355 per share. The vesting dates of these option grants
ranges from February 29, 2012 to March 2, 2012.
b. 401(k) Retirement Savings Plan
Emmis sponsors a Section 401(k) retirement savings plans that is available to substantially
all employees age 18 years and older who have at least 30 days of service. Employees may make
pretax contributions to the plans up to 50% of their compensation, not to exceed the annual limit
prescribed by the Internal Revenue Service (IRS). Emmis may make discretionary matching
contributions to the plans in the form of cash or shares of the Companys Class A common stock.
During the years ended February 28, 2007 and February 29, 2008, the Company elected to match annual
employee 401(k) contributions up to a maximum of $2 thousand per employee, one-half of the
contribution made in Emmis stock. During the year ended February 28, 2009, the Company suspended
the cash match, but continued to make the discretionary stock match. Emmis discretionary
contributions to the plans for continuing operations totaled $1.8 million, $1.7 million and $0.9
million for the years ended February 28, 2007, February 29, 2008 and February 28, 2009,
respectively.
c. Defined Contribution Health and Retirement Plan
Emmis contributes to a multi-employer defined contribution health and retirement plan for
employees who are members of a certain labor union. Amounts charged to expense for continuing
operations related to the multi-employer plan were approximately $699, $779 and $626 for the years
ended February 2007, 2008 and 2009, respectively.
14. OTHER COMMITMENTS AND CONTINGENCIES
a. Commitments of our continuing operations
The Company has various commitments under the following types of material contracts for its
continuing operations: (i) operating leases; (ii) radio syndicated programming; (iii) employment
agreements and (iv) other contracts with annual commitments at February 28, 2009 as follows:
Year ending | Operating | Syndicated | Employment | Other | ||||||||||||||||
February 28 (29), | Leases | Programming | Agreements | Contracts | Total | |||||||||||||||
2010 |
$ | 10,339 | $ | 1,697 | $ | 19,592 | $ | 20,232 | $ | 51,860 | ||||||||||
2011 |
8,297 | 523 | 8,644 | 9,299 | 26,763 | |||||||||||||||
2012 |
7,340 | | 680 | 9,737 | 17,757 | |||||||||||||||
2013 |
6,424 | | 230 | 5,677 | 12,331 | |||||||||||||||
2014 |
4,721 | | | 175 | 4,896 | |||||||||||||||
Thereafter |
20,927 | | | 838 | 21,765 | |||||||||||||||
Total |
$ | 58,048 | $ | 2,220 | $ | 29,146 | $ | 45,958 | $ | 135,372 | ||||||||||
Emmis leases certain office space, tower space, equipment and automobiles under operating
leases expiring at various dates through February 2022. Some of the lease agreements contain
renewal options and annual rental escalation clauses (generally tied to the Consumer Price Index or
increases in the lessors operating costs), as well as provisions for payment of utilities and
maintenance costs. Rental expense for continuing operations during the years ended February 2007,
2008 and 2009 was approximately $7.6 million, $8.6 million and $7.6 million, respectively.
There are no material commitments related to our discontinued operations.
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b. Litigation
The Company is a party to various legal proceedings arising in the ordinary course of
business. In the opinion of management of the Company, there are no legal proceedings pending
against the Company likely to have a material adverse effect on the Company.
Certain individuals and groups have challenged applications for renewal of the FCC licenses of
certain of the Companys stations. The challenges to the license renewal applications are
currently pending before the FCC. Emmis does not expect the challenges to result in the denial of
any license renewals.
