XNAS:EMMS Emmis Communications Corp Class A Annual Report 10-K Filing - 2/29/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

x Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

for the Fiscal Year Ended February 29, 2012

 

¨ 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)

0-23264

(Commission file number)

35-1542018

(I.R.S. Employer

Identification No.)

ONE EMMIS PLAZA

40 MONUMENT CIRCLE

SUITE 700

INDIANAPOLIS, INDIANA 46204

(Address of principal executive offices)

(317) 266-0100

(Registrant’s Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

None

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value 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.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of August 31, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $24,027,000.

The number of shares outstanding of each of Emmis Communications Corporation’s classes of common stock, as of May 1, 2012, was:

 

34,077,279   Class A Common Shares, $.01 par value
4,722,684   Class B Common Shares, $.01 par value

0

  Class C Common Shares, $.01 par value

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Documents

  

Form 10-K Reference

 

Proxy Statement for April 2, 2012 Special Meeting of Shareholders filed on March 21, 2012

     Part III   

Proxy Statement for 2012 Annual Meeting of Shareholders expected to be filed within 120 days

     Part III   

 

 

 


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FORM 10-K

TABLE OF CONTENTS

 

     Page  

PART I

     4   

Item 1. Business

     4   

Item 1A. Risk Factors

     16   

Item 1B. Unresolved Staff Comments

     22   

Item 2. Properties

     23   

Item 3. Legal Proceedings

     23   

Item 4. Mine Safety Disclosures

     25   

PART II

     25   

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     25   

Item 6. Selected Financial Data

     26   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

     26   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 8. Financial Statements and Supplementary Data

     49   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     94   

Item 9A. Controls and Procedures

     94   

Item 9B. Other Information

     95   

PART III

     95   

Item 10. Directors and Executive Officers of the Registrant

     95   

Item 11. Executive Compensation

     95   

Item 12. Security Ownership of Certain Beneficial Owners, and Management, and Related Stockholder Matters

     95   

Item 13. Certain Relationships and Related Transactions

     95   

Item 14. Principal Accountant Fees and Services

     96   

PART IV

     96   

Item 15. Exhibits and Financial Statement Schedules

     96   

Signatures

     101   

 

2


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


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. Emmis owns 18 FM and two AM radio stations in New York, Los Angeles, St. Louis, Austin (Emmis has a 50.1% controlling interest in Emmis’ radio stations located there), Indianapolis and Terre Haute, IN. One of our FM radio stations in Los Angeles and one of our FM radio stations in New York are operated pursuant to Local Marketing Agreements (LMA’s) whereby third parties provide the programming for the stations and sell all advertising within that programming.

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 national radio networks in Slovakia and Bulgaria. 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, digital sales consulting 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 not-for-profits, political advertising, corporate philanthropy, environmental initiatives and government agencies. We believe our capabilities can address these 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.

 

4


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.

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 BIA’s Investing in Radio 2011 (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 based on the March 2012 Portable People MeterTM (PPMTM) results or, in the case of our Terre Haute stations, based on the Fall 2011 Arbitron Survey. A “t” indicates the station tied with another station for the stated ranking. “Station Audience Share” represents a percentage generally computed by dividing the average number of persons in the primary demographic listening to a particular station during specified time periods by the average number of such persons in the primary demographic for all stations in the market area as determined by Arbitron.

 

STATION AND
MARKET

   MARKET
RANK BY
REVENUE
  

FORMAT

   PRIMARY
DEMOGRAPHIC
TARGET AGES
   RANKING IN
PRIMARY
DEMOGRAPHIC
TARGET
   STATION
AUDIENCE
SHARE

Los Angeles, CA 1

   1            

KPWR-FM

      Hip-Hop    18-34    1    7.5

New York, NY 2

   2            

WQHT-FM

      Hip-Hop    18-34    1    8.1

St. Louis, MO

   21            

KPNT-FM

      Alternative Rock    18-34    5    7.8

KSHE-FM

      Album Oriented Rock    25-54    8    5.3

KIHT-FM

      Classic Hits    25-54    9    5.2

KFTK-FM

      Talk    25-54    14    3.9

Austin, TX

   33            

KLBJ-AM

      News/Talk    25-54    5t    5.7

KLZT-FM

      Mexican Regional    18-34    2    8.1

KBPA-FM

      Adult Hits    25-54    2    6.1

KLBJ-FM

      Album Oriented Rock    25-54    5t    5.7

KGSR-FM

      Adult Album Alternative    25-54    12t    4.0

KROX-FM

      Alternative Rock    18-34    9    5.1

Indianapolis, IN

   35            

WFNI-AM

      Sports Talk    25-54    16    3.2

WYXB-FM

      Soft Adult Contemporary    25-54    5    6.2

WLHK-FM

      Country    25-54    8    5.2

WIBC-FM

      News/Talk    35-64    7    5.8

Terre Haute, IN

   226            

WTHI-FM

      Country    25-54    1    21.0

WWVR-FM

      Classic Rock    25-54    3    11.0

 

1 

Our second station in Los Angeles, KXOS-FM, is operating pursuant to a LMA. Under the terms of the LMA, Grupo Radio Centro, S.A.B. de C.V provides the programming for the station and sells all advertising within that programming. Emmis continues to own and operate KXOS-FM.

2 

Our second station in New York, WRKS-FM, is operating pursuant to a LMA. Under the terms of the LMA, New York AM Radio LLC, a subsidiary of Disney Enterprises, Inc., provides the programming for the station and sells all advertising within that programming. Emmis continues to own and operate WRKS-FM.

 

5


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 85 affiliated radio stations in Indiana. Internationally, we own and operate national radio networks in Slovakia and Bulgaria.

PUBLISHING OPERATIONS

We publish the following magazines:

 

     Monthly
Paid & Verified
Circulation1
 

Regional Magazines:

  

Texas Monthly

     311,000   

Los Angeles

     142,200   

Atlanta

     67,000   

Orange Coast

     54,100   

Indianapolis Monthly

     42,500   

Cincinnati

     41,300   

Specialty Magazines2:

  

Country Sampler

     349,300   

Smart Retailer

     19,700   

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 Children’s 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 Ink’s “Radio Executive of the Year.” Our management and on-air personalities have won numerous industry awards.

 

 

1 

Source: Publisher’s Statement subject to audit by the Audit Bureau of Circulations (as of December 31, 2011)

2 

Our specialty magazines are circulated bimonthly

 

6


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. 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., Los Angeles). 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 station’s rank in its market in terms of the number of listeners or viewers, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive position with programming and promotional campaigns aimed at the demographic groups targeted by our stations. 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 FCC’s multiple ownership rules regulating the number of stations that may be owned and controlled by a single entity and cross ownership rules which limit the types of media properties in any given market that can be owned by the same person 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 station’s or magazine’s sales staff. National sales are made by firms specializing in such sales, which are compensated on a commission-only basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station’s audience share position more rapidly than does the volume of local and regional advertising revenue. During the year ended February 29, 2012, 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 29, 2012, our radio stations derived a higher percentage of their advertising revenues from local and regional sales (83%) than our publishing entities (67%).

EMPLOYEES

As of February 29, 2012, Emmis had approximately 810 full-time employees and approximately 330 part-time employees. Approximately 30 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.

 

7


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 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 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.

 

 

8


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 March 31, 2012:

 

Radio Market

  

Stations

  

City of License

   Frequency   

Expiration Date of
License1

   FCC Class    Height Above
Average
Terrain (in
feet)
  

Power (in
Kilowatts)

Los Angeles, CA

   KPWR-FM    Los Angeles, CA    105.9    December 2013    B    3035    25
   KXOS-FM    Los Angeles, CA    93.9    December 2013    B    3009    18.5

New York, NY

   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

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  3    Collinsville, IL    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
   KGSR-FM    Cedar Park, TX    93.3    August 2013    C    1926    100
   KLZT-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    847    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

Under the Communications Act, at the time an application is filed for renewal of a station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC concludes on its own motion) that there is a “substantial and material” question as to whether grant of the renewal application would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine whether the renewal application should be granted. The Communications Act provides for the grant of a renewal application upon a finding by the FCC that the licensee:

 

   

has served the public interest, convenience and necessity;

 

   

has committed no serious violations of the Communications Act or the FCC rules; and

 

   

has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse.

If the FCC cannot make such a finding, it may deny the renewal application, and only then may the FCC consider competing applications for the same frequency. In a vast majority of cases, the FCC renews a broadcast license even when petitions to deny have been filed against the renewal application.

 

 

1 

Under the Communications Act, a license expiration date is extended automatically pending action on the renewal application.

 

2 

Renewal application is pending.

 

3 

The FCC has authorized changes in technical facilities for KPNT-FM at a new transmitter site as follows: FCC Class, C1; Height Above Average Terrain, 715 ft; and Effective Radiated Power, 64 kW. An application is pending to modify the KPNT authorization by increasing the Height Above Average Terrain to 835 ft. and concomitantly reducing the Effective Radiated Power to 54 kW. The station is authorized to continue operation with its existing facilities until the new facilities are constructed. The KPNT-FM changes require change of the city of license of station KSEF-FM from Farmington to St. Genevieve, MO, which the FCC has approved.

 

9


A petition to deny has been filed against the renewal application for KPNT and remains pending. An informal objection was filed against the renewal applications of the Company’s 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 FCC is required by statute to review all of its broadcast ownership rules on a quadrennial basis (i.e., every four years) and to repeal or modify any of its rules that are no longer “necessary in the public interest.”

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 which, while affirming the FCC in certain respects, found fault with other aspects of the FCC’s revised rules, remanded them to the agency for further proceedings, and extended a stay on the implementation of certain of the new rules. 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, presumptively 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 local market. The FCC’s decision was appealed by a number of parties (not including Emmis). The Third Circuit issued a decision in July 2011 which upheld the FCC’s decisions regarding all of its rules except for the revised newspaper/broadcast cross-ownership rule, which the Court vacated and remanded to the Commission based on the Court’s finding that the agency had failed to provide adequate notice and opportunity for comment on the changes to that rule. Several parties (not including Emmis) have petitioned for Supreme Court review of the Third Circuit’s ruling, and those petitions remain pending. Several other parties also jointly filed a petition for reconsideration of the December 2007 decision with the FCC, and that petition similarly remains pending. In 2010, the FCC commenced its most recent statutory quadrennial review of its broadcast ownership rules, and that proceeding is also ongoing. We cannot predict whether such appeals or proceedings 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 as well as the changes in the newspaper/broadcast rule adopted in the FCC’s December 2007 decision, which the FCC has largely proposed to reinstate in its most recent quadrennial review.

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 radio stations.

 

10


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 licensee’s 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 KXOS-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 KXOS-FM started 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. Emmis recently amended the purchase right to permit designees of GRC, subject to certain conditions, to purchase the station for $85.5 million if such purchase can be closed by March 27, 2013. Additionally, on April 26, 2012, a subsidiary of Emmis entered into a LMA with New York AM Radio, LLC pursuant to which, commencing April 30, 2012, it began purchasing from Emmis the right to provide programming on radio station WRKS-FM, 98.7FM, New York, NY until August 31, 2024, subject to certain conditions. Disney Enterprises, Inc., the parent company of New York AM Radio, LLC, has guaranteed the obligations under the LMA. Emmis’ subsidiary will retain ownership of the 98.7FM during the term of the LMA and will receive an annual fee of $8.4 million for the first year of the term under the LMA, which fee will increase by 3.5% each year thereafter until the LMA’s termination. In its most recent quadrennial review, the FCC has also sought comment on whether to expand the categories of agreements that are considered for purposes of evaluating compliance with the ownership rules to include agreements such as “shared services agreements” and/or “local news service” agreements.

Although the FCC’s 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. Subsequently, however, the Third Circuit vacated the FCC’s selected definition of small businesses eligible to purchase clusters that exceed the numerical limits. 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 therefore have to “spin off” one FM station to a separate buyer. The FCC has proposed to retain intact its local radio ownership rule, and has sought comment on alternatives to its previous definition of eligible small businesses, in its most recent quadrennial review.

Cross-Media Ownership:

The FCC’s radio/television cross-ownership rule generally permits the common ownership of the following combinations in the same market, to the extent permitted under the FCC’s television duopoly rule 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.” The FCC has proposed to eliminate this rule in its most recent quadrennial review.

FCC rules also generally prohibit common ownership of a daily newspaper and a radio or television station in the same local market. As noted above, in its December 2007 decision, the FCC adopted rules that contained 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 would have been a presumption against allowing such ownership. In the case of proposed TV/newspaper combinations, the TV station could not be among the top four ranked stations in its market, and at least eight independently owned and operated TV stations would have had to remain in the market post-transaction. As also noted above, the Third Circuit vacated these changes to the newspaper/broadcast cross-ownership ban on procedural grounds, but the FCC has largely proposed to reinstate them in its most recent quadrennial review.

 

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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 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 that it uses 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 FCC’s rules where the broadcasting company and such a stockholder, officer or director together hold attributable interests in more than the permitted number of stations or a prohibited combination of outlets in the same market. The FCC’s regulations generally deem the following relationships and interests to be attributable for purposes of its ownership restrictions:

 

   

all officer and director positions in a licensee or its 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 station’s total weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a same-market media entity (i.e., broadcast company or newspaper). 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. Smulyan’s 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. Smulyan’s 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 Company’s 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 Act’s limitations on alien ownership as well as other statutory and regulatory requirements. When evaluating an assignment or transfer of control application, the FCC is prohibited from considering whether the public interest might be served by an assignment of the broadcast license or transfer of control of the licensee to a party other than the assignee or transferee specified in the application.

 

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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 broadcast of certain types of programming responsive to the needs of a station’s community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness.

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 by the FCC and carry fines of up to $325,000 per violation.

In August 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 FCC’s 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 an announcer at an Emmis station that has since been sold raised any substantial and material questions concerning the company’s qualifications to hold FCC licenses. The Consent Decree was subsequently upheld by a federal court of appeals. Petitions were filed against the license renewal applications of KPNT and the previously owned station, and an informal objection was filed against the license renewals of the company’s Indiana radio stations, in each case based primarily on the matters covered by the Decree. The petition against KPNT remains pending. The objections against the Indiana license renewals and a petition for reconsideration of the grant of those applications were rejected by the FCC, but applications for review of those FCC actions are pending. Subsequent to the approval of the Consent Decree, the company has received letters of inquiry from the FCC alleging additional violations of the 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.

