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

EMMIS COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

INDIANA
(State of incorporation or organization)

0-23264

(Commission file number)

35-1542018
(I.R.S. Employer Identification No.)

ONE EMMIS PLAZA
40 MONUMENT CIRCLE, SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)

(317) 266-0100
(Registrant’s Telephone Number,
Including Area Code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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 Corporation’s classes of common stock, as of January 4, 2010, was:

32,668,418		Shares of Class A Common Stock, $.01 Par Value
4,956,305		Shares of Class B Common Stock, $.01 Par Value
0		Shares of Class C Common Stock, $.01 Par Value

 

 

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended November 30, 2008 and 2009			3
Condensed Consolidated Balance Sheets as of February 28, 2009 and November 30, 2009			5
Condensed Consolidated Statement of Changes in Equity for the nine-month period ended November 30, 2009			7
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended November 30, 2008 and 2009			8
Notes to Condensed Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			46
PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 5. Other Information			47
Item 6. Exhibits			48
Signatures			49
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		November 30,								November 30,
		2008				2009				2008				2009
NET REVENUES		$	79,216			$	64,582			$	246,299			$	188,587
OPERATING EXPENSES:
Station operating expenses excluding depreciation and amortization expense of $2,921, $2,090, $8,569 and $6,821, respectively			59,552				49,458				182,172				154,627
Corporate expenses excluding depreciation and amortization expense of $550, $360, $1,658 and $1,135, respectively			4,128				3,567				14,422				10,649
Restructuring charge			—				—				—				3,350
Impairment loss			210,165				—				210,165				174,642
Depreciation and amortization			3,471				2,450				10,227				7,956
(Gain) loss on disposal of assets			(3	)			9				3				(139	)
Total operating expenses			277,313				55,484				416,989				351,085
OPERATING INCOME (LOSS)			(198,097	)			9,098				(170,690	)			(162,498	)
OTHER INCOME (EXPENSE):
Interest expense			(6,683	)			(7,237	)			(20,212	)			(18,161	)
Gain on debt extinguishment			—				—				—				31,362
Other income (expense), net			383				27				(1,037	)			302
Total other income (expense)			(6,300	)			(7,210	)			(21,249	)			13,503
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS			(204,397	)			1,888				(191,939	)			(148,995	)
BENEFIT FOR INCOME TAXES			(81,110	)			(3,390	)			(73,406	)			(36,604	)
INCOME (LOSS) FROM CONTINUING OPERATIONS			(123,287	)			5,278				(118,533	)			(112,391	)
(GAIN) LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX			(722	)			695				(3,971	)			(578	)
CONSOLIDATED NET INCOME (LOSS)			(122,565	)			4,583				(114,562	)			(111,813	)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			846				722				4,171				3,511
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY			(123,411	)			3,861				(118,733	)			(115,324	)
PREFERRED STOCK DIVIDENDS			2,246				2,195				6,738				6,584
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(125,657	)		$	1,666			$	(125,471	)		$	(121,908	)

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

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,
		2008				2009				2008				2009
Amounts attributable to common shareholders:
Continuing operations		$	(126,256	)		$	1,899			$	(128,086	)		$	(122,257	)
Discontinued operations			599				(233	)			2,615				349
Net income (loss) attributable to common shareholders		$	(125,657	)		$	1,666			$	(125,471	)		$	(121,908	)
Basic net income (loss) per share attributable to common shareholders:
Continuing operations		$	(3.47	)		$	0.05			$	(3.53	)		$	(3.31	)
Discontinued operations, net of tax			0.02				—				0.07				0.01
Net income (loss) attributable to common shareholders		$	(3.45	)		$	0.05			$	(3.46	)		$	(3.30	)
Basic weighted average common shares outstanding			36,388				36,949				36,276				36,942
Diluted net income (loss) per share attributable to common shareholders:
Continuing operations		$	(3.47	)		$	0.05			$	(3.53	)		$	(3.31	)
Discontinued operations, net of tax			0.02				(0.01	)			0.07				0.01
Net income (loss) attributable to common shareholders		$	(3.45	)		$	0.04			$	(3.46	)		$	(3.30	)
Diluted weighted average common shares outstanding			36,388				38,189				36,276				36,942

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(In thousands, except share data)

