UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

EMMIS COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

INDIANA
(State of incorporation or organization)

0-23264
(Commission file number)

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

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

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

NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

The number of shares outstanding of each of Emmis Communications Corporation’s classes of common stock, as of July 6, 2010, was:

	32,913,373			Shares of Class A Common Stock, $.01 Par Value
	4,930,680			Shares of Class B Common Stock, $.01 Par Value
	0			Shares of Class C Common Stock, $.01 Par Value

 

 

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations for the three-month periods ended May 31, 2009 and 2010			3
Condensed Consolidated Balance Sheets as of February 28, 2010 and May 31, 2010			5
Condensed Consolidated Statement of Changes in Equity for the three-month period ended May 31, 2010			7
Condensed Consolidated Statements of Cash Flows for the three-month periods ended May 31, 2009 and 2010			8
Notes to Condensed Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4. Controls and Procedures			49
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 6. Exhibits			50
Signatures			51
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(In thousands, except per share data)

		Three Months Ended
		May 31,
		2009				2010
NET REVENUES		$	59,798			$	60,340
OPERATING EXPENSES:
Station operating expenses excluding depreciation and amortization expense of $2,374 and $2,067, respectively			52,650				48,903
Corporate expenses excluding depreciation and amortization expense of $395 and $354, respectively			3,890				5,178
Restructuring charge			3,350				—
Impairment loss			3,661				—
Depreciation and amortization			2,769				2,421
Gain on disposal of assets			(158	)			—
Total operating expenses			66,162				56,502
OPERATING INCOME (LOSS)			(6,364	)			3,838
OTHER INCOME (EXPENSE):
Interest expense			(5,604	)			(5,680	)
Gain on debt extinguishment			31,905				—
Other income (expense), net			314				(13	)
Total other income (expense)			26,615				(5,693	)
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS			20,251				(1,855	)
PROVISION (BENEFIT) FOR INCOME TAXES			5,316				(1,408	)
INCOME (LOSS) FROM CONTINUING OPERATIONS			14,935				(447	)
(GAIN) LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX			(757	)			257
CONSOLIDATED NET INCOME (LOSS)			15,692				(704	)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			1,510				833
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY			14,182				(1,537	)
PREFERRED STOCK DIVIDENDS			2,195				2,372
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	11,987			$	(3,909	)

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

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		May 31,
		2009				2010
Amounts attributable to common shareholders:
Continuing operations		$	11,734			$	(3,897	)
Discontinued operations			253				(12	)
Net income (loss) attributable to common shareholders		$	11,987			$	(3,909	)
Basic net income (loss) per share attributable to common shareholders:
Continuing operations		$	0.32			$	(0.10	)
Discontinued operations, net of tax			—				—
Net income (loss) attributable to common shareholders		$	0.32			$	(0.10	)
Basic weighted average common shares outstanding			36,928				37,719
Diluted net income (loss) per share attributable to common shareholders:
Continuing operations		$	0.32			$	(0.10	)
Discontinued operations, net of tax			—				—
Net income (loss) attributable to common shareholders		$	0.32			$	(0.10	)
Diluted weighted average common shares outstanding			37,144				37,719

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

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(In thousands, except share data)

						May 31,
		February 28,				2010
		2010				(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	6,814			$	6,723
Accounts receivable, net			36,834				39,834
Prepaid expenses			15,248				15,648
Income tax receivable			7,381				7,686
Other current assets			2,234				1,188
Current assets — discontinued operations			6,052				3,323
Total current assets			74,563				74,402
PROPERTY AND EQUIPMENT, NET			50,204				48,436
INTANGIBLE ASSETS (Note 3):
Indefinite-lived intangibles			335,801				335,801
Goodwill			24,175				24,175
Other intangibles, net			3,833				3,549
Total intangible assets			363,809				363,525
OTHER ASSETS, NET			9,454				9,183
NONCURRENT ASSETS — DISCONTINUED OPERATIONS			138				130
Total assets		$	498,168			$	495,676

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

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

						May 31,
		February 28,				2010
		2010				(Unaudited)
LIABILITIES AND DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	10,062			$	9,042
Current maturities of long-term debt			3,413				3,399
Accrued salaries and commissions			6,475				8,560
Accrued interest			4,513				3,327
Deferred revenue			24,269				22,861
Other current liabilities			5,728				6,880
Current liabilities — discontinued operations			2,381				1,014
Total current liabilities			56,841				55,083
LONG-TERM DEBT, NET OF CURRENT MATURITIES			337,758				342,919
OTHER NONCURRENT LIABILITIES			19,342				14,576
DEFERRED INCOME TAXES			73,305				74,152
Total liabilities			487,246				486,730
COMMITMENTS AND CONTINGENCIES
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE; $50.00 LIQUIDATION PREFERENCE; AUTHORIZED 10,000,000 SHARES; ISSUED AND OUTSTANDING 2,809,170 SHARES AT FEBRUARY 28, 2010 AND MAY 31, 2010			140,459				140,459
SHAREHOLDERS’ DEFICIT:
Class A common stock, $.01 par value; authorized 170,000,000 shares; issued and outstanding 32,661,550 shares at February 28, 2010 and 32,913,373 shares at May 31, 2010			327				329
Class B common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,930,680 shares at February 28, 2010 and May 31, 2010			49				49
Additional paid-in capital			527,120				527,766
Accumulated deficit			(705,135	)			(706,672	)
Accumulated other comprehensive loss			(1,320	)			(1,927	)
Total shareholders’ deficit			(178,959	)			(180,455	)
NONCONTROLLING INTERESTS			49,422				48,942
Total deficit			(129,537	)			(131,513	)
Total liabilities and deficit		$	498,168			$	495,676