The FCC’s indecency rules are also the subject of ongoing litigation. In July 2010, the Second Circuit held the FCC’s indecency standards to be unconstitutionally vague in violation of the First Amendment. The Second Circuit later vacated the agency decision at issue in another appeal based on its earlier decision. The FCC is challenging these rulings in the Supreme Court in a case which remains pending. The Third Circuit issued a decision vacating another FCC indecency ruling in November 2011, and the FCC has sought Supreme Court review of this decision. Several district court actions regarding the indecency rules also remain pending. The outcome of these judicial proceedings will affect future FCC policies in this area and could impact the FCC’s action on the outstanding complaints involving Emmis stations.

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 (Emmis was not one of them), and in April 2007, those groups entered into Consent Decrees with the FCC to resolve outstanding investigations and allegations. Emmis received similar inquiries from the FCC concerning an individual complaint which alleged violations of the sponsorship identification requirements and submitted responses and in April 2011 entered into a Consent Decree with the FCC to resolve these inquiries. Pursuant to the Consent Decree, (i) the company adopted a compliance plan intended to avoid violations of the sponsorship identification requirements, (ii) the company agreed to make a voluntary payment of $12,000 to the U.S. Treasury, and (iii) the FCC terminated its investigation of the matters covered by the complaint and agreed not to use against the company the facts that it had developed in its investigation of the complaint or the existence of the Consent Decree.

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.

 

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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 LPFM’s interference protection from subsequently-authorized full-service stations. Congress then passed legislation eliminating certain minimum distance separation requirements between full-power and LPFM stations, thereby reducing the interference protection afforded to FM stations. As required by the legislation, the FCC in January 2012 submitted a report to Congress indicating that the results of a statutorily mandated economic study indicated that, on the whole, LPFM stations do not currently have, and in the future are unlikely to have, a demonstrable economic impact on full-service commercial FM radio stations. Nevertheless, we cannot predict whether any LPFM stations will interfere with the coverage of our radio stations.

In June of 2009, the FCC adopted rules that allow an AM radio station to use currently authorized FM translator stations to retransmit the AM station’s programming within the AM station’s authorized service area.

The FCC also previously authorized the launch and operation of a satellite digital audio radio service (“SDARS”) system. In July of 2008, the two original SDARS companies—Sirius 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.

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 2005, the FCC announced that, pending 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 station’s website. (The FCC subsequently imposed such a requirement on television stations in November of 2007; broadcasters challenged the requirement and the FCC later vacated it, but the agency has since sought comment on whether it should reimpose a similar mandate.) In January 2010, the FCC revised its DAB service rules to allow FM DAB stations to increase the permitted power levels of DAB transmissions. In September 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.

For the license period 2006-2015, Emmis has been paying royalty rates for non-interactive Internet streaming of sound recordings in accordance with a settlement agreement reached in February 2009 between the National Association of Broadcasters (“NAB”) and SoundExchange (the entity that represents the recording industry and receives royalty payments from webcasters). On March 9, 2011, the Copyright Royalty Board (“CRB”) published statutory royalty rates and terms for non-interactive Internet streaming of sound recordings for 2011-2015. The rates do not apply to services, like Emmis’ Internet streaming services, that are governed by the NAB-SoundExchange settlement. For radio broadcasters, however, the CRB modeled the statutory rates after the rates agreed to in the settlement; both sets of rates increase from 0.17 cent per listener per song in 2011 to 0.25 cent per listener per song in 2015. A group of noncommercial educational college broadcasters appealed the CRB’s decision, challenging the appointment of the Copyright Royalty Judges as violating the Appointments Clause of the U.S. Constitution. The appeal was argued on February 7, 2012 and remains pending. The outcome of the appeal, however, will not directly affect groups such as Emmis that pay rates under separately negotiated agreements.

Legislation has also been introduced in past Congresses that would require terrestrial radio broadcasters to pay performance royalties to performers, ending a long-standing copyright law exception, and similar legislation may be introduced in the future. If enacted, such legislation could have an adverse impact on the cost of music programming.

 

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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 station’s 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 station’s license renewal application. While many broadcasters have opposed these proposals, we cannot predict how the FCC will resolve the issue.

In February of 2012, Congress passed legislation authorizing the FCC to conduct an incentive auction to redistribute spectrum currently used by television broadcasters and to require television broadcasters that do not participate in the auction to make certain modifications to their transmission facilities. The spectrum used by radio broadcasters such as Emmis, however, is not included in this legislation, and the FCC will need to adopt rules to implement it.

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;

 

   

proposals to repeal or modify some or all of the FCC’s multiple ownership rules and/or policies;

 

   

proposals to change rules relating to political broadcasting;

 

   

technical and frequency allocation matters;

 

   

AM stereo broadcasting;

 

   

proposals to modify service and technical rules for digital radio, including possible additional public interest requirements for terrestrial digital audio broadcasters;

 

   

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 related to the implementation of SDARS;

 

   

proposals to reallocate spectrum associated with TV channels 5 and 6 for FM radio broadcasting;

 

   

proposals to modify broadcasters’ public interest obligations;

 

   

proposals to limit the tax deductibility of advertising expenses by advertisers; and

 

   

proposals to regulate violence and hate speech 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 operates 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

Radio Expres

   Slovakia    Council for Broadcasting and Retransmission    February 2021

Radio FM+

   Bulgaria    The Council for Electronic Media    February 2024 to February 2026

Radio Fresh

   Bulgaria    The Council for Electronic Media    February 2025 to February 2026

Star FM

   Bulgaria    The Council for Electronic Media    February 2026

 

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Broadcast licenses in many foreign countries do not necessarily confer the same renewal expectancy as U.S. radio stations broadcast licenses. While we believe that we have reasonable prospects for securing extensions of our remaining international broadcast licenses, we cannot be sure that such extensions will be granted or that the terms and conditions of such extensions will not have a material adverse effect on our international operations. For instance, on October 28, 2009, the Hungarian National Radio and Television Board (ORTT) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager. Slager ceased broadcasting effective November 19, 2009. We are seeking equitable relief through the International Centre for Settlement of Investment Disputes (“ICSID”) as we believe the award of the license by the ORTT to the other bidder violated Hungarian law and various bilateral investment treaties.

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 Company’s segments operate primarily in the United States with 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.

 

     Year Ended Febraury 28 (29),  
     2010      2011      2012  
     (amounts in thousands)  

Net Revenues:

        

Domestic

   $ 225,909       $ 236,329       $ 222,489   

International

     16,193         14,427         13,518   
  

 

 

    

 

 

    

 

 

 

Total

   $ 242,102       $ 250,756       $ 236,007   
  

 

 

    

 

 

    

 

 

 
     As of February 28 (29),  
     2010      2011      2012  
     (amounts in thousands)  

Noncurrent Assets:

        

Domestic

   $ 412,140       $ 400,228       $ 279,188   

International

     10,490         8,299         6,891   
  

 

 

    

 

 

    

 

 

 

Total

   $ 422,630       $ 408,527       $ 286,079   
  

 

 

    

 

 

    

 

 

 

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 Indebtedness:

Our substantial indebtedness could adversely affect our financial health.

We have a significant amount of indebtedness. At February 29, 2012, our total indebtedness was $237.7 million, consisting of $203.8 million under our Amended and Restated Revolving Credit and Term Loan Agreement, dated November 2, 2006, as further amended on March 3, 2009, August 19, 2009, March 29, 2011, November 10, 2011, March 20, 2012 and April 26, 2012 (the “Credit Agreement”) and $33.9 million of our senior unsecured notes. Our shareholders’ deficit was $101.2 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.

Our Credit Agreement begins to mature November 2, 2012 and we may not be able to refinance this indebtedness as it matures.

The revolving credit commitment (“revolver”) under our Credit Agreement matures November 2, 2012. The non-extended term loans mature November 1, 2013 and the extended term loans mature November 1, 2014. We rely on our revolver for liquidity due to the seasonality in our business. While we expect to refinance our Credit Agreement or secure other appropriate amendments prior to the maturity of our revolver, we cannot assure investors that we will be able to refinance our Credit Agreement or secure appropriate amendments on commercially reasonable terms or at all.

If we cannot continue to comply with the financial covenants in our debt instruments, or obtain waivers or other relief from our lenders, we may default, which could result in loss of our sources of liquidity and acceleration of our indebtedness.

We have a substantial amount of indebtedness, and the instrument governing such indebtedness contains restrictive financial covenants. Our ability to comply with the covenants in our debt instruments will depend upon our future performance and various other factors, such as business, competitive, technological, legislative and regulatory factors, some of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we would need to seek an amendment to our debt instruments, or would need to refinance our debt instruments. Under amendments to our debt instruments, certain covenants have been modified or suspended, but more stringent covenant requirements are scheduled to resume in late 2012. There can be no assurance that we can obtain future amendments or waivers of our debt instruments, or refinance our debt instruments and, even if so, it is likely that such relief would only last for a specified period, potentially necessitating additional amendments, waivers or refinancings in the future. In the event that we do not maintain compliance with the covenants under our debt instruments, the lenders could declare an event of default, subject to applicable notice and cure provisions, resulting in a material adverse impact on our financial position. Upon the occurrence of an event of default under our debt instruments, the lenders could elect to declare all amounts outstanding under our senior secured credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. Our lenders under our senior credit facility have taken security interests in substantially all of our consolidated assets. If the lenders accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our debt instruments, and we cannot be assured that sufficient assets will remain for us to continue our business operations after we have paid all of the borrowings under our debt instruments. Our ability to liquidate assets is affected by the regulatory restrictions associated with radio stations, including FCC licensing, which may make the market for these assets less liquid and increase the chances that these assets will be liquidated at a significant loss.

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 debt instruments impose significant operating and financial restrictions on us. These restrictions significantly limit or prohibit, among other things, our ability and the ability of our subsidiaries to incur additional indebtedness, issue preferred stock, incur liens, pay dividends, enter into asset purchase or 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.

 

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Risks Related to our Business

Our results of operations could be negatively impacted by weak economic conditions and instability in financial markets.

We believe that advertising is a discretionary business expense. Spending on advertising tends to decline disproportionately during an economic recession or downturn as compared to other types of business spending. Consequently, a downturn in the United States economy generally has an adverse effect on our advertising revenue and, therefore, our results of operations. A recession or downturn in the economy of any individual geographic market, particularly a major market such as Los Angeles or New York, also generally has a significant effect on us. The recent recession in the global economy negatively impacted our results of operations. While economic conditions appear to be improving, unemployment remains high and we cannot ensure that our results of operations won’t be negatively impacted by delays or reversals in the economic recovery or by future economic downturns.

Even with a recovery from the recent recession in the economy, an individual business sector (such as the automotive industry) that tends to spend more on advertising than other sectors might be forced to maintain a reduced level of advertising expenditures if that sector experiences a slower recovery than the economy in general, or might reduce its advertising expenditures further if additional downturns occur. If that sector’s spending represents a significant portion of our advertising revenues, any reduction in its advertising expenditures may affect our revenue.

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 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.

Because of the competitive factors we face, 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, including the LMA fee we receive from GRC, account for nearly 50% of our domestic radio revenues. Our results from operations can be materially affected by decreased ratings or resulting revenues in either one of these markets.

 

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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 that have been developed or introduced 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);

 

 

HD 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, including additional low-power FM radio signals authorized in December 2010 under the Local Community Radio Act.

New media has resulted in fragmentation in the advertising market, but we cannot predict the impact 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 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.

Each of our domestic 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 FCC’s 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 engaged in vigorous enforcement of its indecency rules against the broadcast industry, which could have a material adverse effect on our business.

The FCC’s rules prohibit the broadcast of obscene material at any time and indecent material between the hours of 6 a.m. and 10 p.m. Broadcasters risk violating the prohibition on the broadcast of indecent material because of the FCC’s broad definition of such material, coupled with the spontaneity of live programming.

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 FCC’s 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 FCC’s 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.

 

19


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 radio’s 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, 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.

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 Credit Agreement, and proceeds from future issuances of debt and equity, both public and private. Currently, the Credit Agreement substantially limits our ability to make acquisitions. 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 international operations in Slovakia 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;

 

20


  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 necessarily confer the same renewal expectancy as U.S. radio stations broadcast licenses. While we believe that we have reasonable prospects for securing extensions of our remaining international broadcast licenses, we cannot be sure that such extensions will be granted or that the terms and conditions of such extensions will not have a material adverse effect on our international operations. For instance, on October 28, 2009, the Hungarian National Radio and Television Board (ORTT) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager. Slager ceased broadcasting effective November 19, 2009. We are seeking equitable relief through the International Centre for Settlement of Investment Disputes (“ICSID”) as we believe the award of the license by the ORTT to the other bidder violated Hungarian law and various bilateral investment treaties.

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 cumulative losses over the past three years and we may incur future losses.

We have reported cumulative net losses in our consolidated statement of operations over the past three years predominately due to the recording of non-cash impairment charges related to FCC licenses and goodwill. As of February 29, 2012, our FCC licenses and goodwill comprise 70% of our total assets. If 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 with the Sarbanes-Oxley Act of 2002 could cause a loss of confidence in the reliability of our financial statements.

In connection with the preparation of our financial statements for the period ended August 31, 2009, the Company discovered a material weakness in its internal control over financial reporting. As disclosed in our Form 10-Q Report for the period ended November 30, 2009, we remediated the material weakness. As such, as of November 30, 2009, based upon the controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were once again effective to provide reasonable assurance that information relating to Emmis that is required to be disclosed by us in the reports that we file or submit, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In future periods, there are no assurances that we will not have additional 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 country’s response to such acts, may negatively affect the U.S. advertising market, which could cause our advertising revenues to decline due to advertising cancellations, delays or defaults in payment for advertising time, and other factors. In addition, these events may have other negative effects on our business, the nature and duration of which we cannot predict.