15. INCOME TAXES
The provision (benefit) for income taxes for the years ended February 2007, 2008 and 2009,
consisted of the following:
2007 | 2008 | 2009 (As Restated) (See Note 1z) |
||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State |
| | | |||||||||
Foreign |
1,021 | 2,061 | 3,413 | |||||||||
1,021 | 2,061 | 3,413 | ||||||||||
Deferred: |
||||||||||||
Federal |
1,862 | (5,235 | ) | (58,346 | ) | |||||||
State |
991 | 474 | (8,581 | ) | ||||||||
Foreign |
(228 | ) | 257 | (513 | ) | |||||||
2,625 | (4,504 | ) | (67,440 | ) | ||||||||
Provision (benefit) for
income taxes |
$ | 3,646 | $ | (2,443 | ) | $ | (64,027 | ) | ||||
Other Tax Related Information: |
||||||||||||
Taxes associated with minority interest earnings |
(2,587 | ) | (2,763 | ) | (2,539 | ) | ||||||
Tax provision of discontinued operations |
78,622 | 12,826 | 1,930 |
United States and foreign income (loss) before income taxes for the years ended February 2007,
2008 and 2009 was as follows:
2007 | 2008 | 2009 | ||||||||||
United States |
$ | 2,276 | $ | (19,658 | ) | $ | (360,059 | ) | ||||
Foreign |
4,815 | 4,537 | 1,012 | |||||||||
Income (loss) before income taxes |
$ | 7,091 | $ | (15,121 | ) | $ | (359,047 | ) | ||||
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The provision (benefit) for income taxes for the years ended February 2007, 2008 and 2009
differs from that computed at the Federal statutory corporate tax rate as follows:
2007 | 2008 | 2009 (As Restated) (See Note 1z) |
||||||||||
Computed income taxes at 35% |
$ | 2,481 | $ | (5,292 | ) | $ | (125,666 | ) | ||||
State income tax |
991 | 474 | (8,581 | ) | ||||||||
Foreign taxes |
(982 | ) | 714 | (254 | ) | |||||||
Nondeductible stock compensation and
Section 162 disallowance |
265 | 1,021 | 1,486 | |||||||||
Entertainment disallowance |
576 | 677 | 620 | |||||||||
Change in US federal valuation allowance |
| | 54,061 | |||||||||
Impairment charges on goodwill with no tax basis |
| | 14,030 | |||||||||
Other |
315 | (37 | ) | 277 | ||||||||
Provision (benefit) for income taxes |
$ | 3,646 | $ | (2,443 | ) | $ | (64,027 | ) | ||||
The components of deferred tax assets and deferred tax liabilities at February 29, 2008 and
February 28, 2009 are as follows:
2008 | 2009 (As Restated) (See Note 1z) |
|||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 13,073 | $ | 23,836 | ||||
Intangible
assets |
5,250 | 29,975 | ||||||
Compensation relating to stock options |
3,693 | 3,487 | ||||||
Interest rate exchange agreement |
3,108 | 2,779 | ||||||
Deferred revenue |
6,231 | 5,491 | ||||||
Tax credits |
5,861 | 5,883 | ||||||
Investments in subsidiairies |
1,050 | 1,751 | ||||||
Other |
3,282 | 4,615 | ||||||
Valuation allowance |
(9,338 | ) | (63,990 | ) | ||||
Total deferred tax assets |
32,210 | 13,827 | ||||||
Deferred tax liabilities |
||||||||
Indefinite-lived intangible assets |
(199,596 | ) | (110,692 | ) | ||||
Fixed assets |
(9,116 | ) | (539 | ) | ||||
Foreign unremitted earnings |
| (9,775 | ) | |||||
Other |
(1,047 | ) | (543 | ) | ||||
Total deferred tax liabilities |
(209,759 | ) | (121,549 | ) | ||||
Net deferred tax liabilities |
$ | (177,549 | ) | $ | (107,722 | ) | ||
A valuation allowance is provided when it is more likely than not that some portion of the
deferred tax asset will not be realized. The Company increased its valuation allowance for all
jurisdictions by $54.7 million to $64.0 million as of February 28, 2009 from $9.3 million as of
February 29, 2008, to reflect a valuation allowance for the majority of its total domestic net
deferred tax assets. The increase in the valuation allowance was primarily the result of charges;
recoveries during the year ended February 28, 2009 were not material to the overall change. As
part of its assessment, the Company also determined that it was not appropriate under generally
accepted accounting principles to benefit its deferred tax assets (DTAs) based on the deferred
tax liabilities (DTLs) related to indefinite-lived intangibles that are not expected to reverse
during the carry-forward period. Because this DTL would not reverse until some future indefinite
period when the intangibles are either sold or impaired, any resulting temporary differences cannot
be considered a source of future taxable income to support realization of the DTAs. The increase in
the valuation allowance was primarily due to the cumulative losses incurred by the Company over the
past three years (primarily as a result of impairment charges recorded during the year ended
February 28, 2009) and the recording of a full valuation reserve against the majority of its
domestic net deferred tax assets. The valuation allowance
as of February 28, 2009 included $2.8 million for an income tax benefit
recorded in other comprehensive income (loss). At February 29,
2008, $1.849 in current
deferred tax assets were recorded with other current assets in the accompanying consolidated
balance sheets.
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The Company has considered future taxable income and ongoing prudent and feasible tax-planning
strategies in assessing the need for the valuation allowance. The Company will assess quarterly
whether it remains more likely than not that the deferred tax assets will not be realized. In the
event the Company determines at a future time that it could realize its deferred tax assets in
excess of the net amount recorded, the Company will reduce its deferred tax asset valuation
allowance and decrease income tax expense in the period when the Company makes such determination.
A valuation allowance has been provided for the net operating loss carryforwards, which do not
expire, related to the Companys Belgium subsidiary. Additionally, a valuation allowance has been
provided for the net operating loss carryforwards related to Federal and most state net operating
losses as it is more likely than not that all but $3.0 million of
the Companys state net operating losses will expire
unutilized. The state net operating loss carryforwards expire between the years ending February
2010 and February 2029.
