e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2007
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
(Registrants Telephone Number,
Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
The number of shares outstanding of each of Emmis Communications Corporations classes of
common stock, as of July 1, 2007, was:
|
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|
|
|
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32,753,216 |
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Shares of Class A Common Stock, $.01 Par Value |
|
|
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4,956,305 |
|
|
Shares of Class B Common Stock, $.01 Par Value |
|
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0 |
|
|
Shares of Class C Common Stock, $.01 Par Value |
INDEX
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Page |
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3 |
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3 |
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5 |
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7 |
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9 |
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23 |
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37 |
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37 |
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38 |
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39 |
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-2-
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended May 31, |
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2006 |
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2007 |
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(As Adjusted, |
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See Note 1) |
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NET REVENUES |
|
$ |
89,787 |
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$ |
87,263 |
|
OPERATING EXPENSES: |
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Station operating expenses |
|
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63,636 |
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65,407 |
|
Corporate expenses |
|
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6,782 |
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|
6,326 |
|
Depreciation and amortization |
|
|
3,275 |
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|
|
3,458 |
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|
|
|
|
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Total operating expenses |
|
|
73,693 |
|
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|
75,191 |
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|
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OPERATING INCOME |
|
|
16,094 |
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|
12,072 |
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|
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OTHER EXPENSE: |
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Interest expense |
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(12,562 |
) |
|
|
(9,332 |
) |
Loss on debt extinguishment |
|
|
(2,843 |
) |
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|
|
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Other income (expense), net |
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|
343 |
|
|
|
(64 |
) |
|
|
|
|
|
|
|
Total other expense |
|
|
(15,062 |
) |
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|
(9,396 |
) |
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INCOME BEFORE INCOME TAXES, MINORITY |
|
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|
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INTEREST AND DISCONTINUED OPERATIONS |
|
|
1,032 |
|
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|
2,676 |
|
PROVISION FOR INCOME TAXES |
|
|
68 |
|
|
|
1,992 |
|
MINORITY INTEREST EXPENSE, NET OF TAX |
|
|
1,171 |
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|
1,193 |
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LOSS FROM CONTINUING OPERATIONS |
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|
(207 |
) |
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|
(509 |
) |
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|
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|
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INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX |
|
|
8,923 |
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|
820 |
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|
|
|
|
|
|
|
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NET INCOME |
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|
8,716 |
|
|
|
311 |
|
|
|
|
|
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PREFERRED STOCK DIVIDENDS |
|
|
2,246 |
|
|
|
2,246 |
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|
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|
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|
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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS |
|
$ |
6,470 |
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|
$ |
(1,935 |
) |
|
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|
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|
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|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-3-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
(In thousands, except per share data)
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Three Months Ended May 31, |
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2006 |
|
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2007 |
|
Basic net income (loss) available to common shareholders: |
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Continuing operations |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
Discontinued operations, net of tax |
|
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0.24 |
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|
0.02 |
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|
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Net income (loss) available to common shareholders |
|
$ |
0.17 |
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$ |
(0.05 |
) |
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Basic weighted average common shares outstanding |
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37,129 |
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37,526 |
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|
|
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Diluted net income (loss) available to common shareholders: |
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Continuing operations |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
Discontinued operations, net of tax |
|
|
0.24 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders |
|
$ |
0.17 |
|
|
$ |
(0.05 |
) |
|
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|
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Diluted weighted average common shares outstanding |
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37,129 |
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|
37,526 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-4-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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February 28, |
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May 31, |
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2007 |
|
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2007 |
|
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|
(Note 1) |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
|
$ |
20,747 |
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$ |
13,873 |
|
Accounts receivable, net |
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62,403 |
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|
67,841 |
|
Prepaid expenses |
|
|
15,292 |
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17,560 |
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Other |
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|
6,137 |
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5,226 |
|
Current assets discontinued operations |
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|
14,430 |
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|
8,068 |
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Total current assets |
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119,009 |
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|
112,568 |
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PROPERTY AND EQUIPMENT, NET |
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61,488 |
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|
60,147 |
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INTANGIBLE ASSETS (Note 3): |
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Indefinite-lived intangibles |
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|
819,338 |
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819,338 |
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Goodwill |
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77,620 |
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77,620 |
|
Other intangibles, net |
|
|
19,560 |
|
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|
18,725 |
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Total intangible assets |
|
|
916,518 |
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|
915,683 |
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OTHER ASSETS, NET |
|
|
34,890 |
|
|
|
26,855 |
|
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|
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|
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|
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NONCURRENT ASSETS DISCONTINUED OPERATIONS |
|
|
75,999 |
|
|
|
60,691 |
|
|
|
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Total assets |
|
$ |
1,207,904 |
|
|
$ |
1,175,944 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-5-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
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February 28, |
|
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May 31, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(Note 1) |
|
|
(Unaudited) |
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|
(As Adjusted, |
|
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|
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|
See Note 1) |
|
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
|
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|
|
|
|
Accounts payable |
|
$ |
17,350 |
|
|
$ |
16,470 |
|
Current maturities of long-term debt |
|
|
4,595 |
|
|
|
5,718 |
|
Accrued salaries and commissions |
|
|
9,991 |
|
|
|
5,841 |
|
Accrued interest |
|
|
265 |
|
|
|
6,058 |
|
Deferred revenue |
|
|
14,894 |
|
|
|
14,731 |
|
Other |
|
|
4,519 |
|
|
|
4,553 |
|
Current liabilities discontinued operations |
|
|
6,926 |
|
|
|
4,665 |
|
|
|
|
|
|
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|
Total current liabilities |
|
|
58,540 |
|
|
|
58,036 |
|
|
|
|
|
|
|
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|
LONG-TERM DEBT, NET OF CURRENT MATURITIES |
|
|
494,587 |
|
|
|
475,450 |
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM DEBT, NET OF CURRENT MATURITIES |
|
|
2,745 |
|
|
|
2,805 |
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT LIABILITIES |
|
|
29,517 |
|
|
|
4,407 |
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
50,780 |
|
|
|
51,639 |
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES |
|
|
171,349 |
|
|
|
171,762 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES DISCONTINUED OPERATIONS |
|
|
18,591 |
|
|
|
1,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
826,109 |
|
|
|
765,871 |
|
|
|
|
|
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|
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|
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|
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COMMITMENTS AND CONTINGENCIES |
|
|
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|
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK,
$0.01 PAR VALUE; $50.00 LIQUIDATION PREFERENCE;
AUTHORIZED 10,000,000 SHARES; ISSUED AND OUTSTANDING
2,875,000 SHARES AT FEBRUARY 28, 2007 AND MAY 31, 2007 |
|
|
143,750 |
|
|
|
143,750 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Class A common stock, $.01 par value; authorized 170,000,000 shares;
issued and outstanding 32,488,863 shares at February 28, 2007
and 32,648,646 shares at May 31, 2007 |
|
|
325 |
|
|
|
326 |
|
Class B common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 4,930,267 shares at February 28, 2007
and 4,956,305 shares at May 31, 2007 |
|
|
49 |
|
|
|
50 |
|
Additional paid-in capital |
|
|
522,655 |
|
|
|
525,780 |
|
Accumulated deficit |
|
|
(285,300 |
) |
|
|
(262,055 |
) |
Accumulated other comprehensive income |
|
|
316 |
|
|
|
2,222 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
238,045 |
|
|
|
266,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,207,904 |
|
|
$ |
1,175,944 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-6-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
|
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|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
|
|
(As Adjusted, |
|
|
|
|
|
|
|
See Note 1) |
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,716 |
|
|
$ |
311 |
|
Adjustments
to reconcile net income to net cash provided by operating activities - |
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
(8,923 |
) |
|
|
(820 |
) |
Depreciation and amortization |
|
|
3,670 |
|
|
|
3,616 |
|
Minority interest expense |
|
|
1,171 |
|
|
|
1,193 |
|
Provision for bad debts |
|
|
449 |
|
|
|
490 |
|
Provision (benefit) for deferred income taxes |
|
|
(133 |
) |
|
|
1,475 |
|
Noncash compensation |
|
|
2,472 |
|
|
|
2,373 |
|
Loss on debt extinguishment |
|
|
2,843 |
|
|
|
|
|
Other |
|
|
8 |
|
|
|
|
|
Changes in assets and liabilities - |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,957 |
) |
|
|
(5,633 |
) |
Prepaid expenses and other current assets |
|
|
(736 |
) |
|
|
(1,937 |
) |
Other assets |
|
|
341 |
|
|
|
444 |
|
Accounts payable and accrued liabilities |
|
|
(18,503 |
) |
|
|
1,650 |
|
Deferred revenue |
|
|
(289 |
) |
|
|
(163 |
) |
Income taxes |
|
|
(195 |
) |
|
|
(1,145 |
) |
Other liabilities |
|
|
(2,619 |
) |
|
|
(1,097 |
) |
Net cash provided by operating activities discontinued operations |
|
|
6,084 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(9,601 |
) |
|
|
6,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(594 |
) |
|
|
(974 |
) |
Deposits and other |
|
|
267 |
|
|
|
(752 |
) |
Net cash provided by investing activities discontinued operations |
|
|
23,093 |
|
|
|
8,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
22,766 |
|
|
|
6,740 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-7-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(148,102 |
) |
|
|
(23,000 |
) |
Proceeds from long-term debt |
|
|
12,000 |
|
|
|
5,000 |
|
Proceeds from exercise of stock options and employee stock purchases |
|
|
106 |
|
|
|
61 |
|
Preferred stock dividends paid |
|
|
(2,246 |
) |
|
|
(2,246 |
) |
Settlement of tax withholding obligations on stock issued to employees |
|
|
(648 |
) |
|
|
(562 |
) |
Other |
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(138,955 |
) |
|
|
(20,747 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
326 |
|
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(125,464 |
) |
|
|
(6,874 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
140,822 |
|
|
|
20,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
15,358 |
|
|
$ |
13,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
Cash paid for - |
|
|
|
|
|
|
|
|
Interest |
|
$ |
19,493 |
|
|
$ |
3,381 |
|
Income taxes |
|
|
201 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
Noncash financing transactions- |
|
|
|
|
|
|
|
|
Value of
stock issued to employees under stock compensation program and to satisfy accrued incentives |
|
|
4,449 |
|
|
|
2,624 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated statements.