For example, 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.

 

21


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 be sure 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 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 May 1, 2012, our Chairman of the Board of Directors, Chief Executive Officer and President, Jeffrey H. Smulyan, beneficially owned shares representing approximately 64% 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 Global Select Market under the symbol “EMMS.” We may not be able to meet the continued listing requirements of the Nasdaq Global Select Market, which require, among other things, a minimum closing price of our common stock and a minimum market capitalization. On August 31, 2011, we received a written deficiency notice from The Nasdaq Stock Market (“NASDAQ”) advising us that the closing bid price of our Class A common stock did not meet the continued listing requirements pursuant to NASDAQ Listing Rule 5450(a)(1). Since we did not regain compliance by the expiration of the grace period set forth in the deficiency notice on February 27, 2012, we received a staff determination of delisting. We appealed the determination and had a hearing with a NASDAQ hearings panel on April 5, 2012. On April 26, 2012, NASDAQ informed the Company that it had granted the Company’s request to allow for continued listing on the Nasdaq Global Select Market, subject to the condition that on or before August 27, 2012, the Company must have evidenced a closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days. If we are unable to satisfy the requirements of the Nasdaq Global Select Market for continued listing in the future, our common stock would be subject to delisting from that market. Any such delisting of our common stock would likely also cause our 6.25% Series A Cumulative Convertible Preferred Stock, which is listed on the Nasdaq Global Select Market under the symbol “EMMSP,” to also be delisted. A delisting of our stock from the Nasdaq Global Select Market could negatively impact us by, among other things, reducing the liquidity and market price of our 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 Emmis. 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.

As a smaller reporting company, we are not required to provide this information.

 

22


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, with each of our owned properties subject to a mortgage under our Credit Agreement. Most of our studio and office space leases contain lease terms with expiration dates of five to fifteen years. A station’s 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 with 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 station’s 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 $58.3 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.

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.

Emmis 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 that we believe are likely to have a material adverse effect on the company.

Emmis and certain of its officers and directors are named as defendants in a lawsuit filed April 16, 2012, in the United States District Court for the Southern District of Indiana entitled Corre Opportunities Fund, LP, et al. v. Emmis Communications Corporation, et al. The plaintiffs allege that Emmis and the other defendants violated various provisions of the federal securities laws and breached fiduciary duties in connection with Emmis’ entry into total return swap agreements and voting agreements with certain holders of Emmis Preferred Stock, and in issuing shares of Preferred Stock to Emmis’ 2012 Retention Plan and Trust (the “Trust”) and entering into a voting agreement with the trustee of the Trust. The plaintiffs also allege that Emmis would violate certain provisions of Indiana corporate law by directing the voting of the shares of Preferred Stock subject to the total return swap agreements (the “Swap Shares”) and the shares of Preferred Stock held by the Trust (the “Trust Shares’) in favor of certain proposed amendments to Emmis’ Articles of Incorporation. The plaintiffs seek declaratory and injunctive relief.

Emmis has filed an answer denying the material allegations of the complaint, and has filed a counterclaim seeking a declaratory judgment that Emmis may legally direct the voting the Swap Shares and the Trust Shares in favor of the proposed amendments. Emmis is defending this lawsuit vigorously.

Effective December 31, 2009, our radio music license agreements with the two largest performance rights organizations, American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”), expired. The Radio Music License Committee (“RMLC”), which negotiates music licensing fees for most of the radio industry with ASCAP and BMI and of which we are a participant, filed motions in the U.S. District Court in New York against BMI and ASCAP on behalf of the radio industry, seeking interim fees and a determination of fair and reasonable industry-wide license fees. The U.S. District Court in New York approved reduced interim fees for ASCAP and BMI.

In January 2012, ASCAP and the RMLC entered into a settlement agreement that was approved by the court and covers the period from January 1, 2010 through December 31, 2016. This settlement also includes a credit for fees previously paid in 2010 and 2011, with such fees expected to be credited over a five-year period beginning January 1, 2012.

The final fees for BMI, still to be determined by the court, may be retroactive to January 1, 2010 and may be different from the interim fees.

 

23


Certain individuals and groups have challenged applications for renewal of the FCC licenses of certain of the company’s 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.

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.

 

NAME

  

POSITION

   AGE AT
FEBRUARY
29, 2012
   YEAR
FIRST
ELECTED
OFFICER

Richard F. Cummings

   President - Radio Programming    60    1984

J. Scott Enright

   Executive Vice President, General Counsel and Secretary    49    1998

Gregory T. Loewen

   President - Publishing Division and Chief Strategy Officer    40    2007

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.

Mr. Cummings was appointed President – Radio Programming in March 2009. Mr. Cummings served as Radio Division President from December 2001 to February 2009. Prior to becoming Radio Division President, Mr. Cummings was Executive Vice President of Programming. Mr. Cummings joined Emmis in 1981.

Mr. Enright was appointed Executive Vice President, General Counsel and Secretary in March 2009. Previously, Mr. Enright served as Senior Vice President, Associate General Counsel and Secretary of Emmis from September 2006 to February 2009 and as Vice President, Associate General Counsel and Assistant Secretary from the date he joined Emmis in October 1998, adding the office of Secretary in 2002.

Mr. Loewen was appointed President – Publishing Division and Chief Strategy Officer in March 2010. Previously, Mr. Loewen served as Chief Strategy Officer from February 2007 to February 2010. Prior to joining Emmis in February 2007, Mr. Loewen served as Vice President of Digital Media and Strategy for The Toronto Star.

 

24


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S 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 Global Select Market 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 sales prices of the Class A common stock for the periods indicated.

 

QUARTER ENDED

   HIGH      LOW  

May 2010

     2.45         0.88   

August 2010

     2.30         1.48   

November 2010

     1.76         0.50   

February 2011

     1.40         0.43   

May 2011

     1.21         0.73   

August 2011

     1.25         0.58   

November 2011

     1.01         0.58   

February 2012

     0.87         0.65   

HOLDERS

At May 1, 2012, there were 5,457 record holders of the Class A common stock, and there was one record holder of the Class B common stock.

DIVIDENDS

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.

The terms of Emmis’ Preferred Stock provide for a quarterly dividend payment of $.78125 per share, when, as, and if declared by our Board of Directors on each January 15, April 15, July 15 and October 15. Emmis last paid its quarterly dividend on October 15, 2008. As of February 29, 2012, undeclared dividends in arrears for shares outstanding in which the Company has no economic rights through total return swaps totaled $10.5 million, or $11.17 per share of Preferred Stock. The Third Amendment to our Credit Agreement prohibits the Company from paying dividends on the Preferred Stock during the Suspension Period (as defined in the Credit Agreement) (See “Liquidity and Capital Resources”). Subject to the restrictions of the Credit Agreement, payment of future Preferred Stock dividends is at the discretion of the Company’s Board of Directors. Failure to declare and pay the dividend is not a default under the terms of the Preferred Stock. However, since undeclared dividends in arrears exceed six quarters, the holders of the Preferred Stock exercised their right to elect two persons to our board of directors. One of these directors, Joseph R. Siegelbaum, resigned in November 2011. Michelle D. Bergman was elected by the holders of the Preferred Stock to replace Mr. Siegelbaum at a special meeting of shareholders on April 2, 2012.

 

25


SHARE REPURCHASES

During the three-month period ended February 29, 2012, there was withholding of shares of common stock upon vesting of restricted stock to cover withholding tax obligations and purchases of Series A cumulative convertible preferred stock under the terms of our senior unsecured notes. The following table provides information on our repurchases during the three months ended February 29, 2012:

 

                   (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 (in  000’s) (1)  

Class A Common Stock

           

December 1, 2011—December 31, 2011

     —           N/A         —         $ —     

January 1, 2012—January 31, 2012

     16,556       $ 0.71         —         $ —     

February 1, 2012—February 29, 2012

     —           N/A         —         $ —     
  

 

 

       

 

 

    
     16,556            —        
  

 

 

       

 

 

    

Series A Cumulative Convertible Preferred Stock

           

December 1, 2011—December 31, 2011

     —           N/A         —         $ 6,507   

January 1, 2012—January 31, 2012

     190,100       $ 16.36         190,100       $ —     

February 1, 2012—February 29, 2012

     —           N/A         —         $ —     
  

 

 

       

 

 

    
     190,100            190,100      
  

 

 

       

 

 

    

 

ITEM 6. SELECTED FINANCIAL DATA.

As a smaller reporting company, we are not required to provide this information.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

GENERAL

The following discussion pertains to Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “Emmis” or the “Company”).

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 70% 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 station’s local market are critical to the station’s financial success, our strategy is to use market research, advertising and promotion to attract and retain audiences in each station’s chosen demographic target group.

Our revenues vary throughout the year. As is typical in the broadcasting industry, our revenues and operating income are usually lowest in our fourth fiscal quarter.

 

 

1 

On November 14, 2011, the Company announced that under the terms of its senior unsecured notes, the Company has the ability to either purchase or purchase rights in up to $35.0 million of its outstanding Series A cumulative convertible preferred stock. Emmis, in November 2011 and January 2012, either purchased or purchased rights in 1,871,529 shares of Series A cumulative convertible preferred stock on four separate occasions at an average price of $15.64 per share. No further Series A cumulative convertible preferred share purchases or purchase of rights in the preferred shares are permitted as the availability under the senior unsecured notes has expired. Any prior share repurchase program is no longer operative.

 

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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 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, and barter.

 

     Year ended February 28 (29),  
     2010      % of Total     2011      % of Total     2012      % of Total  

Net revenues:

               

Local

   $ 143,924         59.4   $ 140,872         56.2   $ 129,289         54.8

National

     31,572         13.0     36,845         14.7     34,188         14.5

Political

     410         0.2     1,657         0.7     702         0.3

Publication Sales

     12,844         5.3     13,025         5.2     12,759         5.4

Non Traditional

     17,439         7.2     18,464         7.4     19,177         8.1

Other

     35,913         14.9     39,893         15.8     39,892         16.9
  

 

 

      

 

 

      

 

 

    

Total net revenues

   $ 242,102         $ 250,756         $ 236,007      
  

 

 

      

 

 

      

 

 

    

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.

KNOWN TRENDS AND UNCERTAINTIES

Although advertising revenues have stabilized following the recent global recession, domestic radio revenue growth has been challenged for several years. Management believes this is principally the result of three factors: (1) the proliferation of advertising inventory caused by the emergence of new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks and social coupon sites, all of 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, and (3) the adoption of a new method of gathering ratings data, which has shown an increase in cumulative audience size, but a decrease in time spent listening as compared to the previous method of gathering ratings data.

The Company and the radio industry have begun several initiatives to address these issues. The radio industry is working aggressively to increase the number of portable digital media devices that contain an FM tuner, including smartphones and music players. In many countries, FM tuners are common features in portable digital media devices. The radio industry is working with leading United States network providers, device manufacturers, regulators and legislators to ensure that FM tuners are included in future portable digital media devices. Including FM as a feature on these devices has the potential to increase radio listening and improve perception of the radio industry while offering network providers the benefits of a proven emergency notification system, reduced network congestion from audio streaming services, and a host of new revenue generating applications.

The Company has also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by becoming one of the fifteen largest streaming audio providers in the United States, developing highly interactive websites with content that engages our listeners, using SMS texting and delivering real-time traffic to navigation devices. We have created the Loud Digital Network, which combines our original content with other music and entertainment content to form one of the ten largest music and entertainment networks on the Internet.

 

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Along with the rest of the radio industry, the majority of our stations have deployed 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 in each radio market to ensure the most diverse consumer offering possible 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. 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 (PPMTM) 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 and Los Angeles markets in October 2008, in the St. Louis market in October 2009, and the Austin and Indianapolis markets in the fall of 2010. In each market in which the service has launched, there has been a compression in the relative ratings of all stations in the market, increasing 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 results of our domestic radio operations are heavily dependent on the results of our stations in the New York and Los Angeles markets. These markets account for nearly 50% of our domestic radio net revenues. During fiscal 2012, KPWR-FM in Los Angeles experienced revenue growth that was better than the overall Los Angeles radio market, whereas our New York cluster trailed the revenue performance of the New York market due to weak performance at our adult urban station, WRKS-FM. Subsequent to February 29, 2012, we entered into a LMA for WRKS-FM. See Note 18 to the accompanying consolidated financial statements for more discussion. Our results in New York and Los Angeles are often more volatile than our larger competitors due to our lack of scale in these markets. We are overly dependent on the performance of one or two stations in these markets, and as the competitive environment shifts, our ability to adapt is limited. Furthermore, some of our competitors that operate larger station clusters in New York and Los Angeles are able to leverage their market share to extract a greater percentage of available advertising revenue through discounting unit rates.

As part of our business strategy, we continually evaluate potential acquisitions of radio stations, publishing properties and other businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, Emmis Operating Company’s (the Company’s principal operating subsidiary, hereinafter “EOC”) Credit Agreement substantially limits our ability to make acquisitions. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. See Note 8 to our consolidated financial statements for a discussion of the sale of a controlling interest in one of our radio stations in New York and our two radio stations in Chicago.

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.

Revenue Recognition

Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising 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.

 

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Allowance for Doubtful Accounts

An allowance for doubtful accounts is recorded based on management’s judgment of the collectability of receivables. When assessing the collectability of receivables, management considers, among other things, historical loss experience and existing economic conditions.

FCC Licenses and Goodwill

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 29, 2012, we have recorded approximately $237.2 million in goodwill and FCC licenses, which represents approximately 70% of our total assets.

In the case of our U.S. 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 our stations’ compliance with the various regulatory requirements. Historically, all of our FCC licenses have been renewed at the end of their respective periods, and we expect that all FCC licenses will continue to be renewed in the future. We consider our FCC licenses to be indefinite-lived intangibles. Our foreign broadcasting licenses expire during periods ranging from February 2021 to February 2026. We will need to submit applications to extend our foreign licenses upon their expiration to continue our broadcast operations in these countries. While there is a general expectancy of renewal of radio broadcast licenses in most countries and we expect to actively seek renewal of our foreign licenses, most of the countries in which we operate do not have the regulatory framework or history that we have with respect to license renewals in the United States. This makes the risk of non-renewal (or of renewal on less favorable terms) of foreign licenses greater than for United States’ licenses, as was demonstrated in Hungary when our broadcasting license was not renewed in November 2009 under circumstances that even a Hungarian court ruled violated Hungarian law and various bilateral investment treaties. We treat our foreign broadcasting licenses as definite-lived intangibles and amortize them over their respective license periods.

