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 November 30, 2006
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 þ Accelerated filer o 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 January 2, 2007, was:
|
|
|
32,396,671
|
|
Shares of Class A Common Stock, $.01 Par Value |
4,929,881
|
|
Shares of Class B Common Stock, $.01 Par Value |
0
|
|
Shares of Class C Common Stock, $.01 Par Value |
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
November 30, |
|
|
November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
NET REVENUES |
|
$ |
97,992 |
|
|
$ |
91,205 |
|
|
$ |
295,027 |
|
|
$ |
280,901 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station operating expenses |
|
|
61,954 |
|
|
|
61,854 |
|
|
|
187,562 |
|
|
|
191,873 |
|
Corporate expenses |
|
|
7,360 |
|
|
|
8,444 |
|
|
|
23,921 |
|
|
|
23,623 |
|
Depreciation and amortization |
|
|
4,225 |
|
|
|
3,417 |
|
|
|
12,278 |
|
|
|
9,915 |
|
Loss on disposal of assets |
|
|
40 |
|
|
|
2 |
|
|
|
85 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
73,579 |
|
|
|
73,717 |
|
|
|
223,846 |
|
|
|
225,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
24,413 |
|
|
|
17,488 |
|
|
|
71,181 |
|
|
|
55,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(20,487 |
) |
|
|
(9,505 |
) |
|
|
(49,073 |
) |
|
|
(33,621 |
) |
Loss on debt extinguishment |
|
|
|
|
|
|
(10,023 |
) |
|
|
|
|
|
|
(13,403 |
) |
Other income (expense), net |
|
|
(48 |
) |
|
|
1,885 |
|
|
|
115 |
|
|
|
2,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(20,535 |
) |
|
|
(17,643 |
) |
|
|
(48,958 |
) |
|
|
(44,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS |
|
|
3,878 |
|
|
|
(155 |
) |
|
|
22,223 |
|
|
|
11,131 |
|
PROVISION FOR INCOME TAXES |
|
|
872 |
|
|
|
461 |
|
|
|
8,919 |
|
|
|
5,019 |
|
MINORITY INTEREST EXPENSE, NET OF TAX |
|
|
1,092 |
|
|
|
654 |
|
|
|
3,511 |
|
|
|
3,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
|
1,914 |
|
|
|
(1,270 |
) |
|
|
9,793 |
|
|
|
2,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX |
|
|
198,107 |
|
|
|
4,400 |
|
|
|
209,036 |
|
|
|
121,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
200,021 |
|
|
|
3,130 |
|
|
|
218,829 |
|
|
|
124,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK DIVIDENDS |
|
|
2,246 |
|
|
|
2,246 |
|
|
|
6,738 |
|
|
|
6,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS |
|
$ |
197,775 |
|
|
$ |
884 |
|
|
$ |
212,091 |
|
|
$ |
117,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
November 30, |
|
|
November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Basic net income (loss) available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.07 |
|
|
$ |
(0.11 |
) |
Discontinued operations, net of tax |
|
|
5.37 |
|
|
|
0.11 |
|
|
|
4.67 |
|
|
|
3.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
5.36 |
|
|
$ |
0.02 |
|
|
$ |
4.74 |
|
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
36,879 |
|
|
|
37,290 |
|
|
|
44,700 |
|
|
|
37,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) available to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.07 |
|
|
$ |
(0.11 |
) |
Discontinued operations, net of tax |
|
|
5.37 |
|
|
|
0.11 |
|
|
|
4.64 |
|
|
|
3.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
5.36 |
|
|
$ |
0.02 |
|
|
$ |
4.71 |
|
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
36,879 |
|
|
|
37,290 |
|
|
|
45,056 |
|
|
|
37,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
|
|
|
|
$ |
4.00 |
|
|
|
|
|
|
$ |
4.00 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2006 |
|
|
2006 |
|
|
|
(Note 1) |
|
|
(Unaudited) |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
140,822 |
|
|
$ |
16,063 |
|
Accounts receivable, net |
|
|
65,374 |
|
|
|
74,873 |
|
Prepaid expenses |
|
|
16,605 |
|
|
|
16,289 |
|
Other |
|
|
10,172 |
|
|
|
5,690 |
|
Current assets discontinued operations |
|
|
22,233 |
|
|
|
10,448 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
255,206 |
|
|
|
123,363 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET |
|
|
64,561 |
|
|
|
60,144 |
|
INTANGIBLE ASSETS (Note 4): |
|
|
|
|
|
|
|
|
Indefinite-lived intangibles |
|
|
819,338 |
|
|
|
819,338 |
|
Goodwill |
|
|
77,413 |
|
|
|
77,413 |
|
Other intangibles, net |
|
|
20,174 |
|
|
|
18,044 |
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
916,925 |
|
|
|
914,795 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS, NET |
|
|
45,093 |
|
|
|
38,935 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT ASSETS DISCONTINUED OPERATIONS |
|
|
230,916 |
|
|
|
87,576 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,512,701 |
|
|
$ |
1,224,813 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
November 30, |
|
|
|
2006 |
|
|
2006 |
|
|
|
(Note 1) |
|
|
(Unaudited) |
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
25,258 |
|
|
$ |
17,362 |
|
Current maturities of long-term debt |
|
|
129,175 |
|
|
|
3,417 |
|
Accrued salaries and commissions |
|
|
11,857 |
|
|
|
6,951 |
|
Accrued interest |
|
|
9,561 |
|
|
|
2,824 |
|
Deferred revenue |
|
|
13,581 |
|
|
|
13,492 |
|
Other |
|
|
6,040 |
|
|
|
4,393 |
|
Current liabilities discontinued operations |
|
|
26,431 |
|
|
|
7,072 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
221,903 |
|
|
|
55,511 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, NET OF CURRENT MATURITIES |
|
|
664,424 |
|
|
|
497,725 |
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM DEBT, NET OF CURRENT MATURITIES |
|
|
3,520 |
|
|
|
3,337 |
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT LIABILITIES |
|
|
3,296 |
|
|
|
28,859 |
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST |
|
|
48,465 |
|
|
|
49,872 |
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES |
|
|
127,228 |
|
|
|
178,554 |
|
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES DISCONTINUED OPERATIONS |
|
|
28,386 |
|
|
|
18,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,097,222 |
|
|
|
832,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006 AND NOVEMBER 30, 2006 |
|
|
143,750 |
|
|
|
143,750 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Class A common stock, $.01 par value; authorized 170,000,000 shares;
issued and outstanding 32,164,397 shares at February 28, 2006
and 32,380,282 shares at November 30, 2006 |
|
|
322 |
|
|
|
324 |
|
Class B common stock, $.01 par value; authorized 30,000,000 shares;
issued and outstanding 4,879,774 shares at February 28, 2006
and 4,929,881 shares at November 30, 2006 |
|
|
49 |
|
|
|
49 |
|
Additional paid-in capital |
|
|
513,879 |
|
|
|
522,783 |
|
Accumulated deficit |
|
|
(240,567 |
) |
|
|
(273,419 |
) |
Accumulated other comprehensive loss |
|
|
(1,954 |
) |
|
|
(1,301 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
271,729 |
|
|
|
248,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,512,701 |
|
|
$ |
1,224,813 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
218,829 |
|
|
$ |
124,066 |
|
Adjustments to reconcile net income to net cash
provided by operating activities - |
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
(209,036 |
) |
|
|
(121,330 |
) |
Depreciation and amortization |
|
|
14,146 |
|
|
|
10,941 |
|
Minority interest expense |
|
|
3,511 |
|
|
|
3,376 |
|
Provision for bad debts |
|
|
1,567 |
|
|
|
1,837 |
|
Provision (benefit) for deferred income taxes |
|
|
8,880 |
|
|
|
(768 |
) |
Noncash compensation |
|
|
8,181 |
|
|
|
6,484 |
|
Loss on debt extinguishment |
|
|
|
|
|
|
13,403 |
|
Other |
|
|
829 |
|
|
|
13 |
|
Changes in assets and liabilities - |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(16,155 |
) |
|
|
(11,163 |
) |
Prepaid expenses and other current assets |
|
|
256 |
|
|
|
1,120 |
|
Other assets |
|
|
1,211 |
|
|
|
(3,855 |
) |
Accounts payable and accrued liabilities |
|
|
865 |
|
|
|
(18,097 |
) |
Deferred revenue |
|
|
(816 |
) |
|
|
(89 |
) |
Other liabilities |
|
|
(4,352 |
) |
|
|
(6,439 |
) |
Net cash provided by operating activities discontinued operations |
|
|
28,781 |
|
|
|
13,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
56,697 |
|
|
|
12,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(8,174 |
) |
|
|
(2,306 |
) |
Cash paid for acquisitions |
|
|
(15,786 |
) |
|
|
|
|
Deposits and other |
|
|
(63 |
) |
|
|
(426 |
) |
Net cash provided by investing activities discontinued operations |
|
|
434,227 |
|
|
|
318,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
410,204 |
|
|
|
316,016 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(114,563 |
) |
|
|
(1,011,970 |
) |
Proceeds from long-term debt |
|
|
499,000 |
|
|
|
719,500 |
|
Restricted cash pledged for debt repayment |
|
|
(207,889 |
) |
|
|
|
|
Purchases of the Companys Class A Common Stock |
|
|
(398,343 |
) |
|
|
|
|
Proceeds from exercise of stock options and employee stock purchases |
|
|
3,763 |
|
|
|
223 |
|
Preferred stock dividends paid |
|
|
(6,738 |
) |
|
|
(6,738 |
) |
Special cash dividends paid |
|
|
|
|
|
|
(150,180 |
) |
Tax benefit of dividend on unvested restricted stock |
|
|
|
|
|
|
667 |
|
Settlement of tax withholding obligations on stock issued to employees |
|
|
(1,289 |
) |
|
|
(721 |
) |
Debt related costs |
|
|
(10,556 |
) |
|
|
(4,548 |
) |
Other |
|
|
|
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(236,615 |
) |
|
|
(453,832 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
(1,185 |
) |
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
229,101 |
|
|
|
(124,759 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
16,054 |
|
|
|
140,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
245,155 |
|
|
$ |
16,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
Cash paid for - |
|
|
|
|
|
|
|
|
Interest |
|
$ |
67,239 |
|
|
$ |
39,323 |
|
Income taxes |
|
|
39 |
|
|
|
5,988 |
|
|
|
|
|
|
|
|
|
|
Noncash financing transactions- |
|
|
|
|
|
|
|
|
Value of stock issued to employees under stock compensation
program and to satisfy accrued incentives |
|
|
13,955 |
|
|
|
9,073 |
|
|
|
|
|
|
|
|
|
|
ACQUISITION OF D.EXPRES (SLOVAKIA): |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
16,208 |
|
|
|
|
|
Cash paid |
|
|
12,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities recorded |
|
$ |
3,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUISITION OF RADIO FM+ (BULGARIA): |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
4,841 |
|
|
|
|
|
Cash paid |
|
|
3,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities recorded |
|
$ |
1,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
November 30, 2006
(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, 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, 2006. 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 November 30, 2006 and the results of
its operations for the three-month and nine-month periods ended November 30, 2005 and 2006 and its
cash flows for the nine-month periods ended November 30, 2005 and 2006.
Accounting Pronouncements
On September 15, 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements [SFAS No. 157], which provides guidance for
using fair value to measure assets and liabilities. The standard also responds to investors
requests for more information about: (1) the extent to which companies measure assets and
liabilities at fair value; (2) the information used to measure fair value; and (3) the effect that
fair value measurements have on earnings. SFAS No. 157 will apply whenever another standard
requires (or permits) assets or liabilities to be measured at fair value. The standard does not
expand the use of fair value to any new circumstances. SFAS No. 157 is effective for the Company as
of 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.
On September 8, 2006, the Financial Accounting Standards Board issued FASB Staff Position AUG
AIR-1, Accounting For Planned Major Maintenance Activities, that eliminates the acceptability of
the accrue-in-advance method of accounting for planned major maintenance activities. This staff
position is effective for the Company as of March 1, 2007 and requires retrospective restatement of
prior period results. Early adoption of this pronouncement is precluded for the Company. The
Company has been accruing for planned major maintenance activities associated with a leased
airplane under the accrue-in-advance method. The Company is currently evaluating this FASB Staff
Position and its effect on the Companys financial position, results of operations and cash flows.