-8-
EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
May 31, 2007
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Preparation of Interim Financial Statements
Pursuant to the rules and regulations of the Securities and Exchange Commission, the condensed
consolidated interim financial statements included herein have been prepared, without audit, by
Emmis Communications Corporation (ECC) and its subsidiaries (collectively, our, us, we,
Emmis or the Company). As permitted under the applicable rules and regulations of the
Securities and Exchange Commission, certain information and footnote disclosures normally included
in financial statements prepared in conformity with U.S. generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that
the disclosures are adequate to make the information presented not misleading. The condensed
consolidated financial statements included herein should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Annual Report for Emmis
filed on Form 10-K for the year ended February 28, 2007. The Companys results are subject to
seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative
of results for a full year.
In the opinion of Emmis, the accompanying condensed consolidated interim financial statements
contain all material adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position of Emmis at May 31, 2007, and the results of its
operations and cash flows for the three-month periods ended May 31, 2006, and 2007.
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159), which permits companies to choose to measure certain financial
instruments and other items at fair value that are not currently required to be measured at fair
value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt
SFAS No. 159 no later than March 1, 2008. The Company is currently evaluating SFAS No. 159 and its
effect, if any, on the Companys financial position, results of operations and cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157), which provides guidance for using fair value to measure assets
and liabilities. The standard also responds to investors requests for more information about: (1)
the extent to which companies measure assets and liabilities at fair value; (2) the information
used to measure fair value; and (3) the effect that fair value measurements have on earnings. SFAS
No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value to any new
circumstances. We will adopt SFAS No. 157 no later than March 1, 2008. The Company is currently
evaluating SFAS No. 157 and its effect, if any, on the Companys financial position, results of
operations and cash flows.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, Accounting for Planned
Major Maintenance Activities (FSP), which amends certain provisions in the AICPA Industry Audit
Guide,
-9-
Audits of Airlines, and APB Opinion No. 28, Interim Financial Reporting. The FSP prohibits
the use of the accrue-in-advance
method of accounting for planned major maintenance activities and requires the use of the
direct expensing method, built-in overhaul method, or deferral method. The FSP is effective for
fiscal years beginning after December 15, 2006.
The Company adopted the FSP on March 1, 2007, and began using the deferral method to account
for major maintenance activities related to its leased airplane. Under this method, actual costs
of the major maintenance activities are capitalized as incurred and amortized to corporate expenses
until the next overhaul date. Prior to the adoption of this standard, the Company accrued for such
overhaul costs in advance and recorded the charge to corporate expenses. As a result of the
adoption of the FSP, the Company has eliminated the effect of the accrue-in-advance method on all
previous periods. The cumulative effect of the adoption of the FSP on prior periods was to
decrease the accumulated deficit by $0.8 million as of March 1, 2006. The restatement had no
effect on earnings per share for the three months ended May 31, 2006. The following tables
illustrate the retrospective changes made in Emmis previously reported financial position as of
February 28, 2007, and our results from operations and cash flows for the three months ended May
31, 2006:
Condensed Consolidated Balance Sheets
As of February 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Accounts payable and accrued expenses |
|
$ |
18,791 |
|
|
$ |
(1,441 |
) |
|
$ |
17,350 |
|
Deferred income taxes |
|
|
170,758 |
|
|
|
591 |
|
|
|
171,349 |
|
Accumulated deficit |
|
|
(286,150 |
) |
|
|
850 |
|
|
|
(285,300 |
) |
|
Condensed Consolidated Statements of Operations
For the three months ended May 31, 2006
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Corporate expenses |
|
|
6,887 |
|
|
|
(105 |
) |
|
|
6,782 |
|
Provision for income taxes |
|
|
25 |
|
|
|
43 |
|
|
|
68 |
|
Loss from continuing operations |
|
|
(269 |
) |
|
|
62 |
|
|
|
(207 |
) |
|
Condensed Consolidated Statements of Cash Flows
For the three months ended May 31, 2006
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Net Income |
|
|
8,654 |
|
|
|
62 |
|
|
|
8,716 |
|
Provision for deferred income taxes |
|
|
(176 |
) |
|
|
43 |
|
|
|
(133 |
) |
Change in accounts payable and accrued liabilities |
|
|
(18,398 |
) |
|
|
(105 |
) |
|
|
(18,503 |
) |
Effective March 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken within an income tax
return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. The amount recognized is measured as the largest
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The
Companys policy is to record interest and penalties related to uncertain tax positions in income
tax expense. The Company did not record any interest or penalties related to uncertain tax
positions during the
-10-
three months ended May 31, 2007.
The Company files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions and various international jurisdictions. The Company has a number of federal and
state income tax years still open for examination as a result of net operating loss carryforwards.
Accordingly, the Company is subject to examination for both U.S. federal and certain state tax
return purposes for the years ending February 28, 2002 to present.
The adoption of FIN 48 resulted in a decrease of $25.2 million to the March 1, 2007, balance
of accumulated deficit, a decrease of $24.9 million in other noncurrent liabilities and a decrease
of $0.3 million in deferred income taxes. Upon the adoption of FIN 48, the estimated value of the
Companys uncertain tax positions is approximately $0.7 million, $0.4 million of which is included
in deferred income taxes and $0.3 million of which is included in other noncurrent liabilities in
the accompanying condensed consolidated balance sheet as of May 31, 2007. If the Companys
positions are sustained by the taxing authorities in favor of the Company and it is more likely
than not that the Company will realize the tax benefits, then approximately $0.7 million would
reduce the Companys provision for income taxes. The Company does not expect any significant
change in the amount of unrecognized tax benefits over the next 12 months.
Advertising Costs
The Company defers the costs of major advertising campaigns for which future benefits are
demonstrated. These costs are amortized over the shorter of the estimated period benefited
(generally six months) or the remainder of the fiscal year. The Company had deferred $1.7 million
and $0.5 million of these costs as of May 31, 2006 and 2007, respectively.
Basic and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted. Potentially
dilutive securities at May 31, 2006 and 2007, consisted of stock options and the 6.25% Series A
cumulative convertible preferred stock. The 6.25% Series A cumulative convertible preferred stock
was excluded from the calculation of diluted net income (loss) per common share for the three-month
periods ended May 31, 2006 and 2007, as the effect of its conversion to 4.9 million shares and 7.0
million shares, respectively, would be antidilutive. Stock options were excluded from diluted net
income (loss) per common share for the three-month periods ended May 31, 2006 and 2007, as the
effect of their conversion to 0.1 million shares and 0.2 million shares, respectively, would be
antidilutive to the net loss available to common shareholders from continuing operations.
Reclassifications
Certain reclassifications have been made to the prior years financial statements to be
consistent with the May 31, 2007, presentation. The reclassifications have no impact on net income
previously reported.
-11-
Discontinued Operations
Summary of Discontinued Operations Activity:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
Income from discontinued operations: |
|
|
|
|
|
|
|
|
KKFR-FM |
|
$ |
921 |
|
|
$ |
|
|
Television |
|
|
7,509 |
|
|
|
1,395 |
|
|
|
|
|
|
|
|
Total |
|
|
8,430 |
|
|
|
1,395 |
|
Less: Provision for income taxes |
|
|
3,650 |
|
|
|
575 |
|
|
|
|
|
|
|
|
Income from operations, net of tax |
|
|
4,780 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations: |
|
|
|
|
|
|
|
|
WRDA-FM |
|
|
7,022 |
|
|
|
|
|
Less: Provision for income taxes |
|
|
2,879 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued
operations, net of tax |
|
|
4,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
8,923 |
|
|
$ |
820 |
|
|
|
|
|
|
|
|
A discussion of each component of discontinued operations follows.