We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by Accounting Standards Codification (“ASC”) Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under a Local Marketing Agreement by another broadcaster.

We complete our annual impairment tests on December 1 of each year and perform additional interim impairment testing whenever triggering events suggest such testing is warranted.

Valuation of Indefinite-lived Broadcasting Licenses

Fair value of our FCC Licenses is estimated to be 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. To determine the fair value of our FCC Licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market 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 commenced operations at the beginning of the valuation period. 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. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control.

The projections incorporated into our license valuations take into consideration then current economic conditions. For example, in connection with our interim impairment assessment on August 1, 2009, the economic recession and credit crisis were considered as part of the assessment. Those events led to a further weakened and less profitable radio marketplace with a higher cost of capital, which impacted the interim assessment.

 

29


Assumptions incorporated into the annual impairment testing as of December 1, 2011 were similar to those used in our December 1, 2010 annual impairment testing. We expect the ongoing recovery in radio revenues to continue throughout our fiscal 2013. Below are some of the key assumptions used in our annual and interim impairment assessments. The methodology used to value our FCC licenses has not changed in the three-year period ended February 29, 2012.

 

     August 1, 2009   December 1, 2009   December 1, 2010   December 1, 2011

Discount Rate

   12.6% - 13.0%   12.7% - 13.1%   12.0% - 12.3%   11.9% - 12.2%

Long-term Revenue Growth Rate

   2.0% - 3.3%   2.0% - 3.5%   2.5% - 3.5%   2.5% - 3.3%

Mature Market Share

   6.3% - 30.6%   6.2% - 30.0%   6.1% - 28.2%   6.4% - 29.4%

Operating Profit Margin

   26.5% - 42.7%   26.0% - 40.9%   25.1% - 37.1%   26.0% - 37.2%

Valuation of Goodwill

ASC Topic 350 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 conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company’s 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. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, 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 or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. For the annual assessment performed as of December 1, 2011, the Company applied a market multiple of 7.0 times and 6.0 times the reporting unit’s operating performance for our radio and publishing reporting units, respectively. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and market transactions. To corroborate the step-one reporting unit fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit.

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 charge in the statement of operations. The methodology used to value our goodwill has not changed in the three-year period ended February 29, 2012.

Sensitivity Analysis

Based on the results of our December 1, 2011 annual impairment assessment, the fair value of our broadcasting licenses was approximately $332.3 million which was in excess of the $213.0 million carrying value by $119.3 million, or 56%. The fair values exceeded the carrying values of all of our units of accounting. Should our estimates or assumptions worsen, or should negative events or circumstances occur in the units that have limited fair value cushion, additional license impairments may be needed.

 

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     Radio Broadcasting Licenses  
     As of         
     February 29, 2012      December 1, 2011      Percentage by which fair  

Unit of Accounting

   Carrying Value      Fair Value      value exceeds carrying value  

New York Cluster

     74,093         118,224         59.6

KXOS-FM (Los Angeles)

     52,333         61,763         18.0

Austin Cluster

     39,025         40,015         2.5

St. Louis Cluster

     27,692         31,170         12.6

Indianapolis Cluster

     17,274         18,728         8.4

KPWR-FM (Los Angeles)

     2,018         61,763         2,960.6

Terre Haute Cluster

     574         625         8.9
  

 

 

    

 

 

    

 

 

 

Total

     213,009         332,288         56.0
  

 

 

    

 

 

    

 

 

 

Our annual impairment testing on December 1, 2011 did not result in an impairment charge. If we were to assume a 1% change in any of our three key assumptions (a reduction in the long-term revenue growth rate, a reduction in local commercial share or an increase in the discount rate) used to determine the fair value of our broadcasting licenses on December 1, 2011, the resulting impairment charge would have been $22.7 million, $18.0 million and $7.5 million, respectively. Also, if we were to assume a market multiple decrease of one or a 10% decrease in the two-year average station operating income, two of the key assumptions used to determine the fair value of our goodwill on December 1, 2011, the resulting estimates of enterprise valuations would still exceed the carrying values of the enterprises. As such, step two of the goodwill impairment testing would not be required, thus no impairment would be recognized if these two key assumptions were lowered.

The sharp economic downturn in late 2008 and throughout calendar 2009 negatively impacted the radio broadcasting industry as advertising revenues declined and expectations for near-term growth declined throughout most of calendar 2009. The projected revenue growth levels for the industry when we completed our interim impairment testing on August 1, 2009 were lower than we had originally forecasted when we completed our fiscal 2009 annual impairment test on December 1, 2008. This decline caused us to record further impairment to broadcasting licenses and goodwill as part of our August 1, 2009 impairment review. As revenues decline, profitability levels are also negatively impacted as fixed costs represent a significant component of a radio station’s operating expenses. As a result, the fair value of our asset base is particularly sensitive to the impact of declining revenues.

Deferred 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 Company’s 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.

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 $0.7 million and $0.8 million accrued for employee healthcare claims as of February 28 (29), 2011 and 2012, 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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ACQUISITIONS, DISPOSITIONS AND INVESTMENTS

The transactions described below impact the comparability of operating results for the three years ended February 29, 2012.

Sale of controlling interest in WRXP-FM, WKQX-FM AND WLUP-FM

On September 1, 2011, the Company completed the sale of a controlling interest in Merlin Media, LLC (“Merlin Media”), which owns the following radio stations: (i) WKQX-FM, 101.1 MHz, Channel 266, Chicago, IL (FIN 19525), (ii) WRXP-FM, 101.9 MHz, Channel 270, New York, NY (FIN 67846) and (iii) WLUP-FM, 97.9 MHz, Channel 250, Chicago, IL (FIN 73233) (collectively the “Merlin Stations”). The Company received gross cash sale proceeds of $130 million in the transaction, and incurred approximately $8.6 million of expenses, principally consisting of severance, state and local taxes, and professional and other fees and expenses. The Company used the net cash proceeds to repay approximately 38% of the term loans outstanding under its credit facility. Emmis also paid a $2.0 million exit fee to its largest lender related to the repayment of Extended Term Loans on September 1, 2011.

On September 1, 2011, subsidiaries of Emmis entered into the 2nd Amended & Restated Limited Liability Company Agreement (the “LLC Agreement”) of Merlin Media, together with Merlin Holdings, LLC (“Merlin Holdings”), an affiliate of investment funds managed by GTCR, LLC, and Benjamin L. Homel (aka Randy Michaels) (together with Merlin Holdings, the “Investors”).

In connection with the completion of the disposition of assets to Merlin Media and sale of a controlling interest in Merlin Media pursuant to the Purchase Agreement dated June 20, 2011 among the Company, Merlin Holdings and Mr. Homel (the “Purchase Agreement), the Company retained preferred equity and common equity interests in Merlin Media, the terms of which are governed by the LLC Agreement. The Company’s common equity interests in Merlin Media represented 20.6% of the initial outstanding common equity interests of Merlin Media and are subject to dilution if the Company fails to participate pro rata in future capital calls. The fair value of the Company’s 20.6% common equity ownership of Merlin Media LLC as of September 1, 2011 was approximately $5.6 million, and accounted for under the equity method. The Company’s preferred equity interests in Merlin Media consist of approximately $28.7 million (at par) of non-redeemable perpetual preferred interests, on which a preferred return accretes quarterly at a rate of 8% per annum. The fair value of this preferred equity interest as of September 1, 2011, was approximately $10.8 million and is accounted for under the cost method. The preferred interests held by the Company are junior to non-redeemable perpetual preferred interests held by the Investors of approximately $87 million, on which a preferred return accretes quarterly at a rate of 8% per annum. The preferred interests held by the Company and the Investors are both junior to a $60 million senior secured note issued to an affiliate of Merlin Holdings. The note matures five years from closing, and interest accrues on the note semi-annually at a rate of 15% per annum, payable in cash or in-kind at Merlin Media’s election. Distributions in respect of Merlin Media’s common and preferred interests are made when declared by Merlin Media’s board of managers. Given the Company’s continued equity interests in the stations, it is precluded from reclassifying the operating results of the stations to discontinued operations.

Upon deconsolidation, Emmis recorded the retained common and preferred equity interests at fair value. The fair value of our investments in Merlin Media LLC was calculated using the Black Scholes option-pricing model. The model’s inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction based upon estimated future cash flows and other estimates at September 1, 2011. Inputs to the model include stock volatility, dividend yields, expected term of the derivatives and risk-free interest rates. Results from the valuation model in one period may not be indicative of future period measurements.

Merlin Media changed the format of WKQX-FM in Chicago and WRXP-FM in New York from a music-intensive format to a news/talk format. Both stations have incurred substantial start-up losses well in excess of the original business model used in the September 1, 2011 valuation. Neither station is now expected to achieve the estimated cash flows used in the September 1, 2011 valuation. Consequently, as of February 29, 2012, it was determined that future cash flows will be substantially lower than the estimated cash flows used in the September 1, 2011 valuation of our retained common and preferred equity interests. As such, Emmis reassessed the fair value of its retained common and preferred equity interests using the same valuation methodology described above with updated assumptions, and determined that the retained common and preferred equity interests were fully impaired. The Company believes that the magnitude of the impairment and the potentially prolonged recovery period indicate that the impairment is other-than-temporary. As such, Emmis wrote-off the remaining carrying value of its investments in Merlin Media LLC. The total equity method loss and other-than-temporary impairment loss recognized related to Merlin Media LLC of $16.4 million is recognized in other income (expense), net in the accompanying consolidated statements of operations.

Under the LLC Agreement, the Company is entitled initially to appoint one out of five members of Merlin Media’s board of managers and has limited consent rights with respect to specified transactions. The Company has no obligation to make ongoing capital contributions to Merlin Media, but as noted above is subject to dilution if it fails to participate pro rata in future capital calls.

 

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Merlin Media is a private company and the Company will have limited ability to sell its interests in Merlin Media, except pursuant to customary tag-along rights with respect to sales by Merlin Media’s controlling Investor or, after five years, in a private sale to third parties subject to rights of first offer held by the controlling Investor. The Company has customary registration rights and is subject to a “drag-along” right of the controlling Investor.

On September 30, 2011, the Compensation Committee of the Company’s Board of Directors approved a discretionary bonus of $1.7 million to certain employees that were key participants in the Merlin Media transaction. The discretionary bonus is reflected in corporate expenses, excluding depreciation and amortization expense during the year ended February 29, 2012.

Sale of Glendale, CA Tower Site

On April 6, 2011, Emmis sold land, towers and other equipment at its Glendale, CA tower site to Richland Towers Management Flint, Inc. for $6.0 million in cash. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $4.9 million. Net proceeds from the sale were used to repay amounts outstanding under the credit facility.

Purchase of 100% of Bulgarian Radio Networks

During the quarter ended May 31, 2009, Emmis completed a series of transactions with its noncontrolling partners of two of our Bulgarian radio networks that gave Emmis 100% ownership in those networks. The purchase price of these transactions totaled $4.9 million in cash, and a substantial portion was allocated to goodwill which was then determined to be substantially impaired. Emmis recorded an impairment loss of $3.7 million related to Bulgarian goodwill during the quarter ended May 31, 2009.

Sale of Belgium Radio Operations

On May 29, 2009, Emmis sold the stock of its Belgium radio operation to Alfacam Group NV, a Belgian corporation, for 100 euros. Emmis recognized a gain on the sale of its Belgium radio operations of $0.4 million, which included a gain of $0.1 million related to the transfer of cumulative translation adjustments. The gain on sale of the Belgium radio operations is included in discontinued operations in the accompanying consolidated statements of operations. Emmis desired to exit Belgium as its financial performance in the market failed to meet expectations. The sale allowed Emmis to eliminate further operating losses.

RESULTS OF OPERATIONS

YEAR ENDED FEBRUARY 28, 2011 COMPARED TO YEAR ENDED FEBRUARY 29, 2012

Net revenues:

 

     For the years ended February 28 (29),               
     2011      2012      $ Change     % Change  
     (As reported, amounts in thousands)        

Net revenues:

          

Radio

   $ 184,648       $ 170,153       $ (14,495     (7.9 )% 

Publishing

     66,108         65,854         (254     (0.4 )% 
  

 

 

    

 

 

    

 

 

   

Total net revenues

   $ 250,756       $ 236,007       $ (14,749     (5.9 )% 
  

 

 

    

 

 

    

 

 

   

Radio net revenues decreased principally due to the July 15, 2011 commencement of a Local Marketing Agreement (“LMA”) related to the Merlin Stations and the ultimate sale of a controlling interest in these stations on September 1, 2011. During the time these stations were operated pursuant to the LMA, Emmis recorded, as net revenue, a $0.3 million monthly LMA fee, but did not record advertising sales during this period. Given the Company’s continued equity interests in the stations, it is precluded from reclassifying the operating results of the stations to discontinued operations. Excluding the Merlin Stations, radio net revenues would have increased $1.1 million or 0.7%.

 

 

33


We typically monitor the performance of our domestic stations against the aggregate performance of the markets in which we operate based on reports for the periods prepared by Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenues basis and exclude revenues from barter arrangements. A summary market revenue performance and Emmis’ revenue performance in those markets for the year ended February 29, 2012 is presented below:

 

     For the year ended February 29, 2012  
     Overall Market     Emmis  

Market

   Revenue Performance     Revenue Performance  

New York

     1.1     -6.4

Los Angeles

     -0.6     2.7

St. Louis

     3.3     -3.5

Indianapolis

     5.6     19.5

Austin

     1.8     -1.3

All Markets

     0.8     0.4

As previously discussed, our New York radio cluster significantly trailed market performance, mostly due to direct format competition for WRKS-FM. Excluding WRKS-FM, revenues of our domestic radio stations would have increased 4.1%.

