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EMMS > SEC Filings for EMMS > Form 10-Q on 9-Jan-2014All Recent SEC Filings




Quarterly Report

Item 2. Management's 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;

• new or changing regulations of the Federal Communications Commission or other governmental agencies;

• changes in radio audience measurement methodologies;

• competition from new or different technologies;

• war, terrorist acts or political instability; and other factors mentioned in other documents filed by the Company with the Securities and Exchange Commission.

For a more detailed discussion of these and other risk factors, see the Risk Factors section of our Annual Report on Form 10-K, for the year ended February 28, 2013. Emmis does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

We are a diversified media company. We own and operate radio and publishing properties located primarily in the United States. Our revenues are mostly affected by the advertising rates our entities charge, as advertising sales represent approximately 70% of our consolidated revenues. These rates are in large part based on our entities' ability to attract audiences/subscribers in demographic groups targeted by their advertisers. The Nielsen Company generally measures radio station ratings in our domestic markets on a weekly basis using a passive digital system of measuring listening (the Portable People Meter™). Because audience ratings in a station's local market are critical to the station's financial success, our strategy is to use market research and advertising and promotion to attract and retain audiences in each station's chosen demographic target group.
Our revenues vary throughout the year. As is typical in the broadcasting industry, our revenues and operating income are usually lowest in our fourth fiscal quarter.


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In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services, which can be used by the station in its business operations. These barter transactions are recorded at the estimated fair value of the product or service received. We generally confine the use of such trade transactions to promotional items or services for which we would otherwise have paid cash. In addition, it is our general policy not to 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, 2012 and 2013. All revenues generated by our international radio properties are included in the "Local" category. The category "Non Traditional" principally consists of ticket sales and sponsorships of events our stations and magazines conduct in their local markets. The category "Other" includes, among other items, revenues generated by the websites of our entities and barter.

                               Three Months Ended November 30,                            Nine Months Ended November 30,
                        2012         % of Total       2013      % of Total        2012       % of Total       2013       % of Total
                                    (Dollars in thousands)
Net revenues:
Local              $   26,040            51.2 %    $ 27,553         52.4 %    $   79,375         52.0 %    $  83,655         52.9 %
National                9,024            17.7 %       8,843         16.8 %        25,262         16.5 %       25,057         15.8 %
Political               1,142             2.2 %         212          0.4 %         2,242          1.5 %          452          0.3 %
Publication Sales       1,531             3.0 %       1,701          3.2 %         4,574          3.0 %        4,801          3.0 %
Non Traditional         3,966             7.8 %       4,026          7.7 %        15,833         10.4 %       16,095         10.2 %
LMA Fees                2,583             5.1 %       2,638          5.0 %         6,026          3.9 %        7,878          5.0 %
Other                   6,600            13.0 %       7,648         14.5 %        19,471         12.7 %       20,236         12.8 %
Total net revenues $   50,886                      $ 52,621                   $  152,783                   $ 158,174

As previously mentioned, we derive approximately 70% of our net revenues from advertising sales. Our radio stations derive a higher percentage of their advertising revenues from local sales than our publishing entities. In the nine-month period ended November 30, 2013, local sales, excluding political revenues, represented approximately 81% and 64% of our advertising revenues for our radio and publishing divisions, respectively.
No customer represents more than 10% of our consolidated net revenues. Our top ten categories for radio represent approximately 61% and 62% of our radio division's total advertising net revenues for the nine-month periods ended November 30, 2012 and 2013, respectively. The automotive industry was the largest category for our radio division for the nine-month periods ended November 30, 2012 and 2013, representing approximately 11% and 12% of our radio net revenues, respectively.
The majority of our expenses are fixed in nature, principally consisting of salaries and related employee benefit costs, office and tower rent, utilities, property and casualty insurance and programming-related expenses. However, approximately 20% of our expenses vary in connection with changes in revenues. These variable expenses primarily relate to sales commissions and bad debt reserves. In addition, costs related to our marketing and promotions department are highly discretionary and incurred primarily to maintain and/or increase our audience and market share.
Although advertising revenues have stabilized following the recent global recession, radio revenue growth remains challenged. Management believes this is principally the result of two factors: (1) the proliferation of advertising inventory caused by the emergence of new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, all of which are gaining advertising share against radio and other traditional media and (2) the perception of investors and advertisers that satellite radio, internet radio, and digital audio sales fragment the radio audience and time spent listening thereby reducing the effectiveness of radio advertising.