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

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(In thousands, except share data)

																										Accumulated
		Class A								Class B								Additional								Other
		Common Stock								Common Stock								Paid-in				Accumulated				Comprehensive				Noncontrolling				Total
		Shares				Amount				Shares				Amount				Capital				Deficit				Loss				Interests				Equity (Deficit)
BALANCE, FEBRUARY 28, 2010			32,661,550			$	327				4,930,680			$	49			$	527,120			$	(705,135	)		$	(1,320	)		$	49,422			$	(129,537	)
Issuance of Common Stock to employees and officers and related income tax benefits			251,823				2				—				—				646				—				—				—				648
Payments of dividends and distributions to noncontrolling interests			—				—				—				—				—				—				—				(1,254	)			(1,254	)
Comprehensive Loss:
Net income (loss)			—				—				—				—				—				(1,537	)			—				833
Change in value of derivative instrument and related income tax effects			—				—				—				—				—				—				(259	)			—
Cumulative translation adjustment			—				—				—				—				—				—				(348	)			(59	)
Total comprehensive loss			—				—				—				—				—				—				—				—				(1,370	)
BALANCE, MAY 31, 2010			32,913,373			$	329				4,930,680			$	49			$	527,766			$	(706,672	)		$	(1,927	)		$	48,942			$	(131,513	)

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

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

(Dollars in thousands)

		Three Months Ended May 31,
		2009				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)		$	15,692			$	(704	)
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities —
Discontinued operations			(757	)			257
Impairment loss			3,661				—
Depreciation and amortization			2,890				2,717
Gain on debt extinguishment			(31,905	)			—
Provision for bad debts			1,197				284
Provision (benefit) for deferred income taxes			5,282				(1,138	)
Noncash compensation			551				743
Gain on sale of assets			(158	)			—
Changes in assets and liabilities —
Accounts receivable			(1,218	)			(3,293	)
Prepaid expenses and other current assets			9,087				766
Other assets			(1,064	)			(53	)
Accounts payable and accrued liabilities			(5,012	)			(62	)
Deferred revenue			7,253				(1,408	)
Income taxes			(837	)			(346	)
Other liabilities			7,944				(1,880	)
Net cash provided by operating activities — discontinued operations			6,975				1,113
Net cash provided by (used in) operating activities			19,581				(3,004	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(585	)			(703	)
Cash paid for acquisitions			(4,882	)			—
Proceeds from the sale of assets			9,058				—
Other			65				12
Net cash provided by (used in) investing activities			3,656				(691	)

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

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

		Three Months Ended May 31,
		2009				2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt			(113,778	)			(2,848	)
Proceeds from long-term debt			73,235				8,000
Debt-related costs			(1,013	)			—
Payments of dividends and distributions to noncontrolling interests			(603	)			(868	)
Settlement of tax withholding obligations on stock issued to employees			(25	)			(82	)
Net cash used in financing activities — discontinued operations			(2,042	)			(386	)
Net cash provided by (used in) financing activities			(44,226	)			3,816
Effect of exchange rates on cash and cash equivalents			(2,576	)			(212	)
DECREASE IN CASH AND CASH EQUIVALENTS			(23,565	)			(91	)
CASH AND CASH EQUIVALENTS:
Beginning of period			40,746				6,814
End of period		$	17,181			$	6,723
SUPPLEMENTAL DISCLOSURES:
Cash paid for —
Interest		$	5,176			$	6,569
Income taxes, net of refunds			930				617
Noncash financing transactions—
Value of stock issued to employees under stock compensation program and to satisfy accrued incentives			495				728
ACQUISITION OF NONCONTROLLING BULGARIAN RADIO INTERESTS
Fair value of assets acquired		$	4,882
Cash paid			(4,882	)
Liabilities recorded		$	—

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

EMMIS COMMUNICATIONS CORPORATION AND SUBSIDIARIES

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Preparation of Interim Financial Statements

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A, for the year ended February 28, 2010. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.

In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position of Emmis at May 31, 2010, and the results of its operations and cash flows for the three-month periods ended May 31, 2009 and 2010.

Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at May 31, 2009 and 2010, consisted of stock options, restricted stock awards and the 6.25% Series A cumulative convertible preferred stock. We currently have 2.8 million shares of preferred stock outstanding and each share converts into 2.44 shares of common stock. Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:

		Three Months Ended May 31,
		2009				2010
		(shares in 000’s)
6.25% Series A cumulative convertible preferred stock			6,854				6,854
Stock options and restricted stock awards			9,850				8,257
Antidilutive common share equivalents			16,704				15,111

Discontinued Operations

Summary of Discontinued Operations Activity:

		Three Months Ended May 31,
		2009				2010
Income (loss) from discontinued operations:
Slager		$	1,643			$	(257	)
Belgium			(561	)			—
Other			(27	)			—
Total			1,055				(257	)
Less: Provision for income taxes			298				—
Income (loss) from discontinued operations, net of tax			757				(257	)

Summary of Assets and Liabilities of Discontinued Operations:

		As of February 28, 2010								As of May 31, 2010
		Slager				Other				Slager				Other
Current assets:
Accounts receivable, net		$	3,299			$	—			$	169			$	—
Prepaid expenses			180				—				26				—
Income tax receivable			1,237				—				1,498				—
Other			1,336				—				1,630				—
Total current assets			6,052				—				3,323				—
Noncurrent assets:
Other noncurrent assets			138				—				130				—
Total noncurrent assets			138				—				130				—
Total assets		$	6,190			$	—			$	3,453			$	—
Current liabilities:
Accounts payable and accrued expenses		$	1,565			$	303			$	365			$	303
Deferred revenue			513				—				346				—
Total current liabilities		$	2,078			$	303			$	711			$	303

Discontinued Operation – Slager

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

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

		For the three months ended May 31,
		2009				2010
Net revenues		$	2,631			$	7
Station operating expenses, excluding depreciation and amortization expense			1,871				427
Depreciation and amortization			393				—
Interest expense			15				—
Other income			1,291				163
Income (loss) before taxes			1,643				(257	)
Provision for income taxes			298				—
Net income (loss) attributable to minority interests			1,345				(245	)

Discontinued Operation – Belgium

On May 29, 2009, Emmis sold the stock of its Belgium radio operation to Alfacam Group NV, a Belgian corporation, for 100 euros. Emmis desired to exit Belgium as its financial performance in the market failed to meet expectations. The sale allowed Emmis to eliminate further operating losses. Emmis recorded a full valuation allowance against the net operating losses generated by the Belgium radio operation during the three months ended May 31, 2009. Belgium had historically been included in the radio segment. Belgium had no assets or liabilities as of February 28, 2010 and May 31, 2010. The following table summarizes certain operating results for Belgium for all periods presented:

		Three months ended May 31,
		2009				2010
Net revenues		$	341			$	—
Station operating expenses, excluding depreciation and amortization expense			920				—
Loss before income taxes			(561	)			—

Uncertain Tax Positions

The Company recognizes the impact of a tax position in the financial statements if it is more likely than not that the position would be sustained on audit based on the technical merits of the position. The nature of the uncertainties pertaining to our income tax position is primarily due to various state tax positions. As of May 31, 2010, we had approximately $0.8 million in unrecognized tax benefits. Accrued interest and penalties related to unrecognized tax benefits is recognized as a component of tax expense. During the three months ended May 31, 2010, the Company recorded an expense for unrecognized tax benefits, interest and penalties of less than $0.1 million. As of May 31, 2010, the Company had a liability of $0.1 million for accrued interest and penalties related to unrecognized tax benefits. The Company estimates the possible change in unrecognized tax benefits prior to May 31, 2011 could be a reduction of up to $0.6 million due to settlement of ongoing audits.

Reclassifications

Certain reclassifications have been made to the prior year’s financial statements to be consistent with the May 31, 2010 presentation. The reclassifications have no impact on net income previously reported.

Note 2. Share Based Payments

Stock Option Awards

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

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

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The Company uses the simplified method to estimate the expected term for all options granted. Although the Company has granted options for many years, the historical exercise activity of our options was impacted by the way the Company processed the equitable adjustment of our November 2006 special dividend. Consequently, the Company believes that reliable data regarding exercise behavior only exists for the period subsequent to November 2006, which is insufficient experience upon which to estimate the expected term. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the three months ended May 31, 2009 and 2010:

		Three Months Ended May 31,
		2009				2010
Risk-Free Interest Rate:			2.3% – 2.4	%			2.9	%
Expected Dividend Yield:			0	%			0	%
Expected Life (Years):			6.4 – 6.5				6.5
Expected Volatility:			72.3% – 85.5	%			98.9	%

The following table presents a summary of the Company’s stock options outstanding at May 31, 2010, and stock option activity during the three months ended May 31, 2010 (“Price” reflects the weighted average exercise price per share):

										Weighted Average				Aggregate
										Remaining				Intrinsic
		Options				Price				Contractual Term				Value
Outstanding, beginning of period			9,038,076			$	10.18
Granted			85,000				0.90
Exercised (1)			—				—
Forfeited			21,623				0.79
Expired			431,026				23.55
Outstanding, end of period			8,670,427				9.45				5.6			$	4,576
Exercisable, end of period			5,740,574				13.86				3.9			$	7

The weighted average grant date fair value of options granted during the three months ended May 31, 2009 and 2010, was $0.19 and $0.73, respectively.