Publishing net revenues were flat for the year ended February 29, 2012 as compared to the year ended February 28, 2011.

Station operating expenses excluding depreciation and amortization expense:

 

     For the years ended February 28 (29),               
     2011      2012      $ Change     % Change  
     (As reported, amounts in thousands)        

Station operating expenses, excluding depreciation and amortization expense:

          

Radio

   $ 136,020       $ 130,533       $ (5,487     (4.0 )% 

Publishing

     63,835         63,772         (63     (0.1 )% 
  

 

 

    

 

 

    

 

 

   

Total station operating expenses, excluding depreciation and amortization expense

   $ 199,855       $ 194,305       $ (5,550     (2.8 )% 
  

 

 

    

 

 

    

 

 

   

Radio station operating expenses, excluding depreciation and amortization expense, decreased principally due to the LMA and eventual sale of the Merlin Stations as previously discussed. Excluding the Merlin Stations, radio station operating expenses, excluding depreciation and amortization expense would have increased $3.1 million or 2.8%. This increase is predominately due to merit wage increases in fiscal 2012 following wage freezes and reductions in recent years, coupled with targeted investments in sales training and enhancements in our digital capabilities.

Publishing operating expenses, excluding depreciation and amortization expense were flat due to expense control given the weak local advertising markets

Corporate expenses excluding depreciation and amortization expense:

 

     For the years ended February 28 (29),                
     2011      2012      $ Change      % Change  
     (As reported, amounts in thousands)         

Corporate expenses excluding depreciation and amortization expense

   $ 15,710       $ 19,096       $ 3,386         21.6

Corporate expenses, excluding depreciation and amortization expense, increased principally due to (i) approximately $0.6 million of indirect costs associated with the preferred stock transactions discussed in Note 3 to the accompanying consolidated financial statements, (ii) approximately $3.0 million of costs associated with the 3rd Amendment to the Company’s Credit Agreement discussed in Note 5 to the accompanying consolidated financial statements, (iii) a $1.7 million bonus paid to certain employees in connection with the sale of the Merlin Stations and (iv) a $0.7 million discretionary bonus paid to substantially all corporate employees during the quarter ended August 31, 2011. During the year ended February 28, 2011 the Company recorded $3.6 million of costs associated with a potential going private transaction discussed in Note 9 to the accompanying consolidated financial statements.

 

34


Impairment loss on intangible assets:

 

     For the year ended February 28 (29),               
     2011      2012      $ Change     % Change  
     (As reported, amounts in thousands)        

Impairment loss on intangible assets

   $ 7,005       $ —         $ (7,005     (100.0 )% 

Our annual impairment testing as of December 1, 2010 resulted in an impairment loss of $7.0 million entirely attributable to radio FCC licenses in our Austin, Texas radio cluster. Our annual impairment testing as of December 1, 2011 resulted in no additional impairment losses.

Due to the stabilization in the economy and a recovery in radio revenues, we do not expect to record in the foreseeable future impairment losses similar to the loss recorded for our Austin radio FCC licenses. Accordingly, we do not expect historical operating results to be indicative of future operating results.

Depreciation and amortization:

 

     For the years ended February 28 (29),               
     2011      2012      $ Change     % Change  
     (As reported, amounts in thousands)        

Depreciation and amortization:

          

Radio

   $ 7,524       $ 5,807       $ (1,717     (22.8 )% 

Publishing

     499         451         (48     (9.6 )% 

Corporate

     1,301         1,390         89        6.8
  

 

 

    

 

 

    

 

 

   

Total depreciation and amortization

   $ 9,324       $ 7,648       $ (1,676     (18.0 )% 
  

 

 

    

 

 

    

 

 

   

The decrease in depreciation and amortization expense for the year ended February 29, 2012 is mostly attributable to the sale of the Merlin Stations on September 1, 2011. Additionally, our international broadcasting license in Slovakia, a definite lived-intangible asset, was extended from February 2013 to February 2021, which decreased annual amortization expense.

Loss on disposal of fixed assets:

 

     For the years ended February 28 (29),         
     2011      2012      $ Change  
     (As reported, amounts in thousands)  

Loss on disposal of fixed assets:

        

Radio

   $ 3       $ 796       $ 793   

Publishing

     —           24         24   

Corporate

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loss on disposal of fixed assets:

   $ 3       $ 820       $ 817   
  

 

 

    

 

 

    

 

 

 

In July 2011, Emmis sold its office building in Terre Haute, Indiana for $0.2 million and recorded a loss on sale of assets of $0.8 million.

 

35


Operating income:

 

     For the years ended February 28 (29),              
     2011     2012     $ Change     % Change  
     (As reported, amounts in thousands)        

Operating income:

        

Radio

   $ 34,096      $ 33,017      $ (1,079     (3.2 )% 

Publishing

     1,774        1,607        (167     (9.4 )% 

Corporate

     (17,011     (20,486     (3,475     (20.4 )% 
  

 

 

   

 

 

   

 

 

   

Total operating income

   $ 18,859      $ 14,138      $ (4,721     (25.0 )% 
  

 

 

   

 

 

   

 

 

   

Operating income is significantly impacted by the impairment loss recorded in 2011, as discussed above. Excluding the impairment loss, operating income would have been $25.9 million for the year ended February 28, 2011. The decrease in operating income is mostly due to the sale of the Merlin Stations, which reduced operating income by approximately $6.4 million and the increase in corporate expenses as discussed above.

Interest expense:

 

     For the years ended February 28 (29),                
     2011      2012      $ Change      % Change  
     (As reported, amounts in thousands)         

Interest expense

   $ 21,099       $ 28,844       $ 7,745         36.7

Although we repaid a significant amount of long-term debt during the year ended February 29, 2012, interest expense increased due to the Third Amendment to our Credit Agreement, which was effective March 29, 2011 and interest expense associated with our senior unsecured notes, issued in November 2011 and January 2012. As a result of the Third Amendment, the interest rate on approximately 55% of our term loans increased from LIBOR + 4% to a minimum fixed rate of 12.25%. We also pay an exit fee upon repayment of this portion of our term loans ranging from 3% to 6% of the balance repaid. We are accruing this exit fee over the term of the amended term loans as a component of interest expense. The senior unsecured notes, issued on various dates in November 2011 and January 2012, total $33.9 million at February 29, 2012 and accrue interest at 22.95%, compounded quarterly.

Loss on debt extinguishment:

 

     For the years ended February 28 (29),         
     2011      2012      $ Change  
     (As reported, amounts in thousands)  

Loss on debt extinguishment

   $ —         $ 2,006       $ 2,006   

During the year ended February 29, 2012, the Company recorded a $0.5 million loss related to the write-off of debt fees associated with term loans repaid during the year. Additionally, the Company recorded a $1.5 million loss related to the write-off of debt fees associated with term loans that were deemed to be substantially modified in connection with the Third Amendment.

 

36


Gain on sale of controlling interest Merlin Media LLC:

 

     For the years ended February 28 (29),         
     2011      2012      $ Change  
     (As reported, amounts in thousands)  

Gain on sale of controlling interest in Merlin Media LLC

   $ —         $ 31,865       $ 31,865   

On September 1, 2011, the Company sold a controlling interest in Merlin Media LLC for $130 million in cash proceeds. Additionally, the Company retained a preferred and common equity interest in Merlin Media LLC. The gain on sale of controlling interest was measured as the aggregate of cash received and the fair value of the retained noncontrolling interests in Merlin Media LLC, less the Company’s carrying value of the assets and liabilities sold.

Other expense, net:

 

     For the years ended February 28 (29),         
     2011      2012      $ Change  
     (As reported, amounts in thousands)  

Other expense, net

   $ 469       $ 15,739       $ 15,270   

Other expense, net for the year ended February 29, 2012, principally relates to the Company’s share of Merlin Media LLC’s losses through its investment in Merlin Media LLC’s common stock and an other-than-temporary impairment loss on the Company’s investment in both the common stock and preferred stock of Merlin Media LLC, all of which was $16.4 million. Partially offsetting the losses related to our investments in Merlin Media LLC were income related to our other equity method investments and interest income.

Other expense, net for the year ended February 28, 2011, principally related to a $0.3 million other-than-temporary impairment loss related to our preferred stock investment in a company that specializes in digital radio transmission technology.

Provision for (benefit from) income taxes:

 

     For the years ended February 28 (29),        
     2011      2012     $ Change  
     (As reported, amounts in thousands)  

Provision for (benefit from) income taxes

   $ 6,304       $ (27,472   $ (33,776

The benefit for income taxes for year ended February 29, 2012, principally relates to the utilization of previously reserved net operating losses and the elimination of the portion of the Company’s deferred tax liability attributable to indefinite-lived intangibles associated with the sale of the Merlin Stations.

We recorded a provision for income taxes in the year ended February 28, 2011 despite our pre-tax loss due to the valuation allowance we record against our deferred tax assets. The Company is recording a valuation allowance for its net deferred tax assets, including its net operating loss carryforwards, but excluding deferred tax liabilities related to indefinite-lived intangibles.

 

37


Income (loss) from discontinued operations, net of tax:

 

     For the years ended February 28 (29),         
     2011     2012      $ Change  
     (As reported, amounts in thousands)  

Income (loss) from discontinued operations, net of tax

   $ (2,526   $ 3,842       $ 6,368   

Our Hungarian radio operations and the operations of our Flint Peak Tower Site have been classified as discontinued operations in the accompanying consolidated statements. The increase in income from discontinued operations, net of tax, for the year ended February 29, 2012 mostly relates to the gain on sale of the Flint Peak Tower Site. A summary of discontinued operations is presented below:

 

     Year ended February 28 (29),  
     2011     2012  

Income (loss) from operations:

    

Slager Radio (Hungary)

   $ (2,740   $ (312

Flint Peak Tower Site

     362        4,883   
  

 

 

   

 

 

 

Total

     (2,378     4,571   

Provision for income taxes

     148        729   
  

 

 

   

 

 

 

Income (loss) from operations, net of tax

     (2,526     3,842   
  

 

 

   

 

 

 

For a description of properties sold, see the discussion under Acquisitions, Dispositions and Investments and in Note 1(j) to our accompanying consolidated financial statements. In the case of our radio operations in Hungary, the Hungarian government did not renew our broadcasting license in November 2009 and we were forced to cease operations. Our fiscal 2011 loss in Hungary was largely due to the reclassification of $2.0 million of accumulated foreign currency losses, previously reflected in accumulated other comprehensive income (loss), due to the substantial liquidation of that entity during the year ended February 28, 2011.

Consolidated net income (loss):

 

     For the years ended February 28 (29),                
     2011     2012      $ Change      % Change  
     (As reported, amounts in thousands)         

Consolidated net income (loss)

   $ (11,539   $ 30,728       $ 42,267         366.3

The increase in consolidated net income is due to (i) the gain on sale of a controlling interest in Merlin Media LLC, (ii) the utilization of previously reserved net operating losses and the elimination of the portion of the Company’s deferred tax liability attributable to indefinite-lived intangibles associated with the sale of the Merlin Stations, (iii) an increase in income from discontinued operations due to the sale of the Flint Peak tower site and (iv) an impairment charge related to our FCC licenses in Austin recorded during the year ended February 28, 2011. These items are partially offset by (i) higher interest expense, (ii) lower operating income (iii) other-than-temporary impairment losses related to our Merlin Media LLC investments and (iii) a loss on debt extinguishment for the year ended February 29, 2012.

Gain on extinguishment of preferred stock:

 

     For the years ended February 28 (29),         
     2011      2012      $ Change  
     (As reported, amounts in thousands)         

Gain on extinguishment of preferred stock

   $ —         $ 61,892       $ 61,892   

 

38


During the year ended February 29, 2012, the Company purchased or purchased rights in 1,871,529 shares of its preferred stock for $31.7 million. Preferred stock is carried on the balance sheet at its stated liquidation preference of $50 per share. The shares that Emmis purchased rights in are considered extinguished from an accounting perspective, and thus Emmis recognized a gain on extinguishment of the preferred stock equal to the difference of the acquisition price and the carrying amount of the preferred stock.

YEAR ENDED FEBRUARY 28, 2010 COMPARED TO YEAR ENDED FEBRUARY 28, 2011

Net revenues:

 

     For the years ended February 28,                
     2010      2011      $ Change      % Change  
     (As reported, amounts in thousands)         

Net revenues:

           

Radio

   $ 177,102       $ 184,648       $ 7,546         4.3

Publishing

     65,000         66,108         1,108         1.7
  

 

 

    

 

 

    

 

 

    

Total net revenues

   $ 242,102       $ 250,756       $ 8,654         3.6
  

 

 

    

 

 

    

 

 

    

Radio net revenues increased principally as a result of general economic growth in our domestic radio markets as the economy recovers from the recent recession. 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, 2011, revenues of our domestic radio stations were up 5.2%, whereas Miller Kaplan reported that revenues of our domestic radio markets were up 5.1%. We significantly outperformed in our middle markets (St. Louis, Indianapolis and Austin), which offset weakness at our Los Angeles and Chicago radio stations. The recovery in radio advertising has put greater demand on our advertising inventory. In fiscal 2011, our average minute rate was up 4.5% and our number of minutes sold was up 1.2%. Our international radio properties did not see the same level of recovery as our domestic radio properties and net revenues were down 10.9% for the fiscal year.

Publishing net revenues also increased principally due to the better economic climate, though the recovery in advertising for our publishing division has been slower to develop than what we have seen in our radio division.

Station operating expenses excluding depreciation and amortization expense:

 

     For the years ended February 28,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Station operating expenses, excluding depreciation and amortization expense:

          

Radio

   $ 141,456       $ 136,020       $ (5,436     (3.8 )% 

Publishing

     64,603         63,835         (768     (1.2 )% 
  

 

 

    

 

 

    

 

 

   

Total station operating expenses, excluding depreciation and amortization expense

   $ 206,059       $ 199,855       $ (6,204     (3.0 )% 
  

 

 

    

 

 

    

 

 

   

Radio station operating expenses, excluding depreciation and amortization expense, decreased principally due to division-wide cost reduction efforts consisting, among other things, of headcount and wage reductions implemented during fiscal 2010. While most of the cost reduction efforts were implemented at the beginning of fiscal 2010, some were implemented later in the fiscal year and we experienced some of this benefit in fiscal 2011.

