| EMMIS COMMUNICATIONS CORP 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 |
| Decreased spending by advertisers or a decrease in our market ratings or market share can adversely affect our advertising revenues |
| 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 would likely have 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, in which we own and operate sizeable stations, could have a significant effect on us |
| Even in the absence of a general recession or downturn in the economy, an individual business sector (such as the automotive industry) that tends to spend more on advertising than other sectors might be forced to reduce its advertising expenditures if that sector experiences a downturn |
| 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 competitors |
| 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 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 |
| In addition, 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 |
| 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 |
| We must respond to the rapid changes in technology, services and standards that characterize our industry in order to remain competitive |
| The radio broadcasting industries are subject to rapid technological change, evolving industry standards and the emergence of competition from new media technologies and services |
| We cannot assure you that we will have the resources to acquire new technologies or to introduce new services that could compete with these new technologies |
| Various new media technologies and services are being developed or introduced, including: - satellite-delivered digital audio radio service, which has resulted in the introduction of new subscriber-based satellite radio services with numerous niche formats; 16 _________________________________________________________________ [72]Table of Contents - audio programming by cable systems, direct-broadcast satellite systems, personal communications systems, Internet content providers and other digital audio broadcast formats; - MP3 players and other personal audio systems that create new ways for individuals to listen to music and other content of their own choosing; - in-band on-channel digital radio (ie, HD digital radio), which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; - low-power FM radio, which could result in additional FM radio broadcast outlets; and We cannot predict the effect, if any, that competition arising from new technologies or regulatory change may have on the radio broadcasting industries or on our financial condition and results of operations |
| We also cannot ensure that our investments in HD digital radio and other technologies will produce the desired returns |
| Our substantial indebtedness could adversely affect our financial health |
| We have a significant amount of indebtedness |
| At February 28, 2006, our total indebtedness was approximately dlra797dtta1 million, and our shareholders’ equity was approximately dlra271dtta7 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 general 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 our competitors that have less debt; and - limit, along with the financial and other restrictive covenants in our credit facility and our other debt instruments, our ability to borrow additional funds |
| Failing to comply with those covenants could result in an event of default, which if not cured or waived, could have a material adverse effect on our businesses |
| 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 credit facility and our bond indenture 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 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 |
| 17 _________________________________________________________________ [73]Table of Contents 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 ability to make payments on and to refinance our indebtedness, to pay dividends 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 may need to refinance all or a portion of our indebtedness on or before maturity |
| We cannot assure investors that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all |
| Our operating results have been and may again be adversely affected by acts of war and terrorism |
| Acts of war and terrorism against the United States, and the country’s response to such acts, may negatively affect the US 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 |
| We may not be able to complete the disposition of our remaining three television stations In May 2005, we announced that we had engaged advisors to assist us in evaluating strategic alternatives for our television assets |
| As of February 28, 2006, we have sold thirteen of our original sixteen television stations, including two stations being operated under local programming and marketing agreements pending FCC approval of the sales |
| On May 5, 2006 we entered into an agreement to sell WKCF-TV in Orlando |
| The transaction contains customary representations, warranties and covenants, and is subject to standard closing conditions, including but not limited to approvals by the Federal Communications Commission |
| We have not sold WVUE-TV in New Orleans, LA and KGMB-TV (plus its satellites) in Honolulu, HI We remain committed to selling these television stations, but we cannot guarantee that we will find a buyer willing to pay an acceptable price |
| Additionally, WVUE was adversely affected by Hurricane Katrina in August 2005, which caused significant damage to the New Orleans area and our facilities at WVUE This has complicated the sales process for the station |
| To continue to grow our business, we will require significant additional capital |
| The continued development, growth and operation of our businesses will require substantial capital |
| In particular, additional acquisitions will require large amounts of capital |