		February 28,				November 30,
		2009				2009
						(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	49,731			$	16,517
Accounts receivable, net			46,348				45,639
Prepaid expenses			18,115				19,836
Other current assets			14,497				6,526
Current assets — discontinued operations			650				7
Total current assets			129,341				88,525
PROPERTY AND EQUIPMENT, NET			55,043				50,712
INTANGIBLE ASSETS (Note 3):
Indefinite-lived intangibles			496,711				335,801
Goodwill			29,442				24,175
Other intangibles, net			11,720				4,366
Total intangible assets			537,873				364,342
OTHER ASSETS, NET			8,015				9,827
NONCURRENT ASSETS — HELD FOR SALE			8,900				—
NONCURRENT ASSETS — DISCONTINUED OPERATIONS			39				—
Total assets		$	739,211			$	513,406

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)

		February 28,				November 30,
		2009				2009
						(Unaudited)
LIABILITIES AND DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	15,365			$	10,325
Current maturities of long-term debt			5,263				4,503
Accrued salaries and commissions			7,651				8,103
Accrued interest			2,895				4,812
Deferred revenue			18,805				24,701
Other current liabilities			6,899				7,658
Current liabilities — discontinued operations			1,081				311
Total current liabilities			57,959				60,413
LONG-TERM DEBT, NET OF CURRENT MATURITIES			417,141				339,600
OTHER LONG-TERM DEBT, NET OF CURRENT MATURITIES			8				3
OTHER NONCURRENT LIABILITIES			22,921				21,888
DEFERRED INCOME TAXES			107,722				75,166
Total liabilities			605,751				497,070
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 2,809,170 SHARES AT FEBRUARY 28, 2009 AND NOVEMBER 30, 2009			140,459				140,459
SHAREHOLDERS’ DEFICIT:
Class A common stock, $.01 par value; authorized 170,000,000 shares; issued and outstanding 31,912,656 shares at February 28, 2009 and 31,988,736 shares at November 30, 2009			319				320
Class B common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,956,305 shares at February 28, 2009 and November 30, 2009			50				50
Additional paid-in capital			524,776				526,571
Accumulated deficit			(582,481	)			(697,805	)
Accumulated other comprehensive loss			(2,664	)			(3,030	)
Total shareholders’ deficit			(60,000	)			(173,894	)
NONCONTROLLING INTERESTS			53,001				49,771
Total deficit			(6,999	)			(124,123	)
Total liabilities and deficit		$	739,211			$	513,406

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(In thousands, except share data)

																										Accumulated
		Class A								Class B								Additional								Other
		Common Stock								Common Stock								Paid-in				Accumulated				Comprehensive				Noncontrolling				Total
		Shares				Amount				Shares				Amount				Capital				Deficit				Loss				Interests				Equity (Deficit)
BALANCE, FEBRUARY 28, 2009			31,912,656			$	319				4,956,305			$	50			$	524,776			$	(582,481	)		$	(2,664	)		$	53,001			$	(6,999	)
Issuance of Common Stock to employees and officers and related income tax benefits			71,080				1				—				—				1,794				—				—				—				1,795
Exercise of stock options			5,000				—				—				—				1				—				—				—				1
Payments of dividends and distributions to noncontrolling interests			—				—				—				—				—				—				—				(6,251	)			(6,251	)
Comprehensive Loss:
Net income (loss)			—				—				—				—				—				(115,324	)			—				3,511
Change in value of derivative instrument			—				—				—				—				—				—				534				—
Cumulative translation adjustment			—				—				—				—				—				—				(900	)			(490	)
Total comprehensive loss			—				—				—				—				—				—				—				—				(112,669	)
BALANCE, NOVEMBER 30, 2009			31,988,736			$	320				4,956,305			$	50			$	526,571			$	(697,805	)		$	(3,030	)		$	49,771			$	(124,123	)

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(Dollars in thousands)