Publishing operating expenses, excluding depreciation and amortization expense, decreased principally due to division-wide cost reduction efforts in the prior year, similar to our radio division.

 

39


Corporate expenses excluding depreciation and amortization expense:

 

     For the years ended February 28,                
     2010      2011      $ Change      % Change  
     (As reported, amounts in thousands)         

Corporate expenses excluding depreciation and amortization expense

   $ 13,634       $ 15,710       $ 2,076         15.2

Corporate expenses, excluding depreciation and amortization expense, increased due to costs incurred by the Company associated with the Going Private Transaction discussed in Note 9 to the accompanying consolidated financial statements. The Company recorded $3.6 million of costs associated with the transaction in the year ended February 28, 2011. Excluding these costs, corporate expenses would have decreased due to cost reduction efforts implemented during fiscal 2010, primarily consisting of headcount reductions and wage reductions.

Restructuring charge:

 

     For the year ended February 28,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Restructuring charge

   $ 3,350       $ —         $ (3,350     (100.0 )% 

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 Company’s standard severance plan. This amount was recognized in the year ended February 28, 2009, as the terminations were probable and the amount was reasonably estimable prior to the end of the period. Employees terminated also received one-time enhanced severance of $3.4 million that was recognized in the year ended February 28, 2010, as the enhanced plan was not finalized and communicated until March 5, 2009.

Impairment loss on intangible assets:

 

     For the year ended February 28 ,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Impairment loss on intangible assets

   $ 174,642       $ 7,005       $ (167,637     (96.0 )% 

During the first quarter of fiscal 2010, Emmis purchased the remaining ownership interests of its two majority owned radio networks in Bulgaria. Emmis now owns 100% of all three radio networks in Bulgaria. Approximately $3.7 million of the purchase price related to these acquisitions was allocated to goodwill, which was then determined to be substantially impaired. During the second quarter of fiscal 2010, we performed an interim impairment test of our intangible assets as indicators of impairment were present. In connection with the interim review, we recorded an impairment loss of $160.9 million related to our radio FCC licenses, $5.3 million related to goodwill at our Los Angeles Magazine publication, $2.8 million related to definite-lived intangibles at our Orange Coast Magazine publication and $2.0 million related to our Bulgarian foreign broadcast licenses.

We performed our annual impairment testing as of December 1, 2010, which resulted in an impairment loss of $7.0 million entirely attributable to radio FCC licenses in our Austin, Texas radio cluster.

 

40


Depreciation and amortization:

 

     For the years ended February 28,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Depreciation and amortization:

          

Radio

   $ 8,076       $ 7,524       $ (552     (6.8 )% 

Publishing

     772         499         (273     (35.4 )% 

Corporate

     1,493         1,301         (192     (12.9 )% 
  

 

 

    

 

 

    

 

 

   

Total depreciation and amortization

   $ 10,341       $ 9,324       $ (1,017     (9.8 )% 
  

 

 

    

 

 

    

 

 

   

The decrease in radio and publishing depreciation and amortization mostly relates to impairment charges related to our definite-lived intangible assets at our Bulgarian radio operation and our Orange Coast publication in connection with our interim impairment testing performed on August 1, 2009.

Operating income (loss):

 

     For the years ended February 28,              
     2010     2011     $ Change     % Change  
     (As reported, amounts in thousands)        

Operating income (loss):

        

Radio

   $ (140,431   $ 34,096      $ 174,527        124.3

Publishing

     (9,200     1,774        10,974        119.3

Corporate

     (16,166     (17,011     (845     (5.2 )% 
  

 

 

   

 

 

   

 

 

   

Total operating income (loss)

   $ (165,797   $ 18,859      $ 184,656        111.4
  

 

 

   

 

 

   

 

 

   

Operating income (loss) is significantly impacted by impairment losses recorded in fiscal 2010 and 2011, as discussed above. Excluding impairment losses, operating income would have been $9.2 million and $26.2 million for the years ended February 28, 2010 and 2011, respectively. Operating income excluding impairment losses increased due to higher net revenues coupled with lower station operating expenses, both of which are discussed above.

Interest expense:

 

     For the years ended February 28,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Interest expense

   $ 24,820       $ 21,099       $ (3,721     (15.0 )% 

The August 2009 amendment to our Credit Agreement increased the interest rate on amounts outstanding under the Credit Agreement by 2%. However, in March 2010, an interest rate swap agreement matured that had fixed LIBOR on $165 million notional principal at 4.8%. Following its maturity, we began paying LIBOR at a floating rate, which lowered our interest on this portion of our debt by approximately 4.5%.

 

41


Gain on debt extinguishment:

 

     For the years ended February 28,               
     2010      2011      $ Change     % Change  
     (As reported, amounts in thousands)        

Gain on debt extinguishment

   $ 31,362       $ —         $ (31,362     (100.0 )% 

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 EOC’s outstanding term loans for $44.7 million in cash. As a result of these purchases, Emmis recognized a gain on extinguishment of debt of $31.9 million in the quarter ended May 31, 2009, which is net of transaction costs of $1.0 million. We are not permitted to effect further tenders under the Credit Agreement.

In August 2009, Emmis amended its Credit Agreement. As part of the August 2009 amendment, maximum availability under the revolver was reduced from $75 million to $20 million. The Company recorded a loss on debt extinguishment during the year ended February 28, 2010 of $0.5 million related to the write-off of deferred debt costs associated with the revolver reduction.

Provision for (benefit from) income taxes:

 

     For the years ended February 28,                
     2010     2011      $ Change      % Change  
     (As reported, amounts in thousands)         

Provision for (benefit from) income taxes

   $ (39,952   $ 6,304       $ 46,256         (115.8 )% 

Our effective income tax benefit for the year ended February 28, 2010 was 25%. We recorded a provision for income taxes in the year ended February 28, 2011 despite our pre-tax loss due to the valuation allowance we record against our deferred tax assets. We concluded that we should record valuation allowances against our deferred tax assets in our year ended February 28, 2009 and we continue to record a valuation allowance against newly created deferred tax assets until we can conclude that recovery of the asset is probable.

Income (loss) from discontinued operations, net of tax:

 

     For the years ended February 28,              
     2010      2011     $ Change     % Change  
     (As reported, amounts in thousands)        

Income (loss) from discontinued operations, net of tax

   $ 641       $ (2,526   $ (3,167     (494.1 )% 

 

 

42


Our international radio operations in Belgium and Hungary and the operations of our Flint Peak Tower Site have been classified as discontinued operations in the accompanying consolidated financial statements. The financial results of these operations and related discussions are fully described in Note 1j to the accompanying consolidated financial statements. Below is a summary of the components of discontinued operations.

 

     Year ended February 28,  
     2010     2011  

Income (loss) from operations:

    

Slager Radio (Hungary)

   $ 1,404      $ (2,740

Flint Peak Tower Site

     311        362   

Belgium

     (944     —     

Other

     (37     —     
  

 

 

   

 

 

 

Total

     734        (2,378

Provision for income taxes

     513        148   
  

 

 

   

 

 

 

Income (loss) from operations, net of tax

     221        (2,526

Gain (loss) on sale of discontinued operations:

    

Belgium

     420        —     
  

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

   $ 641      $ (2,526
  

 

 

   

 

 

 

For a description of properties sold, see the discussion under Acquisitions, Dispositions and Investments and in Note 1(j) to our Consolidated Financial Statements. In the case of our radio operations in Hungary, the Hungarian government did not renew our broadcasting license in November 2009 and we were forced to cease operations. Our fiscal 2011 loss in Hungary was largely due to the reclassification of $2.0 million of accumulated foreign currency losses, previously reflected in accumulated other comprehensive income (loss), due to the substantial liquidation of that entity during the year ended February 28, 2011.

Consolidated net loss:

 

     For the years ended February 28,               
     2010     2011     $ Change      % Change  
     (As reported, amounts in thousands)         

Consolidated net loss

   $ (118,492   $ (11,539   $ 106,953         90.3

The decrease in net loss for the year ended February 28, 2011 is mostly due to the decrease in impairment charges, partially offset by the gain on debt extinguishment and benefit for income taxes recorded in the prior year, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

CREDIT AGREEMENT

On March 29, 2011, Emmis and its principal operating subsidiary, Emmis Operating Company (the “Borrower”), entered into the Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement (the “Third Amendment), by and among the Borrower, Emmis, the lending institutions party to the Credit Agreement referred to below (collectively, the “Lenders”) and Bank of America, N.A., as administrative agent (the “Administrative Agent”) for itself and the other Lenders party to the Amended and Restated Revolving Credit and Term Loan Agreement, dated November 2, 2006 (as amended, supplemented, and restated or otherwise modified and in effect from time to time, the “Credit Agreement”), by and among the Borrower, Emmis, the Lenders, the Administrative Agent, Deutsche Bank Trust Company Americas, as syndication agent, General Electric Capital Corporation, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch and SunTrust Bank, as co-documentation agents.

 

 

43


Among other things, the Third Amendment provides that (i) the leverage ratio and fixed charge covenants will not apply to any amounts outstanding under the Credit Agreement until November 30, 2012, at which time they will be set at 5.0x and 1.15x for the life of the Credit Agreement and from November 30, 2011 through August 31, 2012 there will be a minimum Consolidated EBITDA (as defined in the Credit Agreement) test of $25.0 million per rolling four quarter test period, (ii) the requirement that annual audits be certified without qualification will be waived for the fiscal years ending February 2011 and 2012, (iii) the ability of Emmis to engage in certain activities or transactions, including the payment of dividends, the incurrence of indebtedness and the ability to invest certain proceeds including from asset sales will be further restricted or prohibited and (iv) the terms of the existing Tranche B Term Loans held or purchased on or prior to the date of the Third Amendment by funds or accounts managed by Canyon Capital Advisors LLC (“Canyon”), are amended into an amended tranche of term loans with an extended maturity date of November, 2014. The total amount of Tranche B Term Loans outstanding as of March 29, 2011 was $329 million, and the amount of such term loans that Canyon amended into extended term loans was approximately $182.9 million. The pricing on such amended term loans is based on Emmis’ election on the following pricing grid:

 

Cash Portion

   Paid-in-Kind Portion  

7.50%

     7.00

7.75%

     6.50

8.00%

     6.00

8.25%

     5.50

8.50%

     5.00

8.75%

     4.50

9.00%

     4.00

9.25%

     3.50

9.50%

     3.00

9.75%1

     2.50 %1 

Prior to the entry into the Third Amendment, Emmis entered into a backstop letter agreement, dated March 27, 2011, with Canyon (the “Backstop Letter Agreement”), pursuant to which Canyon agreed to consent to the Third Amendment and to purchase loans necessary to provide the required Lenders consent to the Third Amendment. In consideration of Canyon’s entering into the Backstop Letter Agreement, Canyon will receive an exit fee of 6% (or 3% during the first six months after the Third Amendment effective date) on the Tranche B Term Loans and revolving credit commitments held or purchased by funds or accounts managed by Canyon as of March 29, 2011.

We entered into the Fourth Amendment to our Credit Agreement in November 2011 to allow the issuance of the senior unsecured notes (discussed below). We entered into the Fifth Amendment to our Credit Agreement in March 2012 to allow us to issue preferred stock into the 2012 Retention Plan and Trust Agreement. Neither the Fourth Amendment nor the Fifth Amendment changed financial covenants or the interest rate we pay on outstanding borrowings. We entered into the Sixth Amendment to our Credit Agreement in April 2012 to allow for the WRKS-FM LMA and related transactions, as described in Note 18 to the accompanying consolidated financial statements. In addition, this amendment reduces the amount of required minimum trailing twelve-month Consolidated EBITDA (as defined in the Credit Agreement) from $25.0 million to $24.0 million and allows for $20.0 million of the net proceeds from the monetization of the LMA payments to be used for revolver repayment and general corporate purposes, while simultaneously reducing the revolver commitment by $10.0 million, from $20.0 million to $10.0 million.

Senior Unsecured Notes

On November 10, 2011, Emmis entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Zell Credit Opportunities Master Fund, L.P. (“Zell”).

Under the Note Purchase Agreement, Zell agreed to purchase from ECC up to $35.0 million of unsecured notes (the “Notes”). The Notes, with respect to distributions upon the liquidation, winding-up and dissolution of the Company, rank senior to the Preferred Stock and common equity of the Company, but junior to our Credit Agreement. Emmis was permitted to sell the Notes to Zell on up to four separate occasions on or before February 2, 2012. The Note Purchase Agreement provided that Emmis may enter into transactions to purchase or purchase rights in its Preferred Stock through privately negotiated transactions with individual preferred shareholders and/or through a tender offer. Emmis issued, on four separate occasions in November 2011 and January 2012, Notes to Zell totaling $31.9 million to either purchase or purchase rights in 1,871,529 shares of Preferred Stock at a weighted average price of $15.64 per share and to pay $2.7 million in fees and expenses. Net deferred debt costs of approximately $0.5 million relating to the Notes are reflected in the accompanying consolidated balance sheets as of February 29, 2012, and are being amortized over the life of the Notes as a component of interest expense.

 

 

1 

If the Company elects 9.75% Cash Portion for any payment, it may also elect to pay some or all of the Paid-in-Kind portion in cash for such period.

 

44


Interest on the Notes is paid in kind and compounds quarterly at a rate of 22.95% per annum, except that during the continuance of any event of default the rate will be 24.95% per annum payable on demand in cash. The Notes mature on February 1, 2015, at which time the principal balance and all accreted interest is due entirely in cash.

At any time after the discharge of certain senior obligations of Emmis and its subsidiaries described in the Note Purchase Agreement, Emmis may, upon prior written notice to Zell, redeem the Notes in whole or in part at a redemption price (including with certain make-whole amounts for redemption occurring prior to May 10, 2013) as described in the Note Purchase Agreement. Any partial redemption of the Notes shall be in denominations of at least $10.0 million and in multiples of $1.0 million in excess of such minimum denomination.