-9-
On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting
For Uncertainty In Income Taxes [FIN No. 48], that provides guidance on the financial
statement recognition, measurement, presentation and disclosure of uncertain tax positions that a
company has taken or expects to take on a tax return. Under FIN No. 48, financial statements
should reflect expected future tax consequences of such positions presuming the taxing authorities
have full knowledge of the position and all relevant facts. The interpretation also revises the
disclosure requirements and is effective for the Company as of March 1, 2007. The Company is
currently evaluating FIN No. 48 and its effect on the Companys financial position, results of
operations and cash flows.
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment [SFAS No. 123R]. SFAS No. 123R
requires companies to measure all employee stock-based compensation awards, including employee
stock options, using a fair-value method and to record such expense in their consolidated financial
statements. In addition, the adoption of SFAS No. 123R requires additional accounting and
disclosure related to the income tax and cash flow effects resulting from share-based payment
arrangements. The Company adopted SFAS No. 123R on March 1, 2006. See Note 3 for further
discussion.
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 $1.1 million
and $0.7 million of these costs as of November 30, 2005 and 2006, respectively.
Basic and Diluted Net Income Per Common Share
Basic net income 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 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
November 30, 2005 and 2006 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 per common share for the three-month and nine-month periods ended
November 30, 2005 as the effect of its conversion to 4.8 million shares would be antidilutive. The
6.25% Series A cumulative convertible preferred stock was excluded from the calculation of diluted
net income per common share for the three-month and nine-month periods ended November 30, 2006 as
the effect of its conversion to 7.0 million shares would be antidilutive. Stock options were
excluded from diluted net income per common share for the three months ended November 30, 2005 and
the three months and nine months ended November 30, 2006 as the effect of their conversion to 0.4
million shares, 0.1 million shares, and 0.1 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 November 30, 2006 presentation. The reclassifications have no impact on net
income previously reported.
-10-
Discontinued Operations
Summary of Discontinued Operations Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KKFR-FM |
|
$ |
1,051 |
|
|
$ |
(104 |
) |
|
$ |
3,351 |
|
|
$ |
433 |
|
Television |
|
|
11,083 |
|
|
|
6,678 |
|
|
|
27,401 |
|
|
|
18,060 |
|
WRDA-FM |
|
|
(157 |
) |
|
|
|
|
|
|
(693 |
) |
|
|
|
|
Phoenix |
|
|
|
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,977 |
|
|
|
6,574 |
|
|
|
30,499 |
|
|
|
18,493 |
|
Less: Provision for income taxes |
|
|
3,326 |
|
|
|
2,043 |
|
|
|
10,919 |
|
|
|
7,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations, net of tax |
|
|
8,651 |
|
|
|
4,531 |
|
|
|
19,580 |
|
|
|
11,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KKFR-FM |
|
|
|
|
|
|
(247 |
) |
|
|
|
|
|
|
18,870 |
|
Television |
|
|
321,154 |
|
|
|
|
|
|
|
321,154 |
|
|
|
160,760 |
|
WRDA-FM |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
321,154 |
|
|
|
(217 |
) |
|
|
321,154 |
|
|
|
186,682 |
|
Less: Provision for income taxes |
|
|
131,698 |
|
|
|
(86 |
) |
|
|
131,698 |
|
|
|
76,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued
operations, net of tax |
|
|
189,456 |
|
|
|
(131 |
) |
|
|
189,456 |
|
|
|
109,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
198,107 |
|
|
$ |
4,400 |
|
|
$ |
209,036 |
|
|
$ |
121,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, AZ to
Bonneville International Corporation for $77.5 million in cash and also sold certain tangible
assets to Riviera Broadcast Group LLC for $0.1 million in cash. 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 November 30, |
|
Nine Months Ended November 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Net revenues |
|
$ |
2,525 |
|
|
$ |
|
|
|
$ |
7,869 |
|
|
$ |
3,746 |
|
Station operating expenses |
|
|
1,417 |
|
|
|
104 |
|
|
|
4,293 |
|
|
|
3,149 |
|
Depreciation and amortization |
|
|
49 |
|
|
|
|
|
|
|
190 |
|
|
|
42 |
|
Income (loss) before taxes |
|
|
1,051 |
|
|
|
(104 |
) |
|
|
3,351 |
|
|
|
433 |
|
Provision (benefit) for income taxes |
|
|
431 |
|
|
|
(43 |
) |
|
|
1,374 |
|
|
|
177 |
|
-11-
Net assets related to KKFR-FM are classified as discontinued operations in the
accompanying condensed consolidated balance sheets as follows:
|
|
|
|
|
|
|
February 28, 2006 |
|
Current assets: |
|
|
|
|
Accounts receivable, net |
|
$ |
1,746 |
|
Prepaid expenses |
|
|
269 |
|
Other |
|
|
67 |
|
|
|
|
|
Total current assets |
|
|
2,082 |
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
Property and equipment, net |
|
|
1,785 |
|
Intangibles, net |
|
|
55,671 |
|
|
|
|
|
Total noncurrent assets |
|
|
57,456 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
59,538 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
398 |
|
Noncurrent liabilities |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
443 |
|
|
|
|
|
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 lower its debt, coupled
with the Companys view that, in order to be successful in the long term, television stations need
to be aligned with a company that is larger and more singularly focused on the challenges of
American television, including digital video recorders and the industrys relationship with cable
and satellite providers. As of November 30, 2006, the Company has sold fourteen of its sixteen
television stations. The Company expects to enter into agreements to sell its remaining two
television stations in the next three to twelve months. The Company concluded its television
assets were held for sale in accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) and the results of
operations of the television division have been classified as discontinued operations in the
accompanying condensed consolidated financial statements for all periods presented. The television
division had historically been presented as a separate reporting segment of Emmis. The following
table summarizes certain operating results for the television division for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
|
|
|
Net revenues |
|
$ |
63,518 |
|
|
$ |
8,790 |
|
|
$ |
190,343 |
|
|
$ |
40,472 |
|
Station operating expenses |
|
|
44,644 |
|
|
|
7,246 |
|
|
|
127,402 |
|
|
|
29,120 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
12,321 |
|
|
|
|
|
(Gain) loss on disposal of assets |
|
|
(88 |
) |
|
|
(5,752 |
) |
|
|
556 |
|
|
|
(7,787 |
) |
Interest expense |
|
|
7,699 |
|
|
|
|
|
|
|
21,954 |
|
|
|
|
|
Income before taxes |
|
|
11,083 |
|
|
|
6,678 |
|
|
|
27,401 |
|
|
|
18,060 |
|
Provision for income taxes |
|
|
2,984 |
|
|
|
2,086 |
|
|
|
9,674 |
|
|
|
6,955 |
|
Net assets related to our television division are classified as discontinued operations
in the accompanying condensed consolidated balance sheets as follows:
-12-
|
|
|
|
|
|
|
|
|
|
|
February 28, 2006 |
|
|
November 30, 2006 |
|
Current assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
10,130 |
|
|
$ |
6,874 |
|
Current portion of TV program rights |
|
|
7,988 |
|
|
|
2,555 |
|
Prepaid expenses |
|
|
275 |
|
|
|
219 |
|
Other |
|
|
1,690 |
|
|
|
773 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
20,083 |
|
|
|
10,421 |
|
|
|
|
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
27,477 |
|
|
|
24,866 |
|
Intangibles, net |
|
|
124,369 |
|
|
|
61,034 |
|
Other noncurrent assets |
|
|
8,622 |
|
|
|
1,676 |
|
|
|
|
|
|
|
|
Total noncurrent assets |
|
|
160,468 |
|
|
|
87,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
180,551 |
|
|
$ |
97,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
3,360 |
|
|
$ |
2,161 |
|
Current portion of TV program rights |
|
|
12,731 |
|
|
|
3,413 |
|
Accrued salaries and commissions |
|
|
1,076 |
|
|
|
881 |
|
Deferred revenue |
|
|
7,454 |
|
|
|
63 |
|
Other |
|
|
1,412 |
|
|
|
194 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
26,033 |
|
|
|
6,712 |
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
TV program rights payable, net of current portion |
|
|
9,845 |
|
|
|
1,635 |
|
Other noncurrent liabilities |
|
|
18,496 |
|
|
|
17,134 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
28,341 |
|
|
|
18,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
54,374 |
|
|
$ |
25,481 |
|
|
|
|
|
|
|
|
As of November 30, 2005, certain debt was required to be repaid as a result of the
disposition of the Companys television assets. The Company allocated interest expense of $7.7
million and $22.0 million associated with this portion of debt to the television operations for the
three-month and nine-month periods ended November 30, 2005, respectively, in accordance with
Emerging Issues Task Force Issue 87-24 Allocation of Interest to Discontinued Operations, as
modified. As no debt is required to be repaid as a result of the disposition of the remainder of
the Companys television assets as of November 30, 2006, no interest was allocated to television
operations for the three-month and nine-month periods ended November 30, 2006.
Our television station in New Orleans, Louisiana, WVUE, was significantly affected by
Hurricane Katrina and
the subsequent flooding. The flooding of New Orleans caused extensive property damage at WVUE.
Emmis spent approximately $6.8 million on capital expenditures related to flooding restoration
projects during the nine months ended November 30, 2006 and expects to spend an additional $5.0
million by February 28, 2007 to complete the restoration. During the nine months ended November
30, 2006, the Company received $10.3 million of insurance proceeds, the majority of which were
advanced proceeds from the Companys private insurer. These proceeds are in addition to the $1.0
million Federal flood insurance proceeds received in the prior year. In connection with the
receipt of the insurance proceeds, the Company removed the carrying value of all damaged or
destroyed property and recorded a $4.2 million gain, net of tax, on disposal of these assets which
is reflected in income from discontinued operations in the accompanying condensed consolidated
statements of operations. WVUE did not broadcast its signal for an extended period of time as a
result of Katrina and the general disruption of the local economy has negatively affected ongoing
advertising revenue. The Company maintains business interruption insurance and expects to be
reimbursed for lost net income as a result of Katrina. Emmis has not
-13-
accrued for business
interruption insurance proceeds. Business interruption insurance proceeds will only be recognized
upon receipt.
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. The assets and
liabilities of WRDA-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. WRDA-FM had historically been included in the radio
segment. The following table summarizes certain operating results for WRDA-FM for all periods
presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
November 30, 2005 |
|
November 30, 2005 |
Net revenues |
|
$ |
136 |
|
|
$ |
851 |
|
Station operating expenses |
|
|
226 |
|
|
|
1,432 |
|
Depreciation and amortization |
|
|
6 |
|
|
|
51 |
|
Loss before taxes |
|
|
(157 |
) |
|
|
(693 |
) |
Benefit for income taxes |
|
|
(89 |
) |
|
|
(309 |
) |
The assets related to WRDA-FM are classified as discontinued operations in the
accompanying condensed consolidated balance sheets as follows:
|
|
|
|
|
|
|
February 28, 2006 |
|
Current assets: |
|
|
|
|
Other |
|
$ |
68 |
|
|
|
|
|
Total current assets |
|
|
68 |
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
Intangibles, net |
|
|
12,992 |
|
|
|
|
|
Total noncurrent assets |
|
|
12,992 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,060 |
|
|
|
|
|
Phoenix
On January 14, 2005, Emmis completed its exchange with Bonneville International Corporation
(Bonneville) whereby Emmis swapped three of its radio stations in Phoenix (KTAR-AM, KMVP-AM and
KKLT-FM) for Bonnevilles WLUP-FM located in Chicago and $74.8 million in cash, including payments
for working capital items. The results of operations of the three radio stations in Phoenix have
been classified as discontinued operations in the accompanying condensed consolidated financial
statements. These three radio stations had historically been included in the radio reporting
segment. The following table summarizes certain operating results for the three Phoenix stations
for all periods presented:
-14-
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
November 30, 2005 |
|
November 30, 2005 |
Net revenues |
|
$ |
|
|
|
$ |
|
|
Station operating expenses,
excluding noncash compensation |
|
|
|
|
|
|
(440 |
) |
Noncash compensation |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Pre-tax income |
|
|
|
|
|
|
440 |
|
Provision for income taxes |
|
|
|
|
|
|
180 |
|
Note 2. Shareholders Equity
On November 2, 2006, the Companys Board of Directors declared a special one-time dividend of
$4.00 per common share to shareholders of record as of November 12, 2006. The dividend was paid
November 22, 2006, which reduced shareholders equity by $150.2 million. The dividend was also
paid to holders of unvested restricted stock, resulting in excess tax benefits of $0.7 million,
which is reflected in additional paid in capital in the accompanying condensed consolidated balance
sheet as of November 30, 2006.