		Nine Months Ended November 30,
		2008				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net loss		$	(114,562	)		$	(111,813	)
Adjustments to reconcile consolidated net income to net cash provided by operating activities —
Discontinued operations			(3,971	)			(578	)
Impairment loss			210,165				174,642
Depreciation and amortization			10,700				8,522
Gain on debt extinguishment			—				(31,362	)
Provision for bad debts			1,665				1,602
Benefit for deferred income taxes			(74,673	)			(32,774	)
Noncash compensation			4,612				1,843
Gain (loss) on sale of assets			3				(139	)
Changes in assets and liabilities —
Accounts receivable			845				(1,277	)
Prepaid expenses and other current assets			(9,338	)			12,026
Other assets			6,288				(608	)
Accounts payable and accrued liabilities			(4,294	)			(3,391	)
Deferred revenue			1,096				5,846
Income taxes			(188	)			(5,942	)
Other liabilities			(2,320	)			3,687
Net cash provided by (used in) operating activities — discontinued operations			13,811				(285	)
Net cash provided by operating activities			39,839				19,999
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(3,944	)			(2,302	)
Cash paid for acquisitions			—				(4,882	)
Proceeds from the sale of assets			9				9,108
Other			(232	)			74
Net cash provided by (used in) investing activities — discontinued operations			38,758				(286	)
Net cash provided by investing activities			34,591				1,712

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(Dollars in thousands)

		Nine Months Ended November 30,
		2008				2009
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt			(22,282	)			(121,737	)
Proceeds from long-term debt			6,000				77,235
Debt-related costs			—				(4,846	)
Payments of dividends and distributions to noncontrolling interests			(4,766	)			(2,988	)
Payments of preferred stock dividends			(6,738	)			—
Settlement of tax withholding obligations on stock issued to employees			(546	)			(31	)
Net cash used in financing activities — discontinued operations			(2,233	)			(2,042	)
Other			(138	)			1
Net cash used in financing activities			(30,703	)			(54,408	)
Effect of exchange rates on cash and cash equivalents			352				(517	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			44,079				(33,214	)
CASH AND CASH EQUIVALENTS:
Beginning of period			19,498				49,731
End of period		$	63,577			$	16,517
SUPPLEMENTAL DISCLOSURES:
Cash paid for —
Interest		$	22,365			$	15,728
Income taxes, net of refunds			2,806				4,036
Noncash financing transactions —
Value of stock issued to employees under stock compensation program and to satisfy accrued incentives			5,449				1,825
ACQUISITION OF NONCONTROLLING BULGARIAN RADIO INTERESTS
Fair value of assets acquired						$	4,882
Cash paid							(4,882	)
Liabilities recorded						$	—

The accompanying notes are an integral part of these unaudited condensed consolidated statements.

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(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 (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America 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, as amended by Amendment No. 1 on Form 10-K/A, for the year ended February 28, 2009. The Company’s 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, 2009, and the results of its operations for the three-month and nine-month periods ended November 30, 2008 and 2009 and cash flows for the nine-month periods ended November 30, 2008 and 2009.

Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification as a single source of authoritative nongovernmental U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative literature related to a particular topic in one place. The Company’s adoption of the Codification during the period ended November 30, 2009, did not have an impact on the Company’s financial position, results of operations or cash flows.

In May 2009, an accounting standard was approved, which sets forth the period, circumstances and disclosure after the balance sheet date during which management shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The Company’s adoption of the standard, which was effective for the Company in the period ended August 31, 2009, did not have an effect on the Company’s financial position, results of operations or cash flows.

In April 2009, an accounting standard was issued which requires disclosures about the fair value of financial instruments in interim reporting periods that were previously only required in annual financial statements. The Company’s adoption of this accounting standard, which was effective for the Company for the period ended August 31, 2009, did not have an effect on the Company’s financial position, result of operations or cash flows.

In June 2008, an accounting standard was approved which provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. This accounting standard was adopted by the Company on March 1, 2009 and had no impact on the Company’s financial position, results of operations or cash flows.

In June 2008, an accounting standard was approved which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the computation of earnings per share under the two-class method. This accounting standard was adopted by the Company on March 1, 2009 and had no impact on the Company’s financial position, results of operations or cash flows.

In December 2007, an accounting standard was approved which changed the accounting and reporting for minority interests, which are now characterized as noncontrolling interests and classified as a component of equity in the accompanying condensed consolidated balance sheets. This accounting standard, adopted by the Company on March 1, 2009, required retroactive adoption of the presentation and disclosure requirements for existing minority interests, with all other requirements applied prospectively. The adoption of this standard resulted in the reclassification of $53,001 and $49,771 of noncontrolling interests to a component of equity at February 28, 2009 and November 30, 2009, respectively.

In December 2007, an accounting standard was modified that changed how business combinations are accounted for through the use of fair values in financial reporting and impacts financial statements both on the acquisition date and in subsequent periods. In February 2009, this accounting standard was again modified to allow an exception to the recognition and fair value measurement principles of contingencies in a business combination. This exception requires that acquired contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. These modifications were effective for the Company as of March 1, 2009 for all business combinations that close on or after March 1, 2009.

Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at November 30, 2008 and 2009, consisted of stock options, restricted stock awards and the 6.25% Series A cumulative convertible preferred stock. We currently have 2.8 million shares of preferred stock outstanding and each share converts into 2.44 shares of common stock. Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
		(shares in 000’s)
6.25% Series A cumulative convertible preferred stock			7,015				6,854				7,015				6,854
Stock options and restricted stock awards			8,711				7,614				8,603				8,866
Antidilutive common share equivalents			15,726				14,468				15,618				15,720

Discontinued Operations

Summary of Discontinued Operations Activity:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Gain (loss) from discontinued operations:
Slager		$	1,863			$	(1,095	)		$	6,206			$	1,139
Television			(58	)			—				4,958				—
Belgium			(727	)			—				(2,178	)			(944	)
Tu Ciudad Los Angeles			(15	)			—				(1,898	)			(15	)
Emmis Books			(28	)			—				(53	)			(22	)
Total			1,035				(1,095	)			7,035				158
Less: Provision for income taxes			300				(400	)			2,484				—
Gain (loss) from discontinued operations, net of tax			735				(695	)			4,551				158
Gain (loss) on sale of discontinued operations:
Television			(23	)			—				(1,017	)			—
Belgium			—				—				—				420
Total			(23	)			—				(1,017	)			420
Less: Provision (benefit) for income taxes			(10	)			—				(437	)			—
Gain (loss) on sale of discontinued operations, net of tax			(13	)			—				(580	)			420
Gain (loss) from discontinued operations, net of tax		$	722			$	(695	)		$	3,971			$	578

Discontinued Operation — Slager

On October 28, 2009, the Hungarian National Radio and Television Board (the “ORTT”) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager Radio Co. PLtd. (“Slager”). Slager ceased broadcasting effective November 19, 2009. We have continued to explore our legal remedies in both the Hungarian and international forums, but we cannot predict the outcome of these efforts.

Slager had historically been included in the radio segment. The following table summarizes certain operating results for Slager for all periods presented:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Net revenues		$	5,492			$	3,060			$	17,505			$	9,454
Station operating expenses, excluding depreciation and amortization expense			3,404				3,622				10,007				7,757
Depreciation and amortization			528				460				1,546				1,268
Interest expense			49				18				141				49
Income (loss) before taxes			1,863				(1,095	)			6,206				1,139
Provision (benefit) for income taxes			342				(400	)			1,146				—
Net income (loss) attributable to minority interests			123				(462	)			1,356				229

Assets and liabilities of Slager consist mostly of current assets and current liabilities which are included in continuing operations in the condensed consolidated balance sheet. The results of Slager are consolidated on a calendar-quarter basis. Therefore, the financial results for the period October 1, 2009 through the date operations ceased on November 19, 2009 will be presented in the Company’s fiscal quarter ended February 28, 2010. We do not expect to incur material shut-down costs or material impairment charges related to Slager.

Discontinued Operation — Television Division

On July 18, 2008, Emmis completed the sale of its sole remaining television station, WVUE-TV in New Orleans, LA, to Louisiana Media Company LLC for $41.0 million in cash. The sale of WVUE-TV completed the sale of our television division which began on May 10, 2005, when Emmis announced that it had engaged advisors to assist in evaluating strategic alternatives for its television assets.

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,
		2008				2009				2008				2009
Net revenues		$	—			$	—			$	7,364			$	—
Station operating expenses, excluding depreciation and amortization expense			58				—				2,414				—
Gain on disposal of assets			—				—				8				—
Income (loss) before taxes			(58	)			—				4,958				—
Provision (benefit) for income taxes			(24	)			—				2,135				—

Assets and liabilities related to our television division are classified as discontinued operations in the accompanying condensed consolidated balance sheets as follows:

		February 28, 2009				November 30, 2009
Current assets:
Other		$	5				—
Total current assets			5				—
Current liabilities:
Accounts payable and accrued expenses		$	303			$	303
Total current liabilities			303				303