KKFR-FM
On July 11, 2006, Emmis completed its sale of radio station KKFR-FM in Phoenix to Bonneville
International Corporation for $77.5 million in cash and also sold certain tangible assets to
Riviera Broadcast Group LLC for $0.1 million in cash. The assets and liabilities of KKFR-FM have
been classified as held for sale and its results of operations and cash flows for all periods
presented have been reflected as discontinued operations in the accompanying condensed consolidated
financial statements. KKFR-FM had historically been included in the radio segment. The following
table summarizes certain operating results for KKFR-FM for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
2006 |
|
2007 |
Net revenues |
|
$ |
2,637 |
|
|
$ |
|
|
Station operating expenses |
|
|
1,553 |
|
|
|
|
|
Depreciation and amortization |
|
|
42 |
|
|
|
|
|
Income before taxes |
|
|
921 |
|
|
|
|
|
Provision for income taxes |
|
|
377 |
|
|
|
|
|
Net assets related to KKFR-FM are classified as discontinued operations in the
accompanying condensed consolidated balance sheets as follows:
-12-
|
|
|
|
|
|
|
|
|
|
|
February 28, 2007 |
|
|
May 31, 2007 |
|
Current liabilities |
|
$ |
177 |
|
|
$ |
|
|
Noncurrent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
177 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Television Division
On May 10, 2005, Emmis announced that it had engaged advisors to assist in evaluating
strategic alternatives for its television assets. The decision to explore strategic alternatives
for the Companys television assets stemmed from the Companys desire to reduce its debt, coupled
with the Companys view that its television stations needed to be aligned with a company with more
significant financial resources and a singular focus on the challenges of American television,
including the growth of digital video recorders and the industrys relationship with cable and
satellite providers. As of May 31, 2007, the Company has sold fourteen of its sixteen television
stations. On June 4, 2007, the Company closed on its sale of KGMB-TV in Honolulu to HITV Operating
Co., Inc. for $40.0 million in cash, leaving WVUE-TV in New Orleans as the Companys sole
television asset (See Note 9 for more discussion of the sale of KGMB-TV). The Company expects to
enter into an agreement to sell WVUE-TV in the next three to 12 months. The Company concluded its
television assets were held for sale in accordance with SFAS No. 144 and accordingly the results of
operations of the television division have been classified as discontinued operations in the
accompanying consolidated financial statements for all periods presented. The television division
had historically been presented as a separate reporting segment of Emmis. The following table
summarizes certain operating results for the television division for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
2006 |
|
2007 |
Net revenues |
|
$ |
15,940 |
|
|
$ |
7,945 |
|
Station operating expenses |
|
|
10,239 |
|
|
|
6,400 |
|
Gain on disposal of assets |
|
|
(2,038 |
) |
|
|
|
|
Income before taxes |
|
|
7,509 |
|
|
|
1,395 |
|
Provision for income taxes |
|
|
3,273 |
|
|
|
575 |
|
Net assets related to our television division are classified as discontinued operations
in the accompanying condensed consolidated balance sheets as follows:
-13-
|
|
|
|
|
|
|
|
|
|
|
February 28, 2007 |
|
|
May 31, 2007 |
|
Current assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
6,322 |
|
|
$ |
6,217 |
|
Current portion of TV program rights |
|
|
1,860 |
|
|
|
1,066 |
|
Prepaid expenses |
|
|
406 |
|
|
|
334 |
|
Other |
|
|
5,842 |
|
|
|
451 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,430 |
|
|
|
8,068 |
|
|
|
|
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
27,358 |
|
|
|
28,742 |
|
Intangibles, net |
|
|
46,934 |
|
|
|
30,263 |
|
Other noncurrent assets |
|
|
1,707 |
|
|
|
1,686 |
|
|
|
|
|
|
|
|
Total noncurrent assets |
|
|
75,999 |
|
|
|
60,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
90,429 |
|
|
$ |
68,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
2,660 |
|
|
$ |
1,775 |
|
Current portion of TV program rights |
|
|
2,642 |
|
|
|
1,936 |
|
Accrued salaries and commissions |
|
|
1,173 |
|
|
|
618 |
|
Deferred revenue |
|
|
84 |
|
|
|
81 |
|
Other |
|
|
190 |
|
|
|
255 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,749 |
|
|
|
4,665 |
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
TV program rights payable, net of current portion |
|
|
1,489 |
|
|
|
1,374 |
|
Other noncurrent liabilities |
|
|
17,102 |
|
|
|
398 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
18,591 |
|
|
|
1,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
25,340 |
|
|
$ |
6,437 |
|
|
|
|
|
|
|
|
In accordance with Emerging Issues Task Force Issue 87-24 Allocation of Interest to
Discontinued Operations, as modified, the Company did not allocate any interest expense for the
periods presented to the television division, as no debt would be required to be repaid as a result
of the disposition of the Companys television assets.
In August 2005, our television station in New Orleans, WVUE-TV, was significantly affected by
Hurricane Katrina and the subsequent flooding. The flooding of New Orleans caused extensive
property damage at WVUE-TV. Emmis spent approximately $1.1 million on capital expenditures related
to flooding restoration projects during the quarter ended May 31, 2007, which essentially completed
the restoration projects. The Company has received and recognized in discontinued operations $5.5
million related to business interruption claims it had previously filed. Our business-interruption
claim negotiations with our insurance carrier continue, but it is unclear if Emmis will receive any
additional proceeds related to our claim.
WRDA-FM:
On May 5, 2006, Emmis closed on its sale of WRDA-FM in St. Louis to Radio One, Inc. for $20.0
million in cash. Emmis had tried various formats with the station over the past several years, but
did not achieve an acceptable operating performance with any of the formats. After the most recent
format change failed to meet expectations,
Emmis elected to divest the station. Emmis recorded a $4.1 million gain on sale of WRDA-FM, net of
tax of $2.9 million. The gain on sale of WRDA-FM is included in discontinued operations, net of
tax.
-14-
Note 2. Share Based Payments
The Company has granted options to purchase its common stock to employees and directors of the
Company under various stock option plans at no less than the fair market value of the underlying
stock on the date of grant. These options are granted for a term not exceeding 10 years and are
forfeited, except in certain circumstances, in the event the employee or director terminates his or
her employment or relationship with the Company. All options granted since March 1, 2000, vest
over three years (one-third each year for three years). The Company issues new shares upon the
exercise of stock options.
The Company adopted the fair value recognition provisions of SFAS No. 123R on March 1, 2006,
using the modified-prospective-transition method. The amounts recorded as share based compensation
expense under SFAS No. 123R primarily relate to restricted common stock issued under employment
agreements, common stock issued to employees in lieu of cash bonuses, Company matches of common
stock in our 401(k) plans, and annual stock option and restricted stock grants.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes
option-pricing model and expensed on a straight-line basis over the vesting period. Expected
volatilities are based on historical volatility of the Companys stock. The Company uses
historical data to estimate option exercises and employee terminations within the valuation model.
The Company includes estimated forfeitures in its compensation cost and updates the estimated
forfeiture rate through the final vesting date of awards. The expected term is based on the
midpoint between the vesting date and the end of the contractual term. The risk free rate for
periods within the life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. The following assumptions were used to calculate the fair value of the Companys
options on the date of grant during the three months ended May 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
2006 |
|
2007 |
Risk-Free Interest Rate: |
|
|
4.7 |
% |
|
|
4.5 |
% |
Expected Dividend Yield: |
|
|
0 |
% |
|
|
0 |
% |
Expected Life (Years): |
|
|
6.0 |
|
|
|
6.0 |
|
Expected Volatility: |
|
|
58.3 |
% |
|
|
47.5 |
% |
The following table presents a summary of the Companys stock options outstanding at, and
stock option activity during, the three months ended May 31, 2007 (Price reflects the weighted
average exercise price per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Contractual Term |
|
|
Value |
|
Outstanding, beginning of period |
|
|
7,403,726 |
|
|
$ |
16.80 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
639,320 |
|
|
|
8.21 |
|
|
|
|
|
|
|
|
|
Exercised (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
7,946 |
|
|
|
9.49 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
143,735 |
|
|
|
17.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
7,891,365 |
|
|
|
16.09 |
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
6,761,066 |
|
|
|
17.21 |
|
|
|
5.6 |
|
|
$ |
|
|
Weighted average fair value per option granted |
|
$ |
4.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company did not receive cash from option exercises nor did the Company record an income
tax benefit related to option exercises during the three months ended May 31, 2006 and 2007. |
The weighted average grant date fair value of options granted during the three months ended May 31,
2006 and 2007, was $6.59 and $4.23, respectively. The total intrinsic value of options exercised
during the three months ended May 31, 2006 and 2007, was $0.0 million.
-15-
A summary of the Companys nonvested options at February 28, 2007, and changes during the three
months ended May 31, 2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date |
|
|
Options |
|
Fair Value |
Nonvested, beginning of period |
|
|
722,045 |
|
|
$ |
6.44 |
|
Granted |
|
|
639,320 |
|
|
|
4.23 |
|
Vested |
|
|
223,120 |
|
|
|
6.59 |
|
Forfeited |
|
|
7,946 |
|
|
|
5.25 |
|
|
|
|
|
|
|
|
|
|
Nonvested, end of period |
|
|
1,130,299 |
|
|
|
5.17 |
|
There were 4.5 million shares available for future grants under the various option plans at
May 31, 2007. The vesting date of outstanding options range from September 2007 to March 2010, and
expiration dates range from October 2009 to March 2017.
Restricted Stock Awards
The Company began granting restricted stock awards to employees and directors of the Company in
lieu of stock option grants in 2005. These awards generally vest at the end of the second or third
year after grant and are forfeited, except in certain circumstances, in the event the employee
terminates his or her employment or relationship with the Company prior to vesting. The restricted
stock awards were granted out of the Companys 2004 Equity Incentive Plan. The Company also
awards, out of the Companys 2004 Equity Compensation Plan, stock to settle certain bonuses and
other compensation that otherwise would be paid in cash. Any restrictions on these shares are
immediately lapsed on the grant date.
The following table presents a summary of the Companys restricted stock grants outstanding at May
31, 2007, and restricted stock activity during the three months ended May 31, 2007 (Price
reflects the weighted average share price at the date of grant):
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
Price |
Grants outstanding, beginning of period |
|
|
413,255 |
|
|
$ |
17.12 |
|
Granted |
|
|
398,694 |
|
|
|
8.51 |
|
Vested (restriction lapsed) |
|
|
150,137 |
|
|
|
13.45 |
|
Forfeited |
|
|
17,109 |
|
|
|
10.72 |
|
|
|
|
|
|
|
|
|
|
Grants outstanding, end of period |
|
|
644,703 |
|
|
|
12.82 |
|
The total fair value of shares vested during the three months ended May 31, 2006 and 2007 was
$2.1 million and $2.0 million, respectively.
Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense and related tax benefits recognized
by the Company in the three months ended May 31, 2006 and 2007:
-16-
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
Station operating expenses |
|
$ |
1,122 |
|
|
$ |
1,271 |
|
Corporate expenses |
|
|
1,350 |
|
|
|
1,102 |
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses |
|
|
2,472 |
|
|
|
2,373 |
|
Tax benefit |
|
|
(1,014 |
) |
|
|
(973 |
) |
|
|
|
|
|
|
|
Recognized stock-based compensation expense, net of tax |
|
$ |
1,458 |
|
|
$ |
1,400 |
|
|
|
|
|
|
|
|
As of May 31, 2007, there was $8.9 million of unrecognized compensation cost, net of estimated
forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to
be recognized over a weighted average period of approximately 1.7 years.
Note 3. Intangible Assets and Goodwill
Indefinite-lived Intangibles
Under the guidance in Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142), the Companys Federal Communications Commission (FCC)
licenses are considered indefinite-lived intangibles. These assets, which the Company determined
were its only indefinite-lived intangibles, are not subject to amortization, but are tested for
impairment at least annually. The carrying amounts of the Companys FCC licenses were $819.3
million as of February 28, 2007, and May 31, 2007. This amount is entirely attributable to our
radio division.