| We intend to fund our growth, including acquisitions, if any, with cash generated from operations, borrowings under our new credit facility and proceeds from future issuances of debt and equity both public and private |
| 18 _________________________________________________________________ [74]Table of Contents 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 |
| Our ability to grow through acquisitions may be limited by competition for suitable properties or other factors we cannot control |
| We intend to selectively pursue acquisitions of radio stations, publishing properties and other businesses we believe hold promise for long-term appreciation in value, when appropriate, in order to grow |
| To be successful with this strategy, we must be effective at quickly evaluating markets, obtaining financing on satisfactory terms and obtaining the necessary regulatory approvals, sometimes including, as discussed below, approvals of the FCC and the Department of Justice |
| We also must accomplish these tasks at reasonable costs |
| The radio industry in particular has rapidly consolidated |
| In general, we compete with many other buyers for radio stations as well as publishing properties |
| We cannot predict whether we will be successful in buying stations or publishing properties, or whether we will be successful with any station or publishing property we acquire |
| Our strategy is generally to buy underperforming properties and use our experience to improve their performance |
| Thus, the benefits resulting from the properties we buy may not manifest themselves immediately, and we may need to pay large initial costs for these improvements |
| If we are not able to obtain regulatory approval for future acquisitions, our growth may be impaired |
| Although part of our growth strategy is the acquisition of additional radio stations, we may not be able to complete all the acquisitions that we agree to make |
| Station acquisitions are subject to the approval of the FCC and, potentially, other regulatory authorities |
| Also, the FCC sometimes undertakes review of transactions to determine whether they would result in excessive concentration, even where the transaction complies with the numerical ownership limits |
| Specifically, the staff has had a policy of “flagging” for closer scrutiny the anticompetitive impact of any transactions that will put one owner in a position to earn 50prca or more of the market’s radio advertising revenues or will result in the two largest owners receiving 70prca or more of those revenues |
| While the FCC has noted “flagging” in public notices in the past, current transactions may be “flagged” internally by the FCC without public notice |
| As discussed below, the FCC’s new rules with respect to media ownership are under court review |
| We cannot predict how the FCC’s approval process will change based on the outcome of the FCC’s media ownership proceeding or whether such changes would adversely impact us |
| Additionally, since the passage of the Telecommunications Act of 1996, the US Department of Justice has become more involved in reviewing proposed acquisitions of radio stations and radio station networks |
| The Justice Department is particularly concerned when the proposed buyer already owns one or more radio stations in the market of the station it is seeking to buy |
| Recently, the Justice Department has challenged a number of radio broadcasting transactions |
| Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations |
| In general, the Justice Department has more closely scrutinized radio broadcasting acquisitions that result in local market shares in excess of 40prca of radio advertising revenue |
| We may not be able to integrate acquired stations successfully, which could affect our financial performance |
| Our ability to operate our Company effectively depends, in part, on our success in integrating acquired stations into our operations |
| These efforts may impose significant strains on our management and financial resources |
| The pursuit and integration of acquired stations will require substantial attention from our management and will limit the amount of time they can devote to other important matters |
| Successful integration of acquired stations will depend primarily on our ability to manage our combined operations |
| If we fail to successfully integrate acquired stations or manage our growth or if we encounter unexpected difficulties during expansion, it could have a negative impact on the performance of acquired stations as well as on our Company as a whole |
| An accounting principle that affects the accounting treatment of goodwill and FCC licenses could cause future losses due to asset impairment |
| In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard Nodtta 142, “Goodwill and Other Intangible Assets,” that requires companies to cease amortizing goodwill and certain other indefinite-lived intangible assets, including broadcast licenses |
| Under SFAS 142, goodwill and some indefinite-lived intangibles will not be amortized into results of 19 _________________________________________________________________ [75]Table of Contents operations, but instead will be tested for impairment at least annually, with impairment being measured as the excess of the carrying value of the goodwill or intangible over its fair value |
| In addition, goodwill and intangible assets will be tested more often for impairment as circumstances warrant |
| Intangible assets that have finite useful lives will continue to be amortized over their useful lives and will be measured for impairment in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets |
| ” After initial adoption, any impairment losses under SFAS 142 or 144 will be recorded as operating expenses |
| In connection with the adoption of SFAS 142 effective March 1, 2002, we recorded an impairment loss of dlra148dtta6 million, net of tax, related to our television division that is reflected in loss from discontinued operations and an impairment loss of dlra18dtta8 million related to radio stations and a publishing entity that is reflected as the cumulative effect of an accounting change |