Discontinued Operation — Belgium

On May 29, 2009, Emmis sold the stock of its Belgium radio operation to Alfacam Group NV, a Belgian corporation, for 100 euros. Emmis desired to exit Belgium as its financial performance in the market failed to meet expectations. The sale allowed Emmis to eliminate further operating losses. Emmis recorded a full valuation allowance against the net operating losses generated by the Belgium radio operation during the three months and nine months ended November 30, 2008 and 2009. Belgium had historically been included in the radio segment. The following table summarizes certain operating results for Belgium for all periods presented:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Net revenues		$	427			$	—			$	1,576			$	703
Station operating expenses, excluding depreciation and amortization expense			1,071				—				3,467				1,647
Depreciation and amortization			99				—				306				—
Loss before income taxes			727				—				2,178				944

Assets and liabilities related to Belgium are classified as discontinued operations in the accompanying condensed consolidated balance sheets as follows:

		February 28, 2009				November 30, 2009
Current assets:
Accounts receivable, net		$	446			$	—
Prepaid expenses			136				—
Other			18				—
Total current assets			600				—
Noncurrent assets:
Other noncurrent assets			34				—
Total noncurrent assets			34				—
Total assets		$	634			$	—
Current liabilities:
Accounts payable and accrued expenses		$	542			$	—
Accrued salaries and commissions			116				—
Deferred revenue			80				—
Total current liabilities		$	738			$	—

Discontinued Operation — Tu Ciudad Los Angeles

On July 10, 2008, Emmis announced that it had indefinitely suspended publication of Tu Ciudad Los Angeles because the magazine’s financial performance did not meet the Company’s expectations. Tu Ciudad Los Angeles had historically been included in the publishing segment. The following table summarizes certain operating results for Tu Ciudad Los Angeles for all periods presented:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Net revenues		$	—			$	—			$	818			$	—
Station operating expenses, excluding depreciation and amortization expense			5				—				2,604				15
Depreciation and amortization			—				—				22				—
Loss on disposal of assets			10				—				90				—
Loss before income taxes			15				—				1,898				15
Benefit from income taxes			6				—				775				—

Assets and liabilities related to Tu Ciudad Los Angeles are classified as discontinued operations in the accompanying condensed consolidated balance sheets as follows:

		February 28, 2009				November 30, 2009
Noncurrent assets:
Other noncurrent assets		$	5			$	—
Total noncurrent assets		$	5			$	—
Current liabilities:
Accounts payable and accrued expenses		$	10			$	8
Other			3				—
Total current liabilities		$	13			$	8

Discontinued Operation — Emmis Books

In February 2009, Emmis discontinued the operations of Emmis Books, which was engaged in regional book publication, as Emmis Books’ financial performance did not meet the Company’s expectations. Emmis had ceased new book publication in March 2006, but continued to sell existing book inventory until the decision to totally cease operations. Emmis Books had historically been included in the publishing segment. The following table summarizes certain operating results for Emmis Books for all periods presented:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Net revenues		$	5			$	—			$	10			$	(7	)
Station operating expenses, excluding depreciation and amortization expense			33				—				49				15
Depreciation and amortization			—				—				5				—
Loss before taxes			28				—				53				22
Benefit for income taxes			12				—				22				—

Assets and liabilities related to Emmis Books are classified as discontinued operations in the accompanying condensed consolidated balance sheets as follows:

		February 28, 2009				November 30, 2009
Current assets:
Accounts receivable, net		$	45			$	7
Total current assets			45				7
Current liabilities:
Accounts payable and accrued expenses		$	27			$	—
Total current liabilities			27				—

Uncertain Tax Positions

The Company recognizes the impact of a tax position in the financial statements if it is more likely than not that the position would be sustained on audit based on the technical merits of the position. The nature of the uncertainties pertaining to our income tax position is primarily due to various state tax positions. As of November 30, 2009, we had approximately $1.1 million in unrecognized tax benefits. Accrued interest and penalties related to unrecognized tax benefits is recognized as a component of tax expense. During the nine months ended November 30, 2009, the Company recorded an expense for unrecognized tax benefits, interest and penalties of $0.2 million. As of November 30, 2009, the Company had a liability of $0.1 million for unrecognized tax benefits for interest and penalties. The Company estimates the possible change in unrecognized tax benefits prior to November 30, 2010 could be a reduction of up to $0.6 million due to settlement of ongoing audits.

Reclassifications

Certain reclassifications have been made to the prior year’s financial statements to be consistent with the November 30, 2009 presentation. The reclassifications have no impact on net income previously reported.