Since its adoption of EITF Topic D-108 on December 1, 2004, the Company has used a
direct-method valuation approach known as the greenfield income valuation method when it performs
its annual impairment tests. Under this method, the Company projects the cash flows that would be
generated by each of its units of accounting if the unit of accounting were commencing operations
in each of its markets at the beginning of the valuation period. This cash flow stream is
discounted to arrive at a value for the FCC license. The Company assumes the competitive situation
that exists in each market remains unchanged, with the exception that its unit of accounting was
beginning operations. In doing so, the Company extracts the value of going concern and any other
assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis
include market revenue, market revenue growth rates, unit of accounting audience share, unit of
accounting revenue share and discount rate. For its radio stations, the Company has determined the
unit of accounting to be all of its stations in a local market. The required annual impairment
tests may result in future periodic write-downs.
Goodwill
SFAS No. 142 requires the Company to test goodwill for impairment at least annually using a
two-step
process. The first step is a screen for potential impairment, while the second step measures the
amount of impairment. The Company conducts the two-step impairment test on December 1 of each
fiscal year. When assessing its goodwill for impairment, the Company uses an enterprise valuation
approach to determine the fair value of each of the Companys reporting units (radio stations
grouped by market and magazines on an individual basis). Management determines enterprise value
for each of its reporting units by multiplying the two-year average station operating income
generated by each reporting unit (current year based on actual results and the next year based on
budgeted results) by an estimated market multiple. The Company uses a blended station operating
income trading multiple of publicly traded radio operators as a benchmark for the multiple it
applies to its radio reporting units. The multiple applied to each reporting unit is then adjusted
up or down from this benchmark based upon characteristics of the reporting units specific market,
such as market size, market growth
-17-
rate, and recently completed or announced transactions within
the market. There are no publicly traded publishing companies that are focused predominantly on
city and regional magazines as is our publishing segment. 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.
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 in the statement of operations.
As of February 28, 2007, and May 31, 2007, the carrying amount of the Companys goodwill was
$77.6 million. As of February 28, 2007, and May 31, 2007, approximately $25.4 million and $52.2
million of our goodwill was attributable to our radio and publishing divisions, respectively. The
required annual impairment tests may result in future periodic write-downs.
Definite-lived intangibles
The Companys definite-lived intangible assets consist primarily of foreign broadcasting
licenses, favorable office leases and trademarks, all of which are amortized over the period of
time the assets are expected to contribute directly or indirectly to the Companys future cash
flows. The following table presents the weighted-average useful life, gross carrying amount and
accumulated amortization for each major class of definite-lived intangible asset at February 28,
2007, and May 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2007 |
|
|
May 31, 2007 |
|
|
|
Weighted Average |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Useful Life |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
(in years) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Foreign Broadcasting Licenses |
|
|
7.4 |
|
|
$ |
38,306 |
|
|
$ |
19,430 |
|
|
$ |
18,876 |
|
|
$ |
38,461 |
|
|
$ |
20,387 |
|
|
$ |
18,074 |
|
Favorable Office Leases |
|
|
6.4 |
|
|
|
688 |
|
|
|
394 |
|
|
|
294 |
|
|
|
688 |
|
|
|
420 |
|
|
|
268 |
|
Other |
|
|
37.5 |
|
|
|
782 |
|
|
|
392 |
|
|
|
390 |
|
|
|
782 |
|
|
|
399 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
|
|
|
|
$ |
39,776 |
|
|
$ |
20,216 |
|
|
$ |
19,560 |
|
|
$ |
39,931 |
|
|
$ |
21,206 |
|
|
$ |
18,725 |
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense from definite-lived intangibles for the three-month periods
ended May 31, 2006 and 2007, was $1.0 million in both periods. The following table presents the
Companys estimate of amortization expense for each of the five succeeding fiscal years for
definite-lived intangibles:
|
|
|
|
|
YEAR ENDED FEBRUARY 28 (29), |
|
|
|
|
2008 |
|
$ |
4,070 |
|
2009 |
|
|
4,132 |
|
2010 |
|
|
3,968 |
|
2011 |
|
|
2,396 |
|
2012 |
|
|
2,396 |
|
Note 4. Derivative Instruments and Hedging Activities
Under the terms of its senior credit facility, the Company is required to fix or cap the
interest rate on at least 30% of its debt outstanding (as defined in the credit facility) for a
period of at least three years. In March 2007, the Company fulfilled this requirement by entering
into a three-year interest rate exchange agreement (Swap), whereby the Company pays a fixed rate
of 4.795% on $165 million of notional principal to a
syndicate
-18-
of banks, and the banks pay to the
Company a variable rate on the same amount of notional principal based on the three-month London
Interbank Offered Rate (LIBOR). The counterparties to this agreement are international financial
institutions. The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the agreement. However, the Company considers this risk to be low.
Under the provisions of Statement of Financial Accounting Standards No. 133, as amended and
interpreted (SFAS No. 133), the Company recognizes at fair value all derivatives, whether
designated as hedging relationships or not, in the balance sheet as either an asset or liability.
The accounting for changes in the fair value of a derivative, including certain derivative
instruments embedded in other contracts, depends on the intended use of the derivative and the
resulting designation. If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and the hedged item are recognized in the statement of operations. If
the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the statement of operations when the
hedged item affects net income. If a derivative does not qualify as a hedge, it is marked to fair
value through the statement of operations. Any fees associated with these derivatives are
amortized over their term. Under these derivatives, the differentials to be received or paid are
recognized as an adjustment to interest expense over the life of the contract. Gains and losses on
termination of these instruments are recognized as interest expense when terminated.
SFAS No. 133 defines requirements for designation and documentation of hedging relationships,
as well as on-going effectiveness assessments, in order to use hedge accounting under this
standard. The Company formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes relating all derivatives that are designated as fair value or
cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Companys derivative activities, all of which are for
purposes other than trading, are initiated within the guidelines of corporate risk-management
policies. The Company formally assesses, both at inception and at least quarterly thereafter,
whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in either the fair value or cash flows of the hedged item. If a derivative ceases to be a
highly effective hedge, the Company discontinues hedge accounting.
The Company estimates the fair value of the Swap identified above to be a receivable of $1.8
million as of May 31, 2007. The fair value of the Swap is estimated by obtaining a quotation from
a financial institution that is one of the counterparties to the Companys Swap agreement. The
fair value is an estimate of the net amount that the Company would receive on May 31, 2007, if the
agreements were transferred to other parties or cancelled by the Company.
Note 5. Completion of Sale of KMTV-TV
On March 27, 2007, the Company completed its sale of KMTV-TV in Omaha to Journal
Communications and received $10.0 million in cash. KMTV-TV had been operated by Journal
Communications under a local programming and marketing agreement since December 5, 2005.
Note 6. Comprehensive Income
Comprehensive income was comprised of the following for the three-month periods ended May 31,
2006 and 2007:
-19-
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
Net income |
|
$ |
8,716 |
|
|
$ |
311 |
|
Change in fair value of derivative instrument, net of tax |
|
|
|
|
|
|
1,060 |
|
Translation adjustment |
|
|
472 |
|
|
|
846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
9,188 |
|
|
$ |
2,217 |
|
|
|
|
|
|
|
|
Note 7. Segment Information
The Companys operations are aligned into two business segments: (i) Radio and (ii) Publishing
and Other. These business segments are consistent with the Companys management of these
businesses and its financial reporting structure. Corporate represents expenses not allocated to
reportable segments.
The Companys segments operate primarily in the United States, but we also operate a network
of radio stations located in Belgium and national radio networks in Hungary, Slovakia and Bulgaria.
The following table summarizes the net revenues and long-lived assets of our international
properties included in our condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
Long-lived Assets |
|
|
Three Months Ended May 31, |
|
As of May 31, |
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
Hungary |
|
$ |
3,833 |
|
|
$ |
4,529 |
|
|
$ |
5,634 |
|
|
$ |
5,232 |
|
|
Belgium |
|
|
175 |
|
|
|
253 |
|
|
|
3,170 |
|
|
|
3,489 |
|
|
Slovakia |
|
|
2,045 |
|
|
|
2,701 |
|
|
|
11,907 |
|
|
|
11,197 |
|
|
Bulgaria |
|
|
367 |
|
|
|
743 |
|
|
|
4,539 |
|
|
|
6,573 |
|
In the quarter ended August 31, 2005, Emmis concluded its television division assets were
held for sale in accordance with SFAS No. 144. Emmis sold KKFR-FM in Phoenix in July 2006.
Accordingly, the results of operations of the television division and KKFR-FM have been classified
as discontinued operations in the
accompanying condensed consolidated financial statements (see Note 1) and excluded from the
segment disclosures below.
The accounting policies as described in the summary of significant accounting policies
included in the Companys Annual Report filed on Form 10-K for the year ended February 28, 2007,
and in Note 1 to these condensed consolidated financial statements, are applied consistently across
segments.
-20-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
May 31, 2006 (unaudited) |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
Net revenues |
|
$ |
68,794 |
|
|
$ |
20,993 |
|
|
$ |
|
|
|
$ |
89,787 |
|
Station operating expenses |
|
|
43,751 |
|
|
|
19,885 |
|
|
|
|
|
|
|
63,636 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
6,782 |
|
|
|
6,782 |
|
Depreciation and amortization |
|
|
2,434 |
|
|
|
162 |
|
|
|
679 |
|
|
|
3,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
22,609 |
|
|
$ |
946 |
|
|
$ |
(7,461 |
) |
|
$ |
16,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
998,793 |
|
|
$ |
77,459 |
|
|
$ |
55,755 |
|
|
$ |
1,132,007 |
|
Assets discontinued operations |
|
|
59,723 |
|
|
|
|
|
|
|
185,977 |
|
|
|
245,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,058,516 |
|
|
$ |
77,459 |
|
|
$ |
241,732 |
|
|
$ |
1,377,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
May 31, 2007 (unaudited) |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
Net revenues |
|
$ |
65,000 |
|
|
$ |
22,263 |
|
|
$ |
|
|
|
$ |
87,263 |
|
Station operating expenses |
|
|
45,720 |
|
|
|
19,687 |
|
|
|
|
|
|
|
65,407 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
6,326 |
|
|
|
6,326 |
|
Depreciation and amortization |
|
|
2,651 |
|
|
|
172 |
|
|
|
635 |
|
|
|
3,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
16,629 |
|
|
$ |
2,404 |
|
|
$ |
(6,961 |
) |
|
$ |
12,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
984,124 |
|
|
$ |
77,122 |
|
|
$ |
45,939 |
|
|
$ |
1,107,185 |
|
Assets discontinued operations |
|
|
|
|
|
|
|
|
|
|
68,759 |
|
|
|
68,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
984,124 |
|
|
$ |
77,122 |
|
|
$ |
114,698 |
|
|
$ |
1,175,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Regulatory, Legal and Other Matters
The Company is a party to various legal and regulatory proceedings arising in the ordinary
course of business. In the opinion of management of the Company, there are no legal or regulatory
proceedings pending against the Company that are likely to have a material adverse effect on the
Company.