| The adoption of this accounting standard reduced our amortization of goodwill and intangibles by approximately dlra54dtta6 million in the year ended February 28, 2003 |
| We also incurred a dlra12dtta4 million impairment loss related to our television division in the fiscal year ended February 29, 2004 as a result of our annual SFAS 142 review |
| This loss is reflected as a loss from discontinued operations in the accompanying consolidated income statements |
| Although we did not recognize any impairment losses in the year ended February 28, 2005, we incurred a dlra37dtta4 million impairment in the fiscal year ended February 28, 2006 (dlra31dtta4 million relating to our radio assets and dlra6dtta0 million related to our publishing assets) related to SFAS 142 |
| Our future impairment reviews could result in additional write-downs |
| One shareholder controls a majority of the voting power of our common stock, and his interest may conflict with investors’ |
| As of April 30, 2006, our Chairman of the Board of Directors, Chief Executive Officer and President, Jeffrey H Smulyan, beneficially owned shares representing approximately 67prca 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 FCC has recently begun more 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 |
| 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 |
| Recently, the FCC has begun more vigorous enforcement of its indecency rules against the broadcasting industry as a whole |
| Two Congressional committees have recently conducted hearings relating to indecency |
| Legislation has also been introduced in Congress that would increase the penalties for broadcasting indecent programming, and depending on the number of violations engaged in, would automatically subject broadcasters to license revocation, renewal or qualifications proceedings in the event that they broadcast indecent material |
| The FCC has indicated that it is stepping up its enforcement activities as they apply to indecency, and has threatened to initiate license revocation proceedings against broadcast licensees for future “serious indecency violations |
| ” The FCC has found on a number of occasions recently that the content of radio broadcasts has contained indecent material |
| The FCC issued fines to the offending licensees |
| Moreover, the FCC has recently begun imposing separate fines for each allegedly indecent “utterance,” in contrast with its previous policy, which generally considered all indecent words or phrases within a given program as constituting a single violation |
| In August of 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 dlra300cmam000 to the US 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 a WKQX announcer raised any substantial and material questions concerning the Company’s qualifications to hold FCC licenses |
| A petition requesting that the FCC reconsider its approval of the Decree has been filed and remains pending |
| If the petition were to be granted by the FCC, or if a court appeal were taken and the court were to invalidate the decree, then any indecent broadcasts that may have occurred on the Company’s stations could be considered by the FCC, which could have an adverse impact on the Company’s FCC licenses |
| In addition, petitions have been filed against the license renewal applications of stations WKQX and KPNT, and an informal objection has been filed against the license renewals of the Company’s Indiana radio stations, in each case based primarily on the matters covered by the Decree |
| Consequently, any invalidation of the Decree could result in the petitions and objections being considered in connection with those and possibly other license renewals |
| 20 _________________________________________________________________ [76]Table of Contents The Communications Act provides that the FCC must renew a broadcast license if (i) the station involved has served the “public interest, convenience and necessity” and (ii) there have been no “serious violations” of the Act or FCC rules, and no “other violations” of the Act or rules which “taken together, would constitute a pattern of abuse |
| ” If the Commission were to determine that indecency or other violations by one or more of our stations fall within either or both of those definitions, the agency could (x) grant the license renewal applications of the stations with burdensome conditions, such as requirements for periodic reports, (y) grant the applications for less than the full eight-year term in order to allow an early reassessment of the stations, or (z) order an evidentiary hearing before an administrative law judge to determine whether renewal of the stations’ licenses should be denied |
| If a station’s license renewal were ultimately denied, the station would be required to cease operation permanently |
| As a result of these developments, we have implemented measures to reduce the risk of broadcasting indecent material in violation of the FCC’s rules |
| These and other future modifications to our programming to reduce the risk of indecency violations could have an adverse effect on our competitive position |
| Legislation is pending in Congress which would, among other things, (i) increase very substantially the fines for indecent broadcasts, (ii) specify that all indecency violations are “serious” violations for license renewal purposes and (iii) mandate an evidentiary hearing on the license renewal application of any station that has had three indecency violations during its license term |
| Our need to comply with comprehensive, complex and sometimes unpredictable federal regulations could have an adverse effect on our businesses |
| We are dependent on licenses from the FCC, which regulates the radio and television broadcasting industries in the United States |