All of the Companys outstanding stock option awards contained anti-dilution provisions that
required an equitable adjustment to reflect the change in the share price on the November 24, 2006
ex-dividend date. The equitable adjustment approved by the Compensation Committee of the Companys
Board of Directors resulted in no incremental noncash compensation expense under SFAS No. 123R.
The effect of this anti-dilution adjustment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the ex-dividend date |
|
|
|
|
Prior to |
|
After |
|
As of |
|
|
Adjustment |
|
Adjustment |
|
November 30, 2006 |
Options outstanding |
|
|
5,192,799 |
|
|
|
7,597,933 |
|
|
|
7,518,569 |
|
Options exercisable |
|
|
4,717,228 |
|
|
|
6,902,008 |
|
|
|
6,822,644 |
|
Weighted average exercise price: |
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
$ |
24.60 |
|
|
$ |
16.82 |
|
|
$ |
16.82 |
|
Options exercisable |
|
$ |
25.44 |
|
|
$ |
17.39 |
|
|
$ |
17.40 |
|
Note 3. 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 ten 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 fair value of the options is estimated using
a Black-Scholes option-pricing model at the date of grant and expensed on a straight-line basis
over the vesting period. Prior to adoption of SFAS No. 123R, the Company accounted for share based
payments under the recognition and
-15-
measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees [APB 25], and related Interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation [SFAS No. 123].
The Company did not recognize employee compensation cost related to its stock option grants in its
consolidated statements of operations for the three years ended February 28, 2006 (prior to
adoption of SFAS No. 123R), as all options vesting during those three years had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The amounts recorded as share based payments prior to adopting SFAS No. 123R primarily related
to the expense associated with 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 common stock issued to employees in exchange for cash compensation pursuant to our stock
compensation program. Under the modified-prospective-transition method, compensation cost
recognized beginning in our fiscal year ending February 28, 2007 includes the above items and (a)
compensation cost for all share-based payments granted on or after March 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No. 123R and (b)
compensation cost associated with our employee stock purchase plan, which qualified as a
noncompensatory plan under APB 25. Results for prior periods have not been restated. In the
fourth quarter of fiscal 2006, the Company accelerated the vesting of substantially all outstanding
option awards that would have otherwise vested in fiscal 2007 and beyond. Consequently, the
Company has an immaterial amount of share-based payment expense associated with stock options
granted prior to March 1, 2006 that vest on or after March 1, 2006.
As a result of adopting SFAS No. 123R, the Companys income before income taxes, minority
interest and discontinued operations for the three-month and nine-month periods ended November 30,
2006, was $0.4 million and $1.2 million lower, respectively, than if it had continued to account
for share-based compensation under APB 25. The Companys net income for the three-month and
nine-month periods ended November 30, 2006, was $0.2 million and $0.7 million lower, respectively,
than if it had continued to account for share-based compensation under APB 25. Basic and diluted
loss per share from continuing operations available to common shareholders for the nine-month
period ended November 30, 2006 was $0.02 lower than if the Company had continued to account for
share based compensation under APB 25, but the three-month period ended November 30, 2006 was
unchanged. The impact of adopting SFAS No. 123R in the current year was minimized by the Company
accelerating the vesting of substantially all unvested options in the fourth quarter of fiscal
2006. The Company accelerated the vesting of the unvested stock options to avoid recognizing the
expense in future financial statements after the adoption of SFAS No. 123R.
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the consolidated statements
of cash flows. SFAS No. 123R requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash
flows. The Company recorded $0.6 million of excess tax benefits related to the exercise of stock
options as operating cash flows in the accompanying condensed consolidated statements of cash flows
for the nine-month period ended November 30, 2005. These excess tax benefits were not reclassified
to financing cash flows as the Company adopted SFAS No. 123R using the modified prospective
transition method. The Company did not record any excess tax benefits in the nine-month period
ended November 30, 2006 related to the exercise of stock options.
The following table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123R to options granted under
the Companys stock option plans in all periods presented.
-16-
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended November 30, |
|
|
Ended November 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net Income Available to Common Shareholders: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
197,775 |
|
|
$ |
212,091 |
|
Plus: Reported stock-based employee
compensation costs, net of tax |
|
|
2,115 |
|
|
|
6,407 |
|
Less: Stock-based employee compensation
costs, net of tax, if fair value method had
been applied to all awards |
|
|
3,924 |
|
|
|
11,834 |
|
|
|
|
|
|
|
|
Pro Forma |
|
$ |
195,966 |
|
|
$ |
206,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
5.36 |
|
|
$ |
4.74 |
|
Pro Forma |
|
$ |
5.31 |
|
|
$ |
4.62 |
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
As Reported |
|
$ |
5.36 |
|
|
$ |
4.71 |
|
Pro Forma |
|
$ |
5.31 |
|
|
$ |
4.59 |
|
The fair value of each option awarded is estimated on the date of grant using a
Black-Scholes option-pricing model. 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. Prior to the adoption of SFAS No. 123R, the Company
recognized forfeitures as they occurred in its SFAS No. 123 pro forma disclosures. Beginning March
1, 2006, 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 nine months ended November 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
2005 |
|
2006 |
Risk-Free Interest Rate: |
|
|
4.1 |
% |
|
|
4.7 |
% |
Expected Dividend Yield: |
|
|
0 |
% |
|
|
0 |
% |
Expected Life (Years): |
|
|
6.0 |
|
|
|
6.0 |
|
Expected Volatility: |
|
|
60.8 |
% |
|
|
58.2 |
% |
The following table presents a summary of the Companys stock options outstanding at, and
stock option activity during, the nine months ended November 30, 2006 (Price reflects the
weighted average exercise price per share):
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Contractual Term |
|
|
Value |
|
Outstanding, beginning of year |
|
|
5,615,888 |
|
|
$ |
25.07 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
487,434 |
|
|
|
16.25 |
|
|
|
|
|
|
|
|
|
Exercised (1) |
|
|
2,728 |
|
|
|
16.41 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
11,863 |
|
|
|
16.34 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
895,932 |
|
|
|
23.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, November 23 |
|
|
5,192,799 |
|
|
|
24.60 |
|
|
|
|
|
|
|
|
|
Dividend Adjustment |
|
|
2,405,134 |
|
|
|
(7.78 |
) |
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
79,364 |
|
|
|
16.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, November 30 |
|
|
7,518,569 |
|
|
|
16.82 |
|
|
|
5.5 |
|
|
$ |
|
|
Exercisable, November 30 |
|
|
6,822,644 |
|
|
|
17.40 |
|
|
|
5.1 |
|
|
$ |
|
|
Weighted average fair value per option granted (2) |
|
$ |
6.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash received from option exercises for the nine months ended November 30, 2005 and 2006 was
$3.8 million and $0 million, respectively. The Company recorded an income tax benefit
relating to the options exercised during the nine months ended November 30, 2005 and 2006 of
$0.6 million and $0 million, respectively. |
|
(2) |
|
Reflects equitable adjustment for special one-time $4 per share dividend (see Note 2). |
The weighted average grant date fair value of options granted during the nine months ended November
30, 2005 and 2006 was $7.66 and $6.55, respectively after giving effect to the dividend equitable
adjustment (see Note 2). The total intrinsic value of options exercised during the nine months
ended November 30, 2005 and 2006 was $0.8 million and $0 million, respectively.
A summary of the Companys nonvested options at February 28, 2006, and changes during the nine
months ended November 30, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date |
|
|
Options |
|
Fair Value |
Nonvested, beginning of year |
|
|
598,274 |
|
|
$ |
16.49 |
|
Granted |
|
|
487,434 |
|
|
|
9.58 |
|
Vested |
|
|
598,274 |
|
|
|
16.49 |
|
Forfeited |
|
|
11,863 |
|
|
|
9.65 |
|
|
|
|
|
|
|
|
|
|
Nonvested, November 23 |
|
|
475,571 |
|
|
|
9.58 |
|
Dividend adjustment |
|
|
220,354 |
|
|
|
(3.03 |
) |
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, November 30 |
|
|
695,925 |
|
|
|
6.55 |
|
There were 5.3 million shares available for future grants under the various option plans at
November 30, 2006. The vesting date of outstanding options range from March 2007 to September
2009, and expiration dates range from March 2007 to September 2016 at exercise prices and average
contractual lives as follows:
-18-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Weighted Average |
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of |
|
Remaining |
|
Weighted Average |
|
as of |
|
Weighted Average |
|
|
Range of Exercise Prices |
|
11/30/06 |
|
Contractual Life |
|
Exercise Price |
|
11/30/06 |
|
Exercise Price |
|
|
$ |
.01 |
|
|
|
|
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
5.01 |
|
|
|
|
|
|
|
10.00 |
|
|
|
14,634 |
|
|
|
9.8 |
|
|
|
8.30 |
|
|
|
|
|
|
|
|
|
|
|
|
10.01 |
|
|
|
|
|
|
|
15.00 |
|
|
|
2,486,820 |
|
|
|
7.4 |
|
|
|
11.89 |
|
|
|
1,805,529 |
|
|
|
12.16 |
|
|
|
|
15.01 |
|
|
|
|
|
|
|
20.00 |
|
|
|
4,533,098 |
|
|
|
4.7 |
|
|
|
18.76 |
|
|
|
4,533,098 |
|
|
|
18.76 |
|
|
|
|
20.01 |
|
|
|
|
|
|
|
25.00 |
|
|
|
476,700 |
|
|
|
3.2 |
|
|
|
24.18 |
|
|
|
476,700 |
|
|
|
24.18 |
|
|
|
|
25.01 |
|
|
|
|
|
|
|
30.00 |
|
|
|
7,317 |
|
|
|
3.6 |
|
|
|
25.97 |
|
|
|
7,317 |
|
|
|
25.97 |
|
|
|
|
30.01 |
|
|
|
|
|
|
|
35.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.01 |
|
|
|
|
|
|
|
40.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,518,569 |
|
|
|
5.5 |
|
|
|
16.82 |
|
|
|
6,822,644 |
|
|
|
17.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
November 30, 2006 and restricted stock activity during the nine months ended November 30, 2006
(Price reflects the weighted average share price at the date of grant):
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
Price |
Grants outstanding, beginning of year |
|
|
262,154 |
|
|
$ |
18.80 |
|
Granted |
|
|
395,436 |
|
|
|
14.67 |
|
Vested (restriction lapsed) |
|
|
229,070 |
|
|
|
14.17 |
|
Forfeited |
|
|
20,882 |
|
|
|
17.61 |
|
|
|
|
|
|
|
|
|
|
Grants outstanding, November 30 |
|
|
407,638 |
|
|
|
17.36 |
|
The total fair value of shares vested during the nine months ended November 30, 2005 and 2006
was $7.3 million and $3.3 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-month and nine-month periods ended November 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended November 30, |
|
|
Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Station operating expenses |
|
$ |
1,089 |
|
|
$ |
803 |
|
|
$ |
3,651 |
|
|
$ |
2,769 |
|
Corporate expenses |
|
|
1,570 |
|
|
|
1,150 |
|
|
|
4,530 |
|
|
|
3,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses |
|
|
2,659 |
|
|
|
1,953 |
|
|
|
8,181 |
|
|
|
6,484 |
|
Tax benefit |
|
|
(1,090 |
) |
|
|
(801 |
) |
|
|
(3,354 |
) |
|
|
(2,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized stock-based compensation expense, net of tax |
|
$ |
1,569 |
|
|
$ |
1,152 |
|
|
$ |
4,827 |
|
|
$ |
3,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2006, there was $6.6 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements. The cost is expected to be recognized over a
weighted average period of approximately 2.1 years.
-19-
Note 4. 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 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, 2006 and
November 30, 2006, respectively. 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 rate, and recently completed or announced transactions within
the market. There are no publicly traded publishing companies that are focused predominantly on
city and regional magazines as is our publishing segment. The market multiple used as a benchmark
for our publishing reporting units is based on recently completed transactions within the city and
regional magazine industry.