The $5.9 million of tax credits at February 28, 2009 relate to alternative minimum tax
carryforwards that can be carried forward indefinitely. A valuation allowance has been placed
against this deferred tax asset.
United States Federal and state deferred income taxes have been recorded on undistributed
earnings of foreign subsidiaries because such earnings are not intended to be indefinitely
reinvested in these foreign operations. At February 28, 2009, we had an aggregate of $19.8 million
of unremitted earnings of foreign subsidiaries that, when distributed, would result in additional
U.S. income taxes of $9.8 million.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken within a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by
taxing authorities. The amount recognized is measured as the largest benefit that is greater than
50 percent likely of being realized upon ultimate settlement.
The adoption of FIN 48 resulted in a decrease of $25.2 million to the March 1, 2007, balance
of accumulated deficit, a decrease of $24.9 million in other noncurrent liabilities and a decrease
of $0.3 million in deferred income taxes. Upon the adoption of FIN 48 on March 1, 2007, the
estimated value of the Companys net uncertain tax positions was approximately $0.7 million, $0.4
million of which was included in deferred income taxes and $0.3 million of which was included in
other noncurrent liabilities. As of February 28, 2009, the estimated value of the Companys net
uncertain tax positions is approximately $1.5 million, $0.4 million of which is included in
deferred income taxes, $1.0 million of which is included in other current liabilities and $0.1
million of which is included in noncurrent liabilities.
The following is a tabular reconciliation of the total amounts of gross unrecognized tax
benefits for the years ending February 29, 2008 and February 28, 2009:
For the year ending February 28 (29), | ||||||||
2008 | 2009 | |||||||
Gross unrecognized tax benefit opening balance |
$ | 878 | $ | 864 | ||||
Gross increases tax positions in prior periods |
150 | 875 | ||||||
Gross decreases tax positions in prior periods |
(164 | ) | | |||||
Gross unrecognized tax benefit ending balance |
$ | 864 | $ | 1,739 | ||||
Included in the balance of unrecognized tax benefits at February 28, 2009 are $1.5 million of
tax benefits that, if recognized, would reduce the Companys provision for income taxes. No
additional significant increases or decreases in unrecognized tax benefits are expected within the
next twelve months.
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as
income tax expense. Related to the uncertain tax benefits noted above, the Company accrued an
immaterial amount of interest during the year ending February 28, 2009 and in total, as of February
28, 2009, has recognized a liability for interest of $0.1 million.
The Company files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions and various international jurisdictions. The Company has a number of federal, state
and foreign income tax years still open for examination as a result of the net
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operating loss
carryforwards. Accordingly the Company is subject to examination for both U.S. federal and certain
state tax return purposes for the years ending February 28, 2002 to present.
16. SEGMENT INFORMATION
The Companys operations are aligned into two business segments: Radio and Publishing. These
business segments are consistent with the Companys management of these businesses and its
financial reporting structure. Corporate represents expenses not allocated to reportable segments.
The Companys segments operate primarily in the United States, with one radio station located
in Hungary, and a network of radio stations in Belgium and national radio networks in Slovakia and
Bulgaria. The following table summarizes the net revenues and long lived assets of our
international properties included in our consolidated financial statements.
Net Revenues for the Year Ended February 28 (29), | Long-lived Assets as of February 28 (29), | |||||||||||||||||||||||
2007 | 2008 | 2009 | 2007 | 2008 | 2009 | |||||||||||||||||||
Hungary |
18,608 | 20,579 | 23,911 | 5,360 | 4,261 | 2,110 | ||||||||||||||||||
Belgium |
1,317 | 1,803 | 2,031 | 3,604 | 684 | 34 | ||||||||||||||||||
Slovakia |
10,582 | 14,839 | 18,195 | 11,491 | 10,843 | 9,965 | ||||||||||||||||||
Bulgaria |
1,861 | 3,943 | 3,858 | 6,806 | 15,291 | 3,722 |
The following tables summarize the results of operations and total assets of our business
segments for the years ended February 28, 2007, February 29, 2008 and February 28, 2009.