The Company and the radio industry have begun several initiatives to address these issues. The radio industry is working aggressively to increase the number of smartphones that contain an FM tuner. In many countries, FM tuners are common features in smartphones. Including FM as a feature on these devices has the potential to increase radio listening and improve perception of the radio industry while offering network providers the benefits of a proven emergency notification system, reduced network congestion from audio streaming services, and a host of new revenue generating applications. Emmis is at the leading edge of this initiative and has developed TagStation®, a cloud-based software platform that allows a broadcaster to manage album art, meta data and enhanced advertising on its various broadcasts, and NextRadio®, a hybrid radio smartphone application, as an industry solution to make the user experience of listening to free over-the-air radio broadcasts on their


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enabled smartphones a rich experience. In August 2013, Sprint began enabling FM tuners and pre-loading the NextRadio® application on certain models of smartphones. The radio industry continues to work with other leading United States network providers, device manufacturers, regulators and legislators to ensure that FM tuners are included in smartphones.
The Company has also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by becoming one of the fifteen largest streaming audio providers in the United States, developing highly interactive websites with content that engages our listeners, using SMS texting and deploying mobile applications, harnessing the power of digital video on our websites and YouTube channels, and delivering real-time traffic to navigation devices.
Along with the rest of the radio industry, the majority of our stations have deployed HD Radio®. HD Radio® offers listeners advantages over standard analog broadcasts, including improved sound quality and additional digital channels. In addition to offering secondary channels, the HD Radio® spectrum allows broadcasters to transmit other forms of data. We are participating in a joint venture with other broadcasters to provide the bandwidth that a third party uses to transmit location-based data to hand-held and in-car navigation devices. The number of radio receivers incorporating HD Radio has increased in the past year, particularly in new automobiles. It is unclear what impact HD Radio® will have on the markets in which we operate.
The results of our radio operations are heavily dependent on the results of our stations in the New York and Los Angeles markets. These markets account for nearly 50% of our radio net revenues. During the nine months ended November 30, 2013, KPWR-FM in Los Angeles experienced revenue growth that was better than its overall market, but revenue growth at WQHT-FM in New York lagged its overall market growth. Our results in New York and Los Angeles are often more volatile than our larger competitors due to our lack of scale in these markets. We are dependent on the performance of one station in each of these markets, and as the competitive environment shifts, our ability to adapt is limited. Furthermore, some of our competitors that operate larger station clusters in New York and Los Angeles are able to leverage their market share to extract a greater percentage of available advertising revenue through packaging a variety of advertising inventory at discounted unit rates and may be able to realize operating efficiencies by programming multiple stations in these markets.
As part of our business strategy, we continually evaluate potential acquisitions of radio stations, publishing properties and other businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, Emmis Operating Company's 2012 Credit Agreement substantially limits our ability to make acquisitions. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. See Note 1 to our condensed consolidated financial statements for a discussion of various dispositions.

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. Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. LMA fee revenue is recognized on a straight-line basis over the term of the LMA. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded based on management's judgment of the collectability of receivables. When assessing the collectability of receivables, management considers, among other things, historical loss experience and existing economic conditions. FCC Licenses and Goodwill
We have made acquisitions in the past for which a significant amount of the purchase price was allocated to FCC licenses and goodwill assets. As of November 30, 2013, we have recorded approximately $163.2 million in goodwill and FCC licenses, which represents approximately 62% of our total assets.


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In the case of our U.S. radio stations, we would not be able to operate the properties without the related FCC license for each property. FCC licenses are renewed every eight years; consequently, we continually monitor our stations' compliance with the various regulatory requirements. Historically, all of our FCC licenses have been renewed at the end of their respective periods, and we expect that all FCC licenses will continue to be renewed in the future. We consider our FCC licenses to be indefinite-lived intangibles.
We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by Accounting Standards Codification ("ASC") Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA by another broadcaster.
We complete our annual impairment tests on December 1 of each year and perform additional interim impairment testing whenever triggering events suggest such testing is warranted.

Valuation of Indefinite-lived Broadcasting Licenses Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control.
Valuation of Goodwill
ASC Topic 350 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company's reporting units (radio stations grouped by market and magazines on an individual basis). Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, the market multiple used as a benchmark for our publishing reporting units is based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions. To corroborate the step-one reporting unit fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit.
This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations. Deferred Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between


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amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.

Estimate of Effective Tax Rates
We estimate the effective tax rates and associated liabilities or assets for each legal entity within Emmis. 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 advisors in the various tax jurisdictions to evaluate our position and to assist in our calculation of our tax expense and related assets and liabilities.