A summary of the Company’s nonvested options at May 31, 2010, and changes during the three months ended May 31, 2010, is presented below:

						Weighted Average
						Grant Date
		Options				Fair Value
Nonvested, beginning of period			3,235,738			$	0.78
Granted			85,000				0.73
Vested			371,093				2.83
Forfeited			19,792				0.54
Nonvested, end of period			2,929,853				0.52

There were 1.7 million shares available for future grants under the Company’s various equity plans at May 31, 2010. The vesting dates of outstanding options at May 31, 2010 range from July 2010 to March 2013, and expiration dates range from March 2011 to March 2020.

Restricted Stock Awards

The Company granted restricted stock awards to employees and directors of the Company in lieu of certain stock option grants from 2005 through 2008. These awards generally vest at the end of the second or third year after grant and are forfeited, except in certain circumstances, in the event the employee terminates his or her employment or relationship with the Company prior to vesting. The restricted stock awards were granted out of the Company’s 2004 Equity Incentive Plan. The Company also awards, out of the Company’s 2004 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares are immediately lapsed on the grant date.

The following table presents a summary of the Company’s restricted stock grants outstanding at May 31, 2010, and restricted stock activity during the three months ended May 31, 2010 (“Price” reflects the weighted average share price at the date of grant):

		Awards				Price
Grants outstanding, beginning of period			398,363			$	5.02
Granted			254,275				2.22
Vested (restriction lapsed)			481,800				4.06
Forfeited			2,063				2.95
Grants outstanding, end of period			168,775				3.58

The total grant date fair value of shares vested during the three months ended May 31, 2009 and 2010 was $2.1 million and $2.0 million, respectively.

Recognized Non-Cash Compensation Expense

The following table summarizes stock-based compensation expense and related tax benefits recognized by the Company in the three months ended May 31, 2009 and 2010:

		Three Months
		Ended May 31,
		2009				2010
Station operating expenses		$	163			$	431
Corporate expenses			388				312
Stock-based compensation expense included in operating expenses			551				743
Tax benefit			—				—
Recognized stock-based compensation expense, net of tax		$	551			$	743

As of May 31, 2010, there was $1.2 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 1.4 years.

Note 3. Intangible Assets and Goodwill

Valuation of Indefinite-lived Broadcasting Licenses

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

The carrying amounts of the Company’s FCC licenses were $335.8 million as of February 28, 2010 and May 31, 2010. This amount is entirely attributable to our radio division. The Company generally performs its annual impairment test of indefinite-lived intangibles as of December 1 of each year. When indicators of impairment are present, the Company will perform an interim impairment test. During the quarter ended May 31, 2010, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. These impairment tests may result in impairment charges in future periods.

Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by 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.

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. During the quarter ended May 31, 2010, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. 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 has been based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions.

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

As of February 28, 2010 and May 31, 2010, the carrying amount of the Company’s goodwill was $24.2 million. As of February 28, 2010 and May 31, 2010, approximately $6.3 million and $17.9 million of our goodwill was attributable to our radio and publishing divisions, respectively.

Definite-lived intangibles

The Company’s definite-lived intangible assets consist primarily of foreign broadcasting licenses, trademarks, and favorable office leases, all of which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The following table presents the weighted-average useful life, gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at February 28, 2010 and May 31, 2010:

						February 28, 2010												May 31, 2010
		Weighted Average				Gross								Net				Gross								Net
		Useful Life				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		(in years)				Amount				Amortization				Amount				Amount				Amortization				Amount
Foreign Broadcasting Licenses			7.8			$	8,716			$	5,230			$	3,486			$	8,716			$	5,505			$	3,211
Trademarks			37.8				749				458				291				749				461				288
Favorable Office Leases			6.4				688				632				56				688				638				50
TOTAL						$	10,153			$	6,320			$	3,833			$	10,153			$	6,604			$	3,549

Total amortization expense from definite-lived intangibles for the three months ended May 31, 2009 and 2010, was $0.5 million and $0.3 million, respectively. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:

YEAR ENDED FEBRUARY 28 (29),
2011		$	1,244
2012			1,277
2013			1,265
2014			121
2015			18

Note 4. Liquidity

The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through the end of fiscal year 2011 with cash and cash equivalents on hand, projected cash flows from operations and, to the extent necessary, through its borrowing capacity under the Credit Agreement, which was approximately $11.4 million at May 31, 2010. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2011. However, unforeseen circumstances, such as those described in Item 1A “Risk Factors” on our Form 10-K for the year ended February 28, 2010, may negatively impact the Company’s operations beyond those assumed in its projections. Management considered the risks that the current economic conditions may have on its liquidity projections, as well as the Company’s ability to meet its debt covenant requirements. If economic conditions deteriorate to an extent that we could not meet our liquidity needs or it appears that noncompliance with debt covenants is likely to result, the Company would implement several remedial measures, which could include further operating cost and capital expenditure reductions, ceasing to operate certain unprofitable properties and the sale of assets. If these measures are not successful in maintaining compliance with our debt covenants, the Company would attempt to negotiate for relief through a further amendment with its lenders or waivers of covenant noncompliance, which could result in higher interest costs, additional fees and reduced borrowing limits. There is no assurance that the Company would be successful in obtaining relief from its debt covenant requirements in these circumstances. Failure to comply with our debt covenants and a corresponding failure to negotiate a favorable amendment or waivers with the Company’s lenders could result in the acceleration of the maturity of all the Company’s outstanding debt, which would have a material adverse effect on the Company’s business and financial position.