This enterprise valuation is compared to the carrying value of the reporting unit for the
first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company
proceeds to the second step of the goodwill impairment test. For its step-two testing, the
enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC
licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such
as customer lists, with the residual amount representing the implied fair value of the goodwill.
To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill,
the difference is recorded in the statement of operations.
-20-
As of February 28, 2006 and November 30, 2006, the carrying amount of the Companys
goodwill was $77.4 million. As of February 28, 2006 and November 30, 2006, approximately $25.2
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, customer lists and non-compete agreements, all of which are
amortized over the period of time the assets are expected to contribute directly or indirectly to
the Companys future cash flows. The 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, 2006 and November 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2006 |
|
November 30, 2006 |
|
|
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 |
|
|
$ |
34,975 |
|
|
$ |
16,043 |
|
|
$ |
18,932 |
|
|
$ |
35,774 |
|
|
$ |
18,547 |
|
|
$ |
17,227 |
|
Favorable Office Leases |
|
|
6.4 |
|
|
|
688 |
|
|
|
286 |
|
|
|
402 |
|
|
|
688 |
|
|
|
367 |
|
|
|
321 |
|
Customer Lists |
|
|
1.0 |
|
|
|
4,765 |
|
|
|
4,549 |
|
|
|
216 |
|
|
|
1,155 |
|
|
|
1,124 |
|
|
|
31 |
|
Non-Compete Agreements |
|
|
1.3 |
|
|
|
5,738 |
|
|
|
5,717 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
25.3 |
|
|
|
1,357 |
|
|
|
754 |
|
|
|
603 |
|
|
|
1,241 |
|
|
|
776 |
|
|
|
465 |
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
|
|
|
|
$ |
47,523 |
|
|
$ |
27,349 |
|
|
$ |
20,174 |
|
|
$ |
38,858 |
|
|
$ |
20,814 |
|
|
$ |
18,044 |
|
|
|
|
|
|
|
|
|
|
Total amortization expense from definite-lived intangibles for the threemonth periods
ended November 30, 2005 and 2006 was $1.0 million in both periods. Total amortization expense from
definite-lived intangibles for the ninemonth periods ended November 30, 2005 and 2006 was $2.6
million and $2.9 million, respectively. 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), |
|
|
|
|
2007 |
|
$ |
3,856 |
|
2008 |
|
|
3,599 |
|
2009 |
|
|
3,560 |
|
2010 |
|
|
3,417 |
|
2011 |
|
|
2,059 |
|
Note 5. Significant Events
On March 9, 2006, Emmis redeemed at par the remaining $120.0 million outstanding of its senior
floating rate notes. In connection with this debt extinguishment, Emmis recorded a loss of
approximately $2.6 million in its quarter ended May 31, 2006 related to the write-off of
unamortized deferred debt costs.
On March 15, 2006, Emmis redeemed at 106.25% of par the remaining $1.4 million outstanding of
its 12.5% senior discount notes. In connection with this debt extinguishment, Emmis recorded a
loss of approximately $0.1 million in its quarter ended May 31, 2006 related to the premium paid
and the write-off of unamortized deferred debt costs.
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 used the proceeds to repay outstanding debt obligations. In connection
with the sale, Emmis recorded a
gain on sale of approximately $4.2 million, net of tax, in its quarter ended May 31, 2006,
which is included in discontinued operations in the accompanying condensed consolidated statement
of operations.
-21-
On May 8, 2006, Emmis announced that ECC Acquisition, Inc., an Indiana corporation
wholly owned by Jeffrey H. Smulyan, the Chairman, Chief Executive Officer and controlling
shareholder of the Company, had made a non-binding proposal to acquire the outstanding publicly
held shares of Emmis for $15.25 per share in cash. The proposal stated that the purchaser intended
to invite certain other members of the Companys management to join the purchaser to participate in
the transaction. In the proposal, Mr. Smulyan also made clear that, in his capacity as a
shareholder of the Company, his interest in the proposed transaction was to purchase shares of the
Company not owned by him and that he would not agree to any other transaction involving the Company
or his shares of the Company. In response to the proposal, the Board of Directors of Emmis formed
a special committee of three independent directors, namely, Peter A. Lund, Frank V. Sica and
Lawrence B. Sorrel, to consider the proposal. The special committee selected its own independent
financial and legal advisors and appointed Mr. Sica to serve as its chairman. Mr. Smulyan and other
directors of Emmis that are members of management did not participate in the evaluation of the
proposal. On August 4, 2006, the Company received a letter from ECC Acquisition, Inc. withdrawing
the proposal. Subsequently, Mr. Smulyan and his advisors at various times discussed with directors
who served on the special committee and/or their advisors the withdrawn proposal and whether Mr.
Smulyan or ECC Acquisition, Inc. would make a similar going private proposal. Those discussions
included exploration by Mr. Smulyan of the directors views of a potential reinstitution of the
proposal at a price of $16.80 per share in cash. Those discussions were discontinued on or around
August 31, 2006 without a new offer being made. The special committee is no longer active.
On July 7, 2006, Emmis closed on its sale of WBPG-TV in Mobile, AL Pensacola, FL to LIN
Television Corporation for $3.0 million in cash. LIN Television Corporation had been operating
WBPG-TV under a Local Programming and Marketing Agreement since November 30, 2005. Emmis used the
proceeds to repay outstanding debt obligations. In connection with the sale, Emmis recorded a gain
on sale of approximately $1.1 million, net of tax, in its quarter ended August 31, 2006, which is
included in discontinued operations in the accompanying condensed consolidated statement of
operations.
On July 11, 2006, Emmis closed on its sale of 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. Emmis used the proceeds to repay outstanding debt obligations.
In connection with the sale, Emmis recorded a gain on sale of $11.3 million, net of tax, in its
quarter ended August 31, 2006, which is included in discontinued operations in the accompanying
condensed consolidated statement of operations.
On August 31, 2006, Emmis closed on its sale of WKCF-TV in Orlando to Hearst-Argyle Television
Inc. for $217.5 million in cash. Emmis used a portion of the proceeds to repay outstanding debt
obligations. In connection with the sale, Emmis recorded a gain on sale of $93.3 million, net of
tax, in its quarter ended August 31, 2006, which is included in discontinued operations in the
accompanying condensed consolidated statement of operations.
On September 21, 2006, Emmis announced that Emmis Operating Company (EOC) had commenced an
offer to purchase, at par, $339.6 million of the outstanding 6 7/8% Senior Subordinated Notes (the
Notes) due 2012 pursuant to an asset sale offer required under the indenture for a portion of the
Notes and a separate tender offer for the balance of the Notes. On October 20, 2006, approximately
$374.9 million of the $375.0 million outstanding Notes were redeemed at par plus accrued and unpaid
interest. The redemption was financed with available cash on hand from the sale of WKCF-TV coupled
with additional borrowings under the Companys senior credit facility.
-22-
On October 31, 2006, Emmis sold land and the associated building formerly occupied by WKCF-TV
to Goodlife Broadcasting, Inc. for $3.0 million in cash. In connection with the sale, Emmis
recorded a gain on sale of approximately $0.3 million, net of tax, in its quarter ended November 30, 2006, which is
included in discontinued operations in the accompanying condensed consolidated statement of
operations.
On November 2, 2006, EOC amended and restated its Revolving Credit and Term Loan Agreement to
provide for total borrowings of up to $600 million, including (i) a $455 million term loan and (ii)
a $145 million revolver, of which $50 million may be used for letters of credit. The credit
facility also provides for the ability to have incremental facilities of up to $450 million, a
portion of which may be allocated to a revolver. Emmis may access the incremental facility on one
or more occasions, subject to certain provisions, including a potential market adjustment to
pricing of the entire credit facility.
All outstanding amounts under the credit facility bear interest, at the option of EOC, at a
rate equal to the Eurodollar Rate or an alternative base rate (as defined in the credit facility)
plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies under the
revolver (ranging from 0% to 2.25%), depending on Emmis ratio of debt to consolidated operating
cash flow, as defined in the agreement. The margins over the Eurodollar Rate and the alternative
base rate are 2.00% and 1.00%, respectively, for the term loan facility. Interest is due on a
calendar quarter basis under the alternative base rate and at least every three months under the
Eurodollar Rate. Beginning six months after closing, the credit facility requires Emmis to maintain
fixed interest rates, for at least a three year period, on a minimum of 30% of its total
outstanding debt, as defined.
The term loan and revolver mature on November 1, 2013 and November 2, 2012, respectively.
Beginning on August 31, 2007, the borrowings under the term loan are payable in equal quarterly
installments equal to 0.25% of the term loan, with the remaining balance payable November 1, 2013.
Proceeds from raising additional equity, issuing additional subordinated debt or from asset sales,
as well as excess cash flow, may be required to be used to repay amounts outstanding under the
credit facility. Whether these mandatory repayment provisions apply depends, in certain instances,
on Emmis total leverage ratio, as defined under the credit facility.
Borrowing under the credit facility depends upon our continued compliance with certain
operating covenants and financial ratios, including leverage and fixed charge coverage as
specifically defined. The operating covenants and other restrictions with which we must comply
include, among others, restrictions on additional indebtedness, incurrence of liens, engaging in
businesses other than our primary business, paying certain dividends, redeeming or repurchasing
capital stock of Emmis, acquisitions and asset sales. No default or event of default has occurred
or is continuing. The credit facility provides that an event of default will occur if there is a
change of control of Emmis, as defined. The payment of principal, premium and interest under the
credit facility is fully and unconditionally guaranteed, jointly and severally, by ECC and most of
its existing wholly-owned domestic subsidiaries. Substantially all of Emmis assets, including the
stock of Emmis wholly-owned, domestic subsidiaries, are pledged to secure the credit facility.
In connection with the redemption of substantially all of the Notes and the amendment and
restatement of the credit facility, the Company recorded a loss on debt extinguishment of $10.0
million, which is recorded in its quarter ended November 30, 2006.
On November 2, 2006, the Companys Board of Directors declared a special one-time dividend of
$4.00 per common share to shareholders of record as of November 12, 2006. The dividend was paid
November 22, 2006, which reduced shareholders equity by $150.2 million. See Note 2 for further
discussion.
-23-
Note 6. Pro Forma Financial Information
Unaudited pro forma summary information is presented below for the three-month and nine-month
periods
ended November 30, 2005 assuming the acquisition of (i) D.EXPRES in Slovakia in March 2005 and (ii)
Radio FM Plus in Bulgaria in November 2005 had occurred on the first day of the pro forma period
presented below. Unaudited historical information is presented below for the three-month and
nine-month periods ended November 30, 2006.
Preparation of the pro forma summary information was based upon assumptions deemed appropriate
by the Companys management. The pro forma summary information presented below is not necessarily
indicative of the results that actually would have occurred if the transactions indicated above had
been consummated at the beginning of the periods presented, and is not intended to be a projection
of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
|
(Pro Forma) |
|
|
(Historical) |
|
|
(Pro Forma) |
|
|
(Historical) |
|
Net revenues |
|
$ |
98,393 |
|
|
$ |
91,205 |
|
|
$ |
297,180 |
|
|
$ |
280,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
1,826 |
|
|
$ |
(1,270 |
) |
|
$ |
8,980 |
|
|
$ |
2,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
shareholders from continuing operations |
|
$ |
(420 |
) |
|
$ |
(3,516 |
) |
|
$ |
2,242 |
|
|
$ |
(4,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share available to
common shareholders from continuing
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.05 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.05 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
36,879 |
|
|
|
37,290 |
|
|
|
44,700 |
|
|
|
37,214 |
|
Diluted |
|
|
36,879 |
|
|
|
37,290 |
|
|
|
45,056 |
|
|
|
37,214 |
|
Note 7. Comprehensive Income
Comprehensive income was comprised of the following for the three-month and nine-month periods
ended November 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended November 30, |
|
|
Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Net income |
|
$ |
200,021 |
|
|
$ |
3,130 |
|
|
$ |
218,829 |
|
|
$ |
124,066 |
|
Translation adjustment |
|
|
98 |
|
|
|
445 |
|
|
|
(2,348 |
) |
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
200,119 |
|
|
$ |
3,575 |
|
|
$ |
216,481 |
|
|
$ |
124,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. 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.