YEAR ENDED FEBRUARY 28, 2009 | Radio | Publishing | Corporate | Consolidated | ||||||||||||
Net revenues |
$ | 250,883 | $ | 82,990 | $ | | $ | 333,873 | ||||||||
Station operating expenses excluding
depreciation and amortization
expense |
180,749 | 76,322 | | 257,071 | ||||||||||||
Corporate expenses excluding
depreciation and amortization
expense |
| | 18,503 | 18,503 | ||||||||||||
Depreciation and amortization |
10,955 | 1,231 | 2,152 | 14,338 | ||||||||||||
Impairment loss |
333,735 | 32,422 | 7,251 | 373,408 | ||||||||||||
Restructuring charge |
1,521 | 599 | 2,088 | 4,208 | ||||||||||||
(Gain) loss on disposal of fixed assets |
25 | 1 | (12 | ) | 14 | |||||||||||
Operating income (loss) |
$ | (276,102 | ) | $ | (27,585 | ) | $ | (29,982 | ) | $ | (333,669 | ) | ||||
Assets continuing operations |
$ | 627,703 | $ | 52,263 | $ | 59,190 | $ | 739,156 | ||||||||
Assets discontinued operations |
| 50 | 5 | 55 | ||||||||||||
Total assets |
$ | 627,703 | $ | 52,313 | $ | 59,195 | $ | 739,211 | ||||||||
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YEAR ENDED FEBRUARY 29, 2008 | Radio | Publishing | Corporate | Consolidated | ||||||||||||
Net revenues |
$ | 266,120 | $ | 91,939 | $ | | $ | 358,059 | ||||||||
Station operating expenses excluding
depreciation and amortization expense |
188,440 | 78,258 | | 266,698 | ||||||||||||
Corporate expenses excluding
depreciation and amortization expense |
| | 20,883 | 20,883 | ||||||||||||
Depreciation and amortization |
10,947 | 971 | 2,471 | 14,389 | ||||||||||||
Impairment loss |
21,225 | | | 21,225 | ||||||||||||
Contract termination fee |
15,252 | | | 15,252 | ||||||||||||
Gain on disposal of fixed assets |
(104 | ) | | | (104 | ) | ||||||||||
Operating income (loss) |
$ | 30,360 | $ | 12,710 | $ | (23,354 | ) | $ | 19,716 | |||||||
Assets continuing operations |
$ | 963,420 | $ | 87,136 | $ | 40,808 | $ | 1,091,364 | ||||||||
Assets discontinued operations |
| 949 | 47,427 | 48,376 | ||||||||||||
Total assets |
$ | 963,420 | $ | 88,085 | $ | 88,235 | $ | 1,139,740 | ||||||||
YEAR ENDED FEBRUARY 28, 2007 | Radio | Publishing | Corporate | Consolidated | ||||||||||||
Net revenues |
$ | 271,929 | $ | 84,834 | $ | | $ | 356,763 | ||||||||
Station operating expenses excluding
depreciation and amortization expense |
178,940 | 72,668 | | 251,608 | ||||||||||||
Corporate
expenses excluding depreciation and amortization expense |
| | 28,176 | 28,176 | ||||||||||||
Depreciation and amortization |
9,988 | 626 | 2,653 | 13,267 | ||||||||||||
Loss on disposal of fixed assets |
4 | | | 4 | ||||||||||||
Operating income (loss) |
$ | 82,997 | $ | 11,540 | $ | (30,829 | ) | $ | 63,708 | |||||||
17. RELATED PARTY TRANSACTIONS
Although Emmis no longer makes loans to executive officers and directors, we currently have a
loan outstanding to Jeffrey H. Smulyan, our Chairman, Chief Executive Officer and President, that
is grandfathered under the Sarbanes-Oxley Act of 2002. The largest aggregate amount outstanding on
this loan at any month-end during fiscal 2009 was $1,011 and the balance at February 29, 2008 and
February 28, 2009 was $984 and $1,011, respectively. This loan bears interest at our cost of debt
under our Credit Agreement, which at February 29, 2008 and February 28, 2009 was approximately 6.8%
and 4.8% per annum, respectively.
Prior to 2002, the Company had made certain life insurance premium payments for the benefit of
Mr. Smulyan. The Company discontinued making such payments in 2001; however, pursuant to a Split
Dollar Life Insurance Agreement and Limited Collateral Assignment dated November 2, 1997, the
Company retains the right, upon Mr. Smulyans death, resignation or termination of employment, to
recover all of the premium payments it has made, which total $1,119.
During the last three fiscal years, Emmis leased an airplane and was party to a timeshare
agreement with Mr. Smulyan with respect to his personal use of the airplane. On April 14, 2009, we
sold the airplane and the timeshare agreement terminated. Under the timeshare agreement, whenever
Mr. Smulyan used the airplane for non-business purposes, he paid Emmis for the aggregate
incremental cost to Emmis of operating the airplane up to the maximum amount permitted by Federal
Aviation Authority regulations (which maximum generally approximates the total direct cost of
operating the airplane for the applicable trip). With respect to the personal flights during the
years ended February 28, 2007, February 29, 2008 and February 28, 2009, Mr. Smulyan paid Emmis
approximately $313, $171 and $31, respectively, for expenses under the timeshare arrangement. In
addition, under IRS regulations, to the extent Mr. Smulyan or any other officer or director allows
non-business guests to travel on the airplane on a business trip or takes the airplane on a
non-business detour as part of a business trip, additional compensation is attributed to Mr.
