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Emmis Communications Corporation
One Emmis Plaza
40 Monument Circle, Suite 700
Indianapolis, Indiana 46204
Tel. (317) 266-0100
Fax (317) 631-3750
January 11, 2006
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Kathryn Jacobson, Staff Accountant
Kyle Moffatt, Accountant Branch Chief
Emmis Communications Corporation
Form 10-K for Fiscal Year Ended February 28, 2005, filed May 16, 2005
Form 10-Q for the Quarter Ended August 31, 2005, filed October 11, 2005
FILE NO. 0-23264
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Ladies and Gentlemen:
I am writing in response to the comments of the Staff contained in the
Staff's letter to Walter Berger, the former Chief Financial Officer of Emmis
Communications Corporation ("Emmis" or the "Company") dated December 20, 2005
(the "Comment Letter") regarding the above-referenced Annual Report on Form 10-K
(the "Form 10-K") and Quarterly Report on Form 10-Q (the "Form 10-Q").
Set forth below are the Staff's comments conveyed in the Comment Letter
and the Company's responses thereto.
FORM 10-K FOR THE YEAR ENDED FEBRUARY 28, 2005
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CRITICAL ACCOUNTING POLICIES
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INSURANCE CLAIMS AND LOSS RESERVES, PAGE 27
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1. Tell us, and disclose, amounts accrued for self-insurance and
similar risk assessments included in the balance sheets. Refer to paragraph 27
of SOP 97-3. In this regard, we note that you attributed operating cost
increases, in part, to "higher insurance and health care costs" in your MD&A.
<PAGE>
RESPONSE TO COMMENT 1
In response to the Staff's comment, the amount accrued by the Company
for employee healthcare claims as of February 29, 2004 and February 28, 2005 was
approximately $1.9 million and $2.8 million, respectively. The Company will
revise its future Exchange Act filings to include the requested disclosure. The
Company notes that it has included the requested disclosure in its recently
filed Quarterly Report Form 10-Q for the quarterly period ended November 30,
2005 (filed on January 9, 2006) (the "Third Quarter 10-Q").
SUMMARY DISCLOSURES ABOUT CONTRACTUAL CASH OBLIGATIONS, PAGE 42
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2. We note that you are required to maintain fixed interest rates
on a minimum of 30% of your outstanding debt. Accordingly, please disclose your
fixed interest payments in your contractual cash obligations table.
RESPONSE TO COMMENT 2
In response to the Staff's comment, the Company will include the
requested disclosure in the contractual cash obligations table of the Company's
Form 10-K for the year ending February 28, 2006. The Company notes that it
discloses its fixed debt service requirements (consisting of fixed interest
payments and mandatory term loan repayments under the Company's credit facility)
and preferred stock dividends for the prospective twelve-month period in the
"Financing Activities" section of its Management's Discussion and Analysis in
its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, including in
the Third Quarter 10-Q.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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e. TELEVISION PROGRAMMING, PAGE 69.
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3. We note that you record certain program contracts at the
estimated fair value of the advertising air time given in exchange for the
program rights when the programs are aired. Tell us why certain program
contracts are recorded based on the fair value of the advertising air time
GIVEN, instead of the estimated fair value of the programming received. Refer to
paragraph 8 of SFAS 63.
RESPONSE TO COMMENT 3
A significant portion of the Company's barter programming is only
available on a barter basis and runs in non-desirable time periods (i.e.,
overnight hours). This programming is not available for purchase on a cash
basis. The Company estimates the fair value of the programming received by
applying a discount to its average unit rates charged during more desirable time
<PAGE>
periods. The Company believes that this approximates the fair value of the
programming received. The Company will revise the disclosure in its Form 10-K
for the year ending February 28, 2006 to state that barter programming is
recorded based on the fair value of the programming received.
FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 2005
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NOTE 2. INTANGIBLE ASSETS AND GOODWILL
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INDEFINITE-LIVED INTANGIBLES, PAGE 13
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4. We note that you "use an enterprise valuation approach to assess
possible impairment of FCC licenses, whereby an estimated market multiple is
applied to the station operating income generated by each reporting unit."
Please describe this impairment test in detail. Tell us why you apply the
"reporting unit" concept per paragraph 30 of SFAS 142 rather than the "unit of
accounting" concept as detailed by EITF 02-7.
RESPONSE TO COMMENT 4
THE COMPANY'S IMPAIRMENT TEST
The only indefinite-lived intangible assets recorded by the Company are
its FCC licenses.
On December 1, 2004, the Company adopted EITF Topic D-108, "Use of the
Residual Method to Value Acquired Assets Other than Goodwill." In connection
with its adoption of EITF Topic D-108, the Company assessed the fair value of
its FCC licenses using a direct-method valuation approach. This direct-method
valuation was based on the discounted cash flows of a start-up station in each
respective market, commonly called the greenfield income valuation method. The
Company compared the carrying value of each FCC license (grouped by the same
reporting unit used for SFAS No. 142 testing) to the appraised value and
recorded a noncash charge of $303.0 million, net of tax, which was recorded as
the cumulative effect of an accounting change. The Company also performed its
annual impairment test under SFAS No. 142 on December 1, 2004, immediately after
its adoption of EITF Topic D-108, using the direct-method valuation approach
discussed above. This method will be used by the Company when performing its
future SFAS No. 142 annual impairment tests.