-24-
The Companys segments operate primarily in the United States with one radio station located
in Hungary, a network of radio stations located in Belgium and national radio networks in Slovakia
and Bulgaria. The following table summarizes the net revenues and long-lived assets of our
international properties included in our condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
Net Revenues |
|
Long-lived Assets |
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
As of November 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Hungary |
|
$ |
3,900 |
|
|
$ |
3,549 |
|
|
$ |
13,402 |
|
|
$ |
12,870 |
|
|
$ |
6,023 |
|
|
$ |
5,051 |
|
|
Belgium |
|
|
184 |
|
|
|
459 |
|
|
|
605 |
|
|
|
1,026 |
|
|
|
3,417 |
|
|
|
3,629 |
|
|
Slovakia |
|
|
1,835 |
|
|
|
2,417 |
|
|
|
4,768 |
|
|
|
7,396 |
|
|
|
13,910 |
|
|
|
11,229 |
|
|
Bulgaria |
|
|
N/A |
|
|
|
459 |
|
|
|
N/A |
|
|
|
1,303 |
|
|
|
4,621 |
|
|
|
5,133 |
|
In the quarter ended August 31, 2005, Emmis concluded its television assets were held for
sale in accordance with SFAS No. 144. Emmis sold KKFR-FM in Phoenix, AZ in July 2006 and WRDA-FM
in St. Louis, MO in May 2006. Accordingly, the results of operations of the television division,
KKFR-FM and WRDA-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, 2006 and
in Note 1 to these condensed consolidated financial statements, are applied consistently across
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
November 30, 2005 |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
|
|
(Unaudited) |
|
Net revenues |
|
$ |
73,492 |
|
|
$ |
24,500 |
|
|
$ |
|
|
|
$ |
97,992 |
|
Station operating expenses |
|
|
41,877 |
|
|
|
20,077 |
|
|
|
|
|
|
|
61,954 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
7,360 |
|
|
|
7,360 |
|
Depreciation and amortization |
|
|
2,399 |
|
|
|
180 |
|
|
|
1,646 |
|
|
|
4,225 |
|
(Gain) loss on disposal of assets |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
29,216 |
|
|
$ |
4,243 |
|
|
$ |
(9,046 |
) |
|
$ |
24,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
1,093,242 |
|
|
$ |
87,341 |
|
|
$ |
488,064 |
|
|
$ |
1,668,647 |
|
Assets discontinued operations |
|
|
14,013 |
|
|
|
|
|
|
|
427,368 |
|
|
|
441,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,107,255 |
|
|
$ |
87,341 |
|
|
$ |
915,432 |
|
|
$ |
2,110,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-25-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
November 30, 2006 |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
|
|
(Unaudited) |
|
Net revenues |
|
$ |
66,704 |
|
|
$ |
24,501 |
|
|
$ |
|
|
|
$ |
91,205 |
|
Station operating expenses |
|
|
41,665 |
|
|
|
20,189 |
|
|
|
|
|
|
|
61,854 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
8,444 |
|
|
|
8,444 |
|
Depreciation and amortization |
|
|
2,568 |
|
|
|
192 |
|
|
|
657 |
|
|
|
3,417 |
|
Loss on disposal of assets |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
22,470 |
|
|
$ |
4,119 |
|
|
$ |
(9,101 |
) |
|
$ |
17,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
996,787 |
|
|
$ |
80,916 |
|
|
$ |
49,080 |
|
|
$ |
1,126,783 |
|
Assets discontinued operations |
|
|
27 |
|
|
|
|
|
|
|
98,003 |
|
|
|
98,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
996,814 |
|
|
$ |
80,916 |
|
|
$ |
147,083 |
|
|
$ |
1,224,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
November 30, 2005 |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
|
|
(Unaudited) |
|
Net revenues |
|
$ |
229,631 |
|
|
$ |
65,396 |
|
|
$ |
|
|
|
$ |
295,027 |
|
Station operating expenses |
|
|
128,846 |
|
|
|
58,716 |
|
|
|
|
|
|
|
187,562 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
23,921 |
|
|
|
23,921 |
|
Depreciation and amortization |
|
|
6,853 |
|
|
|
535 |
|
|
|
4,890 |
|
|
|
12,278 |
|
(Gain) loss on disposal of assets |
|
|
(6 |
) |
|
|
1 |
|
|
|
90 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
93,938 |
|
|
$ |
6,144 |
|
|
$ |
(28,901 |
) |
|
$ |
71,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
1,093,242 |
|
|
$ |
87,341 |
|
|
$ |
488,064 |
|
|
$ |
1,668,647 |
|
Assets discontinued operations |
|
|
14,013 |
|
|
|
|
|
|
|
427,368 |
|
|
|
441,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,107,255 |
|
|
$ |
87,341 |
|
|
$ |
915,432 |
|
|
$ |
2,110,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
November 30, 2006 |
|
Radio |
|
|
and Other |
|
|
Corporate |
|
|
Consolidated |
|
|
|
(Unaudited) |
|
Net revenues |
|
$ |
214,630 |
|
|
$ |
66,271 |
|
|
$ |
|
|
|
$ |
280,901 |
|
Station operating expenses |
|
|
133,246 |
|
|
|
58,627 |
|
|
|
|
|
|
|
191,873 |
|
Corporate expenses |
|
|
|
|
|
|
|
|
|
|
23,623 |
|
|
|
23,623 |
|
Depreciation and amortization |
|
|
7,395 |
|
|
|
522 |
|
|
|
1,998 |
|
|
|
9,915 |
|
(Gain) loss on disposal of assets |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
73,985 |
|
|
$ |
7,121 |
|
|
$ |
(25,621 |
) |
|
$ |
55,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets continuing operations |
|
$ |
996,787 |
|
|
$ |
80,916 |
|
|
$ |
49,080 |
|
|
$ |
1,126,783 |
|
Assets discontinued operations |
|
|
27 |
|
|
|
|
|
|
|
98,003 |
|
|
|
98,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
996,814 |
|
|
$ |
80,916 |
|
|
$ |
147,083 |
|
|
$ |
1,224,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. 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.
-26-
During the Companys fiscal quarter ended November 30, 2004, Emmis entered into a consent
decree with the Federal Communications Commission to settle all outstanding indecency-related
matters. Terms of the agreement 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 have 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 challenge to the consent decree
is currently pending in federal court and 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, we received the first of several subpoenas from the Office of Attorney
General of the State of New York, as have some of the other radio broadcasting companies operating
in the State of New York. The subpoenas were issued in connection with the New York Attorney
Generals investigation of record company promotional practices. We are cooperating with this
investigation. We do not expect that the outcome of this matter would have a material impact on
our financial position, results of operations or cash flows.
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.
-27-
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; |
|
|
|
|
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 own and operate radio, television and publishing properties located primarily in the United
States. 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. Our television
divisions revenues (classified as discontinued operations) typically fluctuate from year to year
due to political spending, which is the highest in our odd-numbered fiscal years.
-28-
In addition to the sale of advertising time for cash, stations typically exchange advertising
time for goods or services, which can be used by the station in its business operations. These
barter transactions are recorded at the estimated fair value of the product or service received.
We generally confine the use of such trade transactions to
promotional items or services for which we would otherwise have paid cash. In addition, it is
our general policy not to 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 and nine-month
periods ended November 30, 2005 and 2006. 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 November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
% of Total |
|
|
2006 |
|
|
% of Total |
|
|
2005 |
|
|
% of Total |
|
|
2006 |
|
|
% of Total |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
$ |
63,011 |
|
|
|
64.3 |
% |
|
$ |
58,259 |
|
|
|
63.9 |
% |
|
$ |
193,402 |
|
|
|
65.6 |
% |
|
$ |
182,320 |
|
|
|
64.9 |
% |
National |
|
|
18,667 |
|
|
|
19.0 |
% |
|
|
18,177 |
|
|
|
19.9 |
% |
|
|
50,991 |
|
|
|
17.3 |
% |
|
|
51,725 |
|
|
|
18.4 |
% |
Political |
|
|
77 |
|
|
|
0.1 |
% |
|
|
202 |
|
|
|
0.2 |
% |
|
|
92 |
|
|
|
0.0 |
% |
|
|
241 |
|
|
|
0.1 |
% |
Publication Sales |
|
|
4,447 |
|
|
|
4.5 |
% |
|
|
3,628 |
|
|
|
4.0 |
% |
|
|
13,622 |
|
|
|
4.6 |
% |
|
|
10,941 |
|
|
|
3.9 |
% |
Non Traditional |
|
|
6,284 |
|
|
|
6.4 |
% |
|
|
4,710 |
|
|
|
5.2 |
% |
|
|
22,442 |
|
|
|
7.6 |
% |
|
|
17,931 |
|
|
|
6.4 |
% |
Other |
|
|
5,506 |
|
|
|
5.7 |
% |
|
|
6,229 |
|
|
|
6.8 |
% |
|
|
14,478 |
|
|
|
4.9 |
% |
|
|
17,743 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
97,992 |
|
|
|
|
|
|
$ |
91,205 |
|
|
|
|
|
|
$ |
295,027 |
|
|
|
|
|
|
$ |
280,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine-month period ended November 30, 2006,
local and regional sales, excluding political revenues, represented approximately 82% and 60% of
our advertising revenues for our radio and publishing divisions, respectively. In the nine-month
period ended November 30, 2005, local and regional sales, excluding political revenues, represented
approximately 84% and 57% 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 62% of the total advertising net revenues. The automotive
industry is the largest category for radio, representing approximately 13% of the radio segments
advertising net revenues in the nine-month period ended November 30, 2006.
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.
-29-
KNOWN TRENDS AND UNCERTAINTIES
Domestic radio revenue growth has been anemic for several years. Management believes this is
principally the result of four factors: (1) lack of inventory and pricing discipline by radio
operators, (2) a more focused newspaper advertising sales force that has slowed the market share
gains radio was making vis-à-vis newspapers, (3) the emergence of new media, such as internet
advertising and cable interconnects, which are gaining advertising share against radio and other
traditional media, and (4) the perception of advertisers that satellite radio and MP3 players
diminish the reach and effectiveness of radio advertising.
The radio industry has begun several initiatives to address these issues. The radio industry
has begun the rollout of HD Radio digital broadcasting. Music transmitted in HD sounds noticeably
better than the current analogue broadcasts. Further, compression technology enables radio
operators to offer second and possibly third or fourth digital program streams within each
operators existing allotted bandwidth. This will essentially increase the number of radio
programming alternatives available to listeners in each radio market and enable radio operators to
offer a broader selection of free music and other format choices. 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
digital program streams in each radio market to ensure a more diverse consumer offering and to
accelerate the rollout of HD receivers, particularly in automobiles. In recent months,
broadcasters have begun to aggressively promote HD radio on their analogue signals to increase
consumer awareness of the technology. These industry efforts are in addition to the independent
decisions of many radio operators to dramatically reduce the number of commercials aired per hour,
which serves the dual purpose of creating a more enjoyable experience for listeners plus creating a
more favorable pricing environment due to a reduction in the supply of commercial inventory.
Our two radio stations in Los Angeles have suffered significant ratings declines, which has
led to a decline in revenues of the stations. KPWR-FM has been negatively affected by direct
format competition. The Companys second Los Angeles station, KMVN-FM (formerly KZLA-FM) switched
its format from Country to Rhythmic/Pop Contemporary during the quarter ended August 31, 2006. The
targeted demographic of the Rhythmic/Pop Contemporary format is much larger in Los Angeles than
the Country format, and should give the station a much broader audience base. However, the format
change has led to substantial revenue and operating income declines which will continue throughout
the remainder of the fiscal year. Also, our three radio stations in New York have been adversely
affected by the decline in radio advertising revenue in the entire New York market and by a decline
in station ratings. Our New York ratings have declined primarily due to increased competition in
the formats of our stations. We have invested resources in promoting our Los Angeles and New York
stations to recapture lost ratings and revenues. Recent ratings information indicates that our
stations ratings are improving.