Smulyan or the applicable officer or director. Generally, these trips on which compensation is
assessed pursuant to IRS regulations do not result in any material additional cost or expense to
Emmis.
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A person who shares a household with Michael Levitan, our former Executive Vice President of
Human Resources, is the President of EchoPoint Media, a media buying agency in Indianapolis.
During the years ended February 2007, 2008 and 2009, Emmis paid EchoPoint approximately $143, $156
and $92 in agency commissions. During the years ended February 28, 2007 and February 29, 2008,
Emmis paid approximately $250 and $195 for advertisements placed for Emmis by EchoPoint,
respectively. Emmis did not use EchoPoints services to place advertisements during the year ended
February 2009. Emmis revenues prior to agency commissions from advertisements placed by EchoPoint
during the years ended February 28, 2007, February 29, 2008 and February 28, 2009, were $1,058,
$1,041 and $610, respectively.
The sister of Richard Leventhal, one of our independent directors, owns Simon Seyz, an
Indianapolis business that provides corporate gifts and specialty items. During the three years
ended February 2009, Emmis made purchases from Simon Seyz of approximately $101, $128 and $150,
respectively.
18. SUBSEQUENT EVENTS
On March 3, 2009, Emmis and its principal operating subsidiary, Emmis Operating Company,
entered into the First Amendment and Consent to Amended and Restated Revolving Credit and Term Loan
Agreement (the First Amendment) by and among Emmis, Emmis Operating Company and Bank of America,
N.A., as administrative agent for itself and other Lenders, to the Amended and Restated Revolving
Credit and Term Loan Agreement, dated November 2, 2006 (the Credit Agreement). Among other
things, the First Amendment (i) permits Emmis to purchase a portion of the Tranche B Term Loan (as
defined in the Credit Agreement) at an amount less than par for an aggregate purchase price not to
exceed $50 million, (ii) reduces the Total Revolving Credit Commitment (as defined in the Credit
Agreement) from $145 million to $75 million, (iii) excludes from Consolidated Operating Cash Flow
(as defined in the Credit Agreement) up to $10 million in cash severance and contract termination
expenses incurred for the period commencing March 1, 2008 and ending February 28, 2010, (iv) makes
Revolving Credit Loans (as defined in the Credit Agreement) subject to a pro forma incurrence test
and (v) tightens the restrictions on the ability of Emmis to perform certain activities, including
restricting the amount that can be used to fund our TV Proceeds Quarterly Bonus Program, and of
Emmis Operating Company to conduct transactions with affiliates.
On April 3, 2009, Emmis entered into an LMA and a Put and Call Agreement for KMVN-FM in Los
Angeles with a subsidiary of Grupo Radio Centro, S.A.B. de C.V (GRC), a Mexican broadcasting
company. The LMA for KMVN-FM starts on April 15, 2009 and will continue for up to 7 years, for $7
million a year plus reimbursement of certain expenses. At any time during the LMA, GRC has the
right to purchase the station for $110 million. At the end of the term, Emmis has the right to
require GRC to purchase the station for the same amount. Under the LMA, Emmis continues to own and
operate the station, with GRC providing Emmis with programming to be broadcast.
In April 2009, Emmis commenced a series of Dutch auction tenders to purchase term loans of EOC
under the Credit Agreement as amended. The cumulative effect of all of the debt tenders resulted
in the purchase of $78.5 million in face amount of EOCs outstanding term loans for $44.7 million
in cash. The Credit Agreement as amended permitted the Company to pay up to $50 million (less
amounts paid after February 1, 2009 under our TV Proceeds Quarterly Bonus Program) to purchase
EOCs outstanding term loans through tender offers and required a minimum offer of $5 million per
tender. Since the Company paid $44.7 million in debt tenders and paid $4.1 million under the TV
Bonus Program in March 2009, we are not permitted to effect further tenders under the Credit
Agreement.