Under the terms of the Second Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement, the Company must maintain a minimum amount of trailing twelve-month Consolidated EBITDA (as defined in the Credit Agreement) and at least $5 million in Liquidity (as defined in the Credit Agreement) through September 1, 2011. Subsequent to September 1, 2011, the Company must meet the Total Leverage Ratio and the Fixed Charge Coverage Ratio financial covenants (each as defined in the Credit Agreement). The Credit Agreement also contains certain other non-financial covenants. We were in compliance with all financial and non-financial covenants as of May 31, 2010. Our Liquidity (as defined in the Credit Agreement) as of May 31, 2010 was $13.7 million. Our minimum Consolidated EBITDA (as defined in the Credit Agreement) requirement and actual amount as of May 31, 2010 was as follows:

		As of May 31, 2010
						Actual Trailing
		Covenant				Twelve-Month
		Requirement				Consolidated EBITDA1
Trailing Twelve-month Consolidated EBITDA1		$	23,200			$	26,774

Note 5. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

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

•

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

•

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

•

comply with covenant requirements in the Company’s Credit Agreement

Cash Flow Hedges of Interest Rate Risk

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company’s interest rate derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not record any hedge ineffectiveness in earnings during the three months ended May 31, 2009 and 2010.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that an additional $2.4 million will be reclassified as an increase to interest expense over the next twelve months.

As of May 31, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative		Number of Instruments				Notional
Interest Rate Swaps		2				$	175,000

In March 2007, the Company entered into a three-year interest rate exchange agreement (a “Swap”), whereby the Company paid a fixed rate of 4.795% on $165 million of notional principal to Bank of America, and Bank of America paid to the Company a variable rate on the same amount of notional principal based on the three-month London Interbank Offered Rate (“LIBOR”). This swap matured in March 2010, at which time the Company recognized a $2.0 million tax benefit that had previously been recorded in accumulated other comprehensive loss. In March 2008, the Company entered into an additional three-year Swap, whereby the Company pays a fixed rate of 2.964% on $100 million of notional principal to Deutsche Bank, and Deutsche Bank pays to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR. In January 2009, the Company entered into an additional two-year Swap effective as of March 28, 2009, whereby the Company pays a fixed rate of 1.771% on $75 million of notional principal to Deutsche Bank, and Deutsche Bank pays to the Company a variable rate on the same amount of notional principal based on the three-month LIBOR.

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of February 28, 2010 and May 31, 2010. Accumulated other comprehensive loss balances related to our derivative instruments at February 28, 2010 and May 31, 2010 were ($1,289) and ($1,548), respectively. The fair values of the derivative instruments are estimated by obtaining quotations from the financial institution that is the counterparty to the instruments. The fair value is an estimate of the net amount that the Company would have been required to pay on February 28, 2010 and May 31, 2010, if the agreements were transferred to other parties or cancelled by the Company, as further adjusted by a credit adjustment required by ASC Topic 820, Fair Value Measurements and Disclosures, discussed below.

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability Derivatives

As of February 28, 2010

As of May 31, 2010

As of February 28, 2010

As of May 31, 2010

Derivatives designated as hedging

Balance Sheet

Balance Sheet

Balance Sheet

Balance Sheet

instruments

Location

Fair Value

Location

Fair Value

Location

Fair Value

Location

Fair Value

Interest Rate Swap Agreements (Current Portion)

N/A

$

—

N/A

$

—

Other Current Liabilities

$

569

Other Current Liabilities

$

2,335

Interest Rate Swap Agreements (Long Term Portion)

N/A

—

N/A

—

Other Noncurrent Liabilities

3,499

N/A

—

Total derivatives designated as hedging instruments

$

—

$

—

$

4,068

$

2,335

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months ended May 31, 2009 and 2010.

		For the Three Months Ended May 31,
																						Location of Gain or (Loss)				Amount of Gain or (Loss)
										Location of Gain or												Recognized in Income on				Recognized in Income on Derivative
		Amount of Gain or (Loss)								(Loss) Reclassified				Amount of Gain or (Loss)								Derivative (Ineffective				(Ineffective Portion and Amount
		Recognized in OCI on Derivative								from Accumulated				Reclassified from Accumulated OCI								Portion and Amount				Excluded from Effectiveness
Derivatives in Cash Flow		(Effective Portion)								OCI into Income				into Income (Effective Portion)								Excluded from				Testing)
Hedging Relationships		2009				2010				(Effective Portion)				2009				2010				Effectiveness Testing)				2009				2010
Interest Rate Swap Agreements		$	(3,440	)		$	156			Interest expense				$	(1,968	)		$	(1,577	)			N/A			$	—			$	—
Total		$	(3,440	)		$	156							$	(1,968	)		$	(1,577	)						$	—			$	—

Credit-risk-related Contingent Features

The Company manages its counterparty risk by entering into derivative instruments with global financial institutions where it believes the risk of credit loss resulting from nonperformance by the counterparty is low. The Company’s counterparty on its outstanding interest rate swaps is Deutsche Bank.