On May 31, 2007, the Company received a letter on behalf of SJL Acquisition, LLC, the buyer of
KHON-TV, our former station in Honolulu. The letter alleges that Emmis violated the terms of its
affiliation agreement with Fox Broadcasting Company during its ownership of KHON-TV causing damages
to SJL Acquisition, LLC in excess of $10 million. Emmis disputes the allegations and intends to
defend itself vigorously in the matter.
On May 7, 2007, the Company received a letter of inquiry and request for information from the
FCC related to sponsorship identification practices at certain of our radio stations as part of an
industry-wide investigation by the FCC. The Company will cooperate with the FCC in this
investigation and will produce documents and other information requested by the FCC. The Company
has not yet determined what effect the inquiry will have, if any, on its financial position,
results of operations and cash flows.
During the Companys fiscal quarter ended November 30, 2004, Emmis entered into a consent
decree with the
FCC to settle all outstanding indecency-related matters. Terms of the decree call for Emmis
to make a voluntary contribution of $0.3 million to the U.S. Treasury, with the FCC terminating all
then-current indecency-related inquiries and fines against Emmis. Certain individuals and groups
appealed the FCCs adoption of the consent decree and have challenged applications for renewal of
the licenses of certain of the Companys stations based primarily on the matters covered by the
decree. The consent decree became final on June 27, 2007, and Emmis made its voluntary
contribution to the U.S. Treasury in July 2007. The challenges to the license renewal applications
are currently pending before the Commission; Emmis does not expect the challenges to result in any
changes to the consent decree or in the denial of any license renewals.
-21-
In January 2005, a third party threatened claims against our radio station in Hungary seeking
damages of approximately $4.6 million. Emmis has investigated the matter, and based on information
gathered to date, Emmis believes the claims are without merit. Litigation has not been initiated
and Emmis intends to defend itself vigorously in the matter.
Note 9. Subsequent Events
On June 4, 2007, Emmis closed on its sale of KGMB-TV in Honolulu to HITV Operating Co., Inc.,
a wholly-owned portfolio company of MCG Capital Corporation, for $40.0 million in cash. Emmis used
the proceeds to repay outstanding debt obligations. In connection with the sale, Emmis plans to
record a gain on sale of approximately $10.4 million, net of tax, in its quarter ended August 31,
2007, which will be reflected in discontinued operations.
-22-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Note: Certain statements included in this report or in the financial statements contained herein
which are not statements of historical fact, including but not limited to those identified with the
words expect, should, will or look are intended to be, and are, by this Note, identified as
forward-looking statements, as defined in the Securities and Exchange Act of 1934, as amended.
Such statements involve known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially different from any
future result, performance or achievement expressed or implied by such forward-looking statement.
Such factors include, among others:
|
|
|
general economic and business conditions; |
|
|
|
|
fluctuations in the demand for advertising and demand for different types of advertising media; |
|
|
|
|
our ability to service our outstanding debt; |
|
|
|
|
loss of key personnel; |
|
|
|
|
increased competition in our markets and the broadcasting industry; |
|
|
|
|
our ability to attract and secure programming, on-air talent, writers and photographers; |
|
|
|
|
inability to obtain (or to obtain timely) necessary approvals for purchase or sale
transactions or to complete the transactions for other reasons generally beyond our
control; |
|
|
|
|
increases in the costs of programming, including on-air talent; |
|
|
|
|
inability to grow through suitable acquisitions; |
|
|
|
|
new or changing regulations of the Federal Communications Commission or other
governmental agencies; |
|
|
|
|
changes in radio audience measurement methodologies; |
|
|
|
|
competition from new or different technologies; |
|
|
|
|
war, terrorist acts or political instability; and |
|
|
|
|
other factors mentioned in other documents filed by the Company with the Securities and
Exchange Commission. |
Emmis does not undertake any obligation to publicly update or revise any forward-looking statements
because of new information, future events or otherwise.
GENERAL
We are a diversified media company. We own and operate radio and publishing properties
located primarily in the United States. We also own one television station, which is held for
sale. In the quarter ended August 31, 2005, we classified our television assets as held for sale
(see Note 1 to the accompanying condensed consolidated financial statements for more discussion).
Our revenues are mostly affected by the advertising rates our entities charge, as advertising sales
represent more than 80% of our consolidated revenues. These rates are in large part based on our
entities ability to attract audiences/subscribers in demographic groups targeted by their
advertisers. Radio station ratings are measured principally four times a year by Arbitron Radio
Market Reports. Because audience ratings in a stations local market are critical to the stations
financial success, our strategy is to use market research and advertising and promotion to attract
and retain audiences in each stations chosen demographic target group.
Our revenues vary throughout the year. As is typical in the broadcasting industry, our
revenues and operating income are usually lowest in our fourth fiscal quarter.
In addition to the sale of advertising time for cash, stations typically exchange advertising
time for goods or services, which can be used by the station in its business operations. These
barter transactions are recorded at
-23-
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 pre-empt advertising spots paid for in cash with
advertising spots paid for in trade.
The following table summarizes the sources of our revenues for the three-month periods ended
May 31, 2006 and 2007. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2006 |
|
|
% of Total |
|
|
2007 |
|
|
% of Total |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
$ |
61,185 |
|
|
|
68.1 |
% |
|
$ |
59,353 |
|
|
|
68.0 |
% |
National |
|
|
15,032 |
|
|
|
16.7 |
% |
|
|
14,340 |
|
|
|
16.4 |
% |
Publication Sales |
|
|
4,340 |
|
|
|
4.8 |
% |
|
|
3,960 |
|
|
|
4.5 |
% |
Non Traditional |
|
|
3,558 |
|
|
|
4.0 |
% |
|
|
3,269 |
|
|
|
3.7 |
% |
Other |
|
|
5,672 |
|
|
|
6.4 |
% |
|
|
6,341 |
|
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
89,787 |
|
|
|
|
|
|
$ |
87,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously mentioned, we derive more than 80% of our net revenues from advertising
sales. Our radio stations derive a higher percentage of their advertising revenues from local and
regional sales than our publishing entities. In the three-month period ended May 31, 2007, local
and regional sales, excluding political revenues, represented approximately 86% and 61% of our
advertising revenues for our radio and publishing divisions, respectively. In the three-month
period ended May 31, 2006, local and regional sales, excluding political revenues, represented
approximately 85% and 65% of our advertising revenues for our radio and publishing divisions,
respectively.
No customer represents more than 10% of our consolidated net revenues. Our top-ten categories
for radio represent approximately 61% of the total advertising net revenues. The automotive
industry is the largest category for radio, representing approximately 11% of the radio segments
advertising net revenues in the three-month period ended May 31, 2007.
A significant portion of our expenses vary in connection with changes in revenue. These
variable expenses primarily relate to costs in our sales department, such as salaries, commissions,
and bad debt. Certain expenses related to our programming and general and administrative
departments, such as talent costs, syndicated programming fees, utilities and office salaries are
less variable in nature. Lastly, costs related to our marketing and promotions department are
highly discretionary and incurred primarily to maintain and/or increase our audience and market
share.
-24-
KNOWN TRENDS AND UNCERTAINTIES
Domestic radio revenue growth has been anemic for several years. Management believes this is
principally the result of three factors: (1) lack of inventory and pricing discipline by radio
operators, (2) the emergence of new media, such as Internet advertising and cable interconnects,
which are gaining advertising share against radio and other traditional media, and (3) the
perception of investors and advertisers that satellite radio and MP3 players diminish the
effectiveness of radio advertising.
The radio industry has begun several initiatives to address these issues, most notable of
which is the rollout of HD Radio TM. HD Radio offers listeners advantages over
standard analog broadcasts, including improved sound quality and additional channels. To make the
rollout of HD Radio more efficient, a consortium of broadcasters representing a majority of the
radio stations in nearly all of our markets have agreed to work together to coordinate the
programming on secondary channels in each radio market to ensure a more diverse consumer offering
and to accelerate the rollout of HD Radio receivers, particularly in automobiles. We currently
utilize HD Radio digital technology on most of our FM stations and plan to complete the build-out
of HD Radio capabilities at most of our remaining FM stations in fiscal 2008. 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 Meter TM
(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 PPM 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
content is aired and when audience listening or viewing habits can be reported. To date, more than
10 radio broadcasters, including Emmis, have signed long-term contracts to use the PPM service.
This service will begin in the New York market in the fall of 2007, with the Los Angeles and
Chicago markets following in 2008. It is unclear what impact the introduction of the PPM will have
on ratings in the markets in which we operate, however in markets in which PPM is currently in
place, urban formats have generally received lower ratings as compared to the traditional ratings
system. Since more than 50% of our domestic radio revenues are derived from urban formats, the
adoption of PPM could have a material adverse impact on our ratings and revenues.
Our three station radio cluster in New York trailed the performance of its peers during the
three months ended May 31, 2007. For the three months ended May 31, 2007, our New York radio
stations net revenues were down 14.1%, whereas the independent accounting firm Miller, Kaplan,
Arase & Co., LLP (Miller Kaplan) reported that net revenues of the New York market in total were
down 1.3%. We believe we trailed the performance of our peers in New York principally due to
turnover in key management positions at our New York stations and deterioration in ratings at each
of our three radio stations. We believe that we have solidified our management positions in New
York, but ratings continue to be weak, which will continue to impair revenues.