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19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended | Full | |||||||||||||||||||
May 31 | Aug. 31 | Nov. 30 | Feb. 28 (29) (As Restated) (See Note 1z) |
Year (As Restated) (See Note 1z) |
||||||||||||||||
Year ended February 28, 2009 |
||||||||||||||||||||
Net revenues |
$ | 86,024 | $ | 94,221 | $ | 85,135 | $ | 68,493 | $ | 333,873 | ||||||||||
Operating income (loss) |
13,213 | 17,132 | (197,280 | ) | (166,734 | ) | (333,669 | ) | ||||||||||||
Net income (loss) available to common shareholders |
(1,050 | ) | 1,236 | (125,657 | ) | (183,731 | ) | (309,202 | ) | |||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | (0.04 | ) | $ | 0.02 | $ | (3.45 | ) | $ | (4.98 | ) | $ | (8.50 | ) | ||||||
Discontinued operations |
$ | 0.01 | $ | 0.01 | $ | | $ | (0.03 | ) | $ | | |||||||||
Net income (loss) available to common shareholders |
$ | (0.03 | ) | $ | 0.03 | $ | (3.45 | ) | $ | (5.01 | ) | $ | (8.50 | ) | ||||||
Diluted earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | (0.04 | ) | $ | 0.02 | $ | (3.45 | ) | $ | (4.98 | ) | $ | (8.50 | ) | ||||||
Discontinued operations |
$ | 0.01 | $ | 0.01 | $ | | $ | (0.03 | ) | $ | | |||||||||
Net income (loss) available to common shareholders |
$ | (0.03 | ) | $ | 0.03 | $ | (3.45 | ) | $ | (5.01 | ) | $ | (8.50 | ) | ||||||
Year ended February 29, 2008 |
||||||||||||||||||||
Net revenues |
$ | 86,364 | $ | 95,685 | $ | 90,561 | $ | 85,449 | $ | 358,059 | ||||||||||
Operating income (loss) |
12,575 | 17,124 | 2,207 | (12,190 | ) | 19,716 | ||||||||||||||
Net income (loss) available to common shareholders |
(1,935 | ) | 11,810 | (2,142 | ) | (18,067 | ) | (10,334 | ) | |||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | (0.07 | ) | $ | 0.04 | $ | (0.21 | ) | $ | (0.52 | ) | $ | (0.74 | ) | ||||||
Discontinued operations |
$ | 0.02 | $ | 0.27 | $ | 0.15 | $ | 0.01 | $ | 0.46 | ||||||||||
Net income (loss) available to common shareholders |
$ | (0.05 | ) | $ | 0.31 | $ | (0.06 | ) | $ | (0.51 | ) | $ | (0.28 | ) | ||||||
Diluted earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | (0.07 | ) | $ | 0.04 | $ | (0.21 | ) | $ | (0.52 | ) | $ | (0.74 | ) | ||||||
Discontinued operations |
$ | 0.02 | $ | 0.27 | $ | 0.15 | $ | 0.01 | $ | 0.46 | ||||||||||
Net income (loss) available to common shareholders |
$ | (0.05 | ) | $ | 0.31 | $ | (0.06 | ) | $ | (0.51 | ) | $ | (0.28 | ) |
Our results of operations are usually subject to seasonal fluctuations, which generally result
in higher second and third quarter revenues and operating income. The net income available to
common shareholders in the quarter ended August 31, 2007 reflects the gain on sale of television
properties of $10.4 million, net of tax. The net loss available to common shareholders in the
quarter ended November 30, 2007 includes a $15.3 million noncash contract termination fee related
to our change in national sales representation firms. The net loss available to common
shareholders in the quarter ended February 29, 2008 includes a $21.2 million noncash impairment
charge related to broadcast licenses. The net loss available to common shareholders in the
quarter ended November 30, 2008 includes a $210.2 million noncash impairment charge related to
broadcast licenses and other indefinite-lived intangibles. The net loss available to common
shareholders in the quarter ended February 29, 2009 includes a $163.2 million noncash impairment
charge related to broadcast licenses, other indefinite-lived and definite-lived intangibles and
certain other long-lived assets. See Notes 1r and 12 for more discussion of the impairment
charges.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the restatement discussed above in the explanatory note to this Form 10-K/A and
in note 1 to our financial statements, under the direction of our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), we reevaluated our disclosure controls and procedures. We
identified a material weakness in our internal control over financial reporting with respect to
accounting for deferred income taxes, specifically, that we did not have adequately designed
procedures to identify deferred tax assets for which a valuation allowance should have been
provided.
Solely as a result of this material weakness, we concluded that our disclosure controls and
procedures were not effective as of February 28, 2009.
As
of October 8, 2009, we modified the presentation of our reconciliation of deferred tax assets
related to indefinite-lived intangible assets and deferred tax liabilities related to indefinite-lived intangible assets to adequately identify deferred tax assets existing as of the balance sheet date.
We believe this change in presentation has remediated the internal control weakness. In connection
with this amended Form 10-K/A, under the direction of our CEO and CFO, we have evaluated
our disclosure controls and procedures as currently in effect, including the remedial actions
discussed above, and we have concluded that, as of this date, our disclosure controls and
procedures are effective.
Other
than as expressly noted in this Item 9A, there was no change in our internal control over financial reporting during
the quarter ended February 28, 2009, that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Managements Annual Report on Internal Control over Financial Reporting (as restated)
Managements report on internal control over financial reporting and the attestation report of
Emmis Communications Corporations independent registered accounting firm are included in Emmis
Communications Corporations financial statements under the captions entitled Managements Report
on Internal Control Over Financial Reporting and Report of Independent Registered Public
Accounting Firm and are incorporated herein by this reference.