The Note Purchase Agreement contains representations, warranties, indemnities and affirmative and negative covenants that are customary for agreements of its type. The negative covenants include, without limitation, certain limitations on the ability to (1) incur liens and indebtedness, (2) consummate mergers, consolidations or asset sales, (3) make guarantees and investments, and (4) pay dividends or distributions on or make any distributions in respect of Preferred Stock or common equity. The Note Purchase Agreement also includes certain events of default customary for agreements of its type including, among others, the failure to make payments when due, insolvency, certain judgments, breaches of representations and warranties, breaches of covenants, and the occurrence of certain events, including cross acceleration to certain other indebtedness of Emmis, including its senior credit facility. In addition, Emmis is required to deliver compliance certificates demonstrating compliance with the Note Purchase Agreement and Emmis’ senior credit facility.

The Company was in compliance with all financial and non-financial covenants of the Credit Agreement, as amended, as of February 29, 2012. Our Liquidity (as defined in the Credit Agreement) as of February 29, 2012 was $14.6 million and our Consolidated EBITDA (as defined in the Credit Agreement) was $26.3 million. The impairment charge recorded by the Company during the year ended February 28, 2011 was noncash and had no impact on our liquidity or debt covenant compliance.

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. As of the filing of this Form 10-K, management believes the Company can meet its liquidity needs through the end of fiscal year 2013 with cash and cash equivalents on hand, projected cash flows from operations, cash from transactions outlined in Note 18 to the accompanying consolidated financial statements, and, to the extent necessary, through its borrowing capacity under the Credit Agreement, which was approximately $13.5 million at February 29, 2012. Based on these projections, and the transactions outlined in Note 18 to the accompanying consolidated financial statements, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2013.

SOURCES OF LIQUIDITY

Our primary sources of liquidity are cash provided by operations and cash available through revolver borrowings under our credit facility. Our primary uses of capital during the past few years have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements and the repayment of debt.

At February 29, 2012, we had cash and cash equivalents of $5.6 million and net working capital of $0.8 million. At February 28, 2011, we had cash and cash equivalents of $6.1 million and net working capital of $12.1 million. Cash and cash equivalents held at various European banking institutions at February 28 (29), 2011 and 2012 was $5.8 million and $4.3 million (which includes approximately $1.7 million and $0.9 million of cash related to our Slager discontinued operation which is classified as current assets – discontinued operations in the consolidated balance sheets), respectively. Our ability to access our share of these international cash balances (net of noncontrolling interests) is limited by country-specific statutory requirements. During the year ended February 29, 2012, working capital decreased $11.3 million. The decrease in net working capital primarily relates to the reclassification of our revolver to current maturities of long-term debt as the revolver matures in November 2012 and lower accounts receivable as of February 29, 2012. 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 a discussion of specific segment needs.

The Company previously entered into three separate three-year interest rate exchange agreements, whereby the Company paid a fixed rate of notional principal in exchange for a variable rate on the same amount of notional principal based on the three-month LIBOR. The counterparties to these agreements were global financial institutions. One of these interest rate exchange agreements matured in March 2010 and the remaining two matured in March 2011.

 

45


Operating Activities

Cash flows provided by operating activities were $19.6 million and $3.8 million for the years ended February 28 (29), 2011 and 2012, respectively. The decrease in cash flows provided by operating activities was mainly attributable to a decrease in operating income coupled with higher interest expense.

Cash flows provided by operating activities were $25.7 million and $19.6 million for the years ended February 28, 2010 and 2011, respectively. The decrease in cash flows provided by operating activities was mainly attributable to changes in working capital. The decrease in cash provided by working capital was largely driven by the receipt of $10.2 million related to our national representation firm’s performance guarantee and the collection of $14.0 million for the first two years of LMA fees for KXOS-FM, both of which occurred in the year ended February 28, 2010. These fiscal 2010 receipts are partially offset by the receipt of $6.8 million related to the previously discussed federal tax refund during the year ended February 28, 2011.

Investing Activities

For the year ended February 29, 2012, cash provided by investing activities was $131.3 million. During the year ended February 29, 2012, the Company sold a controlling interest in the Merlin Stations for $130.0 million in cash, sold its Flint Peak Tower Site for $5.8 million of net cash proceeds and sold its 50% share of a partnership in which the sole asset is land in New Jersey on which a transmission tower is located to the other partner for $1.3 million of net cash proceeds. The proceeds related to the Flint Peak Tower sale are classified as cash provided by discontinued operations in the accompanying consolidated statements of cash flows. Partially offsetting the net cash proceeds on the sales described above was approximately $5.7 million of capital expenditures.

For the year ended February 28, 2011, cash used in investing activities was $4.2 million, almost all of which related to capital expenditures.

For the year ended February 28, 2010, cash used in investing activities was $0.6 million. This consisted of $4.6 million of capital expenditures and $4.9 million paid to purchase the noncontrolling interests share of our Bulgarian radio networks, both of which were partially offset by $9.1 million of cash received from the sale of property and equipment ($9.0 million of which related to our airplane purchased in fiscal 2009 and sold in fiscal 2010).

In the years ended February 2010, 2011 and 2012, our capital expenditures were $4.6 million, $4.1 million and $5.7 million, respectively. Capital expenditures for the year ended February 29, 2012 include approximately $0.8 million related to a customer relationship management system. Recurring capital expenditures primarily relate to leasehold improvements to various office and studio facilities, broadcast equipment purchases, and tower upgrades. 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 $58.3 million, $15.8 million and $135.3 million for the years ended February 2010, 2011 and 2012, respectively. Cash used in financing activities for the year ended February 29, 2012 primarily relates to net payments related to our senior credit agreement of $127.2 million, payments to either purchase or purchase rights in preferred stock of $31.7 million, payments for other debt-related costs of $4.2 million and distributions to noncontrolling interests of $4.2 million, all of which are partially offset by the issuance of senior unsecured notes of $31.9 million.

Cash flows used in financing activities during the year ended February 28, 2011 primarily relate to the net long-term debt repayments of $10.1 million and $5.6 million used to pay distributions to noncontrolling interests ($1.2 million of which is related to Slager and thus is classified as discontinued operations).

Cash flows used in financing activities during the year ended February 28, 2010 primarily relate to the net long-term debt repayments of $47.5 million, payment of $4.8 million of debt-related fees and $6.0 million used to pay distributions to noncontrolling interests ($2.0 million of which is related to Slager and thus is classified as discontinued operations).

 

46


As of February 29, 2012, Emmis had $203.8 million of borrowings under the Credit Agreement ($8.0 million current and $195.8 million long-term), $33.9 million of senior unsecured notes (entirely long-term) and, excluding shares outstanding subject to total return swaps, $46.9 million of Preferred Stock liquidation preference (excluding undeclared dividends in arrears for shares outstanding in which the Company has no economic rights through total return swaps of $10.5 million). Approximately $110.0 million of borrowings under the Credit Agreement bears interest pursuant to a grid under which 7.5% to 12.25% per annum is to be paid in cash and 7.0% to 0.0% per annum is to be paid in kind, subject to a minimum yield of 12.25% per annum. The remainder of the Credit Agreement debt bears interest, at our option, at a rate equal to the Eurodollar rate or an alternative Base Rate plus a margin. The senior unsecured notes compound quarterly at a rate of 22.95% per annum and is paid in kind, except that during the continuance of any event of default the rate will be 24.95% per annum payable on demand in cash. As of February 29, 2012, our weighted average borrowing rate under our Credit Agreement was approximately 8.8%. Including the senior unsecured notes, our weighted average borrowing rate at February 29, 2012 was 10.8%.

Subsequent to the execution of the Third Amendment, approximately $182.9 million of borrowings under the Credit Agreement bears interest pursuant to a grid under which 7.5% to 12.25% per annum is to be paid in cash and 7.0% to 0.0% per annum is to be paid in kind, subject to a minimum yield of 12.25% per annum (see previous discussion under “Credit Agreement”). The remainder of the debt bears interest, at our option, at a rate equal to the Eurodollar rate or an alternative Base Rate plus a margin.

The debt service requirements of Emmis over the next twelve-month period are expected to be $2.0 million for mandatory repayment of term notes under our Credit Agreement, $6.0 million for revolver borrowings under our Credit Agreement as the revolver is set to mature on November 2, 2012, and a minimum of $8.2 million related to interest on the Extended Term Loans. The Company may, at its election, choose to pay a portion of the interest due on the Extended Term Loans in-kind. The remainder of the Credit Agreement debt bears interest at variable rates and is not included in the debt service requirements previously discussed.

The terms of Emmis’ Preferred Stock provide for a quarterly dividend payment of $.78125 per share, when, as, and if declared by our Board of Directors on each January 15, April 15, July 15 and October 15. Emmis last paid its quarterly dividend on October 15, 2008. As of February 29, 2012, undeclared dividends in arrears for shares outstanding in which the Company has no economic rights through total return swaps totaled $10.5 million, or $11.17 per share of preferred stock. The Third Amendment to our Credit Agreement prohibits the Company from paying dividends on the Preferred Stock during the Suspension Period (as defined in the Credit Agreement) (See “Liquidity and Capital Resources”). Subject to the restrictions of the Credit Agreement, payment of future preferred stock dividends is at the discretion of the Company’s Board of Directors. Failure to declare and pay the dividend is not a default under the terms of the Preferred Stock. However, since undeclared dividends in arrears exceed six quarters, the holders of the Preferred Stock exercised their right to elect two persons to our board of directors. One of these directors, Joseph R. Siegelbaum, resigned in November 2011. Michelle D. Bergman was elected by the holders of the Preferred Stock to replace Mr. Siegelbaum at a special meeting of shareholders on April 2, 2012.

As of May 1, 2012, we had $5.5 million available for additional borrowing under our credit facility, which is net of $0.5 million in outstanding letters of credit. Availability under the credit facility depends upon our continued compliance with certain operating covenants and financial ratios. Emmis was in compliance with these covenants as of February 29, 2012. As part of our business strategy, we continually evaluate potential acquisitions of radio stations, publishing properties and other businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, Emmis Operating Company’s Credit Agreement, as amended, substantially limits our ability to make acquisitions. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. See Note 8 to our consolidated financial statements for a discussion of the sale of a controlling interest in one of our radio stations in New York and our two radio stations in Chicago.

INTANGIBLES

As of February 29, 2012, approximately 70% 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 FCC 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 various foreign broadcasting licenses in Slovakia and Bulgaria expire during periods ranging from February 2021 to February 2026. We will need to submit applications to seek to extend our foreign licenses upon their expiration to continue our broadcast operations in these countries.

 

47


NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance for comprehensive income which requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Also, the entity is required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The new guidance should be applied retrospectively and is effective for the Company on March 1, 2012. As this guidance only changes the format of the financial statements, the Company does not expect this to have an impact on results of operations, cash flows or financial condition.

In September 2011, the FASB issued guidance to simplify how entities test goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying value. The Company does not expect that this guidance, which will be effective for the Company as of March 1, 2012, will have a material effect on the Company’s results of operations, cash flows or financial condition.

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.

OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

Other than interest rate swap agreements, which are discussed in Note 6 to the consolidated financial statements, and lease commitments, legal contingencies incurred in the normal course of business, contractual commitments to purchase goods and services and employment contracts for key employees, all of which are discussed in Note 12 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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting company, we are not required to provide this information.

 

48


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Emmis Communications Corporation’s 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 Corporation’s principal executive and principal financial officers and effected by Emmis Communications Corporation’s 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 Corporation’s assets that could have a material effect on the financial statements.

Management has evaluated the effectiveness of its internal control over financial reporting as of February 29, 2012, based on the control criteria established in a report entitled Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that Emmis Communications Corporation’s internal control over financial reporting is effective as of February 29, 2012.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the company, as a smaller reporting company, to provide only management’s report in this annual report.

 

/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

 

49


Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Emmis Communications Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of Emmis Communications Corporation and Subsidiaries as of February 28, 2011 and February 29, 2012 and the related consolidated statements of operations, changes in shareholders’ deficit, and cash flows for each of the three years in the period ended February 29, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 28, 2011 and February 29, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 29, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Indianapolis, Indiana

May 10, 2012

 

50


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

     For the years ended February 28 (29),  
     2010     2011     2012  

NET REVENUES

   $ 242,102      $ 250,756      $ 236,007   

OPERATING EXPENSES:

      

Station operating expenses excluding depreciation and amortization expense of $8,848, $8,023 and $6,258 respectively

     206,059        199,855        194,305   

Corporate expenses excluding depreciation and amortization expense of $1,493, $1,301 and $1,390 respectively

     13,634        15,710        19,096   

Restructuring charge

     3,350        —          —     

Impairment loss on intangible assets

     174,642        7,005        —     

Depreciation and amortization

     10,341        9,324        7,648   

(Gain) loss on disposal of assets

     (127     3        820   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     407,899        231,897        221,869   
  

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (165,797     18,859        14,138   
  

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

      

Interest expense

     (24,820     (21,099     (28,844

Gain (loss) on debt extinguishment

     31,362        —          (2,006

Gain on sale of controlling interest in Merlin Media LLC

     —          —          31,865   

Other income (expense), net

     170        (469     (15,739
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     6,712        (21,568     (14,724
  

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS

     (159,085     (2,709     (586

(BENEFIT) PROVISION FOR INCOME TAXES

     (39,952     6,304        (27,472
  

 

 

   

 

 

   

 

 

 

GAIN (LOSS) FROM CONTINUING OPERATIONS

     (119,133     (9,013     26,886   

GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX

     641        (2,526     3,842   
  

 

 

   

 

 

   

 

 

 

CONSOLIDATED NET INCOME (LOSS)

     (118,492     (11,539     30,728   

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     4,162        4,019        4,535   
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

     (122,654     (15,558     26,193   

GAIN ON EXTINGUISHMENT OF PREFERRED STOCK

     —          —          61,892   

PREFERRED STOCK DIVIDENDS

     (9,123     (9,711     (8,591
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

   $ (131,777   $ (25,269   $ 79,494   
  

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

51


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – (CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

CONSOLIDATED STATEMENTS OF OPERATIONS
     For the years ended February 28 (29),  
     2010     2011     2012  

