10-K 1 emms10k-2014.htm 10-K EMMS 10K-2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 (Mark One)
ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
for the Fiscal Year Ended February 28, 2014
 
¨
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
for the Transition Period from                      to                     .
 
EMMIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
 INDIANA
(State of incorporation or organization)
0-23264
(Commission file number)
35-1542018
(I.R.S. Employer Identification No.)
ONE EMMIS PLAZA
40 MONUMENT CIRCLE
SUITE 700
INDIANAPOLIS, INDIANA 46204
(Address of principal executive offices)
(317) 266-0100
(Registrant’s Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
 
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A common stock, $.01 par value of Emmis Communications Corporation; 6.25% Series A Convertible Preferred Stock, $.01 par value of Emmis Communications Corporation.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the voting stock held by non-affiliates of the registrant, as of August 31, 2013, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $100,517,000.
The number of shares outstanding of each of Emmis Communications Corporation’s classes of common stock, as of May 2, 2014, was:
38,480,820         Class A Common Shares, $.01 par value
4,569,464         Class B Common Shares, $.01 par value
0          Class C Common Shares, $.01 par value
DOCUMENTS INCORPORATED BY REFERENCE
 
Documents
 
Form 10-K Reference
Proxy Statement for 2014 Annual Meeting of Shareholders
expected to be filed within 120 days
 
Part III



2


EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 

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FORWARD-LOOKING STATEMENTS
This report includes or incorporates forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by our use of words such as “intend,” “plan,” “may,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. We cannot guarantee that we will achieve these plans, intentions or expectations. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important facts in various cautionary statements in this report that we believe could cause our actual results to differ materially from forward-looking statements that we make. These include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors.”
The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We undertake no obligation to update or revise any forward-looking statements because of new information, future events or otherwise.


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PART I
 
ITEM 1. BUSINESS.
GENERAL
We are a diversified media company, principally focused on radio broadcasting. We operate the 9th largest radio portfolio in the United States based on total listeners. Emmis owns 18 FM and 3 AM radio stations in New York, Los Angeles, St. Louis, Austin (Emmis has a 50.1% controlling interest in Emmis’ radio stations located there), Indianapolis and Terre Haute, IN and operates two additional stations in New York (one FM and one AM) pursuant to a Local Marketing Agreement (“LMA”) whereby Emmis provides the programming for these stations and sells all advertising within that programming pending its acquisition of the stations. In addition, one of the FM radio stations that Emmis currently owns in New York is operated pursuant to an LMA by a third party.
In addition to our radio properties, we publish several city and regional magazines. Our publishing operations consist of Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati, and Orange Coast.
BUSINESS STRATEGY
We are committed to improving the operating results of our core assets while simultaneously seeking future growth opportunities in related businesses. Our strategy is focused on the following operating principles:
Develop unique and compelling content and strong local brands
Most of our established local media brands have achieved and sustained a leading position in their respective market segments over many years. Knowledge of local markets and consistently producing unique and compelling content that meets the needs of our target audiences are critical to our success. As such, we make substantial investments in areas such as market research, data analysis and creative talent to ensure that our content remains relevant, has a meaningful impact on the communities we serve and reinforces the core brand image of each respective property.
Extend the reach and relevance of our local brands through digital platforms
In recent years, we have placed substantial emphasis on enhancing the distribution of our content through digital platforms, such as the Internet and mobile phones. We believe these digital platforms offer excellent opportunities to further enhance the relationships we have with our audiences by allowing them to consume and share our content in new ways and providing us with new distribution channels for one-to-one communication with them.
Deliver results to advertisers
Competition for advertising revenue is intense and becoming more so. To remain competitive, we focus on sustaining and growing our audiences, optimizing our pricing strategy and developing innovative marketing programs for our clients that allow them to interact with our audiences in more direct and measurable ways. These programs often include elements such as on-air endorsements, events, contests, special promotions, Internet advertising, email marketing, text messaging and online video. Our ability to deploy multi-touchpoint marketing programs allows us to deliver a stronger return-on-investment for our clients while simultaneously generating ancillary revenue streams for our media properties.
Extend sales efforts into new market segments
Given the competitive pressures in many of our “traditional” advertising categories, we are expanding our network of advertiser relationships into not-for-profits, political advertising, corporate philanthropy, environmental initiatives and government agencies. We believe our capabilities can address these clients’ under-served needs. The early return on these efforts has been encouraging and we plan to shift additional resources toward these efforts over time.
Enhance the efficiency of our operations
We believe it is essential that we operate our businesses as efficiently as possible. In response to the 2008 economic recession, we implemented a series of aggressive restructurings and cost cuts. More recently, we have been investing in common technology platforms across all of our radio and publishing entities to help standardize our business processes.
Effectively deploy technology to enhance the value of our media assets
We continue to seek innovative ways to combine or enhance our scalable, low cost FM radio distribution system with digital systems like HD Radio® and wireless broadband to enhance radio’s future through advances like 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 enabled smartphones a rich experience.


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RADIO STATIONS
In the following table, “Market Rank by Revenue” is the ranking of the market revenue size of the principal radio market served by our stations among all radio markets in the United States. Market revenue rankings are from BIA/Kelsey’s Media Access Pro database as of March 26, 2014. “Ranking in Primary Demographic Target” is the ranking of the station within its designated primary demographic target among all radio stations in its market based on the January 2014 Portable People Meter (PPM) results or, in the case of our Terre Haute stations, based on the Fall 2013 Nielsen Survey. A “t” indicates the station tied with another station for the stated ranking. “Station Audience Share” represents a percentage generally computed by dividing the average number of persons in the primary demographic listening to a particular station during specified time periods by the average number of such persons in the primary demographic for all stations in the market area as determined by Nielsen.
STATION AND MARKET
 
MARKET
RANK BY
REVENUE
 
FORMAT
 
PRIMARY
DEMOGRAPHIC
TARGET AGES
 
RANKING IN
PRIMARY
DEMOGRAPHIC
TARGET
 
STATION
AUDIENCE
SHARE
Los Angeles, CA
 
1
 
 
KPWR-FM
 
 
 
Hip-Hop
 
18-34
 
1
 
8.4
New York, NY 1
 
2
 
 
 
 
 
 
 
 
WQHT-FM
 
 
 
Hip-Hop
 
18-34
 
3
 
7.1
St. Louis, MO
 
20
 
 
 
 
 
 
 
 
KPNT-FM
 
 
 
Alternative Rock
 
18-34
 
5
 
8.6
KSHE-FM
 
 
 
Album Oriented Rock
 
25-54
 
4
 
6.6
KIHT-FM
 
 
 
Classic Hits
 
25-54
 
13
 
4.4
KFTK-FM
 
 
 
Talk
 
25-54
 
15t
 
3.0
Austin, TX
 
33
 
 
 
 
 
 
 
 
KLBJ-AM
 
 
 
News/Talk
 
25-54
 
14
 
3.1
KLZT-FM
 
 
 
Mexican Regional
 
18-34
 
6
 
5.7
KBPA-FM
 
 
 
Adult Hits
 
25-54
 
1
 
11.4
KLBJ-FM
 
 
 
Album Oriented Rock
 
25-54
 
7
 
4.7
KGSR-FM
 
 
 
Adult Album Alternative
 
25-54
 
13
 
3.4
KROX-FM
 
 
 
Alternative Rock
 
18-34
 
3
 
7.8
Indianapolis, IN
 
38
 
 
 
 
 
 
 
 
WFNI-AM
 
 
 
Sports Talk
 
25-54
 
19t
 
1.6
WYXB-FM
 
 
 
Soft Adult Contemporary
 
25-54
 
1
 
7.7
WLHK-FM
 
 
 
Country
 
25-54
 
8
 
5.4
WIBC-FM
 
 
 
News/Talk
 
35-64
 
3
 
7.1
Terre Haute, IN
 
227
 
 
 
 
 
 
 
 
WTHI-FM
 
 
 
Country
 
25-54
 
1
 
14.7
WFNF-AM
 
 
 
Sports Talk
 
25-54
 
11
 
0.9
WFNB-FM
 
 
 
Adult Hits
 
25-54
 
6
 
5.5
WWVR-FM
 
 
 
Classic Rock
 
25-54
 
4
 
9.2
1 Our second owned station in New York, WEPN-FM, is operating pursuant to an LMA. Under the terms of the LMA, New York AM Radio LLC, a subsidiary of Disney Enterprises, Inc., provides the programming for the station and sells all advertising within that programming. Emmis continues to own and operate WEPN-FM.
On February 11, 2014, Emmis entered into a Purchase and Sale Agreement with YMF Media LLC ("YMF"), pursuant to which Emmis agreed to purchase the assets of radio stations WBLS-FM and WLIB-AM in New York, NY ("Stations") for $131 million, subject to customary adjustments and prorations. Following approval by the Federal Communications Commission and the satisfaction of other customary closing conditions, the transaction is scheduled to close in two separate closings. The first closing is expected to occur promptly after receipt of the FCC’s consent to the assignment to Emmis of the Stations’ FCC licenses, and will involve YMF transferring WBLS-FM's and WLIB-AM's assets to Emmis and Emmis (i) transferring the Stations’ assets to newly-formed subsidiaries of Emmis, (ii) paying YMF $55 million of the purchase price and (iii) transferring to YMF a 49.9% noncontrolling ownership interest in the Emmis subsidiaries that will own the Stations’ assets. The second

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closing is scheduled to occur on or about February 15, 2015, and will involve the payment of the balance of the purchase price to YMF ($76 million) in exchange for the transfer to Emmis of YMF’s interest in the Emmis subsidiaries that own the Stations’ assets. The Purchase and Sale Agreement contains customary representations, warranties, covenants and indemnities, including liquidated damages in the amount of ten percent of the purchase price and specific performance remedies that may be asserted by either Emmis or YMF.
On February 11, 2014, Emmis entered into an LMA with YMF to program the Stations. The LMA did not commence until March 1, 2014.
In addition to our other radio broadcasting operations, we own and operate Network Indiana, a radio network that provides news and other programming to 90 affiliated radio stations in Indiana.

PUBLISHING OPERATIONS
We publish the following magazines:
 
Monthly
 
Paid & Verified Circulation1
Texas Monthly
300,945

Los Angeles
141,000

Atlanta
68,280

Orange Coast
47,060

Indianapolis Monthly
39,280

Cincinnati
33,960

1 Source: Publisher’s Statement subject to audit by the Alliance for Audited Media or Circulation Verification Council (as of December 31, 2013)
INTERNET AND NEW TECHNOLOGIES
We believe that the growth of the Internet and other new technologies present not only a challenge, but an opportunity for broadcasters and publishers. The primary challenge is increased competition for the time and attention of our listeners and readers. The opportunity is to further enhance the relationships we already have with our listeners and readers by expanding products and services offered by our stations and magazines.
COMMUNITY INVOLVEMENT
We believe that to be successful, we must be integrally involved in the communities we serve. We see ourselves as community partners. To that end, each of our stations and magazines participates in many community programs, fundraisers and activities that benefit a wide variety of organizations. Charitable organizations that have been the beneficiaries of our contributions, marathons, walkathons, dance-a-thons, concerts, fairs and festivals include, among others, Big Brothers/Big Sisters, Coalition for the Homeless, Indiana Black Expo, the Children’s Wish Fund, the National Multiple Sclerosis Foundation and Special Olympics. The National Association of Broadcasters Education Foundation (“NABEF”) has honored us with the Hubbard Award, honoring a broadcaster “for extraordinary involvement in serving the community.” Emmis was the second broadcaster to receive this prestigious honor, after the Hubbard family, for which the award is named. The NABEF also recently recognized Emmis’ WQHT-FM in New York for its outreach after Hurricane Sandy, both for the news coverage it provided and the relief efforts it organized in the weeks after the storm.
INDUSTRY INVOLVEMENT
We have an active leadership role in a wide range of industry organizations. Our senior managers have served in various capacities with industry associations, including as directors of the National Association of Broadcasters, the Radio Advertising Bureau, the Radio Futures Committee, the Nielsen Audio Advisory Council, the Media Financial Management Association, MPA - the Association of Magazine Media, the City and Regional Magazine Association and as founding members of the Radio Operators Caucus and Magazine Publishers of America. Our chief executive officer has been honored with the National Association of Broadcasters’ “National Radio Award” and as Radio Ink’s “Radio Executive of the Year.” Our management and on-air personalities have won numerous industry awards.
COMPETITION
Radio broadcasting stations compete with the other broadcasting stations in their respective market areas, as well as with other advertising media such as newspapers, cable, magazines, outdoor advertising, transit advertising, the Internet, satellite radio and direct marketing. Competition within the broadcasting industry occurs primarily in individual market areas, so that a station in one market (e.g., New York) does not generally compete with stations in other markets (e.g., Los Angeles). In each of

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our markets, our stations face competition from other stations with substantial financial resources, including stations targeting the same demographic groups. In addition to management experience, factors that are material to competitive position include the station’s rank in its market in terms of the number of listeners, authorized power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other stations in the market area. We attempt to improve our competitive position with programming and promotional campaigns aimed at the demographic groups targeted by our stations. We also seek to improve our position through sales efforts designed to attract advertisers that have done little or no radio advertising by emphasizing the effectiveness of radio advertising in increasing the advertisers’ revenues. The policies and rules of the Federal Communications Commission (the “FCC”) permit certain joint ownership and joint operation of local stations. Most of our radio stations take advantage of these joint arrangements in an effort to lower operating costs and to offer advertisers more attractive rates and services. Although we believe that each of our stations can compete effectively in its market, there can be no assurance that any of our stations will be able to maintain or increase its current audience ratings or advertising revenue market share.
Although the broadcasting industry is highly competitive, barriers to entry exist. The operation of a broadcasting station in the United States requires a license from the FCC. Also, the number of stations that can operate in a given market is limited by the availability of the frequencies that the FCC will license in that market, as well as by the FCC’s multiple ownership rules regulating the number of stations that may be owned and controlled by a single entity and cross ownership rules which limit the types of media properties in any given market that can be owned by the same person or company.
ADVERTISING SALES
Our stations and magazines derive their advertising revenue from local and regional advertising in the marketplaces in which they operate, as well as from the sale of national advertising. Local and most regional sales are made by a station’s or magazine’s sales staff. National sales are made by firms specializing in such sales, which are compensated on a commission-only basis. We believe that the volume of national advertising revenue tends to adjust to shifts in a station’s audience share position more rapidly than does the volume of local and regional advertising revenue. During the year ended February 28, 2014, approximately 23% of our total advertising revenues were derived from national sales, and 77% were derived from local sales. For the year ended February 28, 2014, our radio stations derived a higher percentage of their advertising revenues from local and regional sales (81%) than our publishing entities (66%).
EMPLOYEES
As of February 28, 2014, Emmis had approximately 720 full-time employees and approximately 280 part-time employees. Approximately 20 employees are represented by unions at our various radio stations. We consider relations with our employees to be good.
INTERNET ADDRESS AND INTERNET ACCESS TO SEC REPORTS
Our Internet address is www.emmis.com. Through our Internet website, free of charge, you may obtain copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports will be available the same day we electronically file such material with, or furnish such material to, the SEC. We have been making such reports available on the same day they are filed during the period covered by this report.