ITEM 9B. OTHER INFORMATION
Not applicable.
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 Section 16(a) Beneficial Ownership Reporting Compliance in the
Emmis 2009 Proxy Statement. Information about executive officers of Emmis or its affiliates who
are not directors or nominees to be directors is presented in Part I under the caption Executive
Officers of the Registrant.
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 2009 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is incorporated by reference from the section entitled
Security Ownership of Beneficial Owners and Management in the Emmis 2009 Proxy Statement.
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 or vesting of restricted stock and restricted stock units
under our 1999 Equity Incentive Plan, 2001 Equity Incentive Plan, 2002 Equity Incentive Plan, and
2004 Equity Compensation Plan as of February 28, 2009. Our shareholders have approved these plans.
Number of Securities to be Issued | Weighted-Average Exercise | Number of Securities Remaining | ||||||||||
Upon Exercise of Outstanding | Price of Outstanding Options, | Available for Future Issuance under | ||||||||||
Options, Warrants and Rights | Warrants, Rights and | Equity Compensation Plans (Excluding | ||||||||||
and Vesting of Restricted Stock | Restricted Stock | Securities Reflected in Column (A)) | ||||||||||
Plan Category | (A) | (B) | (C) | |||||||||
Equity Compensation Plans |
||||||||||||
Approved by Security Holders |
8,994,886 | $ | 14.06 | 1,871,413 | ||||||||
Equity Compensation Plans |
||||||||||||
Not Approved by Security Holders |
| | | |||||||||
Total |
8,994,886 | $ | 14.06 | 1,871,413 |
(1) | Subsequent to February 28, 2009, options were granted to employees to purchase an additional 1.4 million shares of Emmis Communications Corporation common stock at a range of $0.295 per share to $0.355 per share. The amount in Column A excludes obligations under employment contracts to issue shares in the future. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the sections entitled
Corporate Governance Certain
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Transactions in the Emmis 2009 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 Registered Public Accountants in the Emmis 2009 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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.
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, as amended effective June 13, 2005 incorporated by reference from Exhibit 3.1 to the Companys Form 10-K for the fiscal year ended February 28, 2006. | |
3.2 | Amended and Restated By-Laws of Emmis Communications Corporation incorporated by reference to the Companys Form 10-Q for the quarter ended November 30, 2008. | |
4.1 | 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). | |
10.1 | Amended and Restated Credit and Term Loan Agreement dated November 2, 2006, incorporated by reference to the Companys Form 8-K filed on November 7, 2006 and First Amendment and Consent to Amended and Restated Revolving Credit and Term Loan Agreement, incorporated by reference to the Companys Form 8-K filed on March 6, 2009. | |
10.2 | Emmis Communications Corporation 2004 Equity Compensation Plan, incorporated by reference from the Companys proxy statement dated May 28, 2004.++ | |
10.3 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Jeffrey H. Smulyan, incorporated by reference from Exhibit 10.7 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.4 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Richard F. Cummings, incorporated by reference from Exhibit 10.8 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.5 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Paul W. Fiddick, incorporated by reference from Exhibit 10.9 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.6 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Gary L. Kaseff, incorporated by reference from Exhibit 10.10 to the Companys Form 8-K filed on January 7, 2009.++ |
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10.7 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Michael Levitan, incorporated by reference from Exhibit 10.11 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.8 | Change in Control Severance Agreement, dated as of January 1, 2008, by and between Emmis Communications Corporation and Gary A. Thoe, incorporated by reference from Exhibit 10.12 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.9 | Change in Control Severance Agreement, dated as of March 1, 2009, by and between Emmis Communications Corporation and J. Scott Enright.*++ | |
10.10 | Aircraft Time Sharing Agreement dated January 22, 2003, by and between Emmis Operating Company and Jeffrey H. Smulyan, incorporated by reference to the Companys Form 10-K for the year ended February 29, 2004. | |
10.11 | Tax Sharing Agreement dated May 10, 2004, by and between Emmis Communications Corporation and Emmis Operating Company, incorporated by reference to the Companys Form 10-K for the year ended February 29, 2004. | |
10.12 | Form of Stock Option Grant Agreement, incorporated by reference to the Companys Form 8-K filed March 7, 2005.++ | |
10.13 | Form of Restricted Stock Option Grant Agreement, incorporated by reference to the Companys Form 8-K filed March 7, 2005.++ | |