In accordance with ASC Topic 820, the Company makes Credit Value Adjustments (CVAs) to adjust the valuation of derivatives to account for our own credit risk with respect to all derivative liability positions. The CVA is accounted for as a decrease to the derivative position with the corresponding increase or decrease reflected in accumulated other comprehensive income (loss) for derivatives designated as cash flow hedges. The CVA also accounts for nonperformance risk of our counterparty in the fair value measurement of all derivative asset positions, when appropriate. As of February 28, 2010 and May 31, 2010, the fair value of our derivative instruments was net of $0.3 million and $0.1 million in CVAs, respectively.

The Company’s interest rate swap agreements with Deutsche Bank incorporate the loan covenant provisions of the Company’s Credit Agreement. Deutsche Bank is a lender under the Company’s Credit Agreement. Failure to comply with the loan covenant provisions of the Credit Agreement could result in the Company being in default of its obligations under the interest rate swap agreements.

As of May 31, 2010, the Company has not posted any collateral related to the interest rate swap agreements.

Note 6. Fair Value Measurements

As defined in ASC Topic 820, fair value is 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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

Recurring Fair Value Measurements

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of February 28, 2010 and May 31, 2010. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

		As of May 31, 2010
		Level 1				Level 2				Level 3
		Quoted Prices
		in Active				Significant
		Markets for				Other				Significant
		Identical Assets				Observable				Unobservable
		or Liabilities				Inputs				Inputs				Total
Available for sale securities		$	—			$	—			$	452			$	452
Total assets measured at fair value on a recurring basis		$	—			$	—			$	452			$	452
Interest rate swap agreements		$	—			$	—			$	2,335			$	2,335
Total liabilities measured at fair value on a recurring basis		$	—			$	—			$	2,335			$	2,335

		As of February 28, 2010
		Level 1				Level 2				Level 3
		Quoted Prices
		in Active				Significant
		Markets for				Other				Significant
		Identical Assets				Observable				Unobservable
		or Liabilities				Inputs				Inputs				Total
Available for sale securities		$	—			$	—			$	452			$	452
Total assets measured at fair value on a recurring basis		$	—			$	—			$	452			$	452
Interest rate swap agreements			—				—				4,068				4,068
Total liabilities measured at fair value on a recurring basis		$	—			$	—			$	4,068			$	4,068

Available for sale securities — Emmis’ available for sale security is an investment in preferred stock of a company that specializes in digital radio transmission technology that is not traded in active markets. The investment is recorded at fair value, which is materially consistent with the Company’s cost basis. This is considered a Level 3 input.

Swap agreements — Emmis’ derivative financial instruments consist solely of interest rate cash flow hedges in which the Company pays a fixed rate and receives a variable interest rate that is observable based upon a forward interest rate curve, as adjusted for the CVA discussed in Note 5. Because a more than insignificant portion of the valuation is based upon unobservable inputs, these interest rate swaps are considered a Level 3 input.

The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:

		For the Three Months Ending
		May 31, 2009								May 31, 2010
		Available								Available
		For Sale				Derivative				For Sale				Derivative
		Securities				Instruments				Securities				Instruments
Beginning Balance		$	452			$	6,777			$	452			$	4,068
Realized (gains) losses included in earnings			—				(1,968	)			—				(1,577	)
Changes in other comprehensive income			—				3,440				—				(156	)
Ending Balance		$	452			$	8,249			$	452			$	2,335

Non-Recurring Fair Value Measurements

The Company has certain assets that are measured at fair value on a non-recurring basis under the circumstances and events described in Note 3, Intangible Assets and Goodwill, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 3 for more discussion).

During the three months ended May 31, 2010, there were no adjustments to the fair value of these assets as there were no indicators that would have required interim testing.

Fair Value Of Other Financial Instruments

The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. The use of different market assumptions may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of financial instruments:

• Cash and cash equivalents, accounts receivable and accounts payable, including accrued liabilities: The carrying amount of these assets and liabilities approximates fair value because of the short maturity of these instruments.

• Credit Agreement debt: As of February 28, 2010 and May 31, 2010, the fair value of the Company’s Credit Agreement debt based on bid prices as of those dates was $283.2 million and $315.1 million, respectively, while the carrying value was $341.2 million and $346.3 million, respectively.

• 6.25% Series A cumulative convertible preferred stock: As of February 28, 2010 and May 31, 2010, the fair value of the Company’s 6.25% Series A cumulative convertible preferred stock based on quoted market prices was $41.0 million and $63.9 million, respectively, while the carrying value was $140.5 million for both periods.

Note 7. Comprehensive Income (Loss)

Comprehensive income (loss) was comprised of the following for the three months ended May 31, 2009 and 2010:

		Three Months
		Ended May 31,
		2009				2010
Consolidated net income (loss)		$	15,692			$	(704	)
Other comprehensive loss, net of tax:
Change in fair value of derivatives			(1,472	)			(259	)
Translation adjustment			(3,619	)			(407	)
Comprehensive income (loss)		$	10,601			$	(1,370	)
Comprehensive income attributable to noncontrolling interests			(520	)			(774	)
Comprehensive income (loss) attributable to the Company		$	10,081			$	(2,144	)

Note 8. Potential Going Private Transaction and Other Related Transactions

On April 26, 2010, JS Acquisition, Inc. (“JS Acquisition”), a corporation then owned entirely by our Chairman, Chief Executive Officer and President, Mr. Jeffrey H. Smulyan, and Alden Global Capital (together with its affiliates and related parties, “Alden”) entered into a non-binding Letter of Intent (the “Letter of Intent”) with respect to a series of transactions relating to the equity securities of Emmis.