FEDERAL REGULATION OF BROADCASTING
Radio broadcasting in the United States is subject to the jurisdiction of the FCC under the Communications Act of 1934 (the “Communications Act”), as amended in part by the Telecommunications Act of 1996 (the “1996 Act”). Radio broadcasting is prohibited except in accordance with a license issued by the FCC upon a finding that the public interest, convenience and necessity would be served by the grant of such license. The FCC has the power to revoke licenses for, among other things, false statements made in applications or willful or repeated violations of the Communications Act or of FCC rules. In general, the Communications Act provides that the FCC shall allocate broadcast licenses for radio stations in such a manner as will provide a fair, efficient and equitable distribution of service throughout the United States. The FCC determines the operating frequency, location and power of stations; regulates the equipment used by stations; and regulates numerous other areas of radio broadcasting pursuant to rules, regulations and policies adopted under authority of the Communications Act. The Communications Act, among other things, prohibits the assignment of a broadcast license or the transfer of control of an entity holding such a license without the prior approval of the FCC. Under the Communications Act, the FCC also regulates certain aspects of media that compete with broadcast stations.
The following is a brief summary of certain provisions of the Communications Act and of specific FCC regulations and policies. Reference should be made to the Communications Act as well as FCC rules, public notices and rulings for further information concerning the nature and extent of federal regulation of radio stations. Other legislation has been introduced from time to time which would amend the Communications Act in various respects, and the FCC from time to time considers new regulations or amendments to its existing regulations. We cannot predict whether any such legislation will be enacted or whether

8


new or amended FCC regulations will be adopted or what their effect would be on Emmis.
LICENSE RENEWAL. Radio stations operate pursuant to broadcast licenses that are ordinarily granted by the FCC for maximum terms of eight years and are subject to renewal upon approval by the FCC. The following table sets forth our FCC license expiration dates in addition to the call letters, license classification, antenna elevation above average terrain (for our FM stations only), power and frequency of all owned stations as of April 30, 2014:

 
 
 
 
 
 
 
Expiration Date
of License1
 
 
 
Height Above
Average
Terrain (in feet)
 
Power (in Kilowatts)
Radio Market
Stations
 
City of License
 
Frequency
 
 
FCC Class
 
 
Los Angeles, CA
KPWR-FM
 
Los Angeles, CA
 
105.9

 
December 2021
  
B
 
3,035

 
25
New York, NY
WQHT-FM
 
New York, NY
 
97.1

 
June 2014
2 
B
 
1,339

 
6.7
 
WEPN-FM
 
New York, NY
 
98.7

 
June 2014
2 
B
 
1,362

 
6
St. Louis, MO
KFTK-FM
 
Florissant, MO
 
97.1

 
February 2021
   
C1
 
561

 
100
 
KIHT-FM
 
St. Louis, MO
 
96.3

 
February 2021
   
C1
 
1,027

 
80
 
KPNT-FM
 
Collinsville, IL
 
105.7

 
December  2004
2, 3  
C1
 
835

 
54
 
KSHE-FM
 
Crestwood, MO
 
94.7

 
February 2021
   
C0
 
1,027

 
100
Austin, TX
KBPA-FM
 
San Marcos, TX
 
103.5

 
August 2013
2 
C0
 
1,257

 
100
 
KGSR-FM
 
Cedar Park, TX
 
93.3

 
August 2021
   
C
 
1,926

 
100
 
KLZT-FM
 
Bastrop, TX
 
107.1

 
August 2013
   
C2
 
499

 
49
 
KLBJ-AM
 
Austin, TX
 
590

 
August 2013
2 
B
 
N/A

 
5 D / 1 N
 
KLBJ-FM
 
Austin, TX
 
93.7

 
August 2013
2 
C
 
1,050

 
97
 
KROX-FM
 
Buda, TX
 
101.5

 
August 2013
   
C2
 
847

 
12.5
Indianapolis, IN
WFNI-AM
 
Indianapolis, IN
 
1070

 
August 2020
   
B
 
N/A

 
50 D / 10 N
 
WLHK-FM
 
Shelbyville, IN
 
97.1

 
August 2020
   
B
 
732

 
23
 
WIBC-FM
 
Indianapolis, IN
 
93.1

 
August 2004
2 
B
 
991

 
13.5
 
WYXB-FM
 
Indianapolis, IN
 
105.7

 
August 2020
  
B
 
492

 
50
Terre Haute, IN
WTHI-FM
 
Terre Haute, IN
 
99.9

 
August 2020
  
B
 
489

 
50
 
WWVR-FM
 
West Terre Haute, IN
 
105.5

 
August 2020
  
A
 
295

 
3.3
 
WFNB-FM
 
Brazil, IN
 
92.7

 
August 2020
  
A
 
299

 
6
 
WFNF-AM
 
Brazil, IN
 
1130

 
August 2020
  
D
 
N/A

 
0.5 D / 0.02 N
1 Under the Communications Act, a license expiration date is extended automatically pending action on the renewal application.
2 Renewal application is pending.
3 The FCC has authorized changes in technical facilities for KPNT-FM at a new transmitter site as follows: FCC Class, C1; Height Above Average Terrain, 715 ft; and Effective Radiated Power, 64 kW. The station is authorized to continue operation with its existing facilities until the new facilities are constructed. The KPNT-FM changes require change of the city of license of station KSEF-FM from Farmington, MO to St. Genevieve, MO, which the FCC has approved.
Under the Communications Act, at the time an application is filed for renewal of a station license, parties in interest, as well as members of the public, may apprise the FCC of the service the station has provided during the preceding license term and urge the denial of the application. If such a petition to deny presents information from which the FCC concludes (or if the FCC concludes on its own motion) that there is a “substantial and material” question as to whether grant of the renewal application would be in the public interest under applicable rules and policy, the FCC may conduct a hearing on specified issues to determine whether the renewal application should be granted. The Communications Act provides for the grant of a renewal application upon a finding by the FCC that the licensee:
has served the public interest, convenience and necessity;
has committed no serious violations of the Communications Act or the FCC rules; and
has committed no other violations of the Communications Act or the FCC rules which would constitute a pattern of abuse.
If the FCC cannot make such a finding, it may deny the renewal application, and only then may the FCC consider competing applications for the same frequency. In a vast majority of cases, the FCC renews a broadcast license even when petitions to deny have been filed against the renewal application.
Petitions to deny were filed against the renewal applications for KPNT submitted in 2004 and 2012, and remain pending. An informal objection was filed against the renewal applications of the Company’s Indiana radio stations and was rejected by the FCC, and the licenses of all the Indiana radio stations except WIBC were renewed. Both a petition for reconsideration, and later an application for review, related to the grant of those Indiana license renewals were filed, and both were rejected. A

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petition for reconsideration of the decision denying the application review to the Indiana license renewal applications was subsequently filed, and remains pending. See “PROGRAMMING AND OPERATION.”
REVIEW OF OWNERSHIP RESTRICTIONS. The FCC is required by statute to review all of its broadcast ownership rules on a quadrennial basis (i.e., every four years) and to repeal or modify any of its rules that are no longer “necessary in the public interest.”
Despite several such reviews and appellate remands, the FCC’s rules limiting the number of radio stations that may be commonly owned, or owned in combination with a television station, in a local market have remained largely intact. The most recent FCC quadrennial review decision was appealed by a number of parties (not including Emmis). The Third Circuit issued a decision in July 2011 which upheld the FCC’s decisions regarding all of its rules except for a revised newspaper/broadcast cross-ownership rule, which the Court vacated and remanded to the Commission based on the Court’s finding that the agency had failed to provide adequate notice and opportunity for comment on the changes to that rule. The Supreme Court denied petitions for certiorari of the Third Circuit’s decision in June 2012. Several parties jointly filed a petition for reconsideration of the December 2007 decision with the FCC, and that petition remains pending. In 2010, the FCC again commenced a quadrennial review of its broadcast ownership rules, which it subsequently incorporated into the record of 2104 quadrennial review launched in April 2014. Both the 2010 and 2014 quadrennial reviews remain pending, and we cannot predict whether these proceedings will result in modifications of the ownership rules or the impact (if any) that such modifications would have on our business.
The discussion below reviews the pertinent ownership rules currently in effect as well as the changes in the newspaper/broadcast rule adopted in the FCC’s December 2007 decision, which the FCC has largely proposed to reinstate in its 2010 and 2014 quadrennial reviews.
Local Radio Ownership:
The local radio ownership rule limits the number of commercial radio stations that may be owned by one entity in a given radio market based on the number of radio stations in that market:
if the market has 45 or more radio stations, one entity may own up to eight stations, not more than five of which may be in the same service (AM or FM);
if the market has between 30 and 44 radio stations, one entity may own up to seven stations, not more than four of which may be in the same service;
if the market has between 15 and 29 radio stations, one entity may own up to six stations, not more than four of which may be in the same service; and
if the market has 14 or fewer radio stations, one entity may own up to five stations, not more than three of which may be in the same service, however one entity may not own more than 50% of the stations in the market.
Each of the markets in which our radio stations are located has at least 15 radio stations.
For purposes of applying these numerical limits, the FCC has also adopted rules with respect to (i) so-called local marketing agreements, or “LMAs,” by which the licensee of one radio station provides programming for another licensee’s radio station in the same market and sells all of the advertising within that programming and (ii) so-called joint sale agreements, or “JSAs,” by which the licensee of one station sells the advertising time on another station in the market. Under these rules, an entity that owns one or more radio stations in a market and programs more than 15% of the broadcast time, or sells more than 15% of the advertising time, on another radio station in the same market pursuant to an LMA or JSA is generally required to count the station toward its media ownership limits even though it does not own the station. As a result, in a market where we own one or more radio stations, we generally cannot provide programming to another station under an LMA, or sell advertising on another station pursuant to a JSA, if we could not acquire that station under the local radio ownership rule. In its most recent quadrennial review, the FCC has also sought comment on whether to expand the categories of agreements that are considered for purposes of evaluating compliance with the ownership rules to include agreements such as “shared services agreements” and/or “local news service” agreements.
On April 26, 2012, a subsidiary of Emmis entered into an LMA with New York AM Radio, LLC pursuant to which, commencing April 30, 2012, it began purchasing from Emmis the right to provide programming on radio station WRKS-FM (now WEPN-FM), 98.7FM, New York, NY until August 31, 2024, subject to certain conditions. Disney Enterprises, Inc., the parent company of New York AM Radio, LLC, has guaranteed the obligations under the LMA. Emmis’ subsidiary will retain ownership of the 98.7FM FCC license during the term of the LMA and will receive an annual fee of $8.4 million for the first year of the term under the LMA, which fee will increase by 3.5% each year thereafter until the LMA’s termination.
Although the FCC’s quadrennial review decisions have not changed the numerical caps under the local radio rule, the FCC adjusted the rule in June 2003 by deciding that both commercial and noncommercial stations could be counted in determining the number of stations in a radio market. The decision also altered the definition of the relevant local market for

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purposes of the rule. The FCC “grandfathered” existing station “clusters” not in compliance with the numerical caps as calculated pursuant to the new market definition, but provided that they could be sold intact only to small businesses meeting certain requirements. In December 2007, the FCC expanded this policy to allow an owner to sell a grandfathered station cluster to any buyer, so long as the buyer committed to file, within 12 months, an application with the FCC to transfer the excess station(s) to an eligible small business or to a trust for ultimate sale to such an entity. Subsequently, however, the Third Circuit vacated the FCC’s selected definition of small businesses eligible to purchase clusters that exceed the numerical limits. The change in market definition appears to impact the Austin, Texas market, such that we exceed the numerical cap for FM stations. If we chose to sell our Austin cluster of stations, we would therefore have to “spin off” one FM station to a separate buyer. The FCC has proposed to retain intact its local radio ownership rule, and has sought comment on alternatives to its previous definition of eligible small businesses, in its most recent quadrennial reviews.
Cross-Media Ownership:
The FCC’s radio/television cross-ownership rule generally permits the common ownership of the following combinations in the same market, to the extent permitted under the FCC’s television duopoly rule and local radio rules:
up to two commercial television stations and six commercial radio stations or one commercial television station and seven commercial radio stations in a market where at least 20 independent media voices will remain post-merger;
up to two commercial television stations and four commercial radio stations in a market where at least 10 independent media voices will remain post-merger; and
two commercial television stations and one commercial radio station in a market with less than 10 independent media voices that will remain post-merger.
For purposes of this rule, the FCC counts as “voices” commercial and non-commercial broadcast television and radio stations as well as some daily newspapers and no more than one cable operator. The FCC will consider permanent waivers of its revised radio/television cross-ownership rule only if one of the stations is a “failed station.” The FCC has proposed to eliminate this rule in its most recent quadrennial reviews.
FCC rules also generally prohibit common ownership of a daily newspaper and a radio or television station in the same local market. In its December 2007 quadrennial review decision, the FCC adopted rules that contained a presumption in favor of allowing ownership of one television or radio station in combination with one daily newspaper in the 20 largest media markets. In smaller markets, there would have been a presumption against allowing such ownership. In the case of proposed TV/newspaper combinations, the TV station could not be among the top four ranked stations in its market, and at least eight independently owned and operated TV stations would have had to remain in the market post-transaction. As noted above, the Third Circuit vacated these changes to the newspaper/broadcast cross-ownership ban on procedural grounds. The FCC has largely proposed to reinstate the standards applicable to proposed newspaper/TV combinations in its most recent quadrennial reviews, while at the same time seeking comment on whether to eliminate the newspaper/radio cross-ownership rule.
ALIEN OWNERSHIP. Under the Communications Act, no FCC license may be held by a corporation if more than one-fifth of its capital stock is owned or voted by aliens or their representatives, a foreign government or representative thereof, or an entity organized under the laws of a foreign country (collectively, “Non-U.S. Persons”). Furthermore, the Communications Act provides that no FCC license may be granted to an entity directly or indirectly controlled by another entity of which more than one-fourth of its capital stock is owned or voted by Non-U.S. Persons if the FCC finds that the public interest will be served by the denial of such license. The FCC staff has interpreted this provision to require an affirmative public interest finding to permit the grant or holding of a license, and such a finding has been made only in limited circumstances. In November 2013 the FCC clarified that it would accept requests to allow foreign investment above 25% in broadcast stations, and that it would evaluate those requests on a case-by-case basis to determine whether the requesting party had provided a sufficient public interest showing. The foregoing restrictions on alien ownership apply in modified form to other types of business organizations, including partnerships and limited liability companies. An LMA with a foreign owned company is not prohibited as long as the non-foreign holder of the FCC license continues to control and operate the station. Our Second Amended and Restated Articles of Incorporation and Amended and Restated Code of By-Laws authorize the Board of Directors to prohibit such restricted alien ownership, voting or transfer of capital stock as would cause Emmis to violate the Communications Act or FCC regulations.
ATTRIBUTION OF OWNERSHIP INTERESTS. In applying its ownership rules, the FCC has developed specific criteria that it uses to determine whether a certain ownership interest or other relationship with an FCC licensee is significant enough to be “attributable” or “cognizable” under its rules. Specifically, among other relationships, certain stockholders, officers and directors of a broadcasting company are deemed to have an attributable interest in the licenses held by that company, such that there would be a violation of the FCC’s rules where the broadcasting company and such a stockholder, officer or director together hold attributable interests in more than the permitted number of stations or a prohibited combination of outlets in the same market. The FCC’s regulations generally deem the following relationships and interests to be attributable for purposes of its ownership restrictions:

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all officer and director positions in a licensee or its direct/indirect parent(s);
voting stock interests of at least 5% (or 20%, if the holder is a passive institutional investor, i.e., a mutual fund, insurance company or bank);
any equity interest in a limited partnership or limited liability company where the limited partner or member has not been “insulated” from the media-related activities of the LP or LLC pursuant to specific FCC criteria;
equity and/or debt interests which, in the aggregate, exceed 33% of the total asset value of a station or other media entity (the “equity/debt plus policy”), if the interest holder supplies more than 15% of the station’s total weekly programming (usually pursuant to a time brokerage, local marketing or network affiliation agreement) or is a same-market media entity (i.e., broadcast company or newspaper). In December 2007, the FCC increased these limits under certain circumstances where the equity and/or debt interests are in a small business meeting certain requirements. Subsequently, however, the Third Circuit vacated the FCC’s definition of small businesses eligible to take advantage of the increased limits. The FCC has sought comment on alternatives to its previous definition of eligible small businesses in its 2010 quadrennial review.
To assess whether a voting stock interest in a direct or indirect parent corporation of a broadcast licensee is attributable, the FCC uses a “multiplier” analysis in which non-controlling voting stock interests are deemed proportionally reduced at each non-controlling link in a multi-corporation ownership chain.
Under existing FCC policy, in the case of corporations having a “single majority shareholder,” the interests of minority shareholders are generally not deemed attributable. Because Jeffrey H. Smulyan’s voting interest in the Company currently exceeds 50%, this exemption appears to apply to the Company. Elimination of the exemption is, however, under consideration by the FCC. If the exemption is eliminated, or if Mr. Smulyan’s voting interest falls to or below 50%, then the interests of any minority shareholders that meet or exceed the thresholds described above would become attributable and would be combined with the Company’s interests for purposes of determining compliance with FCC ownership rules.
Ownership-rule conflicts arising as a result of aggregating the media interests of the Company and its attributable shareholders could require divestitures by either the Company or the affected shareholders. Any such conflicts could result in Emmis being unable to obtain FCC consents necessary for future acquisitions. Conversely, Emmis’ media interests could operate to restrict other media investments by shareholders having or acquiring an interest in Emmis.
ASSIGNMENTS AND TRANSFERS OF CONTROL. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors, including compliance with the various rules limiting common ownership of media properties, the “character” of the assignee or transferee and those persons holding attributable interests therein and compliance with the Communications Act’s limitations on alien ownership as well as other statutory and regulatory requirements. When evaluating an assignment or transfer of control application, the FCC is prohibited from considering whether the public interest might be served by an assignment of the broadcast license or transfer of control of the licensee to a party other than the assignee or transferee specified in the application.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to serve the “public interest.” Beginning in the late 1970s, the FCC gradually relaxed or eliminated many of the more formalized procedures it had developed to promote the broadcast of certain types of programming responsive to the needs of a station’s community of license. However, licensees continue to be required to present programming that is responsive to community problems, needs and interests and to maintain certain records demonstrating such responsiveness.
Federal law prohibits the broadcast of obscene material at any time and the broadcast of indecent material during specified time periods; these prohibitions are subject to enforcement by the FCC and carry fines of up to $325,000 per violation.
In August 2004, Emmis entered into a Consent Decree with the FCC, pursuant to which (i) the company adopted a compliance plan intended to avoid future indecency violations, (ii) the company admitted, solely for purposes of the Decree, that certain prior broadcasts were “indecent,” (iii) the company agreed to make a voluntary payment of $300,000 to the U.S. Treasury, (iv) the FCC rescinded its prior enforcement actions against the company based on allegedly indecent broadcasts, and agreed not to use against the company any indecency violations based on complaints within the FCC’s possession as of the date of the Decree or “similar” complaints based on pre-Decree broadcasts, and (v) the FCC found that neither the alleged indecency violations nor the circumstances surrounding a civil suit filed by an announcer at an Emmis station that has since been sold raised any substantial and material questions concerning the company’s qualifications to hold FCC licenses. The Consent Decree was subsequently upheld by a federal court of appeals. Petitions were filed against the license renewal applications of KPNT and the previously owned station, and an informal objection was filed against the license renewals of the company’s Indiana radio stations, in each case based primarily on the matters covered by the Decree. Petitions against KPNT remain pending. The objections against the Indiana license renewals and a petition for reconsideration of the grant of those applications were rejected by the FCC, as were applications for review of those FCC actions. A petition for reconsideration of the decision denying the application for review related to the license renewal applications for the Indiana stations and the previously owned station was later filed, and remains pending. Subsequent to the approval of the Consent Decree, the company has received letters of inquiry from the FCC alleging