10.14 | Director Compensation Policy effective May 13, 2005, incorporated by reference from Exhibit 10.36 to the Companys Form 10-K for the year ended February 28, 2005.++ | |
10.15 | Change in Control Severance Agreement, dated as of August 24, 2006, by and between Emmis Communications Corporation and Patrick M. Walsh incorporated by reference from Exhibit 10.1 to the Companys Form 10-Q for the quarter ended August 31, 2006.++ | |
10.16 | Employment Agreement, dated as of December 15, 2008, by and between Emmis Operating Company and Patrick M. Walsh incorporated by reference from Exhibit 10.1 to the Companys Form 8-K filed December 15, 2008.++ | |
10.17 | Amendment to Employment Agreement, dated as of March 1, 2008, by and between Emmis Operating Company and Patrick M. Walsh incorporated by reference from Exhibit 10.6 to the Companys Form 8-K filed March 6, 2008.++ | |
10.18 | Employment Agreement, dated as of March 1, 2008, by and between Emmis Operating Company and Jeffrey H. Smulyan incorporated by reference from Exhibit 10.1 to the Companys Form 8-K filed March 6, 2008.++ | |
10.19 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and Jeffrey H. Smulyan incorporated by reference from Exhibit 10.1 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.20 | Employment Agreement, dated as of March 1, 2009, by and between Emmis Operating Company and Richard F. Cummings incorporated by reference from Exhibit 10.2 to the Companys Form 8-K filed March 6, 2009.++ | |
10.21 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and Richard F. Cummings incorporated by reference from Exhibit 10.2 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.22 | Employment Agreement, dated as of March 1, 2008, by and between Emmis Operating Company and Gary L. Kaseff incorporated by reference from Exhibit 10.3 to the Companys Form 8-K filed March 6, 2008.++ | |
10.23 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and Gary L. Kaseff incorporated by reference from Exhibit 10.4 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.24 | Employment Agreement, dated as of March 1, 2008, by and between Emmis Operating Company and Michael Levitan incorporated by reference from Exhibit 10.4 to the Companys Form 8-K filed March 6, 2008.++ | |
10.25 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and |
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Michael Levitan incorporated by reference from Exhibit 10.5 to the Companys Form 8-K filed on January 7, 2009.++ | ||
10.26 | Employment Agreement, dated as of March 1, 2008, by and between Emmis Operating Company and Gary A. Thoe incorporated by reference from Exhibit 10.5 to the Companys Form 8-K filed March 6, 2008.++ | |
10.27 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and Gary A. Thoe incorporated by reference from Exhibit 10.6 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.28 | Employment Agreement, effective as of March 1, 2009, by and between Emmis Operating Company and Paul W. Fiddick, incorporated by reference to the Company Form 10-Q for the quarter ended August 31, 2008.++ | |
10.29 | Amendment to Employment Agreement, dated as of January 1, 2008, by and between Emmis Operating Company and Paul Fiddick incorporated by reference from Exhibit 10.3 to the Companys Form 8-K filed on January 7, 2009.++ | |
10.30 | Employment Agreement, effective as of March 1, 2009, by and between Emmis Operating Company and J. Scott Enright.*++ | |
10.31 | Employment Agreement, effective as of March 3, 2009, by and between Emmis Operating Company and Gary L. Kaseff.*++ | |
10.32 | Asset Purchase Agreement, dated May 2, 2008, among Emmis Television Broadcasting, L.P., Emmis Television License, LLC, Emmis Operating Company and Louisiana Media Company, LLC., incorporated by reference from Exhibit 10.1 to the Companys Form 8-K filed on May 5, 2008. | |
12 | Ratio of Earnings to Fixed Charges.* | |
21 | Subsidiaries of Emmis.* | |
23 | Consent of Independent Registered Public Accounting Firm.* | |
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.* | |
31.2 | Certification of Principal Financial Officer of Emmis Communications Corporation 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.* |
* | Filed with this report. | |
++ | Management contract or compensatory plan or arrangement. |
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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 CORPORATION |
||||
Date: October 9, 2009 | By: | /s/ Jeffrey H. Smulyan | ||
Jeffrey H. Smulyan | ||||
Chairman of the Board,
President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and on the dates indicated.
SIGNATURE | TITLE | |||
Date: October 9, 2009
|
/s/ Jeffrey H. Smulyan
|
President, Chairman of the Board and Director (Principal Executive Officer) | ||
Date: October 9, 2009
|
/s/ Patrick M. Walsh
|
Executive Vice President, Chief Financial Officer, Chief Operating Officer and Director (Principal Accounting Officer) | ||
Date:
|
|
Director | ||
Date: October 9, 2009
|
Gary L. Kaseff*
|
Director | ||
Date: October 9, 2009
|
Richard A. Leventhal*
|
Director | ||
Date: October 9, 2009
|
Peter A. Lund*
|
Director | ||
Date: October 9, 2009
|
Greg A. Nathanson*
|
Director | ||
Date: October 9, 2009
|
Lawrence B. Sorrel*
|
Director |
*By:
|
/s/ J. Scott Enright
|
|||
Attorney-in-Fact |
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