Results of Operations for the Three-month and Nine-Month Periods Ended November

30, 2013, Compared to November 30, 2012
Net revenues:

             For the Three Months                                   For the Nine Months Ended
              Ended November 30,                                          November 30,
               2012          2013        $ Change      % Change        2012           2013       $ Change       % Change
             (As reported, amounts in thousands)
Radio      $   34,710     $ 34,854     $      144         0.4 %    $   109,550     $ 113,039     $    3,489         3.2 %
Publishing     16,176       17,767          1,591         9.8 %         43,233        45,135          1,902         4.4 %
Total net
revenues   $   50,886     $ 52,621     $    1,735         3.4 %    $   152,783     $ 158,174     $    5,391         3.5 %

Radio net revenues increased during the three-month and nine-month periods ended November 30, 2013. We typically monitor the performance of our domestic stations against the aggregate performance of the markets in which we operate based on reports for the periods prepared by Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenues basis and exclude revenues from barter arrangements. Miller Kaplan reported gross revenues for our domestic radio markets increased 2.3% for the nine-month period ended November 30, 2013 as compared to the same period of the prior year. Our gross revenues, as reported to Miller Kaplan, increased 3.1% for the nine-month period ended November 30, 2013 as compared to the same period of the prior year. For the nine-month period ended November 30, 2013, our gross revenues exceeded the market average in all of our markets except New York. Miller Kaplan does not report gross revenue market data for our Terre Haute market. For the nine-month period ended November 30, 2013 as compared to the same period of the prior year, our average rate per minute for our domestic radio stations was up 4%, and our minutes sold were down 1%.
Publishing net revenues increased in the three-month and nine-month periods ended November 30, 2013 as our investments in our sales teams have helped us accelerate revenue growth at our magazines. In addition, we have increased the number of custom publications (e.g., college alumni magazines, tourism guides, etc.) that we produce.


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Station operating expenses excluding depreciation and amortization expense:

                      For the Three Months                                  For the Nine Months Ended
                       Ended November 30,                                         November 30,
                        2012          2013        $ Change     % Change        2012           2013       $ Change      % Change
                      (As reported, amounts in thousands)
Station operating
expenses excluding
depreciation and
Radio               $   23,064     $ 23,517     $      453        2.0 %    $    75,372     $  74,428     $    (944 )     (1.3 )%
Publishing              14,335       15,031            696        4.9 %         42,377        43,770         1,393        3.3  %
Total station
operating expenses
depreciation and
expense             $   37,399     $ 38,548     $    1,149        3.1 %    $   117,749     $ 118,198     $     449        0.4  %

The increase in station operating expenses, excluding depreciation and amortization expense, for our radio division for the three months ended November 30, 2013 was entirely due to expenses related to the development and launch of our smartphone application. The decrease in station operating expenses, excluding depreciation and amortization expense for our radio division for the nine months ended November 30, 2013 is mainly attributable to the execution of the LMA of 98.7FM on April 26, 2012, which significantly reduced ongoing operating expenses related to 98.7FM. Furthermore, we incurred approximately $3.4 million of severance and contract termination costs associated with the transaction in the prior year. Excluding the effects of the 98.7FM LMA and related severance and contract termination costs, station operating expenses excluding depreciation and amortization expense would have increased approximately 4.2% in the nine-month period ended November 30, 2013 largely due to increased noncash compensation expense and expenses related to the development and launch of our smartphone application as discussed above. Station operating expenses excluding depreciation and amortization expense for publishing increased during the three months and nine months ended November 30, 2013 mostly due to increased print production costs, increased noncash compensation expense, and continued strategic investments in sales, marketing and digital initiatives.
Corporate expenses excluding depreciation and amortization expense:

                  For the Three Months                               For the Nine Months Ended
                   Ended November 30,                                      November 30,
                    2012          2013       $ Change    % Change        2012          2013      $ Change      % Change
                 (As reported, amounts in thousands)
expense         $    3,717     $  3,653     $    (64 )     (1.7 )%   $   12,850     $ 13,123     $     273        2.1 %

Corporate expenses excluding depreciation and amortization expense increased during the nine months ended November 30, 2013 primarily due to higher noncash compensation expense related to the 2012 Retention Trust Plan and contractual bonuses that were paid in stock. The increase in noncash compensation expense for the nine months ended November 30, 2013 was partially offset by a decline in legal expenses associated with our preferred stock litigation.


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Hungary license litigation and related expenses:

                 For the Three Months Ended                              For the Nine Months Ended
                        November 30,                                            November 30,
                     2012           2013        $ Change     % Change       2012           2013       $ Change       % Change
                    (As reported, amounts in thousands)
Hungary license
litigation and
. . .
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