Subsequent Events

We have evaluated the financial statements for subsequent events through the time of the filing of this Form 10-Q.

Note 2. Share Based Payments

Stock Option Awards

The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding 10 years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over three years (one-third each year for three years), or cliff vest at the end of three years. The Company issues new shares upon the exercise of stock options.

The amounts recorded as share based compensation expense primarily relate to annual stock option and restricted stock grants, but may also include restricted common stock issued under employment agreements, common stock issued to employees in lieu of cash bonuses, and, in prior periods, Company matches of common stock in our 401(k) plans.

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The Company uses the simplified method to estimate the expected term for all options granted. Although the Company has granted options for many years, the historical exercise activity of our options was impacted by the way the Company processed the equitable adjustment of our November 2006 special dividend. Consequently, the Company believes that reliable data regarding exercise behavior only exists for the period subsequent to November 2006, which is insufficient experience upon which to estimate the expected term. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the nine months ended November 30, 2008 and 2009:

		Nine Months Ended November 30,
		2008				2009
Risk-Free Interest Rate:		2.7% – 3.5%				2.3% – 2.8%
Expected Dividend Yield:		0%				0%
Expected Life (Years):		6.0				6.0 – 6.5
Expected Volatility:		48.6% – 52.3%				72.3% – 100.4%

The following table presents a summary of the Company’s stock options outstanding at November 30, 2009, and stock option activity during the nine months ended November 30, 2009 (“Price” reflects the weighted average exercise price per share):

										Weighted Average				Aggregate
										Remaining				Intrinsic
		Options				Price				Contractual Term				Value
Outstanding, beginning of period			8,350,802			$	14.60
Granted			2,419,085				0.62
Exercised (1)			5,000				0.30
Forfeited			47,918				3.49
Expired			1,637,486				18.85
Outstanding, end of period			9,079,483				10.18				5.8			$	1,396,458
Exercisable, end of period			5,816,760				15.11				3.9			$	—

The weighted average grant date fair value of options granted during the nine months ended November 30, 2008 and 2009, was $1.42 and $0.44, respectively.

A summary of the Company’s nonvested options at November 30, 2009, and changes during the nine months ended November 30, 2009, is presented below:

						Weighted Average
						Grant Date
		Options				Fair Value
Nonvested, beginning of period			1,536,094			$	2.73
Granted			2,419,085				0.44
Vested			644,538				4.06
Forfeited			47,918				1.77
Nonvested, end of period			3,262,723				0.79

There were 1.4 million shares available for future grants under the Company’s various equity plans at November 30, 2009. The vesting date of outstanding options at November 30, 2009 range from February 2010 to July 2012, and expiration dates range from March 2010 to November 2019.

Restricted Stock Awards

The Company granted restricted stock awards to employees and directors of the Company in lieu of certain stock option grants from 2005 through 2008. 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 Company’s 2004 Equity Incentive Plan. The Company also awards, out of the Company’s 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 Company’s restricted stock grants outstanding at November 30, 2009, and restricted stock activity during the nine months ended November 30, 2009 (“Price” reflects the weighted average share price at the date of grant):

		Awards				Price
Grants outstanding, beginning of period			644,084			$	7.08
Granted			30,975				0.29
Vested (restriction lapsed)			245,128				9.92
Forfeited			24,753				4.78
Grants outstanding, end of period			405,178				4.99

The total grant date fair value of shares vested during the nine months ended November 30, 2008 and 2009 was $5.8 million and $2.4 million, respectively.

Recognized Non-Cash Compensation Expense

The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the three months and nine months ended November 30, 2008 and 2009:

		Three Months Ended November 30,								Nine Months Ended November 30,
		2008				2009				2008				2009
Station operating expenses		$	486			$	178			$	2,096			$	517
Corporate expenses			347				559				2,516				1,326
Stock-based compensation expense included in operating expenses			833				737				4,612				1,843
Benefit for income taxes			(342	)			—				(1,891	)			—
Recognized stock-based compensation expense, net of tax		$	491			$	737			$	2,721			$	1,843

As of November 30, 2009, there was $1.9 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 1.5 years.

Note 3. Intangible Assets and Goodwill

Indefinite-lived Intangibles

In accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other, the Company’s Federal Communications Commission (“FCC”) licenses are considered indefinite-lived intangibles. These assets, which the Company determined were its only indefinite-lived intangibles, are not subject to amortization, but are tested for impairment at least annually as discussed below.