The Company's Third Quarter 10-Q discusses this direct-method valuation
approach utilized for our SFAS No. 142 annual impairment test.
"REPORTING UNIT" VERSUS "UNIT OF ACCOUNTING"
Emmis owns and operates broadcast properties in the radio and
television industries with FCC licenses, which the Company has determined are
indefinite-lived intangible assets. After giving effect to announced asset
<PAGE>
sales, Emmis will operate 3 television stations in 3 markets and 24 domestic
radio stations in 8 markets. Emmis considers each television station a reporting
unit and each radio market a reporting unit. Emmis followed the guidance of EITF
02-07 and determined that it was appropriate to group radio stations at the
market level for purposes of assessing the fair value of FCC licenses under SFAS
No. 142. This determination was based on consideration of the following factors:
1. In the markets in which Emmis owns multiple radio stations, the stations
are operated collectively by one management team (one general manager, one
director of sales, one chief engineer, etc.).
2. Emmis programs multiple radio stations in a single market to be
complimentary to each other, rather than competitive. For example, in New
York City, the Company owns and operates three radio stations targeting the
African-American demographic. Although all three stations generally target
African-Americans, one station is a hip-hop station targeting people of
ages 18-34, a second station is a rhythm and blues and soul station
targeting people of ages 25-54 and the third station is a smooth jazz
station targeting more affluent people of ages 25-54. The loss of any of
these three stations would leave our cluster exposed to a competitor that
also wanted to target African-Americans in New York City. Emmis employs
similar strategies in other markets, such as targeting males of all ages in
St. Louis and Chicago with various rock formats.
3. Emmis has not historically sold a significant portion of the radio stations
in any of its markets separately. Emmis notes that the only time in the
last ten years that it has sold a majority of its stations in a market and
not exited the market entirely was its exchange of three of its four radio
stations in Phoenix for a radio station in Chicago, which was complementary
to the Company's existing station in the Chicago market. The primary reason
that all four of the Company's radio stations in Phoenix were not sold in
the same transaction was the buyer's unwillingness to acquire the fourth
radio station.
4. The Company prefers to enter new markets by purchasing multiple stations in
that market. For example, when the Company entered the Austin, TX market in
July 2003, it purchased a majority interest in a partnership that owned and
operated six radio stations. The Company has already changed the format of
two of the six radio stations to reduce the overlap of listeners with its
other stations and to improve their position within the market.
The Company continues to monitor and evaluate its assessment of
reporting unit versus unit of accounting when performing its annual SFAS No. 142
impairment analysis.
<PAGE>
GOODWILL, PAGE 14
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5. Further, we note your statement that "consistent with the
Company's approach to assessing possible impairment of its FCC licenses, the
enterprise valuation approach was used to determine the fair value of . . .
reporting units." Describe this impairment test in detail, and tell us how your
test complies with paragraphs 19-35 of SFAS 142. Tell us why you believe the
impairment testing for goodwill and FCC licenses should be "consistent."
RESPONSE TO COMMENT 5
The Company's enterprise valuation approach is as follows:
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 and a
blended station operating income trading multiple of publicly traded television
operators as a benchmark for the multiple it applies to its television reporting
units. The multiple applied to each radio or television reporting unit is then
adjusted up or down from this benchmark based upon characteristics of the
reporting unit's specific market, such as market size, market growth rate, and
recently completed or announced transactions within the market. There are no
publicly traded publishing companies that are focused predominantly on city and
regional magazines as is our publishing segment. The market multiple used for
our publishing reporting units is based on recently completed transactions
within the city and regional magazine industry, such as the recent transactions
involving Chicago magazine and New York magazine.
This enterprise valuation is compared to the carrying value of the
reporting unit for the first step of the goodwill impairment test, as discussed
in paragraph 19 of SFAS No. 142. If the reporting unit exhibits impairment, the
Company proceeds to the second step of the goodwill impairment test, as
discussed in paragraph 20 of SFAS No. 142. 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, including network affiliation agreements and
customer lists (as discussed in paragraph 21 of SFAS No. 142), with the residual
amount representing the implied fair value of our goodwill. To the extent the
carrying amount of the goodwill exceeds the implied fair value of the goodwill,
the difference is recorded in the statement of operations.
The Company believes its enterprise valuation approach is consistent
with guidance in paragraph 25 of SFAS No. 142. Further, consistent with
paragraphs 34-35 of SFAS No. 142, all goodwill of the Company has been assigned
to its reporting units.
The Company's impairment tests for goodwill and FCC licenses are not
consistent. The Company has corrected this disclosure in its Third Quarter 10-Q.