Emmis is in the process of divesting its two remaining television stations. The decision to
explore strategic alternatives for the Companys television assets stemmed from the Companys
desire to lower its debt, coupled with the Companys view that, in order to be successful in the
long term, television stations need to be aligned with a company that is larger and more singularly
focused on the challenges of American television, including digital video recorders and the
industrys relationship with cable and satellite providers. As of November 30, 2006, Emmis has
closed on sales of fourteen of its sixteen television stations, receiving gross proceeds of
approximately $1.14 billion. Emmis expects to sell KGMB-TV in Honolulu, Hawaii and WVUE-TV in New
Orleans, Louisiana in the next three to twelve 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.
-30-
ACCOUNTING PRONOUNCEMENTS
SFAS 157
On September 15, 2006, the Financial Accounting Standards Board 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. SFAS No. 157 is effective for the Company as of March 1, 2008. The Company is
currently evaluating SFAS No. 157 and its effect, if any, on the Companys financial position,
results of operations or cash flows.
FASB Staff Position AUG AIR-1
On September 8, 2006, the Financial Accounting Standards Board issued FASB Staff Position AUG
AIR-1, Accounting For Planned Major Maintenance Activities, that eliminates the acceptability of
the accrue-in-advance method of accounting for planned major maintenance activities. This staff
position is effective for the Company as of March 1, 2007 and requires retrospective restatement of
prior period results. Early adoption of this pronouncement is precluded for the Company. The
Company has been accruing for planned major maintenance activities associated with a leased
airplane under the accrue-in-advance method. The Company is currently evaluating this FASB Staff
Position and its effect on the Companys financial position, results of operations and cash flows.
FIN No. 48
On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting For Uncertainty In Income Taxes [FIN No. 48], that provides guidance on the financial
statement recognition, measurement, presentation and disclosure of uncertain tax positions that a
company has taken or expects to take on a tax return. Under FIN No. 48, financial statements
should reflect expected future tax consequences of such positions presuming the taxing authorities
have full knowledge of the position and all relevant facts. The interpretation also revises the
disclosure requirements and is effective for the Company as of March 1, 2007. The Company is
currently evaluating FIN No. 48 and its effect on the Companys financial position, results of
operations and cash flows.
SFAS 123R
The Company adopted the fair value recognition provisions of SFAS No. 123R, on March 1, 2006,
using the modified-prospective-transition method. The fair value of the options is estimated using
a Black-Scholes option-pricing model at the date of grant and expensed on a straight-line basis
over the vesting period. Prior to adoption of SFAS No. 123R, the Company accounted for share based
payments under the recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees [APB 25], and related Interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation [SFAS No. 123].
The Company did not recognize employee compensation cost related to its stock option grants in its
consolidated statements of operations for the three years ended February 28, 2006 (prior to
adoption of SFAS No. 123R), as all options vesting during those three years had an exercise price
equal to the market value of the underlying common stock on the date of grant.
-31-
The amounts recorded as share based payments prior to adopting SFAS No. 123R primarily related
to the expense associated with 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 common stock issued to employees in exchange for cash compensation pursuant to our stock
compensation program. Under the
modified-prospective-transition method, compensation cost recognized beginning in our fiscal
year ending February 28, 2007 includes the above items and (a) compensation cost for all
share-based payments granted on or after March 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123R and (b) compensation cost associated
with our employee stock purchase plan, which qualified as a noncompensatory plan under APB 25.
Results for prior periods have not been restated. The Company accelerated the vesting of
substantially all outstanding option awards that would have otherwise vested in fiscal 2007 and
beyond. Consequently, the Company has an immaterial amount of share-based payment expense
associated with stock options granted prior to March 1, 2006 that vest on or after March 1, 2006.
As a result of adopting SFAS No. 123R, the Companys income before income taxes, minority
interest and discontinued operations for the three-month and nine-month periods ended November 30,
2006, was $0.4 million and $1.2 million lower, respectively, than if it had continued to account
for share-based compensation under APB 25. The Companys net income for the three-month and
nine-month periods ended November 30, 2006, was $0.2 million and $0.7 million lower, respectively,
than if it had continued to account for share-based compensation under APB 25. Basic and diluted
loss per share from continuing operations available to common shareholders for the nine-month
period ended November 30, 2006 was $0.02 lower than if the Company had continued to account for
share based compensation under APB 25, but the three-month period ended November 30, 2006 was
unchanged. The impact of adopting SFAS No. 123R in the current year was minimized by the Company
accelerating the vesting of substantially all unvested options in the fourth quarter of fiscal
2006. The Company accelerated the vesting of the unvested stock options to avoid recognizing the
expense in future financial statements after the adoption of SFAS No. 123R.
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.
As of November 30, 2006, there was $6.6 million of unrecognized compensation cost related to
nonvested share-based compensation arrangements. The cost is expected to be recognized over a
weighted average period of approximately 2.1 years.
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.
-32-
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. 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 $2.2
million and $1.5 million accrued for employee healthcare claims as of February 28, 2006 and
November 30, 2006, respectively. The decrease in accrued employee healthcare claims is the result
of a smaller workforce primarily due to our television divestitures. 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 and Nine-month Periods Ended November 30, 2006 Compared
to November 30, 2005
Net revenue pro forma reconciliation:
Since March 1, 2005, we have acquired radio networks in Slovakia and Bulgaria. The results of
our television division, our radio stations sold in Phoenix and our radio station sold in St. Louis
have been included in discontinued operations and are not included in reported results below. The
following table reconciles actual results to pro forma results.
-33-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Reported net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
73,492 |
|
|
$ |
66,704 |
|
|
$ |
(6,788 |
) |
|
|
-9.2 |
% |
|
$ |
229,631 |
|
|
$ |
214,630 |
|
|
$ |
(15,001 |
) |
|
|
-6.5 |
% |
Publishing |
|
|
24,500 |
|
|
|
24,501 |
|
|
|
1 |
|
|
|
0.0 |
% |
|
|
65,396 |
|
|
|
66,271 |
|
|
|
875 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
97,992 |
|
|
|
91,205 |
|
|
|
(6,787 |
) |
|
|
-6.9 |
% |
|
|
295,027 |
|
|
|
280,901 |
|
|
|
(14,126 |
) |
|
|
-4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Net revenues from
stations acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
|
73,893 |
|
|
|
66,704 |
|
|
|
(7,189 |
) |
|
|
-9.7 |
% |
|
|
231,784 |
|
|
|
214,630 |
|
|
|
(17,154 |
) |
|
|
-7.4 |
% |
Publishing |
|
|
24,500 |
|
|
|
24,501 |
|
|
|
1 |
|
|
|
0.0 |
% |
|
|
65,396 |
|
|
|
66,271 |
|
|
|
875 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
98,393 |
|
|
$ |
91,205 |
|
|
$ |
(7,188 |
) |
|
|
-7.3 |
% |
|
$ |
297,180 |
|
|
$ |
280,901 |
|
|
$ |
(16,279 |
) |
|
|
-5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For further disclosure of segment results, see Note 8 to the accompanying condensed
consolidated financial statements. For additional pro forma results, see Note 6 to the
accompanying condensed consolidated financial statements.
Net revenues:
Radio net revenues decreased principally as a result of declining revenues in our New York and
Los Angeles markets. On a pro forma basis (assuming the radio networks in Slovakia and Bulgaria
had been purchased on March 1, 2005), radio net revenues for the three-month and nine-month periods
ended November 30, 2006 would have decreased $7.2 million, or 9.7%, and $17.2 million, or 7.4%,
respectively. 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, Arase & Co., LLP (Miller, Kaplan). For the
three-month period ended November 30, 2006, on a pro forma basis, net revenues of our domestic
radio stations were down 11.5%, whereas Miller, Kaplan reported that net revenues of our
domestic radio markets were down 2.1%. For the nine-month period ended November 30, 2006, on a pro
forma basis, net revenues of our domestic radio stations were down 8.9%, 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. We have had significant ratings and revenue declines at our New York and Los Angeles
stations. Additionally, during the three-months ended November 30, 2006, we changed the format of
KMVN-FM (formerly KZLA-FM) from Country to Rhythmic/Pop Contemporary. This format change
negatively impacted net revenues. Our New York and Los Angeles stations account for approximately
50% of our domestic radio revenues. We are continuing to reinvest in our properties, particularly
in New York and Los Angeles, through additional promotional spending, recruiting and retaining
compelling on-air talent and by doing extensive research.
Publishing net revenues increased in the nine-month period ended November 30, 2006 principally
due to the introduction of new city guides in Atlanta and Cincinnati coupled with positive
performance at our other city magazines. Also, Tu Ciudad produced one additional issue during the
nine months ended November 30, 2006 versus the same period of the prior year. These gains are
partially offset by revenue declines at Country Sampler and Emmis Books as we ceased unprofitable
operations.
On a consolidated basis, pro forma net revenues for the three-month and nine-month periods
ended November 30, 2006 decreased $7.2 million, or 7.3%, and $16.3 million, or 5.5%, respectively,
due to the effect of the items described above.
-34-
Station operating expenses pro forma reconciliation:
Since March 1, 2005, we have acquired radio networks in Slovakia and Bulgaria. The results of
our television division, our radio station sold in Phoenix and our radio station sold in St. Louis
have been included in discontinued operations and are not included in reported results below. The
following table reconciles actual results to pro forma results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Reported station operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
41,877 |
|
|
$ |
41,665 |
|
|
$ |
(212 |
) |
|
|
-0.5 |
% |
|
$ |
128,846 |
|
|
$ |
133,246 |
|
|
$ |
4,400 |
|
|
|
3.4 |
% |
Publishing |
|
|
20,077 |
|
|
|
20,189 |
|
|
|
112 |
|
|
|
0.6 |
% |
|
|
58,716 |
|
|
|
58,627 |
|
|
|
(89 |
) |
|
|
-0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
61,954 |
|
|
|
61,854 |
|
|
|
(100 |
) |
|
|
-0.2 |
% |
|
|
187,562 |
|
|
|
191,873 |
|
|
|
4,311 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Station operating expenses
from stations acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma station operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
|
42,187 |
|
|
|
41,665 |
|
|
|
(522 |
) |
|
|
-1.2 |
% |
|
|
130,831 |
|
|
|
133,246 |
|
|
|
2,415 |
|
|
|
1.8 |
% |
Publishing |
|
|
20,077 |
|
|
|
20,189 |
|
|
|
112 |
|
|
|
0.6 |
% |
|
|
58,716 |
|
|
|
58,627 |
|
|
|
(89 |
) |
|
|
-0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
62,264 |
|
|
$ |
61,854 |
|
|
$ |
(410 |
) |
|
|
-0.7 |
% |
|
$ |
189,547 |
|
|
$ |
191,873 |
|
|
$ |
2,326 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For further disclosure of segment results, see Note 8 to the accompanying condensed
consolidated financial statements. For additional pro forma results, see Note 6 to the
accompanying condensed consolidated financial statements.
Station operating expenses:
Radio station operating expenses decreased in the three-month period ended November 30, 2006
principally due to lower sales-related costs due to the decline in revenues as discussed above.
Radio station operating expenses increased in the nine-month period ended November 30, 2006 as a
result of increased promotional spending, particularly in New York and Los Angeles as discussed
above. Additionally, a portion of the increase relates to higher programming costs associated with
certain on-air talent contracts and severances recorded in association with the format change at
KMVN-FM, as previously discussed. The additional operating expenses incurred in the nine-month
period ended November 30, 2006 are partially offset by lower sales-related costs due to the decline
in revenues as discussed above.
Publishing operating expenses decreased slightly in the nine-month period ended November 30,
2006 principally due operating cost savings due to the elimination of certain specialty magazines
of Country Sampler. These savings were partially offset by severance expenses associated with the
elimination of the specialty magazines and by a $0.2 million inventory write-down related to our
Emmis Books operation, both of which were incurred in our first fiscal quarter.
On a consolidated basis, pro forma station operating expenses, for the three-month and
nine-month periods ended November 30, 2006 decreased $0.4 million, or 0.7%, and increased $2.3
million, or 1.2%, respectively, due to the effect of the items described above.
-35-
Corporate expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Corporate expenses |
|
$ |
7,360 |
|
|
$ |
8,444 |
|
|
$ |
1,084 |
|
|
|
14.7 |
% |
|
$ |
23,921 |
|
|
$ |
23,623 |
|
|
$ |
(298 |
) |
|
|
(1.2 |
)% |
Corporate expenses decreased during the nine months ended November 30, 2006 primarily as
a result of staffing reductions following the divestiture of the Companys television stations.