| The radio and television broadcasting industries in the United States are subject to extensive and changing regulation by the FCC Among other things, the FCC is responsible for the following: - assigning frequency bands for broadcasting; - determining the particular frequencies, locations and operating power of stations; - issuing, renewing, revoking and modifying station licenses; - determining whether to approve changes in ownership or control of station licenses; - regulating equipment used by stations; and - adopting and implementing regulations and policies that directly affect the ownership, operation, programming and employment practices of stations |
| The FCC has the power to impose penalties for violation of its rules or the applicable statutes |
| While in the vast majority of cases licenses are renewed by the FCC, we cannot be sure that any of our United States stations’ licenses will be renewed at their expiration date |
| Even if our licenses are renewed, we cannot be sure that the FCC will not impose conditions or qualifications that could cause problems in our businesses |
| The FCC regulations and policies also affect our growth strategy because the FCC has specific regulations and policies about the number of stations, including radio and television stations, and daily newspapers that an entity may own in any geographic area |
| As a result of these rules, we may not be able to acquire more properties in some markets FCC regulations also limit the ability of non-US persons to own our capital stock and to participate in our affairs, which could limit our ability to raise equity |
| Our articles of incorporation contain provisions which place restrictions on the ownership, voting and transfer of our capital stock in accordance with the law |
| Finally, a number of federal rules governing broadcasting have changed significantly in recent years and additional changes may occur, particularly with respect to the rules governing digital audio broadcasting, satellite radio services, multiple ownership and attribution |
| We cannot predict the effect that these regulatory changes may ultimately have on our operations |
| 21 _________________________________________________________________ [77]Table of Contents Any changes in current FCC ownership regulations may negatively impact our ability to compete or otherwise harm our business operations |
| In June of 2003, the FCC substantially modified its rules governing ownership of broadcast stations |
| The new rules (i) allow, for the first time in many years, common ownership of broadcast stations and daily newspapers in most markets, (ii) generally allow common ownership of television and radio stations within a given market, and (iii) change the definition of “market” for purposes of the rules restricting the number of radio stations that may be commonly owned within a given market |
| The new rules were appealed in federal court, and in September of 2003, the court stayed the effectiveness of the new rules, pending a decision in the appeal |
| As a result of the stay, the former ownership rules were reinstated |
| We cannot predict the impact of these developments on our business |
| In particular, we cannot predict the outcome of FCC’s media ownership proceeding or its 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 the method of defining radio markets contained in the new ownership rules, 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 |
| Consequently, if the new rules go into effect and we wish to sell our interest in the Austin stations, we will have to either sell to an entity that meets the FCC definition or exclude at least one FM station from the transaction |
| Our business strategy and our ability to operate profitably depends on the continued services of our key employees, the loss of whom could materially adversely affect 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 |
| Our current and future operations are subject to certain risks that are unique to operating in a foreign country |
| We currently have several international operations, including operations in Hungary, Slovakia, Belgium and Bulgaria, and, therefore, we are exposed to risks inherent in international business operations |
| We may pursue opportunities to buy additional broadcasting properties in other foreign countries |
| The risks of doing business in foreign countries include the following: - changing regulatory or taxation policies; - currency exchange risks; - changes in diplomatic relations or hostility from local populations; - seizure of our property by the government or restrictions on our ability to transfer our property or earnings out of the foreign country; - potential instability of foreign governments, which might result in losses against which we are not insured; and - difficulty of enforcing agreements and collecting receivables through some foreign legal systems |
| Our failure to comply under the Sarbanes-Oxley Act of 2002 could cause a loss of confidence in the reliability of our financial statements |
| 22 _________________________________________________________________ [78]Table of Contents We have undergone a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002 |
| This effort included documenting and testing our internal controls |
| As of February 28, 2006, we did not identify any material weaknesses in our internal controls as defined by the Public Company Accounting Oversight Board |
| In future years, there are no assurances that we will not have material weaknesses that would be required to be reported or that we will be able to comply with the reporting deadline requirements of Section 404 |
| A reported material weakness or the failure to meet the reporting deadline requirements of Section 404 could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements |
| This loss of confidence could cause a decline in the market price of our stock |