On May 6, 2010, JS Acquisition was recapitalized so that Mr. Smulyan held all 10 shares of Class B Common Stock, par value $0.01 per share (the “JS Acquisition Class B Common Stock”), of JS Acquisition and all 1,000,000 shares of the Class A Non-Voting Common Stock, par value $0.01 per share (the “JS Acquisition Class A Common Stock”) of JS Acquisition. Also on May 6, 2010, Mr. Smulyan contributed the JS Acquisition Class A Common Stock to JS Acquisition, LLC, a newly-formed Indiana limited liability company (“JS Parent”) that is wholly owned by Mr. Smulyan.

Based on the framework laid out in the Letter of Intent, Alden Global Distressed Opportunities Master Fund, L.P. (the “Alden Fund”), Alden Global Value Recovery Master Fund, L.P., Alden Media Holdings, LLC (“Alden Media”), JS Parent and Mr. Smulyan, entered into a Securities Purchase Agreement, dated May 24, 2010 (the “Alden Purchase Agreement”), and Emmis, JS Parent and JS Acquisition entered into an Agreement and Plan of Merger, dated May 25, 2010 (the “Merger Agreement”). The transactions contemplated by the Alden Purchase Agreement and the Merger Agreement (collectively, the “Transactions”) will result in Emmis being taken private by JS Parent. In connection with the Transactions, some shares of Class A common stock, par value $0.01 per share (the “Class A Common Stock”) of Emmis will be contributed to Emmis by the parties to a Rollover Agreement (the “Rollover Shares” and such parties, the “Rolling Shareholders”), dated May 24, 2010, by and among JS Parent and the shareholders set forth therein (the “Rollover Agreement”).

The Transactions include the following:

•

JS Acquisition Tender Offer: On June 2, 2010, JS Acquisition commenced a tender offer (the “JS Acquisition Tender Offer”) for all of the outstanding shares of Class A Common Stock. The offer price is $2.40 per share in cash (without interest and less any applicable withholding taxes). The completion of the JS Acquisition Tender Offer is conditioned on, among other things:

•

the effectiveness of certain amendments (the “Proposed Amendments”) to the terms of the Company’s 6.25% Series A Cumulative Convertible Preferred Stock (the “Existing Preferred Stock”), and

•

the valid tender without a valid withdrawal of shares of Class A Common Stock, that, when combined with the Rollover Shares and the shares of Common Stock beneficially owned by JS Parent, JS Acquisition, Mr. Smulyan and his affiliates (collectively, the “Purchaser Group”) and the Alden Fund, will constitute a majority of the votes able to be cast with respect to the Merger (as defined below).

•

Alden Purchase Agreement: Simultaneously with completion of the JS Acquisition Tender Offer, Alden Media will provide all necessary funds for the JS Acquisition Tender Offer and the other Transactions under the Alden Purchase Agreement, under which it will purchase for an aggregate of $90 million in cash, subject to adjustment as described below:

•

Series A Convertible Redeemable PIK Preferred Interests (the “JS Parent Preferred Interests”) of JS Parent, with an initial preferred unrecovered balance of $96.9 million and having a preferred return of 5% per annum until the second anniversary of the closing and 15% per annum thereafter; and

•

common interests (the “JS Parent Common Interests”) of JS Parent initially having a percentage interest of JS Parent equal to 24%, subject to adjustment as provided in the JS Parent operating agreement;

The amount of funds provided by Alden Media, the initial preferred unrecovered capital balance of Alden Media’s JS Parent Preferred Interests and Alden Media’s initial percentage interest of JS Parent may be subject to adjustment, to the extent funds are required to provide cash consideration in the Merger (as defined below) to holders of Existing Preferred Stock that do not tender their shares in the Exchange Offer and/or to pay certain expenses in connection with the Transactions.

•

Exchange Offer: The Company has commenced an Exchange Offer whereby the Company is offering to issue an aggregate of $84,275,100 principal amount of new 12% PIK Senior Subordinated Notes due 2017 (the “New Notes”), which will be offered in exchange for all of the outstanding Existing Preferred Stock at a rate of $30.00 principal amount of New Notes for each $50.00 of liquidation preference (excluding accrued and unpaid dividends) of Existing Preferred Stock, which is conditioned on, among other things:

•

obtaining the requisite 2/3 vote of the holders of Existing Preferred Stock and the affirmative vote of more shares of Class A Common Stock and Class B common stock, par value $0.01 per share (“Class B Common Stock,” and, together with the Class A Common Stock, the “Common Stock”), voting together as a single class (with each share of Class A Common Stock entitled to one vote per share and each share of Class B Common Stock entitled to 10 votes per share), voting in favor of the Proposed Amendments, assuming a quorum is present, (collectively, the “Required Vote”), and