The carrying amounts of the Company’s FCC licenses were $496.7 million as of February 28, 2009 and $335.8 million as of November 30, 2009. This amount is entirely attributable to our radio division. The Company generally performs its annual impairment test of indefinite-lived intangibles as of December 1 of each year, but given the continued revenue declines in the radio broadcasting industry and given a recent radio station sale in one of the markets in which we operate, the Company performed an interim impairment test as of August 1, 2009 in connection with the close of its quarter ended August 31, 2009. As a result of the interim impairment test, we recognized a noncash impairment loss of $160.9 million that reduced the carrying value of our FCC licenses in each of our domestic radio markets. The impairment loss mostly stemmed from lower market revenues. During the quarter ended November 30, 2009, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. The required annual impairment tests may result in impairment charges in future periods.

The Company uses a direct-method valuation approach known as the greenfield income valuation method when it performs its 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.

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. The multiple applied to each reporting unit is then adjusted up or down from this benchmark based upon characteristics of the reporting unit’s 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. Therefore, the market multiple used as a benchmark for our publishing reporting units is based on recently completed transactions within the city and regional magazine industry.

This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations.

As of February 28, 2009 and November 30, 2009, the carrying amount of the Company’s goodwill was $29.4 million and $24.2 million, respectively. As of February 28, 2009, approximately $6.3 million and $23.1 million of our goodwill was attributable to our radio and publishing divisions, respectively. As of November 30, 2009, approximately $6.3 million and $17.9 million of our goodwill was attributable to our radio and publishing divisions, respectively. As noted above, due to continued revenue declines in the markets in which we operate, the Company performed an interim impairment test on its goodwill as of August 1, 2009 in connection with the close of its quarter ended August 31, 2009. As a result of the interim impairment test, we recognized a noncash impairment loss of $5.3 million that reduced the carrying value of our goodwill recorded at our Los Angeles Magazine publication. The impairment loss mostly related to lower than expected revenues. During the three months ended May 31, 2009, Emmis recorded an impairment loss of $3.7 million related to goodwill at our Bulgarian radio operations.

There was no impairment of the $9.4 million of goodwill related to our Country Sampler publication, and the fair value of Country Sampler exceeded its carrying value by 7% as of August 1, 2009, our interim impairment testing date. We have generally determined the fair value of our reporting units by using a valuation technique based on multiples of earnings. Our estimate of the fair value of our reporting units may change if our estimate of multiples or earnings of our reporting units changes in future periods. The required annual impairment tests may result in impairment charges in future periods.

During the quarter ended November 30, 2009, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted.

Definite-lived intangibles

The Company’s definite-lived intangible assets consist primarily of foreign broadcasting licenses, trademarks, and favorable office leases, all of which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s 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 assets at February 28, 2009 and November 30, 2009:

						February 28, 2009												November 30, 2009
		Weighted Average				Gross								Net				Gross								Net
		Useful Life				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		(in years)				Amount				Amortization				Amount				Amount				Amortization				Amount
Foreign Broadcasting Licenses			7.3			$	33,848			$	25,524			$	8,324			$	28,950			$	24,945			$	4,005
Trademarks			37.2				3,687				754				2,933				765				465				300
Customer List			N/A				692				460				232				—				—				—
Favorable Office Leases			6.4				688				605				83				688				627				61
Noncompete and Other			N/A				312				164				148				—				—				—
TOTAL						$	39,227			$	27,507			$	11,720			$	30,403			$	26,037			$	4,366

During the nine-months ended November 30, 2009, Emmis determined the carrying value of our Bulgarian foreign broadcast licenses, Orange Coast trademarks, Orange Coast noncompete and other Orange Coast definite-lived intangible assets exceeded their fair value. As such, we recognized a noncash impairment loss of $2.0 million and $2.8 million related to the Bulgarian and Orange Coast definite-lived intangibles, respectively. Total amortization expense from definite-lived intangibles for the nine-month periods ended November 30, 2008 and 2009, was $4.6 million and $2.4 million, respectively. Total amortization expense from definite-lived intangibles for the three-month periods ended November 30, 2008 and 2009, was $1.6 million and $0.7 million, respectively. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:

YEAR ENDED FEBRUARY 28 (29),
2010		$	2,720
2011			1,282
2012			1,278
2013			1,251
2014			119

Note 4. Liquidity

The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, principal and interest payments on its indebtedness and preferred stock dividends. Management’s most recent operating income and cash flow projections considered the current economic crisis, which has reduced advertising demand in general, as well as the restricted credit environment. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through the end of fiscal year 2010 with cash and cash equivalents on hand, projected cash flows from operations and, to the extent necessary, through its borrowing capacity under the Credit Agreement, which was approximately $16.0 million at November 30, 2009. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2010. However, continued global economic challenges, or other unforeseen circumstances, such as those described in Item 1A “Risk Factors” on our Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended February 28, 2009, may negatively impact the Company’s operations beyond those assumed in its projections. Management considered the risks that the current economic conditions may have on its liquidity projections, as well as the Company’s ability to meet its debt covenant requirements. If economic conditions deteriorate to an extent that we could not meet our liquidity needs or it appears that noncompliance with debt covenants is likely to result, the Company would implement several remedial measures, which could include further operating cost and capital expenditure reductions, ceasing to operate unprofitable properties and the sale of assets. If these measures are not successful in maintaining compliance with our debt covenants, the Company would attempt to negotiate for relief through a further amendment with its lenders or waivers of covenant noncompliance, which could result in higher interest costs, additional fees and reduced borrowing limits. There is no assurance that the Company would be successful in obtaining relief from its debt covenant requirements in these circumstances. Failure to comply with our debt covenants and a corresponding failure to negotiate a favorable amendment or waivers with the Company’s lenders could result in the acceleration of the maturity of all the Company’s outstanding debt, which would have a material adverse effect on the Company’s business and financial position.

Note 5. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage interest rate exposure with the following objectives:

•

manage current and forecasted interest rate risk while maintaining optimal financial flexibility and solvency

•

proactively manage the Company’s cost of capital to ensure the Company can effectively manage operations and execute its business strategy, thereby maintaining a competitive advantage and enhancing shareholder value

•

comply with covenant requirements in the Company’s Credit Agreement

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under the terms of its Credit Agreement, the Company was required to fix or cap the interest rate on at least 30% of its debt outstanding (as defined in the Credit Agreement) for the three-year period ending November 2, 2009.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company’s interest rate derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings during the three months or nine months ended November 30, 2008 and 2009.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that an additional $6.0 million will be reclassified as an increase to interest expense over the next twelve months.

As of November 30, 2009, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative		Number of Instruments				Notional
Interest Rate Swaps			3			$	340,000

In March 2007, the Company entered into a three-year interest rate exchange agreement (a “Swap”), whereby the Company pays a fixed rate of 4.795% on $165 million of notional principal to Bank of America, and Bank of America pays to the Company a variable rate on the same amount of notional principal based on the three-month London Interbank Offered Rate (“LIBOR”). In March 2008, the Company entered into an additional three-year Swap, whereby the Company pays a fixed rate of 2.964% on $100 million of notional principal to Deutsche Bank, and Deutsche Bank pays to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR. In January 2009, the Company entered into an additional two-year Swap effective as of March 28, 2009, whereby the Company pays a fixed rate of 1.771% on $75 million of notional principal to Deutsche Bank, and Deutsche Bank pays to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR.

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of February 28, 2009 and November 30, 2009. Accumulated other comprehensive income (loss) balances related to our derivative instruments at February 28, 2009 and November 30, 2009 were ($3,998) and ($3,464), respectively. The fair values of the derivative instruments are estimated by obtaining quotations from the financial institutions that are counterparties to the instruments. The fair value is an estimate of the net amount that the Company would have been required to pay on February 28, 2009 and November 30, 2009, if the agreements were transferred to other parties or cancelled by the Company, as further adjusted by a credit adjustment required by ASC Topic 820, Fair Value Measurements and Disclosures, discussed below.

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

As of February 28, 2009

As of November 30, 2009

As of February 28, 2009

As of November 30, 2009

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

Derivatives designated as hedging instruments under SFAS 133

Interest Rate Swap Agreements (Current Portion)

N/A

$

—

N/A

$

—

N/A

$

—

Other Current Liabilities

$

2,330

Interest Rate Swap Agreements (Long Term Portion)

N/A

—

N/A

—

Other Noncurrent Liabilities

6,777

Other Noncurrent Liabilities

3,913

Total derivatives designated as hedging instruments under SFAS 133

$

—

$

—

$

6,777

$

6,243