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additional violations of the indecency rules. The broadcasts covered by these letters of inquiry are not covered by the Consent Decree and could result in the imposition of liability.
The FCC’s indecency rules have also been the subject of litigation. In July 2010, the Second Circuit held the FCC’s indecency standards to be unconstitutionally vague in violation of the First Amendment. The Second Circuit later vacated the agency decision at issue in another appeal based on its earlier decision. The FCC challenged these rulings in the Supreme Court. In June 2012 the Supreme Court vacated the Second Circuit’s decision, finding that the FCC had failed to provide adequate notice regarding the contours of its indecency policy with respect to the broadcasts at issue in the underlying proceedings, but leaving open the possibility that the agency might be able to enforce the prohibition on broadcast indecency in the future. The Third Circuit issued a decision vacating another FCC indecency ruling in November 2011, and the Supreme Court denied the FCC’s request for review of this decision. It is not clear how the FCC will apply these judicial decisions to outstanding complaints, including those involving Emmis stations, or how they will impact future FCC policies in this area. The FCC has also solicited public comment on whether, and if so how, to revise its indecency enforcement policies, in a proceeding that remains pending.
In 2006, the FCC commenced an industry-wide inquiry into possible violations of sponsorship identification requirements and “payola” in the radio industry. Its initial inquiries were directed to four radio groups (Emmis was not one of them), and in April 2007, those groups entered into Consent Decrees with the FCC to resolve outstanding investigations and allegations. Emmis received similar inquiries from the FCC concerning an individual complaint which alleged violations of the sponsorship identification requirements and submitted responses and in April 2011 entered into a Consent Decree with the FCC to resolve these inquiries. Pursuant to the Consent Decree, (i) the company adopted a compliance plan intended to avoid violations of the sponsorship identification requirements, (ii) the company agreed to make a voluntary payment of $12,000 to the U.S. Treasury, and (iii) the FCC terminated its investigation of the matters covered by the complaint and agreed not to use against the company the facts that it had developed in its investigation of the complaint or the existence of the Consent Decree.
Stations also must pay regulatory and application fees and follow various rules promulgated under the Communications Act that regulate, among other things, political advertising, sponsorship identification, equal employment opportunities, contest and lottery advertisements, and technical operations, including limits on radio frequency radiation.
Failure to observe FCC rules and policies can result in the imposition of various sanctions, including monetary fines, the grant of “short-term” (less than the maximum term) license renewals or, for particularly egregious violations, the denial of a license renewal application or the revocation of a license.
ADDITIONAL DEVELOPMENTS AND PROPOSED CHANGES. The FCC has adopted rules implementing a new low power FM (“LPFM”) service, and approximately 800 such stations are in operation. In November 2007, the FCC adopted rules that, among other things, enhance LPFM’s interference protection from subsequently-authorized full-service stations. Congress then passed legislation eliminating certain minimum distance separation requirements between full-power and LPFM stations, thereby reducing the interference protection afforded to FM stations. As required by the legislation, the FCC in January 2012 submitted a report to Congress indicating that the results of a statutorily mandated economic study indicated that, on the whole, LPFM stations do not currently have, and in the future are unlikely to have, a demonstrable economic impact on full-service commercial FM radio stations. In March 2012, the FCC modified its rules to permit the processing of additional LPFM applications and to implement the legislative requirements regarding interference protection. The FCC opened a window for the filing of applications seeking authority to construct or make major changes to LPFM facilities which extended from October 15 through November 14, 2013, and in which it received more than 2,800 LPFM applications. The FCC continues to process the applications submitted during the window and, despite the findings of the March 2012 FCC study, we cannot predict whether any LPFM stations will interfere with the coverage of our radio stations.
In June 2009, the FCC adopted rules that allow an AM radio station to use currently authorized FM translator stations to retransmit the AM station’s programming within the AM station’s authorized service area.
The FCC also previously authorized the launch and operation of a satellite digital audio radio service (“SDARS”) system. In July 2008, the two original SDARS companies-Sirius Satellite Radio, Inc. and XM Satellite Radio Holdings, Inc.-merged into a new company called Sirius XM, which currently provides nationwide programming service. Sirius XM also offers channels that provide local traffic and weather information for major cities.
In October 2002, the FCC issued an order selecting a technical standard for terrestrial digital audio broadcasting (“DAB,” also known as high definition radio or “HD Radio”). The in-band, on-channel (“IBOC”) technology chosen by the agency allows AM and FM radio broadcasters to introduce digital operations and permits existing stations to operate on their current frequencies in either full analog mode, full digital mode, or a combination of both (at reduced power). In March 2005, the FCC announced that, pending adoption of final rules, it would allow stations on an interim basis to broadcast multiple digital channels. In March 2007, the FCC adopted service rules for HD Radio®. Significantly, the FCC decided to allow FM stations to broadcast digital multicast streams without seeking prior FCC authority, to provide datacasting services, to lease excess digital capacity to third parties, and to offer subscription services pursuant to requests for experimental authority. Under the new rules, FM stations may operate in the “extended hybrid mode,” which provides more flexibility for multicasting and datacasting services; and may use

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separate analog and digital antennas without seeking prior FCC authority. FM translators, FM boosters and low power FM stations may also broadcast digitally where feasible, and AM stations may now operate digitally during nighttime hours. The new rules mandate that broadcasters offering digital service provide at least one free over-the-air signal comparable in quality to their analog signal and that they simulcast their analog programming on their main digital stream, and prohibit broadcasters from operating exclusively in digital. The FCC declined either to set any mandatory deadline for broadcasters to convert to digital operations or to impose additional public interest obligations (beyond those that already apply to analog broadcasters) on digital broadcasters. The FCC did, however, adopt a Further Notice of Proposed Rulemaking seeking comment on (among other things) whether additional public interest obligations are necessary, including consideration of a requirement that radio stations report their public service programming in detail on a standardized form and post that form and all other contents of their public inspection files on the station’s website. (The FCC subsequently imposed such a requirement on television stations. Broadcasters challenged the portions of the requirement related to the political file, and their appeal remains pending.) In January 2010, the FCC revised its DAB service rules to allow FM DAB stations to increase the permitted power levels of DAB transmissions. In September 2008, shortly after approving the Sirius-XM merger, the FCC sought comment on whether it should mandate the inclusion of HD Radio® features in satellite radio receivers. That proceeding remains pending, and we cannot predict its outcome or the impact that a decision might have on our business.
For the license period 2006-2015, Emmis has been paying royalty rates for non-interactive Internet streaming of sound recordings in accordance with a settlement agreement reached in February 2009 between the National Association of Broadcasters (“NAB”) and SoundExchange (the entity that represents the recording industry and receives royalty payments from webcasters). On March 9, 2011, the Copyright Royalty Board (“CRB”) published statutory royalty rates and terms for non-interactive Internet streaming of sound recordings for 2011-2015. The rates do not apply to services, like Emmis’ Internet streaming services, that are governed by the NAB-SoundExchange settlement. For radio broadcasters, however, the CRB modeled the statutory rates after the rates agreed to in the settlement; both sets of rates increase from 0.17 cent per listener per song in 2011 to 0.25 cent per listener per song in 2015. The CRB has commenced a proceeding to set rates for the upcoming 2016-2020 license period, which remains pending. We cannot predict the outcome of that proceeding or determine the impact (if any) on our business of any new rates the CRB may set or the parties may agree to for the upcoming license period.
Legislation has also been introduced in Congress that would require the payment of performance royalties to artists, musicians, or record companies whose music is played on terrestrial radio stations, ending a long-standing copyright law exception. If enacted, such legislation could have an adverse impact on the cost of music programming.
In December 2007, the FCC initiated a proceeding to consider imposing requirements intended to promote broadcasters’ service to their local communities, including (i) requiring stations to establish a “community advisory board,” (ii) reinstating a requirement that a station’s main studio be in its community of license and (iii) imposing local programming “guidelines” that, if not met, would result in additional scrutiny of a station’s license renewal application. While many broadcasters have opposed these proposals, we cannot predict how the FCC will resolve the issue.
In February 2012, Congress passed legislation authorizing the FCC to conduct an incentive auction to redistribute spectrum currently used by television broadcasters and to require television broadcasters that do not participate in the auction to make certain modifications to their transmission facilities. The FCC has commenced proceedings to adopt rules implementing this legislation, which remain pending. The spectrum used by radio broadcasters such as Emmis, however, is not included in this legislation.
Congress and the FCC also have under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of additional matters that could, directly or indirectly, affect the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenues for our broadcast stations and/or affect our ability to acquire additional broadcast stations or finance such acquisitions. Such matters include, but are not limited to:
proposals to impose spectrum use or other fees on FCC licensees;
proposals to repeal or modify some or all of the FCC’s multiple ownership rules and/or policies;
proposals to change rules relating to political broadcasting;
technical and frequency allocation matters;
AM stereo broadcasting;
proposals to modify service and technical rules for digital radio, including possible additional public interest requirements for terrestrial digital audio broadcasters;
proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
proposals to tighten safety guidelines relating to radio frequency radiation exposure;
proposals permitting FM stations to accept formerly impermissible interference;
proposals to reinstate holding periods for licenses;
changes to broadcast technical requirements related to the implementation of SDARS;
proposals to reallocate spectrum associated with TV channels 5 and 6 for FM radio broadcasting;
proposals to modify broadcasters’ public interest obligations;
proposals to limit the tax deductibility of advertising expenses by advertisers; and

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proposals to regulate violence and hate speech in broadcasts.
We cannot predict whether any proposed changes will be adopted, what other matters might be considered in the future, or what impact, if any, the implementation of any of these proposals or changes might have on our business.
The foregoing is only a brief summary of certain provisions of the Communications Act and of specific FCC regulations. Reference should be made to the Communications Act as well as FCC regulations, public notices and rulings for further information concerning the nature and extent of federal regulation of broadcast stations.
GEOGRAPHIC FINANCIAL INFORMATION
The Company’s segments operate exclusively in the United States. We formerly operated radio networks in eastern Europe, all of which had been sold or ceased broadcasting as of February 28, 2013. All financial information related to our international radio operations has been reclassified to discontinued operations in the accompanying consolidated financial statements.

ITEM 1A. RISK FACTORS.
The risk factors listed below, in addition to those set forth elsewhere in this report, could affect the business and future results of the Company. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

Risks Related to our Business
Our results of operations could be negatively impacted by weak economic conditions and instability in financial markets.
We believe that advertising is a discretionary business expense. Spending on advertising tends to decline disproportionately during an economic recession or downturn as compared to other types of business spending. Consequently, a downturn in the United States economy generally has an adverse effect on our advertising revenue and, therefore, our results of operations. A recession or downturn in the economy of any individual geographic market, particularly a major market such as Los Angeles or New York, also generally has a significant effect on us. The 2008 economic recession negatively impacted our results of operations. While economic conditions appear to be improving, unemployment remains high and we cannot ensure that our results of operations won’t be negatively impacted by delays or reversals in the economic recovery or by future economic downturns.
Even with a recovery from the 2008 economic recession, an individual business sector (such as the automotive industry) that tends to spend more on advertising than other sectors might be forced to maintain a reduced level of advertising expenditures if that sector experiences a slower recovery than the economy in general, or might reduce its advertising expenditures further if additional downturns occur. If that sector’s spending represents a significant portion of our advertising revenues, any reduction in its advertising expenditures may affect our revenue.
We may lose audience share and advertising revenue to competing radio stations or other types of media.
We operate in highly competitive industries. Our radio stations compete for audiences and advertising revenue with other radio stations and station groups, as well as with other media. Shifts in population, demographics, audience tastes, consumer use of technology and forms of media and other factors beyond our control could cause us to lose market share. Any adverse change in a particular market, or adverse change in the relative market positions of the stations located in a particular market, could have a material adverse effect on our revenue or ratings, could require increased promotion or other expenses in that market, and could adversely affect our revenue in other markets. Other radio broadcasting companies may enter the markets in which we operate or may operate in the future. These companies may be larger and have more financial resources than we have. Our radio stations may not be able to maintain or increase their current audience ratings and advertising revenue in the face of such competition.
We routinely conduct market research to review the competitive position of our stations in their respective markets. If we determine that a station could improve its operating performance by serving a different demographic within its market, we may change the format of that station. Our competitors may respond to our actions by more aggressive promotions of their stations or by replacing the format we vacate, limiting our options if we do not achieve expected results with our new format.
From time to time, other stations may change their format or programming, a new station may adopt a format to compete directly with our stations for audiences and advertisers, or stations might engage in aggressive promotional campaigns. These tactics could result in lower ratings and advertising revenue or increased promotion and other expenses and, consequently, lower earnings and cash flow for us. Any failure by us to respond, or to respond as quickly as our competitors, could also have an adverse effect on our business and financial performance.