•

the minimum number of shares of Class A Common Stock, having been validly tendered and not validly withdrawn in the JS Acquisition Tender Offer;

•

Proxy Solicitations: The Company is also soliciting proxies (the “Proxy Solicitations”) from holders of Existing Preferred Stock and Common Stock to vote for the Proposed Amendments. The Company is not seeking proxies with respect to the Merger (as defined below). Mr. Smulyan directly owns shares of Common Stock entitling him to cast approximately 60.0% of the votes able to be cast by holders of Common Stock at the special meeting. Under the Alden Purchase Agreement, Mr. Smulyan has agreed to vote his shares of Common Stock in favor of the proposal to adopt the Proposed Amendments, so the proposal will be approved by the holders of the Common Stock. The Alden Fund directly owns approximately 41.4% of the outstanding Existing Preferred Stock. Under the Alden Purchase Agreement, the Alden Fund has agreed to vote its shares of Existing Preferred Stock in favor of the proposal to adopt the Proposed Amendments;

•

Merger Proxy Solicitation: If the JS Acquisition Tender Offer and this Exchange Offer are completed and the Proposed Amendments are adopted and effected, to the extent required by Indiana law, the Company will seek the affirmative votes of holders of Common Stock (a majority of which will be beneficially owned, following the JS Acquisition Tender Offer, by JS Acquisition) to approve a merger of JS Acquisition with and into Emmis, with Emmis surviving the merger as a subsidiary of JS Parent, with Mr. Smulyan holding all of the shares of a newly issued class of voting common stock of Emmis and JS Parent holding all of the shares of a newly issued class of non-voting common stock of Emmis.

•

The Merger: Once the Merger is approved, we will complete the Merger, in which:

•

immediately prior to the effective time of the Merger:

•

Mr. Smulyan will retain 9,755 shares of Class A Common Stock directly, 190,245 shares of Class B Common Stock directly (which he will convert into Class A Common Stock immediately prior to the Merger) and 8,441 shares of Class A Common Stock in Emmis’ 401(k) plan, and The Smulyan Family Foundation will retain 30,625 shares of Class A Common Stock (collectively, the “Retained Shares”);

•

all shares of Class A Common stock held by the Purchaser Group (other than Retained Shares) and each Rollover Share of the Rolling Shareholders will be contributed to Emmis and cancelled, in satisfaction of each’s respective obligations under the Alden Purchase Agreement and the Rollover Agreement and in consideration for JS Parent Common Interests; and

•

all shares of Class B Common Stock (other than Retained Shares), all of which are held by Mr. Smulyan, and all of the stock options held by Mr. Smulyan, will be contributed to Emmis and cancelled, in satisfaction of his obligations to under the Alden Purchase Agreement, and in consideration for JS Parent Common Interests.

•

each share of Class A Common Stock remaining outstanding, including the Retained Shares, will be converted into the right to receive $2.40 in cash (without interest and less any applicable withholding taxes) from Emmis;

•

all remaining outstanding options to purchase Class A Common Stock, will vest if unvested, and each option with an exercise price of less than $2.40 per share (without interest and less any applicable withholding taxes) will be converted into the right to receive an amount of cash per option equal to $2.40 (without interest and less any applicable withholding taxes) minus the exercise price of the option, and all other options will be cancelled;

•

each outstanding share of Existing Preferred Stock held by the Alden Fund will be converted into New Notes at a rate of $30.00 principal amount of New Notes per $50.00 of liquidation preference of Existing Preferred Stock, excluding accrued and unpaid dividends;

•

each other outstanding share of Existing Preferred Stock will be converted into the right to receive $5.856 in cash (without interest and less any applicable withholding taxes) from Emmis, which is equal to the conversion rate of the Existing Preferred Stock of 2.44 shares of Class A Common Stock per share times the $2.40 in cash (without interest and less any applicable withholding taxes) per share of Class A Common Stock that is being offered in the JS Acquisition Tender Offer;

	•		each share of JS Acquisition Class A Common Stock will be converted into one share of new nonvoting common stock of Emmis; and
	•		each share of JS Acquisition Class B Common Stock will be converted into one share of new voting common stock of Emmis.

Note 9. Segment Information

The Company’s operations are aligned into two business segments: (i) Radio and (ii) Publishing. These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses are not allocated to reportable segments. The results of operations of our Hungary and Belgium radio operations have been classified as discontinued operations and have been excluded from the segment disclosures below. See Note 1 for more discussion of our discontinued operations.

The Company’s segments operate primarily in the United States, but we also operate radio stations located in Slovakia and Bulgaria. The following table summarizes the net revenues and long-lived assets of our international properties included in our condensed consolidated financial statements.

		Net Revenues								Long-lived Assets
		Three Months Ended May 31,								As of February 28,				As of May 31,
		2009				2010				2010				2010
Continuing Operations:
Slovakia		$	2,937			$	3,059			$	9,371			$	8,760
Bulgaria			441				313				1,119				996
Discontinued Operations (see Note 1):
Hungary		$	2,631			$	7			$	138			$	130
Belgium			341				—				—				—