The savings are mostly offset during the nine months ended November 30, 2006 by $2.5 million of
costs incurred related to the going private transaction coupled with $1.8 million of costs in
connection with the special cash dividend as discussed in Note 2 and Note 5 in the accompanying
condensed consolidated financial statements, respectively. Corporate expenses in the three months
ended November 30, 2006 increased due to the costs related to the special cash dividend which were
partially offset by savings as a result of staffing reductions, both of which are discussed above.
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
2,399 |
|
|
$ |
2,568 |
|
|
$ |
169 |
|
|
|
7.0 |
% |
|
$ |
6,853 |
|
|
$ |
7,395 |
|
|
$ |
542 |
|
|
|
7.9 |
% |
Publishing |
|
|
180 |
|
|
|
192 |
|
|
|
12 |
|
|
|
6.7 |
% |
|
|
535 |
|
|
|
522 |
|
|
|
(13 |
) |
|
|
(2.4 |
)% |
Corporate |
|
|
1,646 |
|
|
|
657 |
|
|
|
(989 |
) |
|
|
(60.1 |
)% |
|
|
4,890 |
|
|
|
1,998 |
|
|
|
(2,892 |
) |
|
|
(59.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
4,225 |
|
|
$ |
3,417 |
|
|
$ |
(808 |
) |
|
|
(19.1 |
)% |
|
$ |
12,278 |
|
|
$ |
9,915 |
|
|
$ |
(2,363 |
) |
|
|
(19.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the increase in radio depreciation and amortization expense for the
nine-month period ended November 30, 2006 relates to the acquisition of radio networks in Slovakia
and Bulgaria in March 2005 and November 2005, respectively. The decrease in corporate depreciation
and amortization relates to equipment and furniture and fixtures becoming fully depreciated in the
fourth quarter of fiscal 2006.
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio |
|
$ |
29,216 |
|
|
$ |
22,470 |
|
|
$ |
(6,746 |
) |
|
|
(23.1 |
)% |
|
$ |
93,938 |
|
|
$ |
73,985 |
|
|
$ |
(19,953 |
) |
|
|
(21.2 |
)% |
Publishing |
|
|
4,243 |
|
|
|
4,119 |
|
|
|
(124 |
) |
|
|
(2.9 |
)% |
|
|
6,144 |
|
|
|
7,121 |
|
|
|
977 |
|
|
|
15.9 |
% |
Corporate |
|
|
(9,046 |
) |
|
|
(9,101 |
) |
|
|
(55 |
) |
|
|
(0.6 |
)% |
|
|
(28,901 |
) |
|
|
(25,621 |
) |
|
|
3,280 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
24,413 |
|
|
$ |
17,488 |
|
|
$ |
(6,925 |
) |
|
|
(28.4 |
)% |
|
$ |
71,181 |
|
|
$ |
55,485 |
|
|
$ |
(15,696 |
) |
|
|
(22.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In both the three-month and nine-month periods ended November 30, 2006, radio operating
income decreased due to declining revenues in our New York and Los Angeles markets, as discussed
above. In the nine-month period ended November 30, 2006, radio operating income was also impacted
by higher programming costs associated with certain on-air talent contracts and severances recorded
in association with the format change at KMVN-FM, as discussed above. Although we are investing
heavily in our Los Angeles and New York markets, continued ratings pressure on our stations in New
York and Los Angeles will be a challenge for the Company.
In the nine-month period ended November 30, 2006, publishing operating income increased
principally due to revenue increases associated with our new city guides in Atlanta and Cincinnati,
strong performance of our city magazines and one additional issue of Tu Ciudad being produced in
the current year as compared to the prior year. These revenue gains are partially offset by
declines in revenue associated with the cessation of unprofitable operations at Country Sampler and
Emmis Books. Additionally, operating income was impacted by higher operating costs in the
nine-month period due to severance expenses associated with the
elimination of the specialty magazines and by a $0.2 million inventory charge related to our Emmis Books operation,
both of which were incurred in our first fiscal quarter.
-36-
In the nine-month period ended November 30, 2006, corporate operating income increased
principally due to lower depreciation and amortization and lower corporate expenses due to staffing
reductions following the divestiture of the Companys television stations, both of which are
partially offset by costs incurred related to the going private transaction and special dividend.
Corporate operating income for the three-month period ended November 30, 2006 is consistent with
the same period of the prior year due to lower depreciation and amortization and lower corporate
expenses due to staffing reductions as discussed above, both of which are offset by additional
costs related to the special dividend.
On a consolidated basis in both the three-month and nine-month periods ended November 30,
2006, operating income decreased due to the decline in radio operating income.
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Interest expense |
|
$ |
20,487 |
|
|
$ |
9,505 |
|
|
$ |
(10,982 |
) |
|
|
(53.6 |
)% |
|
$ |
49,073 |
|
|
$ |
33,621 |
|
|
$ |
(15,452 |
) |
|
|
(31.5 |
)% |
Certain debt was required to be repaid as of November 30, 2005 as a result of the
disposition of the Companys television assets. The Company allocated interest expense associated
with this portion of debt to the television operations in accordance with Emerging Issues Task
Force Issue 87-24 Allocation of Interest to Discontinued Operations, as modified. No debt would
be required to be repaid as a result of the disposition of the Companys remaining television
assets as of November 30, 2006, thus no interest was allocated to television operations for the
three-month or nine-month periods ended November 30, 2006. The Company allocated $7.7 million and
$22.0 million of interest expense to discontinued operations for the three-month and nine-month
periods ended November 30, 2005. Excluding the reclassification of interest expense to
discontinued operations, interest expense for the three-month and nine-month periods ended November
30, 2006 would have decreased $18.7 million, or 66.3%, and $37.8 million, or 53.2%, respectively.
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 television sale proceeds partially offset by
higher interest rates on the senior credit facility.
Loss on debt extinguishment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Loss on debt extinguishment |
|
$ |
|
|
|
$ |
(10,023 |
) |
|
$ |
(10,023 |
) |
|
|
N/A |
|
|
$ |
|
|
|
$ |
(13,403 |
) |
|
$ |
(13,403 |
) |
|
|
N/A |
|
During the three months ended November 30, 2006, the Company redeemed approximately
$374.9 million of the $375.0 million outstanding 6 7/8% Senior Subordinated Notes at par plus
accrued and unpaid interest and also amended and restated its senior credit facility (See Note 5 in
the accompanying condensed consolidated financial statements for more discussion). The Company
recorded a loss on debt extinguishment of $10.0 million related to these transactions in its
quarter ended November 30, 2006.
-37-
The loss on debt extinguishment for the nine months ended November 30, 2006 includes the items
noted above as well as the following losses on debt extinguishments incurred in the Companys first
and second fiscal quarters: (i) the redemption at 106.25% of par the remaining $1.4 million outstanding of its
12.5% senior discount notes, (ii) the redemption of the remaining $120.0 million of its senior
floating rate notes and (iii) repayments on its former credit facility that permanently reduced
availability under the facility. In connection with these debt redemptions, the Company recorded a
loss on debt extinguishment of $3.4 million.
Income before income taxes, minority interest and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Income (loss) before income taxes,
minority interest and discontinued
operations |
|
$ |
3,878 |
|
|
$ |
(155 |
) |
|
$ |
(4,033 |
) |
|
|
(104.0 |
)% |
|
$ |
22,223 |
|
|
$ |
11,131 |
|
|
$ |
(11,092 |
) |
|
|
(49.9 |
)% |
The decrease in the three months and nine months ended November 30, 2006 is principally
attributable to the loss on debt extinguishment and lower operating income in our radio division
both of which are partially offset by lower reported interest expense and lower corporate
depreciation and amortization.
Minority interest expense, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Minority interest
expense, net of tax |
|
$ |
1,092 |
|
|
$ |
654 |
|
|
$ |
(438 |
) |
|
|
(40.1 |
)% |
|
$ |
3,511 |
|
|
$ |
3,376 |
|
|
$ |
(135 |
) |
|
|
(3.8 |
)% |
Our minority interest expense principally relates to our 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 November 30, |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
Income from discontinued operations,
net of tax |
|
$ |
198,107 |
|
|
$ |
4,400 |
|
|
$ |
(193,707 |
) |
|
|
(97.8 |
)% |
|
$ |
209,036 |
|
|
$ |
121,330 |
|
|
$ |
(87,706 |
) |
|
|
(42.0 |
)% |
Our television division, radio stations in Phoenix (including KKFR-FM), and one radio
station in St. Louis 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:
-38-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KKFR-FM |
|
$ |
1,051 |
|
|
$ |
(104 |
) |
|
$ |
3,351 |
|
|
$ |
433 |
|
Television |
|
|
11,083 |
|
|
|
6,678 |
|
|
|
27,401 |
|
|
|
18,060 |
|
WRDA-FM |
|
|
(157 |
) |
|
|
|
|
|
|
(693 |
) |
|
|
|
|
Phoenix |
|
|
|
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,977 |
|
|
|
6,574 |
|
|
|
30,499 |
|
|
|
18,493 |
|
Less: Provision for income taxes |
|
|
3,326 |
|
|
|
2,043 |
|
|
|
10,919 |
|
|
|
7,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations, net of tax |
|
|
8,651 |
|
|
|
4,531 |
|
|
|
19,580 |
|
|
|
11,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KKFR-FM |
|
|
|
|
|
|
(247 |
) |
|
|
|
|
|
|
18,870 |
|
Television |
|
|
321,154 |
|
|
|
|
|
|
|
321,154 |
|
|
|
160,760 |
|
WRDA-FM |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
7,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
321,154 |
|
|
|
(217 |
) |
|
|
321,154 |
|
|
|
186,682 |
|
Less: Provision for income taxes |
|
|
131,698 |
|
|
|
(86 |
) |
|
|
131,698 |
|
|
|
76,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued
operations, net of tax |
|
|
189,456 |
|
|
|
(131 |
) |
|
|
189,456 |
|
|
|
109,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
198,107 |
|
|
$ |
4,400 |
|
|
$ |
209,036 |
|
|
$ |
121,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our television station in New Orleans, Louisiana, WVUE, was significantly affected by
Hurricane Katrina and the subsequent flooding. The flooding of New Orleans caused extensive
property damage at WVUE. Emmis spent approximately $6.8 million on capital expenditures related to
flooding restoration projects during the nine months ended November 30, 2006 and expects to spend
an additional $5.0 million by February 28, 2007 to complete the restoration. During the nine
months ended November 30, 2006, the Company received $10.3 million of insurance proceeds, the
majority of which were advanced proceeds from the Companys private insurer. These proceeds are in
addition to the $1.0 million Federal flood insurance proceeds received in the prior year. In
connection with the receipt of the insurance proceeds, the Company removed the carrying value of
all damaged or destroyed property and recorded a $7.8 million gain on disposal of these assets
which is reflected in income from discontinued operations in the accompanying condensed
consolidated statements of operations. WVUE did not broadcast its signal for an extended period of
time as a result of Katrina and the general disruption of the local economy has negatively affected
ongoing advertising revenue. The Company maintains business interruption insurance and expects to
be reimbursed for lost net income as a result of Katrina. Emmis has not accrued for business
interruption insurance proceeds. Business interruption insurance proceeds will only be recognized
upon receipt.
On May 5, 2006, Emmis closed on its sale of WRDA-FM in St. Louis to Radio One, Inc. Emmis
recorded a $4.2 million gain on the sale, net of tax, which is reflected in discontinued operations
in the accompanying condensed consolidated statements of operations.
On July 7, 2006, Emmis closed on its sale of WBPG-TV in Mobile, AL Pensacola, FL to LIN
Television Corporation for $3.0 million in cash. LIN Television Corporation had been operating
WBPG-TV under a Local Programming and Marketing Agreement since November 30, 2005. Emmis used the
proceeds to repay outstanding debt obligations. In connection with the sale, Emmis recorded a gain
on sale of approximately $1.1 million, net of tax, in its quarter ended August 31, 2006, which is
included in discontinued operations in the accompanying condensed consolidated statement of
operations.
On July 11, 2006, Emmis closed on its sale of 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. Emmis used the proceeds to repay outstanding debt obligations.
In connection with the sale, Emmis recorded a gain on sale of $11.3 million, net of tax, in its
quarter ended August 31, 2006, which is included in discontinued operations in the accompanying
condensed consolidated statement of operations.