Our two station radio cluster in Los Angeles has also trailed the performance of its peers
during the three months ended May 31, 2007. For the three months ended May 31, 2007, our Los
Angeles radio stations net revenues were down 16.0%, whereas Miller Kaplan reported that net
revenues of the Los Angeles market in total were down 3.3%. Ratings for KPWR-FM began to improve
during calendar 2006. Revenues have begun to reflect the ratings improvement at KPWR-FM, allowing
us to exceed the performance of our peers for the three months ended May 31, 2007. However,
KMVN-FM (formerly KZLA-FM) changed its format from Country to Rhythmic/Pop Contemporary in August
2006. Given the drastic nature of format differences, the Company expected station ratings and
revenues to be negatively affected immediately after the format switch, but expected ratings and
revenues to rebound and eventually surpass those under the Country format. Ratings and revenues
-25-
results since the format change have not met the Companys expectations. We have invested
additional resources in promoting the station in the three months
ended May 31, 2007. We expect to see a recovery in ratings and revenues in the second half of
our fiscal year.
Emmis is in the process of divesting all its television stations. The decision to sell all of
our television stations stemmed from the Companys desire to reduce its debt, coupled with the
Companys view that its television stations needed to be aligned with a company with more
significant financial resources and a singular focus on American television challenges, including
the growth of digital video recorders and the industrys relationship with cable and satellite
providers. As of May 31, 2007, Emmis has sold fourteen of its sixteen television stations,
receiving gross proceeds of approximately $1.14 billion. On June 4, 2007, Emmis closed on its sale
of KGMB-TV in Honolulu for $40.0 million in cash. Emmis expects to sell its remaining television
station, WVUE-TV in New Orleans, in the next three to 12 months.
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.
ACCOUNTING PRONOUNCEMENTS
SFAS 159
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits
companies to choose to measure certain financial instruments and other items at fair value that are
not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We will adopt SFAS No. 159 no later than March 1, 2008. The
Company is currently evaluating SFAS No. 159 and its effect, if any, on the Companys financial
position, results of operations and cash flows.
SFAS 157
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157),
which provides guidance for using fair value to measure assets and liabilities. The standard also
responds to investors requests for more information about: (1) the extent to which companies
measure assets and liabilities at fair value; (2) the information used to measure fair value; and
(3) the effect that fair value measurements have on earnings. SFAS No. 157 will apply whenever
another standard requires (or permits) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value to any new circumstances. We will adopt SFAS No.
157 no later than March 1, 2008. The Company is currently evaluating SFAS No. 157 and its effect,
if any, on the Companys financial position, results of operations and cash flows.
FASB Staff Position AUG AIR-1
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1, Accounting for Planned
Major Maintenance Activities (FSP), which amends certain provisions in the AICPA Industry Audit
Guides, Audits of Airlines, and APB Opinion No. 28, Interim Financial Reporting. The FSP prohibits
the use of the accrue-in-advance method of accounting for planned major maintenance activities and
requires the use of the direct expensing method, built-in overhaul method, or deferral method. The
FSP is effective for fiscal years beginning after December 15, 2006.
The Company adopted the FSP on March 1, 2007 and began using the deferral method to account
for major maintenance activities related to its leased airplane. Under this method, actual costs
of the major maintenance activities are capitalized as incurred and amortized to corporate expenses
until the next overhaul date.
-26-
Prior to the adoption of this standard, the Company accrued for such
overhaul costs in advance and recorded the charge to
corporate expenses. As a result of the adoption of the FSP, the Company has eliminated the
effect of the accrue-in-advance method on all previous periods. The cumulative effect of the
adoption of the FSP on prior periods was to decrease the accumulated deficit by $0.8 million as of
March 1, 2006. The restatement had no effect on earnings per share for the three months ended May
31, 2006. The following tables illustrate the retrospective changes made in Emmis previously
reported financial position as of February 28, 2007, and our results from operations and cash flows
for the three months ended May 31, 2006:
Condensed Consolidated Balance Sheets
As of February 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Accounts payable and accrued expenses |
|
$ |
89,787 |
|
|
$ |
(1,441 |
) |
|
$ |
17,350 |
|
Deferred income taxes |
|
|
170,758 |
|
|
|
591 |
|
|
|
171,349 |
|
Accumulated deficit |
|
|
(286,150 |
) |
|
|
850 |
|
|
|
(285,300 |
) |
|
Condensed Consolidated Statements of Operations
For the three months ended May 31, 2006 |
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Corporate expenses |
|
|
6,887 |
|
|
|
(105 |
) |
|
|
6,782 |
|
Provision for income taxes |
|
|
25 |
|
|
|
43 |
|
|
|
68 |
|
Loss from continuing operations |
|
|
(269 |
) |
|
|
62 |
|
|
|
(207 |
) |
|
Condensed Consolidated Statements of Cash Flows
For the three months ended May 31, 2006 |
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
FSP Adjustment |
|
As Adjusted |
Net Income |
|
|
8,654 |
|
|
|
62 |
|
|
|
8,716 |
|
Provision for deferred income taxes |
|
|
(176 |
) |
|
|
43 |
|
|
|
(133 |
) |
Change in accounts payable and accrued liabilities |
|
|
(18,398 |
) |
|
|
(105 |
) |
|
|
(18,503 |
) |
FIN 48
Effective March 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken within an income tax
return. For those benefits to be recognized, a tax position must be more-likely-than-not to be
sustained upon examination by taxing authorities. The amount recognized is measured as the largest
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The
Companys policy is to record interest and penalties related to uncertain tax positions in income
tax expense. The Company did not record any interest or penalties related to uncertain tax
positions during the three months ended May 31, 2007.
The Company files income tax returns in the U.S. federal jurisdiction, various state
jurisdictions and various international jurisdictions. The Company has a number of federal and
state income tax years still open for examination as a result of net operating loss carryforwards.
Accordingly, the Company is subject to examination
-27-
for both U.S. federal and certain state tax
return purposes for the years ending February 28, 2002, to present.
The adoption of FIN 48 resulted in a decrease of $25.2 million to the March 1, 2007, balance
of accumulated deficit, a decrease of $24.9 million in other noncurrent liabilities and a decrease
of $0.3 million in deferred income taxes. Upon the adoption of FIN 48, the estimated value of the
Companys uncertain tax positions is approximately $0.7 million, $0.4 million of which is included
in deferred income taxes and $0.3 million of which is included in other noncurrent liabilities in
the accompanying condensed consolidated balance sheet as of May 31, 2007. If the Companys
positions are sustained by the taxing authorities in favor of the Company and it is more likely
than not that the Company will realize the tax benefits, then approximately $0.7 million would
reduce the Companys provision for income taxes. The Company does not expect any significant
change in the amount of unrecognized tax benefits over the next 12 months.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that encompass significant judgments and
uncertainties, and potentially lead to materially different results under different assumptions and
conditions. We believe that our critical accounting policies are those described below.
Impairment of Goodwill and Indefinite-lived Intangibles
The annual impairment tests for goodwill and indefinite-lived intangibles under SFAS No. 142
require us to make certain assumptions in determining fair value, including assumptions about the
cash flow growth rates of our businesses. Additionally, the fair values are significantly impacted
by macro-economic factors, including market multiples at the time the impairment tests are
performed. Accordingly, we may incur additional impairment charges in future periods under SFAS
No. 142 to the extent we do not achieve our expected cash flow growth rates, or to the extent that
market values decrease.
Allocations for Purchased Assets
We typically engage an independent appraisal firm to value assets acquired in a material
acquisition. We use the appraisal report to help us allocate the purchase price of the acquisition
among different categories of assets. To the extent that purchased assets are not allocated
appropriately, depreciation and amortization expense could be materially different.
Deferred Taxes and Effective Tax Rates
We estimate the effective tax rates and associated liabilities or assets for each legal entity
within Emmis in accordance with Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes and FIN 48. These estimates are based upon our interpretation of United States and
local tax laws as they apply to our legal entities and our overall tax structure. Audits by local
tax jurisdictions, including the United States Government, could yield different interpretations
from our own and cause the Company to owe more taxes than originally recorded. We utilize experts
in the various tax jurisdictions to evaluate our position and to assist in our calculation of our
tax expense and related liabilities.
Insurance Claims and Loss Reserves
The Company is self-insured for most healthcare claims, subject to stop-loss limits. Claims
incurred but not reported are recorded based on historical experience and industry trends, and
accruals are adjusted when warranted by changes in facts and circumstances. The Company had $1.4
million accrued for employee
-28-
healthcare claims as of February 28, 2007, and May 31, 2007. The
Company also maintains large deductible programs (ranging from $250 thousand to $500 thousand per
occurrence) for workers compensation claims, automotive liability losses and media liability
claims.
Valuation of Stock Options
The Company determines the fair value of its employee stock options at the date of grant using
a Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed for use
in estimating the value of exchange-traded options that have no vesting restrictions and are fully
transferable. The Companys employee stock options have characteristics significantly different
than these traded options. In addition, option pricing models require the input of highly
subjective assumptions, including the expected stock price volatility and expected term of the
options granted. The Company relies heavily upon historical data of its stock price when
determining expected volatility, but each year the Company reassesses whether or not historical
data is representative of expected results.
Results of Operations for the Three-month Periods Ended May 31, 2007, Compared to May 31, 2006
The results of our television division and our radio station sold in Phoenix have been
included in discontinued operations and are not included in reported results below. For further
disclosure of segment results, see Note 7 to the accompanying condensed consolidated financial
statements.