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Because of the competitive factors we face, we cannot assure investors that we will be able to maintain or increase our current audience ratings and advertising revenue.
Our radio operations are heavily concentrated in the New York and Los Angeles markets.
Our radio operations in New York and Los Angeles, including the LMA fee we receive from a subsidiary of Disney, accounted for approximately 50% of our radio revenues in fiscal 2014. Our results from operations can be materially affected by decreased ratings or resulting revenues in either one of these markets. This concentration is expected to increase in fiscal 2015 due to our planned acquisition of WBLS-FM and WLIB-AM in New York.
Our radio operations lack the scale of some of our competitors, especially in the New York and Los Angeles markets.
We currently own one station in Los Angeles and two stations in New York, one of which is being programmed by another broadcaster under the terms of an LMA. Some of our competitors in these markets have larger clusters of radio stations. Our competitors may be able to leverage their market share to extract a greater percentage of available advertising revenues in these markets and may be able to realize operating efficiencies by programming multiple stations in a market. Also, given the reliance on single formats in each of these markets, our results from operations can be materially affected by additional format competition by our competitors. While the acquisition of WBLS-FM and WLIB-AM in New York will increase our scale in that market, we will continue to have fewer stations than several of our competitors in New York.
We must respond to the rapid changes in technology, services and standards that characterize our industry in order to remain competitive, and changes in technology may increase the risk of material intellectual property infringement claims.
The radio broadcasting industry is subject to rapid technological changes, evolving industry standards and the emergence of competition from new technologies and services. We cannot assure that we will have the resources to acquire new technologies or to introduce new services that could compete with these new technologies. Various media technologies and services that have been developed or introduced include:
satellite-delivered digital audio radio service, which has resulted in subscriber-based satellite radio services with numerous niche formats;
audio programming by cable systems, direct-broadcast satellite systems, personal communications systems, Internet content providers and other digital audio broadcast formats;
personal digital audio devices (e.g., audio via Wi-Fi, mobile phones, iPods®, iPhones®, WiMAX, the Internet and MP3 players);
HD Radio®, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; and
low-power FM radio, which could result in additional FM radio broadcast outlets, including additional low-power FM radio signals authorized in December 2010 under the Local Community Radio Act.
New media has resulted in fragmentation in the advertising market, but we cannot predict the impact that additional competition arising from new technologies may have on the radio broadcasting industry or on our financial condition and results of operations. We also cannot ensure that our investments in HD Radio®, TagStation®, NextRadio® and other technologies will produce the desired returns.
Additionally, technological advancements in the operation of radio stations and related businesses have increased the number of patent and other intellectual property infringement claims brought against broadcasters, including Emmis. While Emmis has not historically been subject to material patent and other intellectual property claims and takes certain steps to limit the likelihood of, and exposure to, such claims, no assurance can be given that material claims will not be asserted in the future.
Our business depends heavily on maintaining our licenses with the FCC. We could be prevented from operating a radio station if we fail to maintain its license.
The radio broadcasting industry is subject to extensive and changing regulation. The Communications Act and FCC rules and policies require FCC approval for transfers of control and assignments of FCC licenses. The filing of petitions or complaints against FCC licensees could result in the FCC delaying the grant of, or refusing to grant, its consent to the assignment of licenses to or from an FCC licensee or the transfer of control of an FCC licensee. In certain circumstances, the Communications Act and FCC rules and policies will operate to impose limitations on alien ownership and voting of our common stock. There can be no assurance that there will be no changes in the current regulatory scheme, the imposition of additional regulations or the creation of new regulatory agencies, which changes could restrict or curtail our ability to acquire, operate and dispose of stations or, in general, to compete profitably with other operators of radio and other media properties.
Each of our radio stations operates pursuant to one or more licenses issued by the FCC. Under FCC rules, radio licenses are granted for a term of eight years. Our licenses expire at various times through February 2021. Although we will apply to renew these licenses, third parties may challenge our renewal applications. While we are not aware of facts or circumstances

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that would prevent us from having our current licenses renewed, there can be no assurance that the licenses will be renewed or that renewals will not include conditions or qualifications that could adversely affect our business and operations. Failure to obtain the renewal of any of our broadcast licenses may have a material adverse effect on our business and operations. In addition, if we or any of our officers, directors or significant stockholders materially violates the FCC’s rules and regulations or the Communications Act, is convicted of a felony or is found to have engaged in unlawful anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a petition from a third party or on its own initiative, in its discretion, commence a proceeding to impose sanctions upon us which could involve the imposition of monetary fines, the revocation of our broadcast licenses or other sanctions. If the FCC were to issue an order denying a license renewal application or revoking a license, we would be required to cease operating the applicable radio station only after we had exhausted all rights to administrative and judicial review without success.
The FCC has engaged in vigorous enforcement of its indecency rules against the broadcast industry, which could have a material adverse effect on our business.
The FCC’s rules prohibit the broadcast of obscene material at any time and indecent material between the hours of 6 a.m. and 10 p.m. Broadcasters risk violating the prohibition on the broadcast of indecent material because of the FCC’s broad definition of such material, coupled with the spontaneity of live programming.
Congress has dramatically increased the penalties for broadcasting obscene, indecent or profane programming and broadcasters can potentially face license revocation, renewal or qualification proceedings in the event that they broadcast indecent material. In addition, the FCC’s heightened focus on indecency, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations. As a result of these developments, we have implemented certain measures that are designed to reduce the risk of broadcasting indecent material in violation of the FCC’s rules. These and other future modifications to our programming in an effort to reduce the risk of indecency violations could have an adverse effect on our competitive position.
Any changes in current FCC ownership regulations may negatively impact our ability to compete or otherwise harm our business operations.
The FCC is required to review all of its broadcast ownership rules every four years and to repeal or modify any of its rules that are no longer “necessary in the public interest.” We cannot predict the impact of these reviews on our business or their effect on our ability to acquire broadcast stations in the future or to continue to own and freely transfer stations that we have already acquired.
In 2003, we acquired a controlling interest in five FM stations and one AM station in the Austin, Texas market. Under ownership regulations released after the date of our acquisition, it appears that we would be permitted to own or control only four FM stations in the Austin market (ownership of one AM station would continue to be allowed). The new rules do not require divestiture of existing non-conforming station combinations, but do provide that such clusters may be transferred only to defined small business entities or to buyers that commit to selling any excess stations to such entities within one year. Consequently, if we wish to sell our interest in the Austin stations, we will have to either sell to an entity that meets those FCC requirements or exclude at least one FM station from the transaction.
Changes in current Federal regulations could adversely affect our business operations.
Congress and the FCC have under consideration, and may in the future consider and adopt, new laws, regulations and policies that could, directly or indirectly, affect the profitability of our broadcast stations. In particular, Congress is considering a revocation of radio’s exemption from paying royalties to performing artists for use of their recordings (radio already pays a royalty to songwriters). A requirement to pay additional royalties could have an adverse effect on our business operations and financial performance.
Our business strategy and our ability to operate profitably depend on the continued services of our key employees, the loss of whom could have a material adverse effect on our business.
Our ability to maintain our competitive position depends to a significant extent on the efforts and abilities of our senior management team and certain key employees. Although our executive officers are typically under employment agreements, their managerial, technical and other services would be difficult to replace if we lose the services of one or more of them or other key personnel. Our business could be seriously harmed if one of them decides to join a competitor or otherwise competes directly or indirectly against us.
Our radio stations employ or independently contract with several on-air personalities and hosts of syndicated radio programs with significant loyal audiences in their respective broadcast areas. These on-air personalities are sometimes significantly responsible for the ranking of a station and, thus, the ability of the station to sell advertising. These individuals may not remain with our radio stations and may not retain their audiences.

17


Future operation of our business may require significant additional capital; closing the WBLS-FM/WLIB-AM acquisition will require refinancing our 2012 Credit Agreement.
The continued development, growth and operation of our businesses may require substantial capital. In particular, additional acquisitions may require large amounts of capital. We intend to fund our growth, including acquisitions, if any, with cash generated from operations, borrowings under our Credit Agreement, dated December 28, 2012 (the “2012 Credit Agreement”), and proceeds from future issuances of debt and equity, both public and private. Currently, the 2012 Credit Agreement substantially limits our ability to make acquisitions. Our ability to raise additional debt or equity financing is subject to market conditions, our financial condition and other factors. If we cannot obtain financing on acceptable terms when needed, our results of operations and financial condition could be adversely impacted. Furthermore, in order to consummate our announced acquisition of WBLS-FM and WLIB-AM in New York, we must raise additional debt and refinance the debt currently outstanding under the 2012 Credit Agreement. We cannot ensure that we will be able to raise this indebtedness on acceptable terms, if at all.
We may fail to realize any benefits and incur unanticipated losses related to any acquisition.
The success of our strategic acquisitions will depend, in part, on our ability to successfully integrate the acquired assets with our existing assets. It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers and employees or to achieve the anticipated benefits of the acquisition. Successful integration may also be hampered by any differences between the operations and corporate culture of the two organizations. If we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected. Finally, any cost savings that are realized may be offset by losses in revenues from the acquired business.
Our operating results have been and may again be adversely affected by acts of war, terrorism and natural catastrophes.
Acts of war and terrorism against the United States, and the country’s response to such acts, may negatively affect the U.S. advertising market, which could cause our advertising revenues to decline due to advertising cancellations, delays or defaults in payment for advertising time, and other factors. In addition, these events may have other negative effects on our business, the nature and duration of which we cannot predict.
For example, after the September 11, 2001 terrorist attacks, we decided that the public interest would be best served by the presentation of continuous commercial-free coverage of the unfolding events on our stations. This temporary policy had a material adverse effect on our advertising revenues and operating results for the month of September 2001. Future events like those of September 11, 2001 may cause us to adopt similar policies, which could have a material adverse effect on our advertising revenues and operating results.
Additionally, the attacks on the World Trade Center on September 11, 2001 resulted in the destruction of the transmitter facilities that were located there. Although we had no transmitter facilities located at the World Trade Center, broadcasters that had facilities located in the destroyed buildings experienced temporary disruptions in their ability to broadcast. Since we tend to locate transmission facilities for stations serving urban areas on tall buildings or other significant structures, such as the Empire State Building in New York, further terrorist attacks or other disasters could cause similar disruptions in our broadcasts in the areas affected. If these disruptions occur, we may not be able to locate adequate replacement facilities in a cost-effective or timely manner or at all. Failure to remedy disruptions caused by terrorist attacks or other disasters and any resulting degradation in signal coverage could have a material adverse effect on our business and results of operations.
Similarly, hurricanes, floods, tornadoes, earthquakes, wild fires and other natural disasters can have a material adverse effect on our operations in any given market. While we generally carry insurance covering such catastrophes, we cannot be sure that the proceeds from such insurance will be sufficient to offset the costs of rebuilding or repairing our property or the lost income.
We have significant obligations relating to our current operating leases.
There are proposed changes to the accounting guidance that could require us to recognize our current operating leases on the balance sheet. As of February 28, 2014, we had operating lease commitments of approximately $58.5 million. These leases are classified as operating leases and disclosed in Note 12 to our accompanying consolidated financial statements. Currently, operating leases are classified as off-balance sheet transactions and only the current year operating lease expense is accounted for in the consolidated statements of operations as rent expense. All of our leases, which have been classified as operating leases, require us to make certain estimates at the inception of the lease in order to determine whether the lease is operating or capital. The proposed change would require that substantially all operating leases be recognized as assets (the right to use the leased property) and liabilities (the present value of future lease payments). The effective date has not been determined and may require retrospective adoption. If adopted in its present form, this would result in: (1) an increase in the assets and

18


liabilities reflected on our consolidated balance sheets; and (2) an increase in our interest expense and depreciation and amortization expense and a decrease to our rent expense reflected on our consolidated statements of operations.
Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.
The proper functioning of our internal business processes and information systems is critical to the efficient operation and management of our business. If these information technology systems fail or are interrupted, our operations may be adversely affected and operating results could be harmed. Our business processes and information systems need to be sufficiently scalable to support the future growth of our business and may require modifications or upgrades that expose us to a number of operational risks. Our information technology systems, and those of third party providers, may also be vulnerable to damage or disruption caused by circumstances beyond our control. These include catastrophic events, power anomalies or outages, natural disasters, computer system or network failures, viruses or malware, physical or electronic intrusions, unauthorized access and cyber-attacks. Any material disruption, malfunction or similar challenges with our business processes or information systems, or disruptions or challenges relating to the transition to new processes, systems or providers, could have a material adverse effect on our financial position, results of operations and cash flows.
Because of our holding company structure, we depend on our subsidiaries for cash flow, and our access to this cash flow is restricted.
We operate as a holding company. All of our radio stations and magazines are currently owned and operated by our subsidiaries. Emmis Operating Company(“EOC”), our wholly-owned subsidiary, is the borrower under our credit facility. All of our station and magazine operating subsidiaries and FCC license subsidiaries are subsidiaries of EOC. Further, we guarantee EOC’s obligations under the credit facility and substantially all of EOC’s assets are pledged as collateral under the credit facility. As a holding company, our only source of cash to pay our obligations, including corporate overhead expenses, is cash distributed from our subsidiaries. We currently expect that the majority of the net earnings and cash flow of our subsidiaries will be retained and used by them in their operations, including servicing their debt obligations. Even if our subsidiaries elect to make distributions to us, we cannot be assured that applicable state law and contractual restrictions, including covenants contained in our credit facility, would permit such dividends or distributions.

Risks Related to our Indebtedness:
Our substantial indebtedness could adversely affect our financial health.
We have a significant amount of indebtedness. At February 28, 2014, our total indebtedness was $128.9 million, consisting of $54.0 million under our 2012 Credit Agreement and $74.9 million of 98.7FM nonrecourse debt. The Company expects that proceeds from the LMA in New York with a subsidiary of Disney will be sufficient to pay all debt service related to the 98.7FM nonrecourse debt. Our shareholders’ equity was $35.8 million. Our substantial indebtedness could have important consequences to investors. For example, it could:
make it more difficult for us to satisfy our obligations with respect to our indebtedness;
increase our vulnerability to generally adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
result in higher interest expense in the event of increases in interest rates because some of our debt is at variable rates of interest;
limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
place us at a competitive disadvantage compared to some of our competitors that have less debt; and
limit, along with the financial and other restrictive covenants in our 2012 Credit Agreement, our ability to borrow additional funds.
If we cannot continue to comply with the financial covenants in our debt instruments, or obtain waivers or other relief from our lenders, we may default, which could result in loss of our sources of liquidity and acceleration of our indebtedness.
We have a substantial amount of indebtedness, and the instruments governing such indebtedness contains restrictive financial covenants. Our ability to comply with the covenants in our debt instruments will depend upon our future performance and various other factors, such as business, competitive, technological, legislative and regulatory factors, some of which are beyond our control. We may not be able to maintain compliance with all of these covenants. In that event, we would need to seek an amendment to our debt instruments, or would need to refinance our debt instruments. There can be no assurance that we can obtain future amendments or waivers of our debt instruments, or refinance our debt instruments and, even if so, it is

19


likely that such relief would only last for a specified period, potentially necessitating additional amendments, waivers or refinancings in the future. In the event that we do not maintain compliance with the covenants under our debt instruments, the lenders could declare an event of default, subject to applicable notice and cure provisions, resulting in a material adverse impact on our financial position. Upon the occurrence of an event of default under our debt instruments, the lenders could elect to declare all amounts outstanding under our 2012 Credit Agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. Our lenders under our 2012 Credit Agreement have taken security interests in substantially all of our consolidated assets. If the lenders accelerate the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of our debt instruments, and we cannot be assured that sufficient assets will remain for us to continue our business operations after we have paid all of the borrowings under our debt instruments. Our ability to liquidate assets is affected by the regulatory restrictions associated with radio stations, including FCC licensing, which may make the market for these assets less liquid and increase the chances that these assets will be liquidated at a significant loss.
Our 98.7FM debt is not subject to these risks to the same degree as the debt under our 2012 Credit Agreement, as certain rights and payments under the 98.7FM LMA have been assigned to the holder of the 98.7FM debt, the 98.7FM debt is generally nonrecourse to the rest of Emmis, and the LMA payments have been guaranteed by Disney Enterprises, Inc.
The terms of our indebtedness and the indebtedness of our direct and indirect subsidiaries may restrict our current and future operations, particularly our ability to respond to changes in market conditions or to take some actions.
Our debt instruments impose significant operating and financial restrictions on us. These restrictions significantly limit or prohibit, among other things, our ability and the ability of our subsidiaries to incur additional indebtedness, issue preferred stock, incur liens, pay dividends, enter into asset purchase or sale transactions, merge or consolidate with another company, dispose of all or substantially all of our assets or make certain other payments or investments.
These restrictions currently limit our ability to grow our business through acquisitions and could limit our ability to respond to market conditions or meet extraordinary capital needs. They also could restrict our corporate activities in other ways. These restrictions could adversely affect our ability to finance our future operations or capital needs.
To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our 2012 Credit Agreement requires us to repay $8.0 million of our term notes annually in addition to periodic interest payments. Our ability to make payments on our indebtedness and to fund capital expenditures will depend on our ability to generate cash in the future. This ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our businesses might not generate sufficient cash flow from operations. We might not be able to complete future offerings, and future borrowings might not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We need to refinance all or a portion of our indebtedness in order to fund the acquisition of radio stations WBLS-FM and WLIB-AM. While we believe we have reasonable prospects of refinancing on commercially reasonable terms, we cannot assure investors that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Risks Related to our Common Stock:
One shareholder controls a majority of the voting power of our common stock, and his interest may conflict with those of other shareholders.
As of May 2, 2014, our Chairman of the Board of Directors, Chief Executive Officer and President, Jeffrey H. Smulyan, beneficially owned shares representing approximately 57% of the outstanding combined voting power of all classes of our common stock, as calculated pursuant to Rule 13d-3 of the Exchange Act. He therefore is in a position to exercise substantial influence over the outcome of most matters submitted to a vote of our shareholders, including the election of directors.
The difficulties associated with any attempt to gain control of our company could adversely affect the price of our Class A common stock.
Jeffrey H. Smulyan has substantial influence over the decision as to whether a change in control will occur for our company. There are also provisions contained in our articles of incorporation, by-laws and Indiana law that could make it more difficult for a third party to acquire control of Emmis. In addition, FCC approval for transfers of control of FCC licenses and assignments of FCC licenses are required. These restrictions and limitations could adversely affect the trading price of our Class A common stock.