<PAGE>
NOTE 3. SIGNIFICANT EVENTS, PAGE 14
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6. Please clarify and disclose the conversion terms for your
preferred stock and the nature of the anti-dilution formula that would apply to
all future tender and exchange offers. In this regard, we note your disclosure
on page 76 of your Form 10-K that each preferred share was convertible at the
option of the holder into 1.28 shares of Class A common stock. However, in this
section, you indicated that the conversion price was originally $39.06 but was
reduced to $30.10 per share of Class A common stock as a result of the Tender
Offer.
RESPONSE TO COMMENT 6
Each share of preferred stock is convertible into a number of shares of
common stock, which is determined by dividing the liquidation preference of the
share of preferred stock ($50.00 per share) by the conversion price. Upon the
occurrence of certain events, such as stock splits, stock dividends, mergers and
certain tender offers, the conversion price may be adjusted.
On June 13, 2005, as part of the settlement of the previously disclosed
litigation with the holders of the Company's preferred stock, in order to
correct an error in the anti-dilution provisions of the preferred stock, the
Company amended its second amended and restated articles of incorporation to
change the terms of the Company's outstanding convertible preferred stock so
that (i) a special anti-dilution formula applied to the Company's tender offer
(completed on June 13, 2005) that reduced the conversion price of the
convertible preferred stock proportionately based on the aggregate consideration
paid in the tender offer and (ii) a new customary anti-dilution adjustment
provision would apply to all other tender and exchange offers triggering an
adjustment based on the aggregate consideration paid in such tender or exchange
offer, the Company's overall market capitalization and the market value of the
Company's Class A common stock determined over a 10-day trading period ending on
the date immediately preceding the first public announcement of Emmis' intention
to effect a tender or exchange offer. All other anti-dilution provisions
remained unchanged. The settlement occurred after the filing of the Form 10-K.
At February 28, 2005, the conversion price was $39.06, which resulted
in a conversion ratio of 1.28 shares of common stock per share of preferred
stock ($50.00 divided by $39.06). As a result of the application of the special
anti-dilution adjustment in the June 2005 tender offer, the conversion price was
adjusted from $39.06 to $30.10. Consequently, each share of preferred stock is
convertible now into 1.66 shares of common stock ($50.00 divided by $30.10).
In response to the Staff's comment, in future Exchange Act filings the
Company will, consistent with the foregoing, clarify the conversion terms and
anti-dilution provisions of its preferred stock.
<PAGE>
7. We note that subsequent to the Dutch auction, you revised the
anti-dilution adjustment provisions of your outstanding convertible preferred
stock. Please:
o Tell us whether the conversion feature in your convertible preferred
stock meets the definition of an embedded derivative under paragraph 12
of SFAS 133.
o If you conclude that the conversion feature is a derivative, tell us
your consideration of the anti-dilution provisions, as well as any
other features, before and after the revision when determining whether
the host contract is a conventional convertible instrument pursuant to
paragraph 4 of EITF 00-19.
o If the host is not a conventional convertible instrument, provide us
with your analysis of paragraphs 12-32 of EITF 00-19 when determining
whether the embedded conversion feature should be classified as equity
or as a liability.
RESPONSE TO COMMENT 7
The preferred stock instrument is an embedded derivative due to the
conversion feature. However, Emmis has concluded the convertible preferred
stock, qualifies for the 11a exception outlined in EITF Issue 00-19 as it is a
"conventional convertible" instrument.
Emmis' anti-dilution provision was changed in order to correct an error
in the anti-dilution provisions of the preferred stock and thus to appropriately
adjust the value of the conversion option. Consistent with EITF 05-2,
Conventional Convertible Debt Instruments, instruments that contain "standard"
anti-dilution provisions would not preclude a conclusion that the instrument is
convertible into a fixed number of shares. Standard anti-dilution provisions are
those that result in adjustments to the conversion ratio in the event of an
equity restructuring transaction (as defined in the glossary of Statement
123(R)) that are designed to maintain the value of the conversion option.
Accordingly, the anti-dilution provision prior and subsequent to the change did
not impact Emmis' accounting treatment.
8. Tell us how you considered ASR 268 and EITF Topic D-98 with
respect to the classification and measurement of your convertible preferred
stock.
RESPONSE TO COMMENT 8
The preferred stock is not subject to redemption requirements outside
the control of the Company. Accordingly, the provisions of ASR268 and D-98 are
not applicable.
<PAGE>
9. If applicable, tell us how you evaluated EITF 98-5, as amended
by EITF 00-27, with respect to any beneficial conversion feature.
RESPONSE TO COMMENT 9
The preferred stock does not contain a beneficial conversion feature
and thus EITF 98-5, as amended by EITF 00-27, is not applicable.
* * * *
Additionally, per your request, the Company hereby acknowledges that
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
If you have any questions, please do not hesitate to call me at (317)
684-6548. For future fax correspondence with the Company please use (317)
631-3750.
Sincerely
/s/ David R. Newcomer
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David R. Newcomer
Interim Chief Financial Officer
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