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
68,794 |
|
|
$ |
65,000 |
|
|
$ |
(3,794 |
) |
|
|
-5.5 |
% |
Publishing |
|
|
20,993 |
|
|
|
22,263 |
|
|
|
1,270 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
89,787 |
|
|
|
87,263 |
|
|
|
(2,524 |
) |
|
|
-2.8 |
% |
Radio net revenues decreased principally as a result of declining revenues in our New
York and Los Angeles markets. We typically monitor the performance of our stations against the
aggregate performance of the markets in which we operate based on reports for the periods prepared
by the independent accounting firm Miller Kaplan. For
the three months ended May 31, 2007, net revenues of our domestic radio stations were down 9.0%,
whereas Miller Kaplan reported that net revenues of our domestic radio markets were down 2.7%. We
underperformed the markets in which we operate principally due to continuing challenges in our Los
Angeles and New York markets, which collectively account for approximately 50% of our domestic
radio revenues. We have had significant ratings and revenue declines at our New York and Los
Angeles stations. Additionally, in August 2006, we changed the format of KMVN-FM (formerly
KZLA-FM) from Country to Rhythmic/Pop Contemporary. This format change has continued to negatively
impact net revenues. Market weakness and our stations weaknesses have led us to discount our
rates charged to advertisers. For the three months ended May 31, 2007, our average unit rate for
our domestic radio stations was down 15.1% and our number of units sold was up 3.6%.
The increase in publishing net revenue is due to the performance of Texas Monthly and Los
Angeles Magazine. Texas Monthly net revenues were up approximately $0.5 million due to increases
in the travel, real estate and apparel categories. Los Angeles magazine net revenues were up
approximately $0.8 million due to increases in the automotive, entertainment, retail and travel
categories.
-29-
On a consolidated basis, net revenues for the three month ended May 31, 2007, decreased
$2.5 million, or 2.8% due to the effect of the items described above.
Station operating expenses:
The results of our television division and our radio station sold in Phoenix have been
included in discontinued operations and are not included in reported results below. For further
disclosure of segment results, see Note 7 to the accompanying condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
Station operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
43,751 |
|
|
$ |
45,720 |
|
|
$ |
1,969 |
|
|
|
4.5 |
% |
Publishing |
|
|
19,885 |
|
|
|
19,687 |
|
|
|
(198 |
) |
|
|
-1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
63,636 |
|
|
|
65,407 |
|
|
|
1,771 |
|
|
|
2.8 |
% |
Radio station operating expenses increased in the three-months period ended May 31, 2007,
principally due to increased promotional spending at KMVN-FM, our reformatted Los Angeles station.
Additionally, we incurred $0.7 million of incremental expenses related to Emmis Interactive,
primarily consisting of headcount increases. The additional operating expenses incurred in the
three-month period ended May 31, 2007, are partially offset by lower sales-related costs due to the
decline in revenues as discussed above.
Publishing operating expenses decreased in the three months ended May 31, 2007, due to the
prior year including severance expenses related to the elimination of certain specialty magazines
of Country Sampler and a $0.2 million inventory charge related to our Emmis Books operation. The
benefit of these items is partially offset by higher sales-related costs due to the increase in net
revenues discussed above.
On a consolidated basis, station operating expenses for the three months ended May 31, 2007,
increased $1.8 million, or 2.8%, due to the effect of the items described above.
Corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Corporate expenses |
|
$ |
6,782 |
|
|
$ |
6,326 |
|
|
$ |
(456 |
) |
|
|
(6.7 |
)% |
Corporate expenses decreased due to continuing efforts to streamline our corporate
services subsequent to the divestiture of substantially all of our television division. Also, our
CEO voluntarily reduced his annual salary to $1 for fiscal 2008, which has contributed to the
decrease in the three months ended May 31, 2007, as compared to the
same period of the prior year.
-30-
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
2,434 |
|
|
$ |
2,651 |
|
|
$ |
217 |
|
|
|
8.9 |
% |
Publishing |
|
|
162 |
|
|
|
172 |
|
|
|
10 |
|
|
|
6.2 |
% |
Corporate |
|
|
679 |
|
|
|
635 |
|
|
|
(44 |
) |
|
|
(6.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
3,275 |
|
|
$ |
3,458 |
|
|
$ |
183 |
|
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the increase in radio depreciation and amortization expense for the
three months ended May 31, 2007, relates to various additions of equipment since our quarter ended
May 31, 2006. The decrease in corporate depreciation and amortization relates to certain assets
becoming fully depreciated subsequent to our quarter ended May 31, 2006.
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
22,609 |
|
|
$ |
16,629 |
|
|
$ |
(5,980 |
) |
|
|
(26.4 |
)% |
Publishing |
|
|
946 |
|
|
|
2,404 |
|
|
|
1,458 |
|
|
|
154.1 |
% |
Corporate |
|
|
(7,461 |
) |
|
|
(6,961 |
) |
|
|
500 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
16,094 |
|
|
$ |
12,072 |
|
|
$ |
(4,022 |
) |
|
|
(25.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three months ended May 31, 2007, radio operating income decreased due to declining
revenues in our New York and Los Angeles markets, as discussed above. Continued ratings pressure
on our stations in New York and Los Angeles will continue to present challenges for the Company.
In the three months ended May 31, 2007, publishing operating income increased principally due
to revenue increases associated with Texas Monthly and Los Angeles Magazine. Operating income for
our publishing division for the three months ended May 31, 2007, was also higher due to the prior
year including severance expenses related to the elimination of certain specialty magazines of
Country Sampler and a $0.2 million inventory charge related to our Emmis Books operation.
In the three months ended May 31, 2007, corporate operating income increased due to our
continuing efforts to streamline our corporate services subsequent to the disposition of
predominately all of our television division.
-31-
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Interest expense |
|
$ |
12,562 |
|
|
$ |
9,332 |
|
|
$ |
(3,230 |
) |
|
|
(25.7 |
)% |
The decrease in interest expense is due to reduced levels of borrowings under the
Companys senior credit facility as a result of the application of proceeds from the sale of
assets, partially offset by higher interest rates on the senior credit facility.
Loss on debt extinguishment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Loss on debt extinguishment |
|
$ |
(2,843 |
) |
|
$ |
|
|
|
$ |
2,843 |
|
|
|
N/A |
|
During the three months ended May 31, 2006, the Company redeemed, at 106.25% of par, $1.4
million outstanding of its 12.5% senior discount notes, redeemed $120.0 million of its senior
floating rate notes and also redeemed a portion of its senior credit facility which resulted in a
permanent reduction of capacity under the credit facility. In connection with these debt
redemptions, the Company recorded a loss on debt extinguishment of $2.8 million. No debt was
permanently redeemed in the three months ended May 31, 2007.
Income before income taxes, minority interest and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Income before income taxes,
minority interest and discontinued
operations |
|
$ |
1,032 |
|
|
$ |
2,676 |
|
|
$ |
1,644 |
|
|
|
159.3 |
% |
The increase is principally due to higher publishing income, lower interest expense and
the prior years inclusion of a $2.8 million loss on debt extinguishment, partially offset by lower
radio operating income.
-32-
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Provision for income taxes |
|
$ |
68 |
|
|
$ |
1,992 |
|
|
$ |
1,924 |
|
|
|
2829.4 |
% |
The effective tax rate for the three-month periods ended May 31, 2006 and 2007, was 6.6%
and 74.4% respectively. The effective tax rate of 6.6% for the three months ended May 31, 2006,
differed from our statutory rate of 41% due to the realization of previously reserved foreign tax
assets. The effective tax rate of 74.4% for the three months ended May 31, 2007, differed from our
statutory rate of 41% due to our low income before income taxes in relation to other non-deductible
items recorded during the quarter. We expect our effective tax rate for the year ending February
29, 2008, to be approximately 47%.
Minority interest expense, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Minority interest
expense, net of tax |
|
$ |
1,171 |
|
|
$ |
1,193 |
|
|
$ |
22 |
|
|
|
1.9 |
% |
Our minority interest expense principally relates to our radio partnership in Austin,
Texas (we own 50.1%) and our radio station in Hungary (we own 59.5%).
Income from discontinued operations, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Income from discontinued operations,
net of tax |
|
$ |
8,923 |
|
|
$ |
820 |
|
|
$ |
(8,103 |
) |
|
|
(90.8 |
)% |
Our television division, radio station in Phoenix (KKFR-FM), and one radio station in St.
Louis (WRDA-FM) have been classified as discontinued operations in the accompanying condensed
consolidated statements. The financial results of these stations and related discussions are fully
described in Note 1 to the accompanying condensed consolidated financial statements. Below is a
summary of the components of discontinued operations:
-33-
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2006 |
|
|
2007 |
|
Income from discontinued operations: |
|
|
|
|
|
|
|
|
KKFR-FM |
|
$ |
921 |
|
|
$ |
|
|
Television |
|
|
7,509 |
|
|
|
1,395 |
|
|
|
|
|
|
|
|
Total |
|
|
8,430 |
|
|
|
1,395 |
|
Less: Provision for income taxes |
|
|
3,650 |
|
|
|
575 |
|
|
|
|
|
|
|
|
Income from operations, net of tax |
|
|
4,780 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations: |
|
|
|
|
|
|
|
|
WRDA-FM |
|
|
7,022 |
|
|
|
|
|
Less: Provision for income taxes |
|
|
2,879 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued
operations, net of tax |
|
|
4,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
8,923 |
|
|
$ |
820 |
|
|
|
|
|
|
|
|
In August 2005, our television station in New Orleans, WVUE-TV, was significantly
affected by Hurricane Katrina and the subsequent flooding. The flooding of New Orleans caused
extensive property damage at WVUE-TV. Emmis spent approximately $1.1 million on capital
expenditures related to flooding restoration projects during the quarter ended May 31, 2007, which
essentially completed the restoration projects. The Company has received and recognized in
discontinued operations $5.5 million related to business interruption claims it had previously
filed. Our business interruption claim negotiations with our insurance carrier continue, but it is
unclear if Emmis will receive any additional proceeds related to our claim.
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
Net income |
|
$ |
8,716 |
|
|
$ |
311 |
|
|
$ |
(8,405 |
) |
|
|
(96.4 |
)% |
The decrease in net income in the three-month period ended May 31, 2007, is principally
attributable to lower income from discontinued operations.
Liquidity and Capital Resources
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 have been historically,
and are expected to continue to be, funding acquisitions, capital expenditures, working capital,
debt service and preferred stock dividend requirements. We also have used capital to repurchase
our common stock. In November 2006, we paid a special $4 per common share dividend totaling $150.2
million. We may continue to return capital to shareholders via dividends or stock repurchases.