20


Our stock price and trading volume could be volatile.
Our Class A common stock is currently listed on the Nasdaq Global Select Market under the symbol “EMMS.” The market price of our Class A common stock and our trading volume have been subject to fluctuations since our initial public offering in 1994. Accordingly, the market price of our Class A common stock could experience volatility, regardless of our operating performance.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
The types of properties required to support each of our radio stations include offices, studios and transmitter/antenna sites. We typically lease our studio and office space, although we do own some of our facilities. Most of our studio and office space leases contain lease terms with expiration dates of five to fifteen years. A station’s studios are generally housed with its offices in downtown or business districts. We generally consider our facilities to be suitable and of adequate size for our current and intended purposes. We own many of our main transmitter/antenna sites and lease the remainder of our transmitter/antenna sites with lease terms that generally range from five to twenty years. The transmitter/antenna site for each station is generally located so as to provide maximum market coverage, consistent with the station’s FCC license. In general, we do not anticipate difficulties in renewing facility or transmitter/antenna site leases or in leasing additional space or sites if required. We have approximately $58.5 million in aggregate annual minimum rental commitments under real estate leases. Many of these leases contain escalation clauses such as defined contractual increases or cost-of-living adjustments.
Our principal executive offices are located at 40 Monument Circle, Suite 700, Indianapolis, Indiana 46204, in approximately 91,500 square feet of owned office space which is shared by our Indianapolis radio stations and our Indianapolis Monthly publication. This property is subject to a mortgage under our 2012 Credit Agreement.
We own substantially all of our other equipment, consisting principally of transmitting antennae, transmitters, studio equipment and general office equipment. The towers, antennae and other transmission equipment used by our stations are generally in good condition, although opportunities to upgrade facilities are periodically reviewed.

ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings arising in the ordinary course of business. In the opinion of management of the Company, there are no legal proceedings pending against the Company likely to have a material adverse effect on the Company.
Emmis and certain of its officers and directors were named as defendants in a lawsuit filed April 16, 2012 by certain holders of Preferred Stock (the “Lock-Up Group”) in the United States District Court for the Southern District of Indiana entitled Corre Opportunities Fund, LP, et al. v. Emmis Communications Corporation, et al. The plaintiffs alleged, among other things, that Emmis and the other defendants violated various provisions of the federal securities laws and breached fiduciary duties in connection with Emmis’ entry into total return swap agreements and voting agreements with certain holders of Emmis Preferred Stock, as well as by issuing shares of Preferred Stock to Emmis’ 2012 Retention Plan and Trust (the “Trust”) and entering into a voting agreement with the trustee of the Trust. The plaintiffs also alleged that Emmis violated certain provisions of Indiana corporate law by directing the voting of the shares of Preferred Stock subject to the total return swap agreements (the “Swap Shares”) and the shares of Preferred Stock held by the Trust (the “Trust Shares”) in favor of certain amendments to Emmis’ Articles of Incorporation.
Emmis filed an answer denying the material allegations of the complaint, and filed a counterclaim seeking a declaratory judgment that Emmis may legally direct the voting of the Swap Shares and the Trust Shares in favor of the proposed amendments.
On August 31, 2012, the U.S. District Court denied the plaintiffs' request for a preliminary injunction. Plaintiffs subsequently filed an amended complaint seeking monetary damages and dismissing all claims against the individual officer and director defendants. On February 28, 2014, the U.S. District Court issued a summary judgment in favor of Emmis on all matters in the complaint. The Plaintiffs filed an appeal of the U.S. District Court's decision in March 2014. Emmis is defending this lawsuit vigorously.
Certain individuals and groups have challenged applications for renewal of the FCC licenses of certain of the Company’s stations. The challenges to the license renewal applications are currently pending before the FCC. Emmis does not expect the challenges to result in the denial of any license renewals.

21



EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below is certain information about the executive officers of Emmis or its affiliates who are not directors or nominees to be directors.
NAME
POSITION
 
AGE AT
FEBRUARY 28,
2014
 
YEAR
FIRST
ELECTED
OFFICER
Richard F. Cummings
President—Radio Programming
 
62
 
1984
J. Scott Enright
Executive Vice President, General Counsel and Secretary
 
51
 
1998
Gregory T. Loewen
President—Publishing Division and Chief Strategy Officer
 
42
 
2007
Set forth below is the principal occupation for the last five years of each executive officer of the Company or its affiliates who is not also a director.
Mr. Cummings was appointed President – Radio Programming in March 2009. Mr. Cummings served as Radio Division President from December 2001 to February 2009. Prior to becoming Radio Division President, Mr. Cummings was Executive Vice President of Programming. Mr. Cummings joined Emmis in 1981.
Mr. Enright was appointed Executive Vice President, General Counsel and Secretary in March 2009. Previously, Mr. Enright served as Senior Vice President, Associate General Counsel and Secretary of Emmis from September 2006 to February 2009 and as Vice President, Associate General Counsel and Assistant Secretary from the date he joined Emmis in October 1998, adding the office of Secretary in 2002.
Mr. Loewen was appointed President – Publishing Division and Chief Strategy Officer in March 2010. Previously, Mr. Loewen served as Chief Strategy Officer from February 2007 to February 2010. Prior to joining Emmis in February 2007, Mr. Loewen served as Vice President of Digital Media and Strategy for The Toronto Star.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION FOR OUR COMMON STOCK
Emmis’ Class A common stock is traded in the over-the-counter market and is quoted on the Nasdaq Global Select Market under the symbol EMMS. There is no established public trading market for Emmis’ Class B common stock or Class C common stock.
The following table sets forth the high and low sales prices of the Class A common stock for the periods indicated.
QUARTER ENDED
HIGH
 
LOW
May 2012
1.79

 
0.68

August 2012
2.57

 
1.36

November 2012
2.50

 
1.61

February 2013
2.01

 
1.57

 
 
 
 
May 2013
1.85

 
1.43

August 2013
3.44

 
1.58

November 2013
3.61

 
2.19

February 2014
3.67

 
2.34


22


HOLDERS
At May 2, 2014, there were 5,168 record holders of the Class A common stock, and there was one record holder of the Class B common stock.
DIVIDENDS
Emmis currently intends to retain future earnings for use in its business and has no plans to pay any dividends on shares of its common stock in the foreseeable future. Emmis’ 2012 Credit Agreement sets forth certain restrictions on our ability to pay dividends. See Note 5 to the accompanying consolidated financial statements for more discussion of the 2012 Credit Agreement.
In connection with the September 4, 2012 amendment to the Company’s Articles of Incorporation, all accumulated but undeclared dividends on our Preferred Stock were canceled and the Preferred Stock was changed from cumulative to noncumulative. This amendment is the subject of litigation discussed under Part I, Item 3, “Legal Proceedings.”
SHARE REPURCHASES
During the three-month period ended February 28, 2014, there was withholding of shares of common stock upon vesting of restricted stock to cover withholding tax obligations. The following table provides information on our repurchases during the three months ended February 28, 2014:
Period
(a)
Total Number
of Shares
Purchased
 
(b)
Average Price
Paid Per
Share
 
(c)
Total Number  of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
(d)
Maximum
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans or
Programs (in 000’s)
Class A Common Stock
 
 
 
 
 
 
 
December 1, 2013 - December 31, 2013

 
N/A

 

 
$

January 1, 2014 - January 31, 2014
2,607

 
$
2.74

 

 
$

February 1, 2014 - February 28, 2014
159,272

 
$
3.51

 

 
$

 
161,879

 
 
 

 
 
Series A Non-Cumulative Convertible Preferred Stock
 
 
 
 
 
 
 
December 1, 2013 - December 31, 2013

 
N/A

 

 
$
392,875

January 1, 2014 - January 31, 2014

 
N/A
 

 
$
392,875

February 1, 2014 - February 28, 2014

 
N/A

 

 
$
392,875

 

 
 
 

 
 

PERFORMANCE GRAPH    
The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this performance graph by reference, and shall not otherwise be deemed filed under such Acts.
The following line graph compares the yearly percentage change in the cumulative total shareholder return of our Class A common stock with the cumulative total return of the Nasdaq Stock Market Index and the cumulative total return of an index of certain peer radio broadcasting companies with which the Company competes from February 28, 2009, to the fiscal year ended February 28, 2014. The peer group is comprised of Cumulus Media Inc., Entercom Communications Corp., Radio One, Inc. and Beasley Broadcast Group, Inc. The performance graph assumes that an investment of $100 was made in the Class A common stock and in each index on February 28, 2009 and that all dividends were reinvested.



23



 
2/28/2009

 
2/28/2010

 
2/28/2011

 
2/29/2012

 
2/28/2013

 
2/28/2014

Emmis
$
100.00

 
$
290.32

 
$
354.84

 
$
235.48

 
$
519.35

 
$
1,012.90

NASDAQ
100.00

 
162.45

 
201.93

 
215.33

 
229.36

 
312.67

Peer Group
100.00

 
509.55

 
641.74

 
355.01

 
421.38

 
776.71



ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data as of and for year ended February 28, 2014 and for the four prior years are derived from our audited consolidated financial statements. The selected financial data for the years ended February 28 (29), 2014, 2013 and 2012 and balance sheets as of February 28, 2014 and 2013 are qualified by reference to, and should be read in conjunction with, the corresponding audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report. The selected financial data for the years ended February 28, 2011 and 2010 and the balance sheets as of February 28 (29), 2012, 2011 and 2010 are derived from financial statements not included herein.
Our financial results are not comparable from year to year due to dispositions of radio stations and other businesses, impairments of broadcasting licenses and goodwill and other significant events including:
During the years ended February 28, 2013, 2011 and 2010, we recorded impairment losses in continuing operations of $11.4 million, $7.0 million and $146.3 million, respectively. See the notes accompanying the consolidated financial statements for further discussion of the contributing factors to the impairment;
The Company historically recorded a full valuation allowance on all U.S. (federal and state) deferred tax assets. During the year ended February 28, 2014, principally due to improved operating results, the Company determined that a valuation allowance on most of its deferred tax assets was no longer appropriate and reversed the valuation allowance on all U.S. deferred tax assets (with the exception of certain state NOL DTA's);
Throughout the five-year period ending on February 28, 2014, the Company disposed of numerous radio stations, including both of its stations in Chicago, one station in New York and one station in Los Angeles. The net proceeds from station sales were generally used to pay down long-term debt. The decrease in our long-term debt balance coupled with lower rates on outstanding debt balances subsequent to our debt refinancing in December 2012 substantially decreased our interest expense; and
On September 1, 2011, Emmis sold a controlling interest in WRXP-FM (New York), WLUP-FM (Chicago) and WKQX-FM (Chicago). Emmis retained a preferred equity interest and common equity interest in the

24


company that purchased the stations. Due to its continued equity interests, the Company did not reclassify the results of operations of these stations (which includes a gain on sale of controlling interest of $31.9 million during the year ended February 29, 2012) to discontinued operations, which affects comparability amongst the periods presented below. During the year ended February 29, 2012, Emmis incurred approximately $2.5 million of equity-method losses related to its retained investment in these stations and recorded an other-than-temporary impairment loss of $13.9 million, reducing the carrying amount of the investment to zero.

 
Year ended February 28 (29),
 
2010
 
2011
 
2012
 
2013
 
2014
 
(in 000's, except per share data)
Operating Data:
 
 
 
 
 
 
 
 
 
Net revenues
$
208,222

 
$
216,486

 
$
202,218

 
$
196,084

 
$
205,146

(Loss) income from continuing operations
$
(87,424
)
 
$
(3,319
)
 
$
35,725

 
$
(1,829
)
 
$
48,655

(Loss) income from continuing operations per share (basic)
$
(2.71
)
 
$
(0.46
)
 
$
2.21

 
$
(0.21
)
 
$
1.08

(Loss) income from continuing operations per share (diluted)
$
(2.71
)
 
$
(0.46
)
 
$
0.69

 
$
(0.21
)
 
$
0.94

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
498,168

 
$
472,477

 
$
340,769

 
$
261,624

 
$
265,348

Long-term debt, net of current portion
$
337,758

 
$
327,704

 
$
229,725

 
$
131,494

 
$
114,926

 
 
 
 
 
 
 
 
 
 


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion pertains to Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “Emmis” or the “Company”).
We own and operate radio and publishing properties located 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 weekly for markets measured by the Portable People Meter and four times a year for markets measured by diaries. Because audience ratings in a station’s local market are critical to the station’s financial success, our strategy is to use market research, advertising and promotion to attract and retain audiences in each station’s chosen demographic target group.
Our revenues vary throughout the year. As is typical in the broadcasting industry, our revenues and operating income are usually lowest in our fourth fiscal quarter.
In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services, which can be used by the station in its business operations. These barter transactions are recorded at the estimated fair value of the product or service received. We generally confine the use of such trade transactions to promotional items or services for which we would otherwise have paid cash. In addition, it is our general policy not to preempt advertising spots paid for in cash with advertising spots paid for in trade.
The following table summarizes the sources of our revenues for the past three years. 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, network revenues and barter.
 

25


 
Year ended February 28 (29),
 
2012
 
% of Total
 
2013
 
% of Total
 
2014
 
% of Total
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
Local
$
114,006

 
56.4
%
 
$
103,089

 
52.6
%
 
$
108,010

 
52.7
%
National
34,122

 
16.9
%
 
31,253

 
15.9
%
 
31,995

 
15.6
%
Political
702

 
0.3
%
 
2,242

 
1.1
%
 
604

 
0.3
%
Publication Sales
6,128

 
3.0
%
 
6,141

 
3.1
%
 
6,312

 
3.1
%
Non Traditional
19,177

 
9.5
%
 
19,653

 
10.0
%
 
20,762

 
10.1
%
Interactive
8,242

 
4.1
%
 
8,969

 
4.6
%
 
11,429

 
5.6
%
LMA Fees
310

 
0.2
%
 
8,609

 
4.4
%
 
10,331

 
5.0
%
Other
19,531

 
9.6
%
 
16,128

 
8.3
%
 
15,703

 
7.6
%
Total net revenues
$
202,218

 
 
 
$
196,084

 
 
 
$
205,146

 
 
A significant portion of our expenses varies in connection with changes in revenue. These variable expenses primarily relate to costs in our sales department, such as salaries, commissions and bad debt. Our costs that do not vary as much in relation to revenue are mostly in our programming and general and administrative departments, such as talent costs, syndicated programming fees, utilities, office expenses and salaries. Lastly, our costs that are highly discretionary are costs in our marketing and promotions department, which we primarily incur to maintain and/or increase our audience and market share.
KNOWN TRENDS AND UNCERTAINTIES
Although advertising revenues have stabilized following the 2008 economic recession, radio revenue growth remains challenged. Management believes this is principally the result of two factors: (1) new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, which have gained advertising share against radio and other traditional media and created a proliferation of advertising inventory and (2) the fragmentation of the radio audience and time spent listening caused by satellite radio, internet radio, and digital audio sales has led some investors and advertisers to conclude that the effectiveness of radio advertising has diminished.

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 enabled FM tuner. Most smartphones currently sold in the United States contain an FM tuner. However, most wireless carriers in the United States do not permit the FM tuner to receive the free over-the-air local radio stations it was designed to receive. Furthermore, in many countries outside the United States, enabled FM tuners are made available to smartphone consumers; consequently, radio listening increases. Activating FM as a feature on smartphones sold in the United States 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 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 cause FM tuners to be enabled in all 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.

26


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 approximately 50% of our radio net revenues. During the year ended February 28, 2014, 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. Our dependence on the performance of one station in each of these markets limits our ability to adapt as the competitive environment shifts. 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. On March 1, 2014, we significantly increased our scale in New York when we began programming WBLS-FM and WLIB-AM pursuant to a Local Marketing and Programming Agreement. We expect to consummate our acquisition of these assets during fiscal 2015.
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. To consummate the announced acquisition of WBLS-FM and WLIB-AM in New York, we will refinance the 2012 Credit Agreement. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. See Note 8 to our consolidated financial statements for a discussion of various dispositions.

CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that encompass significant judgments and uncertainties, and potentially derive materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below.
Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.
FCC Licenses and Goodwill
We have made acquisitions in the past for which a significant amount of the purchase price was allocated to FCC licenses and goodwill assets. As of February 28, 2014, we have recorded approximately $163.2 million in goodwill and FCC licenses, which represents approximately 62% of our total assets.
In the case of our 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 a Local Marketing Agreement by another broadcaster.
We complete our annual impairment tests on December 1 of each year and perform additional interim impairment testing whenever triggering events suggest such testing is warranted.
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license.

27


Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. The projections incorporated into our license valuations take current economic conditions into consideration.
Assumptions incorporated into the annual impairment testing as of December 1, 2013 were similar to those used in our December 1, 2012 annual impairment testing. Below are some of the key assumptions used in our annual and interim impairment assessments. The methodology used to value our FCC licenses has not changed in the three-year period ended February 28, 2014.
 