Amounts attributable to common shareholders for basic earnings per share:

      

Continuing operations

     (132,020     (23,212     75,604   

Discontinued operations

     243        (2,057     3,890   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

     (131,777     (25,269     79,494   
  

 

 

   

 

 

   

 

 

 

Amounts attributable to common shareholders for diluted earnings per share:

      

Continuing operations

     (132,020     (23,212     22,303   

Discontinued operations

     243        (2,057     3,890   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

     (131,777     (25,269     26,193   
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share attributable to common shareholders:

      

Continuing operations

   $ (3.56   $ (0.61   $ 1.97   

Discontinued operations, net of tax

     —          (0.06     0.11   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ (3.56   $ (0.67   $ 2.08   
  

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     37,041        37,863        38,293   

Diluted net income (loss) per share attributable to common shareholders:

      

Continuing operations

   $ (3.56   $ (0.61   $ 0.50   

Discontinued operations, net of tax

     —          (0.06     0.08   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ (3.56   $ (0.67   $ 0.58   
  

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     37,041        37,863        44,953   

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

52


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

 

     FEBRUARY 28 (29),  
     2011      2012  

ASSETS

     

CURRENT ASSETS:

     

Cash and cash equivalents

   $ 6,068       $ 5,619   

Accounts receivable, net of allowance for doubtful accounts of $1,568 and $1,249, respectively

     38,930         32,880   

Prepaid expenses

     13,615         12,940   

Other

     2,329         2,252   

Current assets - discontinued operations

     2,063         991   
  

 

 

    

 

 

 

Total current assets

     63,005         54,682   
  

 

 

    

 

 

 

PROPERTY AND EQUIPMENT:

     

Land and buildings

     28,841         27,573   

Leasehold improvements

     18,826         13,788   

Broadcasting equipment

     55,992         48,716   

Office equipment and automobiles

     43,130         36,743   

Construction in progress

     1,926         1,335   
  

 

 

    

 

 

 
     148,715         128,155   

Less-accumulated depreciation and amortization

     103,899         87,653   
  

 

 

    

 

 

 

Total property and equipment, net

     44,816         40,502   
  

 

 

    

 

 

 

INTANGIBLE ASSETS:

     

Indefinite lived intangibles

     328,796         213,009   

Goodwill

     24,175         24,175   

Other intangibles

     10,153         10,153   
  

 

 

    

 

 

 
     363,124         247,337   

Less-accumulated amortization

     7,464         8,155   
  

 

 

    

 

 

 

Total intangible assets, net

     355,660         239,182   
  

 

 

    

 

 

 

OTHER ASSETS:

     

Deferred debt issuance costs, net of accumulated amortization of $2,502 and $1,610, respectively

     2,938         2,100   

Investments

     2,814         1,691   

Deposits and other

     2,299         2,604   
  

 

 

    

 

 

 

Total other assets, net

     8,051         6,395   
  

 

 

    

 

 

 

Noncurrent assets - discontinued operations

     945         8   
  

 

 

    

 

 

 

Total assets

   $ 472,477       $ 340,769   
  

 

 

    

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

53


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS—(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

 

CONSOLIDATED BALANCE SHEETS
     FEBRUARY 28 (29),  
     2011     2012  

LIABILITIES AND SHAREHOLDERS’ DEFICIT

    

CURRENT LIABILITIES:

    

Accounts payable and accrued expenses

   $ 9,818      $ 11,344   

Current maturities of long-term debt

     3,290        7,978   

Accrued salaries and commissions

     9,757        8,136   

Accrued interest

     3,147        3,038   

Deferred revenue

     18,595        16,669   

Other

     5,409        6,206   

Current liabilities - discontinued operations

     854        551   
  

 

 

   

 

 

 

Total current liabilities

     50,870        53,922   

LONG-TERM DEBT, NET OF CURRENT PORTION

     327,704        229,725   

OTHER NONCURRENT LIABILITIES

     14,018        10,988   

DEFERRED INCOME TAXES

     81,411        52,648   
  

 

 

   

 

 

 

Total liabilities

     474,003        347,283   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 12)

    

SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE; $50.00 LIQUIDATION PREFERENCE; AUTHORIZED 2,875,000 SHARES; ISSUED AND OUTSTANDING 2,809,170 SHARES AT FEBRUARY 28, 2011 AND 2,422,320 SHARES AT FEBRUARY 29, 2012. EMMIS HAS OBTAINED RIGHTS IN 1,484,679 OF THE SHARES OUTSTANDING AS OF FEBRUARY 29, 2012 (REDEMPTION AMOUNT, INCLUDING UNDECLARED DIVIDENDS IN ARREARS, OF $161,491 AND $57,351, RESPECTIVELY).

     140,459        46,882   

SHAREHOLDERS’ DEFICIT:

    

Class A common stock, $0.01 par value; authorized 170,000,000 shares; issued and outstanding 33,499,770 shares and 34,007,279 shares in 2011 and 2012, respectively

     335        340   

Class B common stock, $0.01 par value; authorized 30,000,000 shares; issued and outstanding 4,722,684 shares in 2011 and 2012.

     47        47   

Class C common stock, $0.01 par value; authorized 30,000,000 shares; none issued

     —          —     

Additional paid-in capital

     528,786        529,793   

Accumulated deficit

     (720,693     (632,608

Accumulated other comprehensive income

     1,776        1,190   
  

 

 

   

 

 

 

Total shareholders’ deficit

     (189,749     (101,238
  

 

 

   

 

 

 

NONCONTROLLING INTERESTS

     47,764        47,842   
  

 

 

   

 

 

 

Total deficit

     (141,985     (53,396
  

 

 

   

 

 

 

Total liabilities and deficit

   $ 472,477      $ 340,769   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

54


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE THREE YEARS ENDED FEBRUARY 29, 2012

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

 

     Class A      Class B  
     Common Stock      Common Stock  
     Shares      Amount      Shares     Amount  

BALANCE, FEBRUARY 28, 2009

     31,912,656         319         4,956,305        50   

Exercise of stock options and related income tax benefits

     5,000         —           —          —     

Issuance of Common Stock to employees and officers and related income tax benefits

     718,269         7         —          —     

Conversion of Class B Common Stock to Class A Common Stock

     25,625         1         (25,625     (1

Payments of dividends and distributions to noncontrolling interests

     —           —           —          —     

Comprehensive Loss:

          

Net loss

     —           —           —          —     

Cumulative translation adjustment

     —           —           —          —     

Change in value of derivative instrument

     —           —           —          —     

Total comprehensive loss

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

BALANCE, FEBRUARY 28, 2010

     32,661,550       $ 327         4,930,680      $ 49   
  

 

 

    

 

 

    

 

 

   

 

 

 

Issuance of Common Stock to employees and officers and related income tax benefits

     630,224         6         —          —     

Conversion of Class B Common Stock to Class A Common Stock

     207,996         2         (207,996     (2

Payments of dividends and distributions to noncontrolling interests

     —           —           —          —     

Comprehensive Loss:

          

Net loss

     —           —           —          —     

Cumulative translation adjustment

     —           —           —          —     

Change in value of derivative instrument

     —           —           —          —     

Total comprehensive loss

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

BALANCE, FEBRUARY 28, 2011

     33,499,770       $ 335         4,722,684      $ 47   
  

 

 

    

 

 

    

 

 

   

 

 

 

Exercise of stock options and related income tax benefits

     10,000         —           —          —     

Issuance of Common Stock to employees and officers and related income tax benefits

     497,509         5         —          —     

Acquisition of additional controlling interests

     —           —           —          —     

Payments of dividends and distributions to noncontrolling interests

     —           —           —          —     

Preferred stock transactions

     —           —           —          —     

Comprehensive Income:

          

Net income

     —           —           —          —     

Cumulative translation adjustment

     —           —           —          —     

Change in value of derivative instrument

     —           —           —          —     

Total comprehensive income

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

BALANCE, FEBRUARY 29, 2012

     34,007,279       $ 340         4,722,684      $ 47   
  

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

55


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT – (CONTINUED)

FOR THE THREE YEARS ENDED FEBRUARY 29, 2012

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
                  Accumulated              
     Additional            Other              
     Paid-in      Accumulated     Comprehensive     Noncontrolling     Total  
     Capital      Deficit     Income (Loss)     Interests     Deficit  

BALANCE, FEBRUARY 28, 2009

   $ 524,776       $ (582,481   $ (2,664   $ 53,001      $ (6,999

Exercise of stock options and related income tax benefits

     1         —          —          —          1   

Issuance of Common Stock to employees and officers and related income tax benefits

     2,343         —          —          —          2,350   

Conversion of Class B Common Stock to Class A Common Stock

     —           —          —          —          —     

Payments of dividends and distributions to noncontrolling interests

     —           —          —          (7,211     (7,211

Comprehensive Loss:

           

Net loss

     —           (122,654     —          4,162     

Cumulative translation adjustment

     —           —          (1,365     (530  

Change in value of derivative instrument

     —           —          2,709        —       

Total comprehensive loss

     —           —          —          —          (117,678
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, FEBRUARY 28, 2010

   $ 527,120       $ (705,135   $ (1,320   $ 49,422      $ (129,537
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of Common Stock to employees and officers and related income tax benefits

     1,666         —          —          —          1,672   

Conversion of Class B Common Stock to Class A Common Stock

     —           —          —          —          —     

Payments of dividends and distributions to noncontrolling interests

     —           —          —          (5,589     (5,589

Comprehensive Loss:

           

Net loss

     —           (15,558     —          4,019     

Cumulative translation adjustment

     —           —          1,318        (88  

Change in value of derivative instrument

     —           —          1,778        —       

Total comprehensive loss

     —           —          —          —          (8,531
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, FEBRUARY 28, 2011

   $ 528,786       $ (720,693   $ 1,776      $ 47,764      $ (141,985
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of stock options and related income tax benefits

     3         —          —          —          3   

Issuance of Common Stock to employees and officers and related income tax benefits

     1,004         —          —          —          1,009   

Acquisition of additional controlling interests

     —           —          —          (246     (246

Payments of dividends and distributions to noncontrolling interests

     —           —          —          (4,152     (4,152

Preferred stock transactions

     —           61,892        —          —          61,892   

Comprehensive Income:

           

Net income

     —           26,193        —          4,535     

Cumulative translation adjustment

     —           —          (97     (59  

Change in value of derivative instrument

     —           —          (489     —       

Total comprehensive income

     —           —          —          —          30,083   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, FEBRUARY 29, 2012

   $ 529,793       $ (632,608   $ 1,190      $ 47,842      $ (53,396
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

56


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

 

     FOR THE YEARS ENDED FEBRUARY 28 (29),  
     2010     2011     2012  

OPERATING ACTIVITIES:

      

Consolidated net income (loss)

   $ (118,492   $ (11,539   $ 30,728   

Adjustments to reconcile net income (loss)to net cash provided by operating activities -

      

Discontinued operations

     (641     2,526        (3,842

Gain on sale of controlling interest in Merlin Media LLC

     —          —          (31,865

Impairment losses on intangible assets

     174,642        7,005        —     

(Gain) loss on debt extinguishment

     (31,362     —          2,006   

Accretion of debt instruments to interest expense

     —          —          4,968   

Depreciation and amortization

     11,203        10,614        8,467   

Provision for bad debts

     1,899        817        348   

(Benefit) provision for deferred income taxes

     (34,675     5,963        (30,277

Noncash compensation

     2,441        1,794        1,153   

Loss on equity method investments including other-than-temporary impairment

     (47     265        16,068   

(Gain) loss on disposal of fixed assets

     (127     3        820   

Changes in assets and liabilities -

      

Accounts receivable

     4,124        (3,333     5,665   

Prepaid expenses and other current assets

     14,610        1,149        311   

Other assets

     (676     (216     (306

Accounts payable and accrued liabilities

     (2,511     1,628        (256

Deferred revenue

     6,785        (5,667     (1,703

Income taxes

     (10,017     7,494        1,867   

Other liabilities

     2,943        (1,392     (873

Net cash provided by operating activities - discontinued operations

     5,563        2,448        479   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     25,662        19,559        3,758   
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

      

Purchases of property and equipment

     (4,645     (4,082     (5,728

Proceeds from the sale of assets

     9,109        —          160   

Sale of controlling interest in Merlin Media LLC

     —          —          130,000   

Distributions from equity method investments

     102        43        1,308   

Cash paid for acquisitions

     (4,882     —          —     

Net cash provided by (used in) investing activities - discontinued operations

     (287     (165     5,551   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (603     (4,204     131,291   
  

 

 

   

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

57


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(CONTINUED)

(DOLLARS IN THOUSANDS)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
     FOR THE YEARS ENDED FEBRUARY 28 (29),  
     2010     2011     2012  

FINANCING ACTIVITIES:

      

Payments on long-term debt

     (130,660     (29,156     (146,151

Proceeds from long-term debt

     83,235        19,000        50,941   

Settlement of tax withholding obligations

     (69     (90     (86

Dividends and distributions paid to noncontrolling interests

     (3,947     (4,413     (4,152

Proceeds from exercise of stock options and employee stock purchases

     1        —          3   

Payments for debt related costs

     (4,846     —          (4,191

Acquisition of rights in and purchase of preferred stock

     —          —          (31,685

Net cash used in financing activities - discontinued operations

     (2,042     (1,176     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (58,328     (15,835     (135,321
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate on cash and cash equivalents

     (663     (266     (177

DECREASE IN CASH AND CASH EQUIVALENTS

     (33,932     (746     (449

CASH AND CASH EQUIVALENTS:

      

Beginning of period

     40,746        6,814        6,068   
  

 

 

   

 

 

   

 

 

 

End of period

   $ 6,814      $ 6,068      $ 5,619   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

      

Cash paid for (refund from)-

      

Interest

   $ 22,396      $ 21,176      $ 25,368   

Income taxes

     5,110        (7,026     1,007   

Non-cash financing transactions-

      

Value of stock issued to employees under stock compensation program and to satisfy accrued incentives

     2,412        1,756        1,090   

ACQUISITION OF NONCONTROLLING BULGARIAN RADIO INTERESTS

      

Fair value of assets acquired

   $ 4,882