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.
-34-
At May 31, 2007, we had cash and cash equivalents of $13.9 million and net working capital of
$54.5 million. At February 28, 2007, we had cash and cash equivalents of $20.7 million and net
working capital of $60.5 million. During the three months ended May 31, 2007, working capital
decreased $6.0 million as the Company utilized most of its available domestic cash to repay amounts
outstanding under its credit facility. The Company repaid $18.0 million of senior credit facility
debt during the three months ended May 31, 2007 (net of borrowings during the quarter). At July 2,
2007, we had $134.5 million available under our credit facility, which is net of $2.5 million in
outstanding letters of credit.
As required by the terms of its senior credit facility, in March 2007 the Company entered into
a three-year interest rate exchange agreement, whereby the Company pays a fixed rate of 4.795% on
$165 million of notional principal to a syndicate of banks, and the banks pay to the Company a
variable rate on the same amount of notional principal based on the three-month LIBOR. The
counterparties to this agreement are international financial institutions.
Operating Activities
Cash flows provided by operating activities were $6.6 million for the three month period ended
May 31, 2007, versus cash used in operating activities of $9.6 million in the same period of the
prior year. The three months ended May 31, 2006, included the settlement of bonus and severance
amounts associated with television divestitures that occurred in fiscal 2006. Cash flows provided
by operating activities are historically the highest in our third and fourth fiscal quarters as a
significant portion of our accounts receivable collections is derived from revenues recognized in
our second and third fiscal quarters, which are our highest revenue quarters.
Investing Activities
Cash flows provided by investing activities were $6.7 million for the three months ended May
31, 2007, versus $22.8 million in the same period of the prior year. In the three months ended May
31, 2006, we sold WRDA-FM in St. Louis for $20.0 million in cash. In the three months ended May
31, 2007, we closed on our sale KMTV-TV in Omaha to Journal Communications and received the final
$10.0 million in cash. The station had been operated by Journal Communications under a local
programming and marketing agreement since December 2005.
Investing activities include capital expenditures and business acquisitions and dispositions.
Capital expenditures primarily relate to leasehold improvements to various office and studio
facilities, broadcast equipment purchases, tower upgrades and computer equipment replacements. In
the three months ended May 31, 2006 and 2007, we had capital expenditures of $0.6 million and $1.0
million, respectively. We expect capital expenditures related to continuing operations to be
approximately $8.4 million in the current fiscal year, compared to $5.3 million in fiscal 2007. We
expect that future requirements for capital expenditures will include capital expenditures incurred
during the ordinary course of business, including leasehold improvements associated with our new
office space for Emmis Interactive. We expect to fund such capital expenditures with cash
generated from operating activities and borrowings under our credit facility.
Financing Activities
Cash flows used in financing activities were $20.7 million for the three months ended May 31,
2007, versus $139.0 million in the same period of the prior year. Cash flows used in financing
activities in the three months ended May 31, 2007, primarily relate to the $18.0 million of net
repayments of debt under our senior credit facility. Cash used in financing activities for the
three months ended May 31, 2006, included repayments of debt under our senior credit facility, the
redemption of $120.0 million of senior floating rate notes and the redemption of $1.4 million of
senior discount notes. These transactions were funded by cash on hand from our
-35-
sales of
discontinued operations as well as additional borrowings under our senior credit facility.
As of May 31, 2007, Emmis had $480 million of borrowings under its senior credit facility
($4.5 million current and $475.5 million long-term), $4.0 million of other indebtedness ($1.2
million current and $2.8 million long-term) and $143.8 million of convertible preferred stock
outstanding. All outstanding amounts under our credit facility bear interest, at our option, at a
rate equal to the Eurodollar rate or an alternative Base Rate plus a margin. As of May 31, 2007,
our weighted average borrowing rate under our credit facility was approximately 7.1%.
The debt service requirements of Emmis over the next 12 month period (excluding interest under
our credit facility and principal amounts of our senior subordinated notes) are expected to be
$13.5 million. This amount is comprised of $4.5 million for repayment of term notes under our
credit facility and $9.0 million in preferred stock dividend requirements. Although interest will
be paid under the credit facility at least every three months, the amount of interest is not
presently determinable given that the credit facility bears interest at variable rates. The terms
of Emmis preferred stock provide for a quarterly dividend payment of $.78125 per share on each
January 15, April 15, July 15 and October 15.
As part of our business strategy, we continually evaluate potential acquisitions of radio
stations, publishing properties and other businesses we believe hold promise for long-term
appreciation in value. If we elect to take advantage of future acquisition opportunities, we may
incur additional debt or issue additional equity or debt securities, depending on market conditions
and other factors. In addition, Emmis has the option, but not the obligation, to purchase our
49.9% partners entire interest in the Austin radio partnership in December 2007 based on an
18-multiple of trailing 12-month cash flow. If the option is exercised by Emmis, the minority
partner has the right to defer this option for one year, to December 2008.
Intangibles
Including intangible assets classified as noncurrent assets discontinued operations in the
accompanying condensed consolidated balance sheet, at May 31, 2007, approximately 80% 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 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.
Our foreign broadcasting licenses expire during periods ranging from November 2009 to May 2013. We
will need to submit applications to extend our foreign licenses upon their expiration to continue
our broadcast operations in these countries.
Regulatory, Legal and Other Matters
The Company is a party to various legal and regulatory proceedings arising in the ordinary
course of business. In the opinion of management of the Company, there are no legal or regulatory
proceedings pending against the Company that are likely to have a material adverse effect on the
Company.
On May 31, 2007, the Company received a letter on behalf of SJL Acquisition, LLC, the buyer of
KHON-TV, our former station in Honolulu. The letter alleges that Emmis violated the terms of its
affiliation agreement with Fox Broadcasting Company during its ownership of KHON-TV causing damages
to SJL Acquisition LLC in excess of $10 million. Emmis disputes the allegations and intends to
defend itself vigorously in the matter.
On May 7, 2007, the Company received a letter of inquiry and request for information from the
FCC related
-36-
to
sponsorship identification practices at certain of our ratio stations as part of an
industry-wide investigation by the FCC. The Company will cooperate with the FCC in this
investigation and will produce documents and other information requested by the FCC. The Company
has not yet determined what effect the inquiry will have, if any, on its financial position,
results of operations or cash flows.
During the Companys fiscal quarter ended November 30, 2004, Emmis entered into a consent
decree with the FCC to settle all outstanding indecency-related matters. Terms of the decree call
for Emmis to make a voluntary contribution of $0.3 million to the U.S. Treasury, with the FCC
terminating all then-current indecency-related inquiries and fines against Emmis. Certain
individuals and groups appealed the FCCs adoption of the consent decree and have challenged
applications for renewal of the licenses of certain of the Companys stations based primarily on
the matters covered by the decree. On March 29, 2007, the United States Court of Appeals for the
District of Columbia Circuit dismissed the appeal of the petitioners. The consent decree became
final on June 27, 2007, and Emmis made its voluntary contribution to the U.S. Treasury in July
2007. The challenges to the license renewal applications are currently pending before the
Commission; Emmis does not expect the challenges to result in any changes to the consent decree or
in the denial of any license renewals.
In January 2005, a third party threatened claims against our radio station in Hungary seeking
damages of approximately $4.6 million. Emmis has investigated the matter, and based on information
gathered to date, Emmis believes the claims are without merit. Litigation has not been initiated
and Emmis intends to defend itself vigorously in the matter.
Quantitative and Qualitative Disclosures About Market Risk
On March 28, 2007, Emmis entered into an interest rate swap agreement that fixed the
underlying three-month LIBOR at 4.795%. The notional amount of the interest rate swap agreement
totaled $165.0 million, and the agreement expires on March 27, 2010. Based on amounts outstanding
at May 31, 2007, (including the interest rate swap agreement in place) if the interest rate on our
variable debt were to increase by 1.0%, our annual interest expense would increase by approximately
$3.2 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Discussion regarding these items is included in managements discussion and analysis of
financial condition and results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and procedures (Disclosure
Controls). This evaluation (the Controls Evaluation) was performed under the supervision and
with the participation of management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO).
Based upon the Controls Evaluation, our CEO and CFO concluded that as of May 31, 2007, our
Disclosure Controls are effective to provide reasonable assurance that information relating to
Emmis Communications Corporation and Subsidiaries that is required to be disclosed by us in the
reports that we file or submit, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions 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.
-37-
Changes in Internal Control over Financial Reporting
During the period covered by this quarterly report, there were no changes in the Companys
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
It should be noted that any control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control systems objectives will be met.
PART II OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits.
The following exhibits are filed or incorporated by reference as a part of
this report:
|
3.1 |
|
Second Amended and Restated Articles of Incorporation of Emmis
Communications Corporation, as amended effective June 13, 2005 incorporated by
reference from Exhibit 3.1 to the Companys Form 10-K for the fiscal year ended
February 28, 2006. |
|
|
3.2 |
|
Amended and Restated Bylaws of Emmis Communications Corporation,
incorporated by reference from Exhibit 3.2 to the Companys Form 8-K filed on
December 11, 2006. |
|
|
4.1 |
|
Form of stock certificate for Class A common stock, incorporated
by reference from Exhibit 3.5 to the 1994 Emmis Registration Statement on Form
S-1, File No. 33-73218 (the 1994 Registration Statement). |
|
|
12 |
|
Statement re: Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends. |
|
|
31.1 |
|
Certification of Principal Executive Officer of Emmis
Communications Corporation pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
31.2 |
|
Certification of Principal Financial Officer of Emmis
Communications Corporation pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
32.1 |
|
Section 1350 Certification of Principal Executive Officer of
Emmis Communications Corporation. |
|
|
32.2 |
|
Section 1350 Certification of Principal Financial Officer of
Emmis Communications Corporation. |
-38-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
EMMIS COMMUNICATIONS CORPORATION |
|
|
|
Date: July 10, 2007
|
|
By: /s/ PATRICK M. WALSH |
|
|
Patrick M. Walsh |
|
|
Executive Vice President, Chief Financial
|
|
|
Officer and Treasurer |
-39-