December 1, 2011 

December 1, 2012

December 1, 2013
Discount Rate
11.9% - 12.2%

11.9% - 12.3%

12.0% - 12.4%
Long-term Revenue Growth Rate
2.5% - 3.3%

2.3% - 3.3%

2.3% - 3.1%
Mature Market Share
3.2% - 29.4%

3.2% - 29.4%

3.5% - 30.2%
Operating Profit Margin
26.0% - 37.2%

25.1% - 38.3%

25.0% - 39.1%
In connection with the April 2012 LMA of 98.7FM in New York previously discussed, the Company separated its two New York stations into separate units of accounting. The Company performed an interim impairment test of those licenses during the quarter ended May 31, 2012, and recorded an interim impairment charge of $11.0 million. No further impairment of our FCC licenses was recorded as a result of our December 1, 2012 or December 1, 2013 annual tests.
Valuation of Goodwill
ASC Topic 350 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units (radio stations grouped by market and magazines on an individual basis). Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment. Therefore, the market multiple used as a benchmark for our publishing reporting units is based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. For the annual assessment performed as of December 1, 2013, the Company applied a market multiple of 7.0 times and 5.0 to 7.0 times the reporting unit’s operating performance for our radio and publishing reporting units, respectively. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and market transactions. To corroborate the step-one reporting unit fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit.
This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations. The methodology used to value our goodwill has not changed in the three-year period ended February 28, 2014.
During our December 1, 2012 annual goodwill impairment test, the Company wrote off $0.4 million of goodwill associated with our Indianapolis Monthly publication. Declining operating performance of Indianapolis Monthly resulted in a step-one indication of impairment for Indianapolis Monthly on both the market and income approaches. Upon completing the step-two analysis, the Company determined that the full carrying amount of Indianapolis Monthly goodwill of $0.4 million was impaired. No further impairment of our goodwill was recorded as a result of our December 1, 2013 annual test.
Sensitivity Analysis
Based on the results of our December 1, 2013 annual impairment assessment, the fair value of our broadcasting licenses was approximately $281.5 million which was in excess of the $150.6 million carrying value by $130.9 million, or 87%. The fair values exceeded the carrying values of all of our units of accounting. Should our estimates or assumptions worsen, or

28


should negative events or circumstances occur in the units that have limited fair value cushion, additional license impairments may be needed.
 
Radio Broadcasting Licenses
 
As of
 
 
Unit of Accounting
December 1, 2013
Carrying Value
 
December 1, 2013
Fair Value
 
Percentage by which fair
value exceeds carrying value
WQHT-FM (New York)
2,596

 
61,981

 
2,287.6
%
98.7FM (New York)
60,525

 
61,981

 
2.4
%
Austin Cluster
39,254

 
40,683

 
3.6
%
St. Louis Cluster
27,692

 
30,874

 
11.5
%
Indianapolis Cluster
17,654

 
22,812

 
29.2
%
KPWR-FM (Los Angeles)
2,018

 
62,305

 
2,987.5
%
Terre Haute Cluster
819

 
830

 
1.3
%
Total
150,558

 
281,466

 
86.9
%
If we were to assume a 100 basis points change in any of our three key assumptions (a reduction in the long-term revenue growth rate, a reduction in local commercial share or an increase in the discount rate) used to determine the fair value of our broadcasting licenses on December 1, 2013, the resulting impairment charge would have been $27.7 million, $19.0 million and $11.9 million, respectively. Also, if we were to assume a market multiple decrease of one or a 10% decrease in the two-year average station operating income, two of the key assumptions used to determine the fair value of our goodwill on December 1, 2013, the resulting estimates of enterprise valuations would still exceed the carrying values of the enterprises. As such, step two of the goodwill impairment testing would not be required, thus no goodwill impairment would be recognized if these two key assumptions were lowered.
Deferred Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company’s financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.
Insurance Claims and Loss Reserves
The Company is self-insured for most healthcare claims, subject to stop-loss limits. Claims incurred but not reported are recorded based on historical experience and industry trends, and accruals are adjusted when warranted by changes in facts and circumstances. The Company had $0.5 million and $0.6 million accrued for employee healthcare claims as of February 28, 2013 and 2014, respectively. The Company also maintains large deductible programs (ranging from $100 thousand to $250 thousand per occurrence) for workers’ compensation, employment liability, automotive liability and media liability claims.
ACQUISITIONS, DISPOSITIONS AND INVESTMENTS
The transactions described below impact the comparability of operating results for the three years ended February 28, 2014.
Sale of Slovakia radio operations
On February 25, 2013, Emmis completed the sale of its Slovakian radio network to Bauer Ausland 1 GMBH for $21.2 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. The sale of our Bulgarian radio network on January 3, 2013 created a one-time tax benefit that we could use if we sold the Slovakian network on or before February 28, 2013. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $14.8 million, which is included in income from discontinued operations in the accompanying consolidated statements of operations. Emmis paid approximately $1.7 million to settle working capital adjustments and other transaction related costs during the first quarter of fiscal 2014.

29


Sale of Bulgarian radio operations
On January 3, 2013, Emmis completed the sale of its Bulgarian radio network to Reflex Media EEOD for $1.7 million in cash. Emmis believed the sale of its international radio properties would better enable the Company to focus its efforts on its domestic radio stations. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $1.3 million, which is included in income from discontinued operations in the accompanying consolidated statements of operations. The loss on disposal primarily resulted from the reclassification of accumulated currency translation adjustments.
Sale of Emmis Interactive Inc.
On October 31, 2012, Emmis completed the sale of Emmis Interactive Inc., a subsidiary of Emmis that provided a content management system, data analytic tools and related services, to Marketron Broadcast Solutions, LLC (“Marketron”) for no net proceeds. The sale of Emmis Interactive Inc. allowed Emmis to mitigate expected future operating losses and focus its efforts on its domestic radio operations and other promising technology initiatives. Marketron had assumed operating control of Emmis Interactive, Inc., on October 4, 2012. In connection with the sale, Emmis recorded a loss on sale of assets of approximately $0.7 million, which is primarily related to severance for former employees and is included in income from discontinued operations in the accompanying consolidated statements of operations.
Sale of Sampler Publications
On October 1, 2012, Emmis completed the sale of Country Sampler magazine, Smart Retailer magazine, and related publications (altogether the “Sampler Publications”) and certain real estate used in their operations to subsidiaries of DRG Holdings, LLC. Emmis believed the sale of the Sampler Publications, which were niche crafting publications, would enable it to more clearly focus on its core city and regional publications. Emmis received gross proceeds from the sale of $8.7 million, incurred approximately $0.2 million in transaction expenses and tax obligations, and used the remaining $8.5 million to repay term loans under the Company’s 2006 Credit Agreement. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $0.7 million, which is included in income from discontinued operations in the accompanying consolidated statements of operations
Sale of KXOS-FM
On August 23, 2012, Emmis completed the sale of KXOS-FM in Los Angeles for $85.5 million in cash. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $32.8 million, which is included in income from discontinued operations in the accompanying consolidated statements of operations. KXOS-FM had previously been operating pursuant to a local programming and marketing agreement, which is discussed in more detail in Note 1 to the accompanying consolidated financial statements.
Sale of controlling interest in WRXP-FM, WKQX-FM AND WLUP-FM
On September 1, 2011, the Company completed the sale of a controlling interest in Merlin Media, LLC (“Merlin Media”), which owned the following radio stations: (i) WKQX-FM, 101.1 MHz, Channel 266, Chicago, IL (FIN 19525), (ii) WRXP-FM, 101.9 MHz, Channel 270, New York, NY (FIN 67846) and (iii) WLUP-FM, 97.9 MHz, Channel 250, Chicago, IL (FIN 73233) (collectively the “Merlin Stations”). The Company received gross cash sale proceeds of $130 million in the transaction, and incurred approximately $8.6 million of expenses, principally consisting of severance, state and local taxes, and professional and other fees and expenses. The Company used the net cash proceeds to repay approximately 38% of the term loans then outstanding under its 2006 Credit Agreement. Emmis also paid a $2.0 million exit fee to Canyon related to the repayment of Extended Term Loans on September 1, 2011.
On September 1, 2011, subsidiaries of Emmis entered into the 2nd Amended & Restated Limited Liability Company Agreement (the “LLC Agreement”) of Merlin Media, together with Merlin Holdings, LLC (“Merlin Holdings”), an affiliate of investment funds managed by GTCR, LLC, and Benjamin L. Homel (aka Randy Michaels) (together with Merlin Holdings, the “Investors”).
In connection with the completion of the disposition of assets to Merlin Media and sale of a controlling interest in Merlin Media pursuant to the Purchase Agreement dated June 20, 2011 among the Company, Merlin Holdings and Mr. Homel (the “Purchase Agreement), the Company retained preferred equity and common equity interests in Merlin Media, the terms of which were governed by the LLC Agreement. The Company’s common equity interests in Merlin Media represented 20.6% of the initial outstanding common equity interests of Merlin Media and were subject to dilution if the Company failed to participate pro rata in future capital calls. The fair value of the Company’s 20.6% common equity ownership of Merlin Media LLC as of September 1, 2011 was approximately $5.6 million, and accounted for under the equity method. The Company’s preferred equity interests in Merlin Media consist of approximately $28.7 million (at par) of non-redeemable perpetual preferred interests, on which a preferred return accretes quarterly at a rate of 8% per annum. The fair value of this preferred equity interest as of September 1, 2011, was approximately $10.8 million and is accounted for under the cost method. See Note 1 to the accompanying consolidated financial statements for more discussion of our investments in Merlin Media. The preferred interests held by the Company are junior to initial non-redeemable perpetual preferred interests held by the Investors of

30


approximately $87 million, on which a preferred return accretes quarterly at a rate of 8% per annum. The preferred interests held by the Company and the Investors are both junior to an initial $60 million senior secured note issued to an affiliate of Merlin Holdings. The note matures five years from closing, and interest accrues on the note semi-annually at a rate of 15% per annum, payable in cash or in-kind at Merlin Media’s election. Distributions in respect of Merlin Media’s common and preferred interests are made when declared by Merlin Media’s board of managers. Given the Company’s continued equity interests in the stations, it was precluded from reclassifying the operating results of the stations to discontinued operations.
Upon deconsolidation, Emmis recorded the retained common and preferred equity interests at fair value. The fair value of our investments in Merlin Media LLC was calculated using the Black Scholes option-pricing model. The model’s inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction based upon estimated future cash flows and other estimates at September 1, 2011. Inputs to the model include stock volatility, dividend yields, expected term of the derivatives and risk-free interest rates. Results from the valuation model in one period may not be indicative of future period measurements.
Merlin Media changed the format of WKQX-FM in Chicago and WRXP-FM in New York from a music-intensive format to a news/talk format. Both stations incurred substantial start-up losses well in excess of the original business model used in the September 1, 2011 valuation. Both stations underperformed through February 29, 2012, so much so that station cash flows were expected to be substantially lower than the estimated cash flows used in the September 1, 2011 valuation of our retained common and preferred equity interests. As such, Emmis reassessed the fair value of the retained common and preferred equity interests using the same valuation methodology described above with updated assumptions, and determined that our equity interests were fully impaired. The Company believes that the magnitude of the impairment and the potentially prolonged recovery period indicate that the impairment is other-than-temporary. As such, Emmis wrote-off the remaining carrying value of its investments in Merlin Media LLC. The total equity method loss and other-than-temporary impairment loss recognized related to Merlin Media LLC of $16.4 million is recognized in other income (expense), net in the accompanying consolidated statements of operations. During the year ended February 28, 2013, Merlin Media sold WRXP-FM in New York to a third party and changed the format of WKQX-FM in Chicago to a music-intensive format. During the year ended February 28, 2014, Merlin Media entered into an LMA with Cumulus Media, Inc. ("Cumulus") whereby Cumulus began programming Merlin Media's two remaining radio stations in Chicago. The transaction also includes a put and call feature that will presumably result in Cumulus purchasing Merlin Media's remaining assets within four years. The monthly fees provided for in the LMA with Cumulus plus the put/call price are not sufficient for Emmis to realize any value as a result of its retained preferred and common ownership interests.
Under the LLC Agreement, the Company is entitled initially to appoint one out of five members of Merlin Media’s board of managers and has limited consent rights with respect to specified transactions. The Company has no obligation to make ongoing capital contributions to Merlin Media, but as noted above is subject to dilution if it fails to participate pro rata in future capital calls. As of February 28, 2014, due to our nonparticipation in capital contributions to Merlin Media, our common equity ownership interest is approximately 17.5%.
Merlin Media is a private company and the Company will have limited ability to sell its interests in Merlin Media, except pursuant to customary tag-along rights with respect to sales by Merlin Media’s controlling Investor or, after five years, in a private sale to third parties subject to rights of first offer held by the controlling Investor. The Company has customary registration rights and is subject to a “drag-along” right of the controlling Investor.
On September 30, 2011, the Compensation Committee of the Company’s Board of Directors approved a discretionary bonus of $1.7 million to certain employees that were key participants in the Merlin Media transaction. The discretionary bonus is reflected in corporate expenses, excluding depreciation and amortization expense during the year ended February 29, 2012.
Sale of Glendale, CA Tower Site
On April 6, 2011, Emmis sold land, towers and other equipment at its Glendale, CA tower site to Richland Towers Management Flint, Inc. for $6.0 million in cash. In connection with the sale, Emmis recorded a gain on sale of assets of approximately $4.9 million. Net proceeds from the sale were used to repay amounts outstanding under the 2006 Credit Agreement.

RESULTS OF OPERATIONS


31


YEAR ENDED FEBRUARY 28, 2013 COMPARED TO YEAR ENDED FEBRUARY 28, 2014
Net revenues:
 
For the years ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
Radio
$
138,630

 
$
145,399

 
$
6,769

 
4.9
%
Publishing
57,454

 
59,747

 
2,293

 
4.0
%
Total net revenues
$
196,084

 
$
205,146

 
$
9,062

 
4.6
%
Radio net revenues increased during the year ended February 28, 2014 due to low single-digit market revenue growth and strong operating performance in four of our five measured markets. We typically monitor the performance of our stations against the aggregate performance of the markets in which we operate based on reports for the periods prepared by Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenues basis and exclude revenues from barter arrangements. Miller Kaplan reports are not available for the Terre Haute radio market. A summary of market revenue performance and Emmis’ revenue performance in those markets for the year ended February 28, 2014 is presented below:
 
For the year ended February 28, 2014
 
Overall Market
 
Emmis
Market
Revenue Performance
 
Revenue Performance  1
New York
5.5
 %
 
-2.3
 %
Los Angeles
1.2
 %
 
8.6
 %
St. Louis
-1.6
 %
 
2.7
 %
Indianapolis
-1.6
 %
 
4.2
 %
Austin
5.0
 %
 
10.0
 %
All Markets
2.7
 %
 
4.9
 %
1 Emmis revenue performance in New York reflects only WQHT-FM
We principally attribute our better-than-market revenue growth to three factors: (1) our focus on local sales and our strategy of having the most highly skilled local sales team in each market, (2) our digital initiatives, which generated revenue growth in excess of 25% over the prior year, and (3) our Incite group, which caters to the under-served government, not-for-profit, and corporate philanthropy segment of the local advertising market.
Publishing net revenues increased in the year ended February 28, 2014 as 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.

Station operating expenses excluding depreciation and amortization expense:
 
For the years ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Station operating expenses, excluding depreciation and amortization expense:
 
 
 
 
 
 
 
Radio
$
95,830

 
$
99,924

 
$
4,094

 
4.3
%
Publishing
58,241

 
59,085

 
844

 
1.4
%
Total station operating expenses, excluding depreciation and amortization expense
$
154,071

 
$
159,009

 
$
4,938

 
3.2
%

The increase in station operating expenses, excluding depreciation and amortization expense for our radio division for the year ended February 28, 2014 is mainly attributable to increased noncash compensation expense associated with the 2012 Retention Trust Plan, expenses related to the development and launch of our smartphone application, and higher sales-related costs due to the increase in net revenues.

32


Station operating expenses excluding depreciation and amortization expense for publishing increased during the year ended February 28, 2014 mostly due to increased print production costs, increased noncash compensation expense associated with the 2012 Retention Trust Plan, and continued strategic investments in sales, marketing and digital initiatives.

Corporate expenses excluding depreciation and amortization expense:
 
For the years ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Corporate expenses excluding depreciation and amortization expense
$
17,819

 
$
17,024

 
$
(795
)
 
(4.5
)%

Corporate expenses excluding depreciation and amortization expense decreased during the year ended February 28, 2014 primarily due to a decline in legal expenses associated with our preferred stock litigation and a $1.2 million nonrecurring expense in the prior year related to the forgiveness of a loan to our CEO. These decreases were partially offset by higher noncash compensation expense related to the 2012 Retention Trust Plan and contractual bonuses that were paid in stock.