-39-
On August 31, 2006, Emmis closed on its sale of WKCF-TV in Orlando to Hearst-Argyle Television
Inc. for $217.5 million in cash. Emmis used a portion of the proceeds to repay outstanding debt
obligations. In connection with the sale, Emmis recorded a gain on sale of $93.3 million, net of
tax, in its quarter ended August 31, 2006, which
is included in discontinued operations in the accompanying condensed consolidated statement of
operations.
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
|
|
|
|
2005 |
|
2006 |
|
$ Change |
|
% Change |
|
2005 |
|
2006 |
|
$ Change |
|
% Change |
|
|
(As reported, amounts in thousands) |
|
|
|
|
|
(As reported, amounts in thousands) |
|
|
|
|
Net income (loss): |
|
$ |
200,021 |
|
|
$ |
3,130 |
|
|
$ |
(196,891 |
) |
|
|
(98.4 |
)% |
|
$ |
218,829 |
|
|
$ |
124,066 |
|
|
$ |
(94,763 |
) |
|
|
(43.3 |
)% |
The decrease in net income in the three-month period ended November 30, 2006 is primarily
attributable to the gain on sale of discontinued operations recorded in the prior year in addition
to the items discussed in income before income taxes, minority interest and discontinued operations
above. The Company reduced its estimate of annual income before income taxes in the quarter ended
November 30, 2006 which increased its provision for income taxes for the three months then ended.
The decrease in net income in the nine-month period ended November 30, 2006 is primarily
attributable to the gain on sale of discontinued operations in the prior year coupled with the
items discussed in income before income taxes, minority interest and discontinued operations above.
These are partially offset by our sales of discontinued operations in the current year.
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.
At November 30, 2006, we had cash and cash equivalents of $16.1 million and net working
capital of $67.9 million. At February 28, 2006, we had cash and cash equivalents of $140.8 million
and net working capital of $33.3 million. The increase in working capital primarily relates to
higher accounts receivable due to seasonality of the business and lower accrued interest due to
lower overall debt levels and debt refinancing activities in our quarter ended November 30, 2006.
At January 2, 2007, we had $97.5 million available under our credit facility, which is net of $2.5
million in outstanding letters of credit.
On July 11, 2006, Emmis completed its sale of radio station KKFR-FM in Phoenix, AZ to
Bonneville International Corporation for $77.5 million in cash and also sold certain tangible
assets to Riviera Broadcast Group LLC for $0.1 million in cash. On July 7, 2006, Emmis closed on
its sale of WBPG-TV in Mobile, AL Pensacola, FL to LIN Television Corporation for $3.0 million in
cash. On August 31, 2006, Emmis completed its sale of WKCF-TV in Orlando, FL to Hearst-Argyle
Television Inc. for $217.5 million in cash. The proceeds of the KKFR-FM, WBPG-TV and WKCF-TV
transactions were used to pay outstanding indebtedness.
-40-
On March 9, 2006, the Company redeemed at par the remaining $120.0 million outstanding of its
senior floating rate notes. On March 15, 2006, the Company redeemed at 106.25% of par the
remaining $1.4 million outstanding of its 12.5% senior discount notes.
On October 20, 2006, the Company redeemed approximately $374.9 million of the $375.0 million
outstanding 6 7/8% Senior Subordinated Notes at par plus accrued and unpaid interest.
On November 2, 2006, EOC amended and restated its Revolving Credit and Term Loan Agreement to
provide for total borrowings of up to $600 million, including (i) a $455 million term loan and (ii)
a $145 million revolver, of which $50 million may be used for letters of credit. The credit
facility also provides for the ability to have incremental facilities of up to $450 million, a
portion of which may be allocated to a revolver. Emmis may access the incremental facility on one
or more occasions, subject to certain provisions, including a potential market adjustment to
pricing of the entire credit facility.
All outstanding amounts under the credit facility bear interest, at the option of EOC, at a
rate equal to the Eurodollar Rate or an alternative base rate (as defined in the credit facility)
plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies under the
revolver (ranging from 0% to 2.25%), depending on Emmis ratio of debt to consolidated operating
cash flow, as defined in the agreement. The margins over the Eurodollar Rate and the alternative
base rate are 2.00% and 1.00%, respectively, for the term loan facility. Interest is due on a
calendar quarter basis under the alternative base rate and at least every three months under the
Eurodollar Rate. Beginning six months after closing, the credit facility requires Emmis to maintain
fixed interest rates, for at least a three year period, on a minimum of 30% of its total
outstanding debt, as defined.
The term loan and revolver mature on November 1, 2013 and November 2, 2012, respectively.
Beginning on November 30, 2007, the borrowings under the term loan are payable in equal quarterly
installments equal to 0.25% of the term loan, with the remaining balance payable November 1, 2013.
Proceeds from raising additional equity, issuing additional subordinated debt or from asset sales,
as well as excess cash flow, may be required to be used to repay amounts outstanding under the
credit facility. Whether these mandatory repayment provisions apply depends, in certain instances,
on Emmis total leverage ratio, as defined under the credit facility.
Borrowing under the credit facility depends upon our continued compliance with certain
operating covenants and financial ratios, including leverage and fixed charge coverage as
specifically defined. The operating covenants and other restrictions with which we must comply
include, among others, restrictions on additional indebtedness, incurrence of liens, engaging in
businesses other than our primary business, paying certain dividends, redeeming or repurchasing
capital stock of Emmis, acquisitions and asset sales. No default or event of default has occurred
or is continuing. The credit facility provides that an event of default will occur if there is a
change of control of Emmis, as defined. The payment of principal, premium and interest under the
credit facility is fully and unconditionally guaranteed, jointly and severally, by ECC and most of
its existing wholly-owned domestic subsidiaries. Substantially all of Emmis assets, including the
stock of Emmis wholly-owned, domestic subsidiaries, are pledged to secure the credit facility.
In connection with the previously discussed debt redemptions, repayments of the Companys
former credit facility that permanently reduced availability under the facility, and the amendment
and restatement of the Companys former credit facility, the Company recorded a loss on debt
extinguishment of $13.4 million in the nine months ended November 30, 2006.
Operating Activities
Cash flows provided by operating activities were $12.8 million for the nine-month period ended
November 30, 2006 versus $56.7 million in the same period of the prior year. Cash flows provided
by operating activities decreased due to lower net revenues less station operating expenses and
corporate expenses, coupled
-41-
with lower accrued interest and lower accounts payable and accrued
liabilities due to the settlement of year-end bonus and severance obligations. Additionally, since
November 30, 2005, we have sold fourteen television stations and two radio stations, which has
reduced operating cash flows. 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 $316.0 million for the nine-month period
ended November 30, 2006 versus $410.2 million in the same period of the prior year. In the
nine-month period ended November 30, 2006, we sold: (i) WRDA-FM in St. Louis, Missouri for $20.0
million in cash, (ii) WBPG-TV in Mobile, AL Pensacola, FL for $3.0 million in cash, (iii) KKFR-FM
in Phoenix, AZ for $77.6 million in cash, (iv) WKCF-TV in Orlando, FL for $217.5 million in cash,
and (v) certain tangible assets in Orlando for $3.0 million in cash. In the nine-month period
ended November 30, 2005, we sold four stations to LIN Television Corporation for $257.0 in cash
(WALA in Mobile, AL/Pensacola, FL, WTHI in Terre Haute, IN, WLUK in Green Bay, WI, and KRQE in
Albuquerque, NM), entered into a LMA with LIN Television Corporation for WBPG in Mobile,
AL/Pensacola, FL and sold one station to Gray Television for $186.0 million in cash (WSAZ in
Huntington/Charleston, WV). We also purchased national radio networks in Slovakia and Bulgaria for
$15.8 million.
Investment 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 nine-month periods ended November 30, 2005 and 2006, we had capital expenditures of $8.2
million and $2.3 million, respectively. We expect capital expenditures related to continuing
operations to be approximately $7.5 million in the current fiscal year, compared to $11.7 million
in fiscal 2006. The decrease principally relates to an expansion of our offices in Chicago to
accommodate WLUP-FM, which was completed in fiscal 2006. We expect that future requirements for
capital expenditures will include capital expenditures incurred during the ordinary course of
business and HD Radio upgrade costs. 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 $453.8 million for the nine-month period ended
November 30, 2006 versus $236.6 million in the same period of the prior year. Cash flows used in
financing activities in the nine months ended November 30, 2006 relate to the payment of a one-time
dividend of $4.00 per common share totaling $150.2 million, the redemption of $374.9 million of the
6 7/8% Senior Subordinated Notes, the redemption of $120.0 million of senior floating rate notes
and $1.4 million of senior discount notes. These transactions were funded by cash on hand from our
sales of discontinued operations as well as additional borrowings under our senior credit facility.
As of November 30, 2006, Emmis had $500 million of borrowings under its senior credit facility
($2.3 million current and $497.7 million long-term), $0.1 million of senior subordinated notes
classified as current, $4.3 million of other indebtedness ($1.0 million current and $3.3 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 November 30, 2006, our weighted average borrowing
rate under our credit facility and our overall weighted average borrowing rate, after taking into
account amounts outstanding under our senior subordinated notes was approximately 7.3%,
respectively.
-42-
The debt service requirements of Emmis over the next twelve-month period (excluding interest
under our credit facility and principal amounts of our senior subordinated notes) are expected to
be $11.3 million. This amount is comprised of $2.3 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 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 November 30, 2006, 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.
During the Companys fiscal quarter ended August 31, 2004, Emmis entered into a consent decree
with the Federal Communications Commission to settle all outstanding indecency-related matters.
Terms of the agreement 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 have requested that the FCC reconsider the 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 challenge to the consent decree is currently pending in
federal court and the challenges to the license renewal applications
are currently pending before the Commission; but 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, we received the first of several subpoenas from the Office of Attorney General of the State of
New York, as have some of the other radio broadcasting companies operating in the State of New
York. The subpoenas were issued in connection with the New York Attorney Generals investigation
of record company promotional practices. We are cooperating with this investigation. We do not
expect that the outcome of this matter would have a material impact on our financial position,
results of operations or cash flows.
-43-
In January 2005, a third party threatened claims against our radio station in Hungary seeking
damages of approximately $4.6 million. Emmis has investigated this matter, and based on
information gathered, Emmis believes the claims are without merit. Litigation has not been
initiated and Emmis intends to defend itself vigorously in the matter.
On June 13, 2006, Emmis filed a lawsuit in federal court in Indianapolis seeking damages for
CBS Radios actions in connection with its hiring of former Emmis CFO Walter Berger. The complaint
alleges that: (i) CBS Radio knew Mr. Berger had a valid and enforceable employment agreement with
Emmis when it recruited and ultimately
hired him and (ii) despite objections from Emmis, CBS Radio encouraged Mr. Berger to breach
his contract by leaving Emmis in January 2006, more than three years before the contract was set to
expire. Emmis also filed an arbitration action against Mr. Berger seeking damages for breach of
contract, which include repayment of certain amounts paid to him under his Emmis employment
agreement.
The Company is a party to various other legal proceedings arising in the ordinary course of
business. In the opinion of management of the Company, however, none of these pending legal
proceedings is likely to have a material adverse effect on the Company.
Quantitative and Qualitative Disclosures About Market Risk
As of February 28, 2006, approximately 53% of Emmis total outstanding debt bore interest at
variable rates. As a result of the redemption of senior floating rate notes and senior discount
notes in March 2006 and the senior subordinated notes in October 2006 and December 2006, 100% of
the Companys debt as of January 2, 2007 bears interest at variable rates. Based on amounts
outstanding at January 2, 2007, if the interest rate on our variable debt were to increase by 1.0%,
our annual interest expense would be higher by approximately $5.0 million. Beginning in May 2007,
Emmis is required to maintain fixed interest rates, for at least a three year period, on a minimum
of 30% of its total outstanding debt, as defined. Emmis currently has no interest rate derivative
instruments.
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 November 30, 2006,
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.
-44-
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.
-45-
PART II OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits.
The following exhibits are filed or incorporated by reference as a part of
this report:
|
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. |
-46-
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: January 9, 2007
|
|
By: /s/ PATRICK WALSH |
|
|
Patrick Walsh |
|
|
Executive Vice President, Chief Financial |
|
|
Officer and Treasurer |
-47-