Hungary license litigation expense:
 
For the year ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Hungary license litigation expense
$
1,381

 
$
2,058

 
$
677

 
49.0
%

On October 28, 2009, the Hungarian National Radio and Television Board (ORTT) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager. Slager ceased broadcasting effective November 19, 2009. The Company believes that the awarding of the license to the other bidder was unlawful. In October 2011, Emmis filed for arbitration with the International Centre for Settlement of Investment Disputes (“ICSID”) seeking resolution of its claim. In April 2014, the ICSID arbitral tribunal ruled that ICSID did not have the jurisdiction to hear the merits of Emmis' claim. The increase in expenses for the year ended February 28, 2014 is mostly due to legal costs incurred in connection with our preparation for the December 2013 ICSID jurisdictional hearing.

Impairment loss on intangible assets:
 
For the year ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Impairment loss on intangible assets
$
11,419

 
$

 
$
(11,419
)
 
(100
)%
In connection with our April 2012 LMA of 98.7FM in New York and in accordance with the Company’s accounting policy, the Company decoupled its two New York FCC licenses into separate units of accounting. The Company performed an interim impairment test of the 98.7FM in New York given its carrying value exceeded the fair value of a single New York FCC license as of our December 2011 impairment test. The Company recorded an $11.0 million impairment loss in connection with the interim review.
In connection with our annual impairment review conducted on December 1, 2012, the Company determined that the goodwill of its Indianapolis Monthly publication was fully impaired and recorded a $0.4 million loss.
Absent further changes in the Company’s determination of units of accounting due to the execution of an LMA or a significant change in the Company’s assumptions used in determining the fair value of its FCC licenses, the Company believes that continued growth of radio revenues makes it unlikely that further impairment losses will be recorded related to its FCC licenses. Furthermore, barring a significant change in the Company’s assumptions used in determining the fair value of its goodwill, the operating performance of our entities with recorded goodwill makes it unlikely that material amounts of goodwill will be written off in future periods. Accordingly, we do not expect historical operating results to be indicative of future operating results.

33


Depreciation and amortization:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Radio
$
2,451

 
$
2,476

 
$
25

 
1.0
 %
Publishing
318

 
235

 
(83
)
 
(26.1
)%
Corporate
1,953

 
2,155

 
202

 
10.3
 %
Total depreciation and amortization
$
4,722

 
$
4,866

 
$
144

 
3.0
 %
The increase in depreciation and amortization for the year ended February 28, 2014 is mostly due to new computer equipment and software placed into service this fiscal year.

Loss (gain) on disposal of fixed assets:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
(As reported, amounts in thousands)
Loss (gain) on disposal of fixed assets:
 
 
 
 
 
Radio
$
(9,897
)
 
$
(10
)
 
$
9,887

Publishing
20

 
2

 
(18
)
Corporate

 

 

Total loss (gain) on disposal of fixed assets:
$
(9,877
)
 
$
(8
)
 
$
9,869

In April 2012, Emmis sold the intellectual property of WRKS-FM in New York for $10.0 million. WRKS-FM’s intellectual property had no carrying value at the time of sale.
Operating income:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Operating income:
 
 
 
 
 
 
 
Radio
$
37,894

 
$
40,951

 
$
3,057

 
8.1
%
Publishing
(1,573
)
 
425

 
1,998

 
127.0
%
Corporate
(19,772
)
 
(19,179
)
 
593

 
3.0
%
Total operating income
$
16,549

 
$
22,197

 
$
5,648

 
34.1
%

Radio operating income increased in the year ended February 28, 2014 principally due to (1) strong operating performance in most of our radio markets, as discussed above, and (2) the 98.7FM LMA, which greatly reduced our operating expenses in New York, coupled with severance and contract termination costs incurred in connection with the LMA transaction in the prior year.
Publishing operating income increased in the year ended February 28, 2014 mostly due to stronger advertising revenue performance at most of our magazines, as discussed above.
Corporate operating losses decreased in the year ended February 28, 2014 mostly due to a decline in legal expenses associated with our preferred stock litigation and a $1.2 million nonrecurring expense in the prior year related to the forgiveness of a loan to our CEO, both of which were previously discussed.


34


Interest expense:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Interest expense
$
(20,899
)
 
$
(7,068
)
 
$
(13,831
)
 
(66.2
)%

Interest expense decreased due to significant repayments of long-term debt throughout fiscal 2013, coupled with lower interest rates on long-term debt as a result of our refinancing activity in December 2012.
Loss on debt extinguishment:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Loss on debt extinguishment
$
(4,508
)
 
$
(653
)
 
$
(3,855
)
 
(85.5
)%

In the prior year the Company recorded a loss on debt extinguishment related to the write-off of debt fees associated with term loans it repaid under our 2006 Credit Agreement. In the current year, the Company recorded a loss on debt extinguishment related to the write-off of debt fees and unamortized debt discount associated with term loans it repaid under our 2012 Credit Agreement.
Other (expense) income, net:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
(As reported, amounts in thousands)
Other (expense) income, net
$
(10
)
 
$
116

 
$
126

Other income for the year ended February 28, 2014 mostly relates to income from equity method investments.
Benefit from income taxes:
 
For the years ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Benefit from income taxes
$
(7,039
)
 
$
(34,063
)
 
$
(27,024
)
 
383.9
%
The Company previously recorded a valuation allowance for its net deferred tax assets, including its net operating loss carryforwards, but excluding deferred tax liabilities related to indefinite-lived intangibles. During the year ended February 28, 2014, due to improved operating results, the Company determined that a valuation allowance on most of its net deferred tax assets was no longer appropriate, and reversed the valuation allowance. Also, during the year ended February 28, 2014, the Company recorded a benefit of approximately $0.7 million related to the favorable settlement of a state tax dispute and a benefit of approximately $0.5 million related to lower than expected state tax liabilities on asset dispositions.
The benefit for income taxes in the year ended February 28, 2013 principally relates to the utilization of previously reserved net operating losses and the tax benefit associated with our impairment loss on the 98.7FM FCC license.
Income from discontinued operations, net of tax:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
(As reported, amounts in thousands)
Income from discontinued operations, net of tax
$
50,080

 
$

 
$
(50,080
)

Our international radio operations in Hungary, Slovakia and Bulgaria, our Emmis Interactive operations, our operations of KXOS-FM and our Country Sampler operations were classified as discontinued operations in the accompanying consolidated statements. These operations all ceased prior to February 28, 2013. The income from discontinued operations, net of tax for the year ended February 28, 2013 mostly relates to the gain on sale recorded in connection with the sale of KXOS-FM and our Slovakian radio operations.

35


Consolidated net income:
 
For the years ended February 28,
 
 
 
 
 
2013
 
2014
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Consolidated net income
$
48,251

 
$
48,655

 
$
404

 
0.8
%
Consolidated net income is mostly flat as improved operating results in the current year, coupled with lower interest expense and the tax benefits associated with the reversal of our valuation allowance, are mostly offset by income from discontinued operations, net of tax, in the prior year.
Gain on extinguishment of preferred stock:
 
For the years ended February 28,
 
 
 
2013
 
2014
 
$ Change
 
(As reported, amounts in thousands)
Gain on extinguishment of preferred stock
$

 
$
325

 
$
325


During the year ended February 28, 2014, the Company purchased 8,650 shares of its preferred stock for an
average price of $12.38 per share. Emmis recognized a gain on extinguishment of the preferred stock equal to the difference of
the acquisition price and the liquidation preference of $50 per share.

YEAR ENDED FEBRUARY 29, 2012 COMPARED TO YEAR ENDED FEBRUARY 28, 2013
Net revenues:
 
For the years ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
Radio
$
144,826

 
$
138,630

 
$
(6,196
)
 
(4.3
)%
Publishing
57,392

 
57,454

 
62

 
0.1
 %
Total net revenues
$
202,218

 
$
196,084

 
$
(6,134
)
 
(3.0
)%
Radio net revenues decreased principally due to the July 15, 2011 commencement of an LMA related to the Merlin Stations and the ultimate sale of a controlling interest in these stations on September 1, 2011. During the time these stations were operated pursuant to the LMA, Emmis recorded, as net revenue, a $0.3 million monthly LMA fee, but did not record advertising sales during this period. Given the Company’s continued equity interests in the stations, it is precluded from reclassifying the operating results of the stations to discontinued operations. Also, the operating results for 98.7FM (formerly known as WRKS-FM in New York) as an adult urban station through April 30, 2012 and the LMA fee revenue recognized since April 30, 2012 have not been classified as discontinued operations. Excluding the Merlin Stations and 98.7FM for both periods presented, radio net revenues would have increased $4.1 million or 3.3%.

36


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 Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenues basis and exclude revenues from barter arrangements. A summary of market revenue performance and Emmis’ revenue performance in those markets for the year ended February 28, 2013 is presented below:
 
For the year ended February 28, 2013
 
Overall Market
 
Emmis
Market
Revenue Performance
 
Revenue Performance  1
New York
-0.6
 %
 
9.8
 %
Los Angeles
1.5
 %
 
4.7
 %
St. Louis
3.0
 %
 
-2.6
 %
Indianapolis
0.0
 %
 
0.8
 %
Austin
0.7
 %
 
3.0
 %
All Markets
0.7
 %
 
3.4
 %
 1 Emmis revenue performance in New York reflects only WQHT-FM and Los Angeles reflects only KPWR-FM
Publishing net revenues were flat for the year ended February 28, 2013 as compared to the year ended February 29, 2012. During the year ended February 28, 2013, the publishing division made an effort to increase the percentage of its advertising sales settled in cash and reduce the amount settled in barter. In prior periods, the level of barter activity was significantly higher than the level of barter activity during fiscal 2013. Excluding barter revenue, publishing net revenues for the year ended February 28, 2013 would have increased approximately $2.3 million or 4.6%.
Station operating expenses excluding depreciation and amortization expense:
 
For the years ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Station operating expenses, excluding depreciation and amortization expense:
 
 
 
 
 
 
 
Radio
$
110,772

 
$
95,830

 
$
(14,942
)
 
(13.5
)%
Publishing
56,522

 
58,241

 
1,719

 
3.0
 %
Total station operating expenses, excluding depreciation and amortization expense
$
167,294

 
$
154,071

 
$
(13,223
)
 
(7.9
)%
Radio station operating expenses, excluding depreciation and amortization expense, decreased principally due to the LMA and eventual sale of the Merlin Stations as previously discussed as well as our LMA of 98.7FM in New York. In connection with the LMA of 98.7FM in April 2012, Emmis’ operating expenses related to that station were reduced dramatically. Excluding the Merlin Stations and 98.7FM, radio station operating expenses, excluding depreciation and amortization expense would have increased $5.0 million or 5.7%. This increase is due to continued targeted investments in sales training and enhancements in our digital capabilities, coupled with higher operating expenses associated with WQHT-FM in New York as shared costs that had previously been spread across three stations in New York are now borne by WQHT-FM.
Publishing operating expenses, excluding depreciation and amortization expense, increased predominately due to increases in advertising expenses.
Corporate expenses excluding depreciation and amortization expense:
 
For the years ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Corporate expenses excluding depreciation and amortization expense
$
19,096

 
$
17,819

 
$
(1,277
)
 
(6.7
)%
During the year ended February 29, 2012, corporate expenses, excluding depreciation and amortization expense, included the following nonrecurring items (i) approximately $0.6 million of indirect costs associated with the preferred stock transactions discussed in Note 3 to the accompanying consolidated financial statements, (ii) approximately $3.0 million of costs associated with the 3rd Amendment to the Company’s 2006 Credit Agreement discussed in Note 5 to the accompanying consolidated financial statements, (iii) a $1.7 million bonus paid to certain employees in connection with the sale of the Merlin

37


Stations and (iv) a $0.7 million discretionary bonus paid to substantially all corporate employees during the quarter ended August 31, 2011.
During the year ended February 28, 2013, corporate expenses, excluding depreciation and amortization expense, included $2.5 million of costs incurred related to preferred stock litigation, a $1.4 million discretionary bonus paid to substantially all corporate employees and $1.2 million related to the forgiveness of a loan to our CEO in connection with his December 2012 employment agreement. These increases were partially offset by a favorable resolution of an accrued expense, resulting in a $1.4 million reduction to corporate expenses.
Hungary license litigation expense:
 
For the year ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Hungary license litigation expense
$
871

 
$
1,381

 
$
510

 
58.6
%
On October 28, 2009, the Hungarian National Radio and Television Board (ORTT) announced that it was awarding to another bidder the national radio license then held by our majority-owned subsidiary, Slager. Slager ceased broadcasting effective November 19, 2009. The Company believes that the awarding of the license to the other bidder was unlawful. In October 2011, Emmis filed for arbitration with the International Centre for Settlement of Investment Disputes (“ICSID”) seeking resolution of its claim. The increase in Slager litigation expense and related costs during the year ended February 28, 2013 is due to additional 3rd party legal costs incurred by Emmis in the prosecution of its claim.
Impairment loss on intangible assets:
 
For the year ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Impairment loss on intangible assets
$

 
$
11,419

 
$
11,419

 
N/A
In connection with our April 2012 LMA of 98.7FM in New York and in accordance with the Company’s accounting policy, the Company decoupled its two New York FCC licenses into separate units of accounting. The Company performed an interim impairment test of the 98.7FM in New York given its carrying value exceeded the fair value of a single New York FCC license as of our December 2011 impairment test. The Company recorded an $11.0 million impairment loss in connection with the interim review.
In connection with our annual impairment review conducted on December 1, 2012, the Company determined that the goodwill of its Indianapolis Monthly publication was fully impaired and recorded a $0.4 million loss.
Absent further changes in the Company’s determination of units of accounting due to the execution of an LMA or a significant change in the Company’s assumptions used in determining the fair value of its FCC licenses, the Company believes that continued growth of radio revenues makes it unlikely that further impairment losses will be recorded related to its FCC licenses. Furthermore, barring a significant change in the Company’s assumptions used in determining the fair value of its goodwill, the operating performance of our entities with recorded goodwill makes it unlikely that material amounts of goodwill will be written off in future periods. Accordingly, we do not expect historical operating results to be indicative of future operating results.
Depreciation and amortization:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Radio
$
2,970

 
$
2,451

 
$
(519
)
 
(17.5
)%
Publishing
365

 
318

 
(47
)
 
(12.9
)%
Corporate
1,390

 
1,953

 
563

 
40.5
 %
Total depreciation and amortization
$
4,725

 
$
4,722

 
$
(3
)
 
(0.1
)%
The decrease in depreciation and amortization expense for our radio segment is mostly attributable to the sale of a controlling interest in the Merlin Stations on September 1, 2011. The increase in corporate depreciation and amortization is mostly due to the implementation of a new customer management system that was internally developed.

38


Loss (gain) on disposal of fixed assets:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
(As reported, amounts in thousands)
Loss (gain) on disposal of fixed assets:
 
 
 
 
 
Radio
$
797

 
$
(9,897
)
 
$
(10,694
)
Publishing
1

 
20

 
19

Corporate

 

 

Total loss (gain) on disposal of fixed assets:
$
798

 
$
(9,877
)
 
$
(10,675
)
In July 2011, Emmis sold its office building in Terre Haute, Indiana for $0.2 million and recorded a loss on sale of assets of $0.8 million. In April 2012, Emmis sold the intellectual property of WRKS-FM in New York for $10.0 million. WRKS-FM’s intellectual property had no carrying value at the time of sale.
Operating income:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Operating income:
 
 
 
 
 
 
 
Radio
$
29,416

 
$
37,894

 
$
8,478

 
28.8
 %
Publishing
504

 
(1,573
)
 
(2,077
)
 
(412.1
)%
Corporate
(20,486
)
 
(19,772
)
 
714

 
3.5
 %
Total operating income
$
9,434

 
$
16,549

 
$
7,115

 
75.4
 %
Most of the change in operating income is related to the effect of the sale of a controlling interest in the Merlin Media Stations and the LMA of 98.7FM. As previously discussed, the operations of the Merlin Media stations remain in continuing operations given the Company’s retained investment in the stations. The operating loss for these stations during fiscal 2012 was approximately $4.9 million. Also contributing to the increase in operating income was the 98.7FM LMA in New York. In connection with the LMA, the Company’s operating expenses of that station were significantly reduced, but the Company continues to receive an LMA payment. The impairment losses recorded during the year ended February 28, 2013 are mostly negated by the gain on sale of WRKS-FM’s intellectual property.
Interest expense:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Interest expense
$
19,904

 
$
20,899

 
$
995

 
5.0
%
Although we repaid a significant amount of long-term debt during the year ended February 28, 2013, interest expense increased due to interest incurred on the senior unsecured notes which were issued late in fiscal 2012 and exit fees paid on our extended term loans during fiscal 2013. The company refinanced its debt on December 28, 2012 and expects that interest expense for fiscal 2014 will be materially lower than prior periods.
In accordance with the provisions of Accounting Standards Codification (“ASC”) 205-20-45, the Company allocated interest expense to discontinued operations associated with the portion of term loans required to be repaid as a result of dispositions.
Loss on debt extinguishment:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Loss on debt extinguishment
$
2,006

 
$
4,508

 
$
2,502

 
124.7
%
During the year ended February 29, 2012, the Company recorded a $0.5 million loss related to the write-off of debt fees associated with term loans repaid during the year. Additionally, the Company recorded a $1.5 million loss related to the write-

39


off of debt fees associated with term loans that were deemed to be substantially modified in connection with the Third Amendment to the 2006 Credit Agreement.
During the year ended February 28, 2013, the Company recorded a $3.1 million loss related to the write-off of debt fees and the redemption premium related to the full repayment of its senior unsecured notes. Also, the Company recorded a $1.4 million loss related to the write-off of debt fees associated with the 2006 Credit Agreement that was repaid on various dates throughout fiscal 2013.
Gain on sale of controlling interest Merlin Media LLC:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
(As reported, amounts in thousands)
Gain on sale of controlling interest in Merlin Media LLC
$
31,865

 
$

 
$
(31,865
)
On September 1, 2011, the Company sold a controlling interest in Merlin Media LLC for $130 million in cash proceeds. Additionally, the Company retained a preferred and common equity interest in Merlin Media LLC. The gain on sale of controlling interest was measured as the aggregate of cash received and the fair value of the retained noncontrolling interests in Merlin Media LLC, less the Company’s carrying value of the assets and liabilities sold.
Other expense, net:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
(As reported, amounts in thousands)
Other expense, net
$
15,951

 
$
10

 
$
(15,941
)
Other expense, net for the year ended February 29, 2012, principally relates to the Company’s share of Merlin Media LLC’s losses through its investment in Merlin Media LLC’s common equity interests and an other-than-temporary impairment loss on the Company’s investment in both the common equity interests and preferred equity interests of Merlin Media LLC, all of which was $16.4 million. Partially offsetting the losses related to our investments in Merlin Media LLC was income related to our other equity method investments as well as interest income.
Benefit from income taxes:
 
For the years ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Benefit from income taxes
$
(32,287
)
 
$
(7,039
)
 
$
25,248

 
(78.2
)%
The benefit for income taxes for the year ended February 29, 2012, principally relates to the utilization of previously reserved net operating losses and the elimination of the portion of the Company’s deferred tax liability attributable to indefinite-lived intangibles associated with the sale of the Merlin Stations.
The benefit for income taxes in the year ended February 28, 2013 principally relates to the utilization of previously reserved net operating losses and the tax benefit associated with our impairment loss on the 98.7FM FCC license.
Income (loss) from discontinued operations, net of tax:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
(As reported, amounts in thousands)
Income (loss) from discontinued operations, net of tax
$
(4,997
)
 
$
50,080

 
$
55,077

Discontinued operations consist of our international radio operations (Hungary, Slovakia and Bulgaria), KXOS-FM in Los Angeles, the operations of our Flint Peak Tower Site, Emmis Interactive, and Country Sampler and related publications. The increase in income from discontinued operations, net of tax, for the year ended February 28, 2013 mostly relates to the $32.8 million gain on sale of KXOS-FM and the $14.8 million gain on sale of our Slovakian radio operations.
For a description of properties sold, see the discussion in Note 1(j) and Note 8 to our accompanying consolidated financial statements.

40


Consolidated net income:
 
For the years ended February 28 (29),
 
 
 
 
 
2012
 
2013
 
$ Change
 
% Change
 
(As reported, amounts in thousands)
 
 
Consolidated net income
$
30,728

 
$
48,251

 
$
17,523

 
57.0
%
The increase in consolidated net income is mostly due to the gain on sale of our discontinued operations during fiscal 2013 as noted above, which is partially offset by the prior year gain on sale of a controlling interest in the Merlin Media Stations and the related impairment of our investment in Merlin Media, all net of tax.
Gain on extinguishment of preferred stock:
 
For the years ended February 28 (29),
 
 
 
2012
 
2013
 
$ Change
 
(As reported, amounts in thousands)
Gain on extinguishment of preferred stock
$
61,892

 
$

 
$
(61,892
)
During the year ended February 29, 2012, the Company purchased or purchased rights in 1,871,529 shares of its preferred stock for $31.7 million. Prior to the September 4, 2012 amendments to the Company’s Articles of Incorporation, preferred stock was carried on the balance sheet at its stated liquidation preference of $50 per share. The shares that Emmis purchased rights in are considered extinguished from an accounting perspective, and thus Emmis recognized a gain on extinguishment of the preferred stock equal to the difference of the acquisition price and the carrying amount of the preferred stock.

LIQUIDITY AND CAPITAL RESOURCES
CREDIT AGREEMENT
On December 28, 2012, Emmis Operating Company (“EOC”), a wholly owned subsidiary of Emmis, entered into a credit facility (the “2012 Credit Agreement”) to provide for total borrowings of up to $100 million, including (i) an $80 million term loan and (ii) a $20 million revolver, of which $5 million may be used for letters of credit.
A portion of the proceeds under the 2012 Credit Agreement were used to repay (i) EOC’s indebtedness under and terminate the 2006 Credit Agreement, for which Bank of America, N.A. acted as administrative agent and (ii) the Note Purchase Agreement dated as of November 11, 2011 between Emmis Communications Corporation, as Issuer, and Zell Credit Opportunities Master Fund, L.P., as Purchaser, as amended, (“Senior Unsecured Notes”).
In addition to repaying in full the 2006 Credit Agreement and the Senior Unsecured Notes, the proceeds of the borrowings under the 2012 Credit Agreement were used for working capital needs and other general corporate purposes of Emmis, and certain other transactions permitted under the 2012 Credit Agreement.
All outstanding amounts under the 2012 Credit Agreement bear interest, at the option of EOC, at a rate equal to the Eurodollar Rate or an alternative base rate (as defined in the 2012 Credit Agreement) plus a margin. The margin over the Eurodollar Rate or the alternative base rate varies (ranging from 2.50% to 5.00%), depending on Emmis’ ratio of consolidated total debt to consolidated EBITDA, as defined in the agreement. Interest is due on a calendar month basis under the alternative base rate and at least every three months under the Eurodollar Rate. Beginning 60 days after closing, the 2012 Credit Agreement required Emmis to maintain fixed interest rates, for at least one year, on a minimum of 50% of its total outstanding debt, as defined.
The term loan and revolver both mature on December 28, 2017. Beginning on April 1, 2013, the borrowings under the term loan are payable in quarterly installments equal to 2.50% of the term loan, with the remaining balance payable December 28, 2017. Proceeds from raising additional equity, issuing additional subordinated debt or from asset sales, as well as excess cash flow, subject to certain exceptions, are required to be used to repay amounts outstanding under the 2012 Credit Agreement.
In February 2013, the Company entered into a two-year interest rate exchange agreement (a “Swap”), whereby the Company pays a fixed rate of 0.42% on $40 million of notional principal to Fifth Third Bank, and Fifth Third Bank pays to the Company a variable rate on the same amount of notional principal based on the one-month London Interbank Offered Rate (“LIBOR”). This agreement was the Company’s only interest rate derivative designated as a cash flow hedge of interest rate risk outstanding as of February 28, 2014.
Borrowing under the 2012 Credit Agreement 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

41


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 2012 Credit Agreement provides that an event of default will occur if there is a “change in control” of Emmis, as defined. The payment of principal, premium and interest under the 2012 Credit Agreement 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 2012 Credit Agreement.
SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash provided by operations and cash available through revolver borrowings under our credit facility. Our primary uses of capital during the past few years have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements, repayment of debt and investments in future growth opportunities in related businesses.
At February 28, 2014, we had cash and cash equivalents of $5.3 million and net working capital of $4.8 million. At February 28, 2013, we had cash and cash equivalents of $8.7 million and net working capital of $5.8 million. Cash and cash equivalents held at various European banking institutions at February 28, 2013 and 2014 was $6.3 million and $1.2 million, respectively. 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.
Operating Activities
Cash flows provided by operating activities were $24.7 million and $1.8 million for the years ended February 28, 2014 and 2013, respectively. The increase in cash flows provided by operating activities was mainly attributable to lower interest expense coupled with an increase in radio operating income.
Cash flows provided by operating activities were $3.8 million and $1.8 million for the years ended February 28 (29), 2012 and 2013, respectively. The decrease in cash flows provided by operating activities was mainly attributable to higher interest expense, partially offset by an increase in radio operating income.
Investing Activities
For the year ended February 28, 2014, cash used in investing activities of $5.4 million primarily consisted of $3.1 million of capital expenditures, $1.7 million related to the settlement of transaction fees and working capital adjustments associated with the sale of our Bulgarian and Slovakian radio operations which are included in discontinued operations and $0.7 million of additional investments, net of distributions from investments.
For the years ended February 28 (29), 2012 and 2013, cash flows provided by investing activities were $131.3 million and $114.0 million, respectively. These amounts mostly relate to cash received from the sale of our controlling interest in the Merlin Media Stations during fiscal 2012 of $130.0 million and the cash generated by our discontinued operations of $113.8 million in fiscal 2013, most of which related to the sale of Country Sampler and related publications, KXOS-FM and our Bulgarian and Slovakian radio operations.
Financing Activities
Cash flows used in financing activities were $22.8 million, $112.9 million and $135.3 million for the years ended February 28 (29) 2014, 2013 and 2012, respectively.
Cash used in financing activities for the year ended February 28, 2014 primarily relates to net payments related to our senior credit agreement and senior unsecured notes of $17.1 million, distributions to noncontrolling interests of $4.6 million and the settlement of tax withholding obligations of $1.1 million.
Cash used in financing activities for the year ended February 28, 2013 primarily relates to net payments related to our senior credit agreement and senior unsecured notes of $98.5 million, payments for other debt-related costs of $9.3 million and distributions to noncontrolling interests of $5.1 million.
Cash used in financing activities for the year ended February 29, 2012 primarily relates to net payments related to our senior credit agreement of $127.2 million, payments to either purchase or purchase rights in preferred stock of $31.7 million, payments for other debt-related costs of $4.2 million and distributions to noncontrolling interests of $4.2 million, all of which are partially offset by the issuance of senior unsecured notes of $31.9 million.
As of February 28, 2014, Emmis had $54.0 million of borrowings under the 2012 Credit Agreement ($8.0 million current and $46 million long-term), $74.9 million of non-recourse debt ($4.5 million current and $70.4 million long-term) and $46.5 million of Preferred Stock liquidation preference. Borrowings under the 2012 Credit Agreement debt bears interest, at our option, at a rate equal to the Eurodollar rate or an alternative Base Rate plus a margin. The non-recourse debt bears interest at

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4.1% per annum. As of February 28, 2014, our weighted average borrowing rate under our 2012 Credit Agreement including the effect of our interest rate exchange agreement was approximately 4.4%.
The debt service requirements of Emmis over the next twelve-month period are expected to be $9.8 million related to our 2012 Credit Agreement ($8.0 million of mandatory repayments of term notes and $1.8 million of interest related to our interest rate exchange agreement) and $7.5 million related to our 98.7FM non-recourse debt ($4.5 million of principal repayments and $3.0 million of interest payments). The Company expects that proceeds from the 98.7FM LMA will be sufficient to pay all debt service related to the 98.7FM non-recourse debt. The 2012 Credit Agreement debt bears interest at variable rates and is not included in the debt service requirements previously discussed.
On September 4, 2012, following approval by the Company’s shareholders, the Company filed amendments to its Articles of Incorporation that modify the rights of holders of the Company’s Preferred Stock. The amendments:
canceled the amount of undeclared dividends in respect of the Preferred Stock that were accumulated but undeclared on or prior to the effectiveness of the Proposed Amendments;
changed the designation of the Preferred Stock from “Cumulative” to “Non-Cumulative” and changed the rights of the holders of the Preferred Stock such that dividends or distributions on the Preferred Stock will not accumulate unless declared by the board of directors and subsequently not paid (and thereby effectively canceled associated rights to elect directors in the event of dividend arrearages);
canceled the restrictions on Emmis’ ability to pay dividends or make distributions on, or repurchase, its Common Stock or other junior stock prior to paying accumulated but undeclared dividends or distributions on the Preferred Stock;
changed the ability of the holders of the Preferred Stock to require Emmis to repurchase all of such holders’ Preferred Stock upon certain going-private transactions in which an affiliate of Mr. Smulyan participates that do not constitute a change of control transaction, to cause the holders of the Preferred Stock to no longer have such ability;
changed the ability of the holders of the Preferred Stock to convert all of such Preferred Stock to Class A Common Stock upon a change of control at specified conversion prices to cause the holders of the Preferred Stock to no longer have such ability;
changed the ability of holders of the Preferred Stock to vote as a separate class on a plan of merger, share exchange, sale of assets or similar transaction to the ability to vote with the Common Stock on an as-converted basis (except as may otherwise be required by law); and
changed the conversion price adjustment applicable to certain merger, reclassification and other transactions to provide that the Preferred Stock converts into the right to receive property that would have been receivable had such Preferred Stock been converted into Class A Common Stock immediately prior to such transaction.
As a result of the elimination of the rights of holders of Preferred Stock to require Emmis to repurchase all of such holders’ Preferred Stock in certain going-private transactions, the Preferred Stock was reclassified from temporary equity to permanent equity. Additionally, the cancellation of the cumulative feature of the Preferred Stock and the cancellation of accumulated but undeclared preferred dividends modified earnings per share calculations as the numerator in the calculation no longer includes undeclared preferred dividends. Certain holders of our Preferred Stock have challenged the validity of these amendments. See further discussion under Item 3, Legal Proceedings
As of May 2, 2014, we had $16.0 million available for additional borrowing under our credit facility. Availability under the credit facility depends upon our continued compliance with certain operating covenants and financial ratios. Emmis was in compliance with these covenants as of February 28, 2014. As part of our business strategy, we continually evaluate potential acquisitions of radio stations, publishing properties and other businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, Emmis Operating Company’s credit facility substantially limits our ability to make acquisitions. To consummate the announced acquisition of WBLS-FM and WLIB-AM in New York, we will refinance our existing credit facility. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. See Note 8 to our consolidated financial statements for a discussion of various dispositions that occurred during the three years ended February 2014.

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SUMMARY DISCLOSURES ABOUT CONTRACTUAL CASH OBLIGATIONS
The following table reflects a summary of our contractual cash obligations as of February 28, 2014:
 
Payments Due by Period
 
(Amounts in 000's)
 
 
 
Less than
 
1 to 3
 
3 to 5
 
More than
Contractual cash obligations:
Total
 
1 Year
 
Years
 
Years
 
5 Years
 
 
 
 
 
 
 
 
 
 
Long-term debt 1
153,952

 
17,697

 
35,109

 
48,015

 
53,131

Operating leases
58,545

 
7,921

 
14,762

 
12,715

 
23,147

Purchase obligations 2
24,271

 
15,579

 
7,869

 
823

 

  Total contractual cash obligations
236,768

 
41,197

 
57,740

 
61,553

 
76,278

1 Includes an estimate of interest expense on amounts outstanding related to our Credit Agreement as of February 28, 2014 using our weighted average interest rate as of the same date as well as interest due under our 98.7FM nonrecourse debt. See Note 5 to the accompanying consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" for more discussion of our long-term debt.
2 Includes contractual commitments to purchase goods and services, including employment agreements, radio broadcast agreements, audience measurement information and music license fees.
INTANGIBLES
As of February 28, 2014, approximately 62% of our total assets consisted of intangible assets, such as FCC broadcast licenses, goodwill, and trademarks, the value of which depends significantly upon the operational results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the related FCC license for each property. FCC licenses are renewed every eight years; consequently, we continually monitor the activities of our stations for compliance with regulatory requirements. Historically, all of our FCC licenses have been renewed (or a waiver has been granted pending renewal) at the end of their respective eight-year periods, and we expect that all of our FCC licenses will continue to be renewed in the future.
SEASONALITY
Our results of operations are usually subject to seasonal fluctuations, which result in higher second and third quarter revenues and operating income. For our radio operations, this seasonality is due to the younger demographic composition of many of our stations. Advertisers increase spending during the summer months to target these listeners. In addition, advertisers generally increase spending across all segments during the months of October and November, which are part of our third quarter, in anticipation of the holiday season.
INFLATION
The impact of inflation on operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on operating results, particularly since a significant portion of our senior bank debt is comprised of variable-rate debt.
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
Other than interest rate swap agreements, which are discussed in Note 6 to the consolidated financial statements, and lease commitments, legal contingencies incurred in the normal course of business, contractual commitments to purchase goods and services and employment contracts for key employees, all of which are discussed in Note 12 to the consolidated financial statements, the Company does not have any material of